Joining a long line of small and midsize banking companies, Astoria Financial Corp. has decided that it no longer makes sense for it to service mortgages, and will be outsourcing the work.
The Lake Success, N.Y., parent of Astoria Federal Savings and Loan will close its Long Island servicing center, according to an internal memo obtained by American Banker, and eliminate at least 72 jobs, according to a person familiar with the matter.
Beginning in December, Dovenmuehle Mortgage Inc. will subservice Astoria's mortgage portfolio on a private-label basis, according to the Aug. 18 memo to employees.
George Engelke, the longtime chairman, president and chief executive of Astoria, one of the nation's largest thrifts, said in the memo that "the decision to take this action was a difficult one." Stressing that Astoria's skill at servicing has helped drive delinquencies to record lows, he said the move "was driven entirely by economics."
"In an environment of ever-increasing competitive pressure, we must and will continue to strive to increase operating efficiency in all aspects of our operations," he wrote. Messages for Mr. Engelke and a spokeswoman were not returned by deadline.
The cost benefits of scale have led to steady consolidation in mortgage servicing over the years. Most similarly sized banking institutions dropped out "a long time ago," said Kevin T. Timmons, an analyst at C.L. King & Associates Inc.
The $22.8 billion-asset Astoria held $13.2 billion in mortgage loans on June 30, up 8.2% from the end of 2003. However, its third-party servicing work (mostly on securitized loans) has been dwindling rapidly - from $2.67 billion at the end of 2002 to $1.67 billion last Dec. 31 (the most recent date for which data is available). Mr. Engelke wrote in the memo that while its individual loan balances are larger, it has been servicing many fewer loans than in the past, hurting efficiency.
Recent trends are creating new incentives to turn to subservicers, according to Thomas Donatacci, a senior vice president at GMAC Mortgage Corp., whose subservicing portfolio has doubled in the last year to more than $22 billion.
One of these trends is the proliferation of formerly niche products - such as option adjustable-rate mortgages and home equity lines of credit. Servicing these requires more sophisticated technology and processes, Mr. Donatacci said. Also, as the exotic products have become a bigger part of the market, servicers that focus on plain-vanilla mortgages and sell off the trickier ones are losing scale, he said.
Another factor is the growing competition for originations, Mr. Donatacci said. Being able to pay more for servicing by cutting costs through outsourcing allows an originator "to be more competitive in your all-in loan pricing."
Mr. Timmons said losing direct control over customer service would be somewhat risky. But, he added, in many cases, the mortgage loans held by banks are not to "core" retail customers, and retaining such customers is always difficult. Still, "if you're conducting your business with an approach that you're primarily lending to your core customer, turning them over to a poor service situation would be no good."
In the second quarter, Astoria's mortgage banking operations swung to a loss, mainly due to losses on its servicing rights, after gains on that asset a year earlier. Mr. Timmons said Astoria probably decided to keep its servicing rights because their value - $15.4 million on June 30 - is not that large relative to its balance sheet.
Dovenmuehle, a privately held Schaumburg, Ill., subservicing specialist, services 350,000 loans for several clients, according to Astoria's memo. David Allison, a senior vice president at Dovenemuehle, said its "policy is not to comment on specific relationships."
On Friday, GMAC Mortgage announced that it had agreed to subservice NetBank Inc.'s option ARMs prior to sales into the secondary market. The increasingly popular ARMs let borrowers choose among a variety of payments, making preparing monthly statements and handling issues more complex. Mr. Donatacci said many lenders are turning to his company to subservice specific loan types so they can bring products to market faster. The fact that most of NetBank's option ARMs will be sold to another GMAC client provides another incentive, he said. "It's going to be a much smoother transition, and the chance of [Netbank] being able to retain a borrower the next time they refinance" will be higher.
