Mortgage Brokers Scramble for Piece of Shrinking Market

Fred Arnold, president of the Southern California division of American Family Funding, has been spending a lot of time alerting his clients to credit card scams, providing information on setting up trusts and giving other helpful financial advice. The Santa Clarita-based mortgage broker has always been very involved in the community, but his efforts have been stepped up a notch lately, as have those of most of his competitors. With the dramatic downturn in the refinance market and increased competition, mortgage brokers and bankers have all turned up the volume, hoping to get a bigger share of a smaller mortgage market. For smaller companies like Arnold’s, the focus is on building one-on-one relationships with clients. Larger players are hard at work hoping to cement large referral networks that will guarantee a steady flow of business. Among the most dramatic of the recent moves, Countrywide Financial Corp. has struck a deal to acquire the mortgage subsidiary of KB Home, and set up a joint venture to provide mortgage loans to KB customers. Another local mortgage company, Sherman Oaks-based Metrocities Mortgage, is hoping for similar results with the recent appointment of John W. Stewart in the role of president of strategic initiatives. Stewart, a co-founder of Metrocities who left to set up a similar unit in Countrywide, will be charged with developing a referral network among homebuilders, real estate brokers, faith-based organizations and others with close ties to consumers as well as identifying acquisition opportunities. “There are a number of different ways a mortgage company can expand its market share,” said Stewart. “Some go out and do consumer-direct advertising. Some decide they’ll hire a lot of retail loan officers to sell. Metrocities has decided it will form strategic partnerships with companies that are in turn close to the consumer like real estate brokers and homebuilders.” Companies like Calabasas-based Countrywide and Metrocities have long been well entrenched in the purchase mortgage market offering loans to home buyers. But over the past few years, record low interest rates and a skyrocketing refinance market have brought many new players into the fray. Now, as refinancing loans have dropped to about 42 percent of the market at the close of last year, from a high of 74 percent of total mortgage originations at the close of 2002, brokers and bankers have all turned their attention to home purchasers. “There are a lot of brokers who popped up to take advantage of the refinance market,” Stewart said. “A lot are now saying, how will we survive in the future when refinancing isn’t there. Lending in that environment is altogether different than refi and transaction volume.” By forming alliances with those who sell or build homes, mortgage bankers can get first crack at the business. “It’s just another channel for them to have applications funneled in their direction,” said Edwin Groshans, specialty finance analyst at Fox-Pitt, Kelton in New York, who does not have a position in Countrywide. “From Countrywide’s perspective, they set a goal of getting to 30 percent market share. One way they’re attempting to do that is to fill every channel they can possibly be in.” Groshans noted that while Countrywide’s goal, an increase from about a 14 percent share annually, is aggressive, “I wouldn’t bet against this team.” Smaller, well-established mortgage brokers have followed a similar strategy for years, albeit on a smaller scale. “The one thing the mortgage broker has is one-on-one relationships in the community,” said Arnold, who is also a vice president of the California Association of Mortgage Brokers. “They’re very involved in schools, the little league, churches and charities that’s how they get the word out.” Arnold believes that the increased choices now available will ultimately serve the consumer well, and mortgage brokers who stay on top of the changes can also benefit by providing a greater range of choices to consumers, especially since they can typically offer pricing that is competitive with larger players. But others wonder whether some mortgage brokers will come up short as these alliances lead giant lenders closer to the consumer. For one thing, some alliances provide homebuilders with incentives that they in turn pass along to consumers who use a preferred lender that might mean thousands in free upgrades on a home purchase. But even without the incentives, aligning with a large mortgage company often makes good business sense for the homebuilder or realtor. “If you form a joint venture on a company-to-company level, you are really compelled to provide incredible service,” said Stewart. “If you don’t have a relationship and something goes south, so what? You lose a transaction. When you have a joint venture, you don’t have that luxury. (You have to) guarantee the closing time and the price. Most companies aren’t set up to do that.”