Tougher mortgage rules having the desired effect

With home sales falling, underwriting standards rising and the use of government-sponsored mortgages soaring, the mortgage industry is contracting and consolidating -- a trend that spells disaster for some and opportunity for others.

More than 50 Minnesota mortgage brokers have surrendered their state licenses this year -- double last year's rate and not including those who have gone out of business without notifying the Minnesota Department of Commerce.

The state's 1,319 active originators last week were down from more than 4,000 last year at this time. Many of them surrendered their licenses after new state laws aimed at making it tougher to be in the mortgage business were implemented last year.

"We wanted to make tougher to be in this business, and it's working," Commerce Department spokesman Bill Walsh said.

Gary Kirt, owner and chief executive of St. Louis Park-based Bell Mortgage, calls what's happening in the industry a "flight to quality," driven by a shift away from the exotic mortgage products that helped fuel the housing boom and toward more traditional mortgage products. And that's creating opportunities for larger, more-established companies that offer the more tightly regulated government-sponsored mortgages that now represent most mortgage originations.

Though Bell has closed some of its brick-and-mortar offices to reduce expenses during this downturn, the company also has been on the prowl for new talent. During the past year, the company has grown from 150 to 180 employees. That includes the recent addition of more than 15 employees from Banker's Mortgage Group, a Burnsville broker that produced about $120 million of mortgages a year.

Kirt said that the deal made sense, because Bell offers the smaller companies training, programs and access to loan funds that they couldn't get as a small brokerage, while Bell gets a sales team that has deep experience and connections in a part of the metro area where it didn't have much market penetration.

Tom Joslyn, the company's chief operations officer, called what's happening at Bell and in the broader business a "paradigm shift" away from private mortgages toward more government-sponsored mortgages that are accessible to more borrowers and require lower down payments.

In another high-profile deal, Lakeland Mortgage and Northwest Mortgage recently joined forces in a deal that will create a company with about 85 employees in five offices in the Twin Cities area. The new company will have the resources to originate the kind of mortgages that borrowers now rely on, including those funded by the Federal Housing Administration, Department of Veterans Affairs and the Minnesota Housing Finance Agency.

Since that April merger, the combined company has acquired two brokerages that have surrendered their licenses and is working on a third deal.

That shift to regulated mortgages is forcing hundreds of mortgage companies across the country into insolvency, including many that have been documented on national blogs such as the Implode-o-Meter (ml-implode.com), which says it chronicles "the housing finance breakdown."

One of the meltdowns documented on that site was the recent closing of Centennial Mortgage, a large Twin Cities broker that was shut down for "financial irresponsibility," according to the Department of Commerce.

Enter Guaranteed Rate Mortgage, a Chicago company that does business all over the country but has yet to make a big splash in Minnesota despite being licensed here since 2005. The company didn't respond to a request for an interview, but several industry sources said that many of the people who were laid off when Centennial was shut down were hired by Guaranteed.

Edina Realty Mortgage, already the third-largest broker in Minnesota, also hopes to benefit during this downturn. President and CEO Todd Johnson said that, while home sales at the real estate company overall are down, originations in the mortgage division are up more than 25 percent, and he has increased staffing by 10 percent.

"We're growing at a higher percentage than we did last year or any year since 2001," Johnson said.

When the industry is so unstable, more borrowers are attracted to established local companies, Johnson said.

Business is up for the same reason at Dexma, an Edina technology company that helps lenders originate and process loans. President Steve Mase said that mortgage loan volume for its customers grew 11 percent during the first quarter over the same period last year, even though the company had cut staff during 2007 to cope with what turned out to be a temporary slowdown.

He attributes that growth to expansion among local and regional companies that need the technology to process more volume.

"We predicted that the crisis in mortgage lending would provide a unique opportunity for small and midsize lenders to gain customer trust and grow market share," he said.

Jim Buchta • 612-673-7376