End of Bank of the Ozarks Mortgages May Not Signal Trend

Matthew Lewis, president of the Mortgage Bankers Association of Arkansas, sees no alarming trends, but the mortgage banking industry has certainly changed in the past 10 years.
Matthew Lewis, president of the Mortgage Bankers Association of Arkansas, sees no alarming trends, but the mortgage banking industry has certainly changed in the past 10 years. (Jason Burt)

As ArkansasBusiness.com’s Dec. 19 scoop on Bank of the Ozarks’ decision to shut down its mortgage operation drew notice, a jolt of shock and fear spread among the state’s mortgage bankers.

“This is mighty close to home and scary. I’ve been doing mortgages for 25 years. Have never lost my job,” a mortgage banker at a different bank said in an email.

Bank of the Ozarks, the state’s largest bank and one of the most efficient profit-generators in the country, said originating mortgages for resale on the secondary market, as is typical, had become “challenging from a profitability perspective” under the burden of new regulations. It will continue to make select home loans.

Bank of the Ozarks reported $163.2 million in residential mortgage origination revenue in the first three quarters of 2017, down 20 percent from the same portion of 2016. But whether BOZ, a multistate bank headquartered in Little Rock, is a coal-mine canary or an outlier is not clear — not even to other bankers.

Its decision came shortly after another Little Rock lender, Eagle Bank & Trust, went the opposite way; it snatched up several veteran mortgage bankers from IberiaBank to expand the home loan department established under Lee Welfel three years ago.

“It does seem to be a little contradictory trend there,” said Steven Plaisance, president and CEO of Arvest Bank’s mortgage division and Arvest Central Mortgage Co., the biggest mortgage operation in the state.

“We have not seen any kind of trend that is alarming or would constitute concern,” Matthew Lewis of Little Rock, the current president of the Mortgage Bankers Association of Arkansas, said in an interview last week.

George Gleason, CEO of Bank of the Ozarks, “is a smart guy,” said John Allison, chairman of Home BancShares Inc. of Conway, the holding company for Centennial Bank. “Maybe he is seeing something we are not.”

Eagle Bank declined to talk about its strategy following the hiring last fall of Bill Edwards, Chuck Quick, David Bryles and James Quick. “I can say we are still bullish on the Secondary Mortgage Market and believe there is a good future for Eagle Bank in this market,” Chairman Cathy Owen said in an email.

More, More, More
This is not up for debate: Regulations have changed the industry since the financial crisis that will mark its 10th anniversary this year. In explaining its exit from secondary market mortgage lending, BOZ specifically mentioned QM, TRID and HMDA, acronyms for the regulations designed to protect consumers from unsuitable or predatory mortgages and the investors who buy securities made up of bundles of mortgages.

“There’s no question that the cost of running an appropropriate mortgage banking division is different today than it was five years ago or 10 years ago,” Plaisance said. “Oversight is much more significant, and it’s not surprising to see people decide to step by the wayside, particularly as the outlook on mortgages is finally starting to shift away from all those refinances and to a purchase-oriented market in the years to come.”

Mortgage bankers acknowledge that the practices — from juiced appraisals to “liar loans” and incentives for steering borrowers into predatory rates — that combined to create the mortgage crisis had to be reined in. But cheaper and easier are not part of the formula.

“The cost of doing a loan continues to go up,” Lewis said. “There are extra steps. There are extra ways that we are doing homework on the borrower, on all parties involved in a transaction.”

Even the seller of the property now gets checked out to make sure that there is no pattern of scam transactions. And a borrower may be asked to explain any unusual checking account activity.

“Ten years ago, there were about five ways you could end up not closing a loan,” Lewis said. “Now we believe it is closer to 30 or 45 data points.”

The additional costs, he said, are being shared by the borrower in the form of higher fees and the originating lender in the form of a tighter margin — too tight, it turned out, for Bank of the Ozarks.

For that extra cost, the borrowers and investors are getting more protection while the loan originator takes on more liability. An unsuitable mortgage or one made incorrectly can come back to haunt the originator at any point before it is paid off, Lewis said.

And the mortgages being made are better. In the third quarter of 2017, foreclosures nationwide fell back to 2006 levels, according to Attom Data Solutions of Irvine, California.

Leveling the Playing Field
One benefit that the regulations have brought to mortgage bankers, Lewis said, is a level playing field. Because every loan sold on the secondary market must fit in the same box called QM, qualified mortgage, originators can generally trust that competitors must go through the same steps and reject the same unqualified borrowers.

“Being a loan officer has changed,” he said. “It has basically forced loan officers to become masters of their trade.” And educating them, as well as customers, is a goal of the Mortgage Bankers Association of Arkansas, Lewis said.

While the bottom line might not be attractive enough for Bank of the Ozarks, Allison still likes what he’s seen at Centennial Bank.

“We are committed (at least for now) to continued growth in the space,” he said in an email. “When done properly the space is very profitable.”

Mortgage banking accounted for about $8 million in profit in 2017, which Allison said was about 4 percent of Home BancShares’ net income.

At Arvest, which did almost $2 billion in mortgages in 2017 and services $53 billion in mortgages in all 50 states, the flood of refinancing has slowed; Plaisance expects refis to be 30 percent or less of total originations this year. But the thought of not making home loans is, well, unthinkable.

“We love the mortgage business. Getting out of mortgages would be almost like getting out of ATMs,” he said.