Little banks and billion dollar brokers

From the Philly Inquirer:

Mortgage loans are going global

If you get a home mortgage from Abington Community Bank in Jenkintown, chances are the money will come from deposits kept there by other residents of Philadelphia’s northern suburbs.
The 140-year-old bank has been making loans this way for decades, and then keeping the loans on its books instead of selling them. “We are looking for the relationship with the customer,” said Tom Wasekanes, vice president of originations.

While Abington has stayed with community-lending methods, the U.S. mortgage industry has transformed itself in a way that has opened conduits to global capital markets.

By turning mortgages into securities, many lenders have opened up vast distances between homeowners and their mortgage holders, who can be anywhere in the world. Investor appetite for mortgage-backed securities contributed to the explosive growth in recent years of subprime lending, and allowed credit standards to evolve to the point that 100 percent financing with no proof of income became acceptable.

But savings banks don’t go there, leaving them playing an ever smaller role in the mortgage market. From 1996 through 2006, savings banks’ share of U.S. mortgage holdings fell from 14 percent to 8.5 percent, according to Federal Reserve Board data.

Abington has a “very healthy attitude, but it’s a very narrow and small attitude,” said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md. “You can be a mortgage broker originating mortgages out of the trunk of your car and do billions” of dollars more in mortgages than a community bank, he said.

That’s possible because the mortgage broker does not lend money. The broker takes applications and shops around for a mortgage lender who will fund the loan. The lender turns the loan over to an investment bank, which pools the loan with thousands of others in a residential-mortgage-backed security.

That security is sliced and diced to isolate the key forms of risk in mortgage loans: interest-rate risk and credit risk. The process is called securitization; it enables investors, such as hedge funds, that want to take on a lot of risk to do just that. Insurance companies and other more conservative investors can pay more to take on less risk.

The lucrative business of securitization has boomed. Cecala said that almost 66 percent of mortgages were securitized last year, up from 41 percent in 2000.

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