After an extensive review of its mortgage banking business, which has grown rapidly over a short period of time, Pacific Mercantile Bancorp (PMBC) is abandoning wholesale mortgage lending.
The purpose of the review, the company said, was to determine how it could redeploy capital resources committed to mortgage banking toward the bank's core commercial lending business. The strategic move was in preparation for an eventual increase in prevailing interest rates and an effort to improve the efficiencies of its mortgage banking operations.
“Based on that review, a decision has been made to focus our mortgage operations entirely on our direct-to-consumer retail channel and to exit our wholesale mortgage business, which depends on independent mortgage brokers to originate mortgage loans for us,” the company said in a statement.
Pacific Mercantile, the parent holding company of Pacific Mercantile Bank, will cease taking mortgage submissions from brokers after August 31, but will continue to process and fund all mortgage broker-originated loans in process or originated before that date.
The decision is another reminder of the dwindling outlets serving mortgage brokers and their increasingly uncertain future. In wholesale lending, mortgage brokers gather documentation and information on the borrower and pair him or her with a lender. Brokers to this day are fighting claims that they originated most of the problematic vintages of mortgages that created the housing bubble and subsequent burst.
In July, Wells Fargo (WFC) said it will cease funding mortgages originated by independent brokers through its wholesale lending. On the day of the announcement, the San Francisco bank also said it will pay $125 million to settle claims its wholesale brokers steered minority homebuyers into more expensive subprime mortgages.
Wells Fargo, which bought one out of every five loans originated by brokers, was the last of the big four banks to exit the wholesale lending business.
And with the mass exodus of financial institutions from wholesale lending comes those that see a healing space. Quicken Loans Mortgage Services, a division of Detroit-based Quicken Loans, began originating loans two years ago, ballooning from nothing to $750 million in loans in April as a wholesale and correspondent lender.
“The wholesale community is getting healthier," QLMS Vice President Tod Highfield said. "Bank of America (BAC) backing out of the space to a large degree created somewhat of a void in the marketplace. That’s created an opportunity for both QLMS and Quicken Loans in general to gain market share.”
Pacific Mercantile acknowledged that its action will result in a “significant reduction” in mortgage loan originations and, therefore, in its mortgage banking revenues, which were a primary driver of the company’s second-quarter profit.
Net income at the Costa Mesa, Calif.-based company rose to $5.8 million, or 35 cents a share, in the second quarter from $1.2 million, and 8 cents a share, in the year-ago period.
Mortgage banking revenue skyrocketed more than six-fold to $8.5 million in the second quarter one year after Pacific Mercantile generated $1.3 million.
“In our view, this action is in the best interests of the company and our shareholders because we believe that it will enable us to build a stronger foundation for achieving improved profitability in the future,” the company said.