Community Banks Move into Mortgages; So, Too, Does Credit Crunch

As the mortgage mess has rolled on, many community and regional banks have been using the downturn as a chance to build their mortgage origination business. Many local banks were relegated to an afterthought in the mortgage origination business during the housing boom, as larger Wall Street firms and national banks pushed the originate-and-sell models out to consumers. With many of those larger national players scaling back or exiting the business altogether, the playing field has changed dramatically. Companies like Florida Bank Group, Inc., a small bank holding company with $810 million in total assets, epitomize the re-emergence of local banks in the mortgage space — the bank said in January that it had formed Florida Bank Mortgage, as part of an effort to offer wholesale mortgage services statewide. The result is that while origination volume has plummeted in total, many community banks are seeing production volume increase. The Wall Street Journal reports on the case of Boston-based Hingham Institution for Savings, for example, that handles underwriting via pen and paper; the local bank has seen originations increase 20 percent, the Journal reported. Others, like New Jersey-based thrift Hudson City Bancorp Inc. (HCBK), have seen a 26 percent jump in mortgage loan production. As the Journal notes, the return of consumers to community banks has helped firms like Taylor, Bean & Whitaker Mortgage Corp. — the company provides private-label origination services to community banks, since many smaller institutions don’t have the wherewithal to hold the assets on their own books. Which, in some ways, puts community banks into direct competition with mortgage brokers. Credit crunch gets local Just as community and regional bankers are now sensing renewed opportunity in residential mortgage lending, however, many of the nation’s smaller banks are just now beginning to feel the effects of a credit crunch that has reached well outside of the mortgage sector. The result is an interesting tug-of-war between fresh opportunity and emerging capital constraints that serve to limit a bank’s ability to take advantage of changing market conditions. Case in point: Michigan-based Citizens Republic Bancorp, Inc. (CRBC), which said Thursday morning that it would raise $200 million as it looks to deal with $180 million in goodwill impairment and write-downs of $47.1 million tied to its commercial real estate exposure. The regional bank operates in Michigan, Ohio, Wisconsin and Indiana. Webster Financial Corporation (WBS), a $17.2 billion bank based in Connecticut, said on Thursday that it, too, would look to raise up to $250 million in fresh capital to meet its liquidity needs. And PFF Bancorp, Inc. (PFB) said Thursday that it wants to raise $460 million in a private placement of both debt and stock. Officials are taking notice of the increasing risk for problems among the nation’s smaller banks. Boston Fed president Eric Rosengren said last week that continued weakness in housing likely would strain many of the nation’s smaller banks. “Problems could expand beyond securitized assets to have an impact on the nonsecuritized assets held by smaller banking institutions,” he said. “It is possible that these institutions may not be able to tap additional capital quite as easily as larger institutions, and if so they may be forced to constrain other lending to address any losses.” Or course, a number of smaller banks have already crashed this year, with more failures already expected by FDIC officials in the next year. Failed Bentonville, Arkansas-based ANB Financial, NA is one such example — the bank had overextended itself into residential construction lending, and became the second-biggest federally insured bank failure since 2001 late last month. Disclosure: The author held no positions in the publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.