CHAPTER II THE INDUSTRY AND ITS GROWTH -7 An Overall Profile What is a "mortgage banker"? It is an institution which makes long-term mortgage loans but -- unlike a bank, savings and loan association, savings bank, or credit union does not accept deposits from customers. It may call itself a "mortgage company", a "mortgage service company", or a "mortgage bank", but the average person may be unfamiliar with all of these terms. He may, however, know one or more mortgage banking firms by name from personal experience. Perhaps he has borrowed from Weaver Brothers, Advance Mortgage, or Mortgage Associates, or noticed office buildings housing Lomas & Nettleton or Coldwell Banker, but never known what those firms did. Mortgage banking is, in general, an unknown industry. * Mortgage bankers function primarily as intermediaries between local real estate brokers and distant investors who are willing to put large amounts of money into housing loans but find it useful to use locally based agents who specialize in finding people who want to borrow money to buy, improve, or refinance a house. Locally, mortgage bankers seek out brokers or builders who need capital. On the national level, they attempt to find institutional investors who will purchase the locally originated mortgages in groups or "packages" worth, usually, $100,000 or more each. Once the mortgage banker sells a package of mortgages to an investor, it is usually his responsibility to "service" * These other institutions make mortgage loans and are in that sense mortgage banking institutions. Each, however, is unlike the "mortgage bankers" discussed in this report in that each is subject to regulation by a special federal or state agency (e.g. Federal Reserve, Federal Home Loan Bank Board, etc.) and each receives deposits through savings accounts, checking accounts, and other depository methods. HUD refers to mortgage bankers as "nonsupervised" lenders. -8 the loans: to collect monthly payments, see that property taxes and insurance premiums are paid, and handle foreclosure if the buyer misses payments. Mortgage banking can be traced back as far as 1840 when brokers originated agricultural loans in the Midwest for wealthy Easterners. It entered the urban home mortgage market in the late 1920's, but the introduction of the Federal Housing Administration (FHA) and its mortgage insurance programs in 1934 launched the development of the modern mortgage banking industry. The mortgage guaranty program for World War II veterans run by the Veterans Administration (VA) gave mortgage bankers a further boost. As one noted economist has remarked, "Mortgage companies . are essentially a result, though not a planned one, of the federal government's underwriting of residential mortgages." 7/ ... As the housing boom progressed after World War II, life insurance companies became the primary source of funds for mortgage bankers' operations. These companies had initially used their own field agents to originate FHA and VA mortgages, but they soon found it more profitable to contract with independent local mortgage bankers who specialized in this form of investment. This investor decision shaped the character and fueled the growth of the mortgage banking industry throughout the fifties and early sixties. Mortgage companies became specialists in the FHA and VA market issuing and packaging mortgages, handling government paperwork, securing funds from insurance companies and others, and developing strong contacts with local realtors. Between 1945 and 1955, FHA and VA triggered a doubling in the number of mortgage banking firms, from an estimated 409 to 854, and a tenfold increase in assets, from $160 million to $1.8 billion.8/ Federally protected mortgages constituted from threefourths to nine-tenths of the loans closed by mortgage bankers in 1953, 1954, and 1955.9/ -9 The necessary ingredient for this continued expansion was a large reliable source of funds. But the privately financed system did not last. The "credit crunch" of 1966 was the initial shock in a series of events that broke down the close relationship between mortgage bankers and insurance companies. Volatile and often high interest rates reduced the attractiveness of mortgages as an investment, making long-term corporate bonds increasingly attractive to insurance companies. Mortgage bankers were no longer assured a reliable source of private funds. The federal government stepped in to shore up the housing finance market. The 1968 Housing Act vastly increased the scope of FHA activity by adding several new insurance and subsidy programs and in a move - to eliminate FHA redlining and increase mortgage lending in the inner city liberalizing urban underwriting criteria and, therefore, opening up the homebuyer's market for low and moderate income people. At the same time the roles of the Federal and Government National Mortgage Associations (FNMA and GNMA) were expanded dramatically. It is not easy to overemphasize the role that GNMA and FNMA now play in mortgage banking operations. Both purchase mortgage loans from private lenders on a reliable, predictable basis, a service which is especially useful in times of - rising interest rates. In 1975, these two public intermediaries purchased over 53 percent of all loans originated by the industry. 10/ Mortgage bankers have increasingly become an intermediary between local realtors and homebuyers and various federal agencies, rather than between the local people and large private investors. They have thus become an even more central agent for federal housing policy. While economic conditions have changed the ties between mortgage companies and their investors, they have not altered the industry's relationship to the FHA/VA programs. Phillip E. Kidd, an economist for the Mortgage Bankers Association (MBA), has explained -11 this relationship: "Throughout long years of working with FHA and VA programs, mortgage bankers had developed valuable contacts and insights about the federal bureaucracy that helped turn their proposals into operating procedures." 11/ William Cumberland, General Counsel of the Mortgage Bankers Association, described the relationship more succinctly as "a partnership." 12/ Table I illustrates the dominance mortgage bankers enjoy in the origination of FHA mortgages. As Table I shows, mortgage bankers originated about 74 percent of FHA mortgages in 1975. They serviced over $80 billion in federally protected mortgage loans in 1975.13 Within the mortgage banking industry, there is tremendous variety. Mortgage banks range from those with funded capital of only $100,000, the minimum FHA requires for certification to issue insured mortgages, to assets of $454,400,000 (Lomas & Nettleton, the country's largest firm). They vary in size from being part-time businesses linked to real estate firms, to being centerpieces in large, influential conglomerates or being subsidiaries of powerful banks. Many issue mortgages in only one or two neighborhoods; others cover many states, expanding and contracting as rapidly as the demand for mortgage loans goes up and down. The mortgage banking industry is highly concentrated. Seven hundred and thirty mortgage companies are responsible for over 85 percent of the industry's activity. Compared with its mortgage lending competitors, savings and loan associations, the mortgage banking industry is far more concentrated. In 1976, the combined origination of all MBA members totaled $23 billion; an average of $32 million per firm.14/ On the other hand, the 4,855 savings and loan associations in this country each averaged $10 million in mortgage loans. What kind of picture can we get of the industry as a whole? An uncertain one, as reliable statistics are elusive. There is no public body which oversees all mortgage bankers, there are no mandatory reporting 99-247 O 78 18 |