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Bank holding company affiliation and contracyclical lending by mortgage bankers
JuK'onusN 1904; 36:275-281
2"'5
Bank Holding Company Affiliation and Contracyclical Lending by Mortgage Bankers Jim Burke and Stephen A. Rhoades
Bank holding companies have made significant inroads into the mortgage banking ir~dustyy, primarily by acquisition. Federal Reserve Board approval of acquisitions ~s contingent upon the expectation of net public benefits. This study analyzes one of the benefits that BHCs claim will arise from acquisition of mortgage bankers--~he flow of funds into housing will become more cyclically stable. Test results on a 33-firm sample of independent and BHC-affiliated mortgage bankers for 1973-1975 provide little support for this claimed public benefit.
Introduction During the past 15 years, holding companies have become an important form of banking organization in the United States and now account for about 70% of commercial bank deposits. In addition, bank holding companies (BHCs) have, under Section 4~c) (8) of the BHC Act, made significant inroads into several other financial indust~;,~s primarily by acquisition. Federal Reserve Board approval of acquisition proposals is contingent, in large part, upon the Board's assessment th~.~tnet public benefits can be expected to result from the affiliation. Unfortunately, extremely limited da'.a pertaining to the nonbank activities of BHCs has made it very difficult for researchers ~.o analyze the effects of BHCs on the indu~,tries they enter and the firms the~, acquire. This paper analyzes one of the principal benefits that BHCs claim will arise from the acquisition of mortgage banking firms--that the flow of funds to the housing sector will become more cyclically stable.
II. BHC Expansion into Mortgage Banking Although most BHCs (2625 out of 3056) are small companies controlling one bank primarily for tax advantages,t large banking ~rganizations have typically adopted the
i Many one-bank holding companies were organized primarily to g~Lintax advantages. These tax advantages have been described and illustrated in goger D. Rutz, The Tax Benefits of Forming One-Bank Holding Companies Under the Fed's New Guidelines, Banking Law Journal (Janualy ! 98 !), pp. 24-46. The authors are econorr, ists with the Federal Reserve Board, Washington, D.C. Address reprint requests to Stephen A. Rhoades, Financial Structure Section, Division of Research and Statistics, Federal Reserve System, Washington, D.C. 20551.
Journal of Economics and Business, 36, 275-28 ! (1984) © 1984 Temple University
0148-6195/84/$03.00
1"16
J. Burke and S. A. Rhoades BHC form for other reasons. For example, multi-BHCs have been used to establish statewide banking operations in states with restrictive branching laws (e.g., Florida and Texas). The holding company format has also been adopted in order to expand ix,to nonbanking activities pursuant to St,.,ction 4(c) (8) of the Bank Holding Company Act (195,5) as amended in 1970. Since 1970, the Federal Reser..'e Board has designated 22 different nonbank activities as pemlissible for BHCs that have expanded heavily into some of these activities, primarily through acquisitions. For example, between 1970 and 1981, the Federal Reserve Board approved more than 100 applications by BHCs to acq~fire mortgage banking firms. By June of 1981, more than one fourth of the 100 lar::~est mortgage bankers in the country (ranked on servicing volume) were affiliated wi~n BHCs or were direct subsidiaries of national banks. Further, 6 of the top 10, and ! ~ c.f the top 20 mortgage bankers were affiliated with a banking organization.:' Snnce mortgage banking is a local market industry with many multi~tate firms, acquisitio ~s of these firms may be an attractive vehicle for establishing an immediate interstate presence. -~ However, while the expansion into mortgage banking may be (and presumably is) beneficial to BHCs, it is not clear whether it yields benefits to the public. While the BHCs cite various public benefits in their applications to acquire nonbank firms, these claims are difficult to verify due to the lack of readily available data. 4 Thi:, study focuses on the argument that BHCs will benefit the public by making the flow ot funds to the mortgage market cyclically more stable. 5 The cou~-~tercyclical flow of funds is supposed to be possible because of the financial support provided to the mortgage banking affiliate by the parent BHC. Because of their size, most large BHCs have greater access to the commercial paper market than the typice, l mortgage banking firm. Therefore, it is ar2ued that BHCs can provide the mortgage banking affiliates with a steady supply of fund~ with which to originate and warehouse mortgages throughout the business cycle. It: contrast, unaffiliated mortgage bankers often find their funds severely restricted during periods of tight money because they rely heavily on commercial bank credit. These views are often expressed in appli cations submitted to the Federal Reserve Board by BHCs seeking to acquire a mortgage banking affiliate. T~is argument is suspect on a priori grounds because mortgage bankors have access to the secondary market for mortgages, including FNMA and GNMA, whose purchases may also be countercyclical. Further, because mortgage bankers usually reseil thei: mortgages in the secondary market, it is not clear that affiliation with a BHC should have any effect on originations during tight or easy money--what they o,,iginate they pres,lmably can sell. Thougla the question raised here is an empirical one, there are very few studies dealiXlg with the subject of BHC expansion into nonbanking markets. 6 Only one empirical investigation dealing specifically with the effect of BHCs on mortgage lending has been : F.ased on data frorn the list of the i00 largest mortgage bankers that appeared in var|ous issues of the .4 merwan B a n k e r S~m~!arl2,. BHCs have been very active in making acquisitions of con~,umer finance companies. Like mortgage bankers, these companies usually ~perate many offices in severa~ states. "~[ h e fe~, attempts to assess the effect of BHCs in noni'~ank activnties have reached unfavorable conclu~o~l~, See P.hoades ~1975, 1980). Rhoa,:les and Boczar ( 1977); Talley (1976). For example, this view has been exp:essed in a statement by Irving Rose, President, Advance Mortgage '~'orp (at the time a subsidiary of Citi,~.orp.) to the Senate Comn,,ttee on Bankin~g, Housing and Urban -~ffa~rs. Std:,comnuttee on Financiai Institutions, July 25, 1974. " See The Bank Holding C o m p a n y '¢lovement to 1978: A C o m p e n d i u m , Board of Governors of the F;eder;J1 Reser,'e System. Washington. I) C., September 19",'8, pp. 198 -200.
Bank Holding Company Affiliation
277
published to date. In that study, Rhoades (1975) focused specifically on lending activity between 1968 and 1972, but made no reference to monetary conditions during the period. Growth rates of servicing volume ~ for 16 BHC affiliated mortgage bankers over the four-year period were compared with those of 16 independent firms. The relationship tested was G = f (An, S) where G = growth in mortgages serviced (1969-1972)~ A N = 1 if the mortgage banking firm was affiliated with a bank holding company, and A N = 0 if it was not affiliated; S = size of ser,dcing portfolio at the beginning of 1969. Since neither variable proved to be statistically significant, it was cow,eluded that affiliation with a BHC did not cause mortgage bankers to improve their growth performance. Rhoades also found that there was no adjustment in the mortgage holdings of the affiliated commercial bank that would offset changes in the lending activity of the affiliaied mortgage banker. The purpose of this study is to determine whether BHC affiliation has a positive effect (i.e., countercyclical) on the lending capacity of mortgage bankers during periods of tight money. The improvement over the earlier study is tha~ annual mortgage originations (rather than accumulated servicing volume) are used to measure growth during the years 1973-1975. It is hypothesized that the dollar volume of mortgages originated by BHC affiliated mortgag: bankers during tight money period~ will decline less than that of other mortgage bankers. It has been a matter of public policy in the United States for the government to support and encourage home ownership. During the period under study, mortgage bankers played a significant role in financing residential purchases in tl,at they serviced about one-sixth of all mortgages closed. The mortgage banking indust~y was the second largest factor in the real estate financing field as discussed in Trends Report, Number 21 t 1977). Under the circumstances, if it were found that BHC affiliatea morro,age bankers helped to offset t:~e decline in mortgage originations during periods of tight morley, this would be regarded as a benefit to the public.
!II. Sample and D~tta The sample used for testing consists of 33 mortgage bankers. Twenty of these are affiliated with banking organizations a and 13 are not. Each of these companies appeared on the American Banlcer list of the " 1 0 0 largest Mortgage Servicers in the U . S . " for 1973.9 These particular companies were selected because they were among those that responded to a request ~° to provide copies of their annual "Financial Statement Survey.' 'j~ Those companies that provided both originations data and servicing totals for each of the years 1973-1975 were included in our sample. Data for other years were too incomplete to be used in the study. The firms in the sample range in size
' As the a~.thor acknowledged, changes in tool.gage originations would have been a more desirat'~e growth measure since servicing portfolios reflect several years of lending activity. It should also be noted that changes in servicing volume might merely reflect growth throagh merger or by outright purchase of mortgages originated by other.,. 8Sixteen are BtiC affiliates and four are subsidiaries of a bank. 9American Banker, May 6, 1974. ~0The request was made by R. MichaelRice in connectionwith a research project he was conductingat the Federal Reserve Board. ~ These standardized financialstatements are prepared each year by the MortgageBankersAssociationto assist its members in monitoringindustry trends and companyperformance.
2"/8
J. Burke and S. A. Rhoades
from $1. I billion-S34.1 million in origir ations (1973) with an average size of $164.7 million. The key data provided in the financial statements are dollar volume of originations and servicing. The years covered in the analysis are based on two considerations. First, the year 1974 was one of very tight money while the years 1973 and 1975 were marked by moderate to easy money conditions. ~2It is necessary that this analysis cover a time. span characterized by both relatively tight and relatively easy money. Second, a unique set of data was available for these years. ~3 The basic purpose of these tests is to compare the growth of mortgage originations during a year of relatively tight money (1974) with a period characterized by relatively (or,easing conditions)easy money (1975) for a set of BHC affiliated mortgage bankers and a set of independent mortgage bankers. Consequently, growth in mortgage originations (December 1973-December 1974 and December 1974-December 1975) is the dependent variable in the regression analysis. The key explanatory variable in the analysis is a binary variable distinguishing between those mortgage bankers that are independent and those that are affiliated with a BHC. Subject to d~tta availability, other variables that may influence growth in mortgage originations are included as control variables. For example, large mortgage bankers, irrespective of affiliation, may be able to obtain funds more readily than smaller mortgag,: hankers even during periods of tight money. The larger firms may have superior ban~" lines as well as access to the commercial paper market that might allow them to originate mort:gages countercyclically. ~ Consequently, the size of the mortgage banker is included as an independent variable. It is measured by the dollar ~alue of the servicing portfolio for the year under study. Similarly, larger parent organizations may have easier access to funds than smaller parent firms. Therefore, the asset size of the parent firm is also included in the eouation. ~5 IV. Tests and Results The model is intended primarily to test the hypothesis that mortgage bankers affiliated with a BHC will increase (or decreast~,) mortgage originations more (less) "hP,, independent mortgage bankers despite tight monetary conditions. The most complete model tested using least squares regression analysis based on 33 observations is: G O : f ( S M , SP, HC),
where G;t9 = Growth of mortgage originations S M = Size of mortgage banking firm
L: This is suggested by the Federal flmds rate. The average monthly rate was 8.7%, !0.5%, and 5.8% for 1973, 1974, and 1975 respectively. Further, the period from the fourth qt aner of 1973 into the first quarter of 1975 is generally regarded as one of extreme monetary stringency. J3 Data was not available for each office of these firms. Since most of the firms operate in many local markets and usually in sever~.~ states, it was not possible to control for geographic differences in demand conditions or usury ceilings. i, Since bank credit is used by n~ortgage bankers to warehouse mortgages before resale to institutional investors, access to sh¢rt-term credit is a significant consideration. is Of t~he ! 3 mortgage bankers that were not affiliated with a banking organization, 7 were affiliated with a larger corporation.
Bank Holdin3 Company Affiliation
2"19
SP = Size of parent company ,6 H C = 1, if the mortgage banker is a BHC affiliate (or bank sub) t7
= 0, otherwise Tests were conducted on 1) the overall sample of 33 muctgage banking firms, 2) a subsampie of 20 mortgage bankers affiliated with banking organizations plus 6 mortgage bankers that are strictly independent, and 3) a subsaml, le of 20 mortgage bankers affiliated with banking organizations plus 7 mortgage bankers that were affiliated with a nonbank -orporation. t8 Tests were conducted for each sample group for both tight and easy money periods. Results for each of the samnles covering the tight money period (1974) appear in Table 1 .J9 Recall that our hypothesis is that during periods of tight money the growth of mortgage originations by bank affiliated mortgage bankers will exceed that by other mortgage bankers. Test results in Table I provide weak support at best, for the hypothesis. In particular, the binary variable (HC), which distir~guishes J
T A B L E I . C o m p a r i s o n o f Mortgage O r i g i n a t i o n Growth Between BHC Affiliated and O t h e r Mortgage Bankers D u r i n g Tight Money (1974) , Regression coefficients of independent variables (t-values in parentheses) Sample Size
Dependent Variable
Size SM
33
(;074
26
G074
27
G074
-0.0025 (0.2075) -0.0036 (0.2654) 0.0040 (0.1655)
Parent Size SP -0.0007 (0.2919) -0.0011 (0.4084) -0.0009 (0.3220 ~
BHC AffiliateNonaff'fliate HC
Consta n t
#2
0.3103 a (1.5475) 0.3209 (1.1305) 0.3109 (1.1976)
0.91320 (5.0632) 0.9281 b (3.4226) 0.8648 b (3.1231 )
0 0 0
a Indicates the coefficient is statistically significant at the 10% level b lndicatt's the coefficient is statistically significant at the 1% level.
t6 Both of the size variables, SMand SP, were tested in log form as well. The results were essentially the same but there was a high degree of collinearity between the log of size and the H C v~_ri.~ble. The size variable was scaled (divided) by 100,000. t, Tests indicated there was no difference in growth rates between the 16 mortgage bankers affiliated with a BHC and the 4 that were subsidiaries of a bank. A mortgage b~mking firm controlled by a banking organization may be operated as a holding company subsidiary or as ~ acpartment or subsidiary of a commercial bank. Many o~ the mortgage banking firms acquired or ope:ated by n ttional banks prior to the 1970 amendments subsequently became holding company subsidL~des by appl.~ink to the Federal Reserve B~ard for permanent retention under Section 4(c) (8). Four ~f the twenty MBs in our sample were still bank subsidiaries at the time of this study. ts The two subsamples permit us to determine whether the performance of strictly independent mortgage bankers differed from those affiliated with other types of corporatio~ts when compared with the 8HC affiliated firms. ~9Test results using a model similp.r to the one used in Rhoades' earlic;r study, based on all 33 obs~.rvations, yielded results similar to thos,.~in Table 1. Thus, fcJ,rthe period 19"/3-1974:
GO,, = 0.8908 - 0.0008SP + 0.'~ 142HC. R z = 0.02 (6.26"~8) (t3.3304) (I.5997) (t-valu~ in parentheses) Similar results bold for the entire p~.~od 1~'7.~- 1975 using either the reduced model shown above (sinfil ~r ;o Rhoades' study) or the larger muct,'A~hown :n Tables 1 and 2.
280
J. Burke and S. A. Rhoades
T A B L E 2. Comparison o f Mortgage Origination Growth, Between B H C Affiliated and Other Mortgage Bankers During Easy M o n e y (1975) Regression coefficients of independent variables (t-values in parentheses) Sam pie Size 33
Dependent Size \'aria hie SM ............................................ (;07 s
26
(;075
27
GO 75
- (~.0158 a
( 1.6001 ) 0.0134a .~ (! . 3 0 9 5 ) , - " --0.0342"; ( 1.8151)
Parent Size
BHC AffiliateNonaffiliate
SP
tIC
Constant
/~2
-0.0271 (0.1664) -0.0905 (0.4263) 0.0146 (0.0715)
1.1745 b (8.0047) 1.1935 b (5.8851 ) 1.2644b (5.7878)
0
_-:- .... 0.000"~
!6:!215) 0.0010 (0.5000) 0.0010 (0.4"79)
0 .01
a Indicates coefficient is statistically significant at the 10% level. /~ Indicates coefficient is statistically significant ',it the 1% level. c Indicates ~:oefficient is statistically significant at the 5% level.
BHC affiliates from other mortgage bankers is statistically significant in only one equation out of three and there it is statistically significant at on!!y the 10% level. The size variables (SM and SP) are not statistically significant. Thi~ means that the servicing portfolio size of the mortgage banker (SM) and the asset size of the parent to the mortgage banker (SP) do not have a systematic influence on the growth of the mortgage banker during a tight money period. :° Table 2 shows regression results for the easy money year 1975. During a period of easy money there is no apparent reason to expect BHC affiliates to grow faster than other mortgage bankers. Independents should experience little difficulty obtaining bank credit during such a period. The results confirm these expectations--the coefficient on the HC variable is not statistically significant. However, in contrast to the findings in Table l, the results in Table 2 provide some indication that the size of the mortgage banker, in terms of servicing portfolio, has a statistically significant inverse effect on originations growth. This means that, during periods of loose money, small mortgage bankers can grow more rapidly than large ones. The results in both tables generally exhibit/~ 2s of zero indicating that the model explains virtually none of the variation in growth of mortgage bankers. This is basically consistent with the findings of the earlier study of this issue. But the key finding is that affiliation with a BHC does not stimulate growth during an easy period and there is very little indication that it does ..~oduring a tight money period. Finally, the size of the banking organization that controis the mortgage banking firm has no apparent effect on originations. The findings thus cast doubt upon one of the principal claims made by BHCs seeking to affiliate with mortgage banking firms--tbat the flow of funds to the housing sector will, as a resMt of affiliation, become more cyclically stable.
:~ Results were essentially the sa~ae regardless of whether BHC affiliates, strictly independent firms, or ':aongage bankers affiliated with n~nbank corporations were compared with tests using different subsam#es. as in Table 1 and 2, or whether ~,ests were based on the entire sample (33) and the three classes of firms *ere distinguished with dummy variables.
Bank Holding Compary Affiliation
281
The views expressed ~er~in are the authors" and do not necessarily reflect the views of the Federal Re,rye Board or its stttff. We extend thanks to Karen EcEert t:.qd.MargaretH. English for conducting the tests in this study. An unidentified referee made several helpful commen~s.
References Mortgage Bankers Association of America. Oct. 1977 Trends Report Number 21. Rhoades, Stephen A, July ! 975, The effect of bank ho,ding company acquisitions of mortgage bankers en mortgage lending activity, Journal o f B ~zsiness 344-348. Rhoades, Stephen A. Oct. 19813. The performance of bank holding companies in equipment leasino~. Journal of Comm¢'rcial Bank Lending 53-61. Rhoades, Stephen A., and Boczar, Gregory E. 1977. The performance of bank holding compan~ affiliated finance companies. Staff £conomic Studies, No. 90. Rutz, Roger D. Jan, 1981. The tax benefits of forming one-bank holding companies under the Fed's new guidelines, Banking Law Journal 24-46. Talley, Samuel H. July 1976. Bank holding company performance in consumer finance and mortgage banking. Magazine o f Bank Administration 42-44.
2"'5
Bank Holding Company Affiliation and Contracyclical Lending by Mortgage Bankers Jim Burke and Stephen A. Rhoades
Bank holding companies have made significant inroads into the mortgage banking ir~dustyy, primarily by acquisition. Federal Reserve Board approval of acquisitions ~s contingent upon the expectation of net public benefits. This study analyzes one of the benefits that BHCs claim will arise from acquisition of mortgage bankers--~he flow of funds into housing will become more cyclically stable. Test results on a 33-firm sample of independent and BHC-affiliated mortgage bankers for 1973-1975 provide little support for this claimed public benefit.
Introduction During the past 15 years, holding companies have become an important form of banking organization in the United States and now account for about 70% of commercial bank deposits. In addition, bank holding companies (BHCs) have, under Section 4~c) (8) of the BHC Act, made significant inroads into several other financial indust~;,~s primarily by acquisition. Federal Reserve Board approval of acquisition proposals is contingent, in large part, upon the Board's assessment th~.~tnet public benefits can be expected to result from the affiliation. Unfortunately, extremely limited da'.a pertaining to the nonbank activities of BHCs has made it very difficult for researchers ~.o analyze the effects of BHCs on the indu~,tries they enter and the firms the~, acquire. This paper analyzes one of the principal benefits that BHCs claim will arise from the acquisition of mortgage banking firms--that the flow of funds to the housing sector will become more cyclically stable.
II. BHC Expansion into Mortgage Banking Although most BHCs (2625 out of 3056) are small companies controlling one bank primarily for tax advantages,t large banking ~rganizations have typically adopted the
i Many one-bank holding companies were organized primarily to g~Lintax advantages. These tax advantages have been described and illustrated in goger D. Rutz, The Tax Benefits of Forming One-Bank Holding Companies Under the Fed's New Guidelines, Banking Law Journal (Janualy ! 98 !), pp. 24-46. The authors are econorr, ists with the Federal Reserve Board, Washington, D.C. Address reprint requests to Stephen A. Rhoades, Financial Structure Section, Division of Research and Statistics, Federal Reserve System, Washington, D.C. 20551.
Journal of Economics and Business, 36, 275-28 ! (1984) © 1984 Temple University
0148-6195/84/$03.00
1"16
J. Burke and S. A. Rhoades BHC form for other reasons. For example, multi-BHCs have been used to establish statewide banking operations in states with restrictive branching laws (e.g., Florida and Texas). The holding company format has also been adopted in order to expand ix,to nonbanking activities pursuant to St,.,ction 4(c) (8) of the Bank Holding Company Act (195,5) as amended in 1970. Since 1970, the Federal Reser..'e Board has designated 22 different nonbank activities as pemlissible for BHCs that have expanded heavily into some of these activities, primarily through acquisitions. For example, between 1970 and 1981, the Federal Reserve Board approved more than 100 applications by BHCs to acq~fire mortgage banking firms. By June of 1981, more than one fourth of the 100 lar::~est mortgage bankers in the country (ranked on servicing volume) were affiliated wi~n BHCs or were direct subsidiaries of national banks. Further, 6 of the top 10, and ! ~ c.f the top 20 mortgage bankers were affiliated with a banking organization.:' Snnce mortgage banking is a local market industry with many multi~tate firms, acquisitio ~s of these firms may be an attractive vehicle for establishing an immediate interstate presence. -~ However, while the expansion into mortgage banking may be (and presumably is) beneficial to BHCs, it is not clear whether it yields benefits to the public. While the BHCs cite various public benefits in their applications to acquire nonbank firms, these claims are difficult to verify due to the lack of readily available data. 4 Thi:, study focuses on the argument that BHCs will benefit the public by making the flow ot funds to the mortgage market cyclically more stable. 5 The cou~-~tercyclical flow of funds is supposed to be possible because of the financial support provided to the mortgage banking affiliate by the parent BHC. Because of their size, most large BHCs have greater access to the commercial paper market than the typice, l mortgage banking firm. Therefore, it is ar2ued that BHCs can provide the mortgage banking affiliates with a steady supply of fund~ with which to originate and warehouse mortgages throughout the business cycle. It: contrast, unaffiliated mortgage bankers often find their funds severely restricted during periods of tight money because they rely heavily on commercial bank credit. These views are often expressed in appli cations submitted to the Federal Reserve Board by BHCs seeking to acquire a mortgage banking affiliate. T~is argument is suspect on a priori grounds because mortgage bankors have access to the secondary market for mortgages, including FNMA and GNMA, whose purchases may also be countercyclical. Further, because mortgage bankers usually reseil thei: mortgages in the secondary market, it is not clear that affiliation with a BHC should have any effect on originations during tight or easy money--what they o,,iginate they pres,lmably can sell. Thougla the question raised here is an empirical one, there are very few studies dealiXlg with the subject of BHC expansion into nonbanking markets. 6 Only one empirical investigation dealing specifically with the effect of BHCs on mortgage lending has been : F.ased on data frorn the list of the i00 largest mortgage bankers that appeared in var|ous issues of the .4 merwan B a n k e r S~m~!arl2,. BHCs have been very active in making acquisitions of con~,umer finance companies. Like mortgage bankers, these companies usually ~perate many offices in severa~ states. "~[ h e fe~, attempts to assess the effect of BHCs in noni'~ank activnties have reached unfavorable conclu~o~l~, See P.hoades ~1975, 1980). Rhoa,:les and Boczar ( 1977); Talley (1976). For example, this view has been exp:essed in a statement by Irving Rose, President, Advance Mortgage '~'orp (at the time a subsidiary of Citi,~.orp.) to the Senate Comn,,ttee on Bankin~g, Housing and Urban -~ffa~rs. Std:,comnuttee on Financiai Institutions, July 25, 1974. " See The Bank Holding C o m p a n y '¢lovement to 1978: A C o m p e n d i u m , Board of Governors of the F;eder;J1 Reser,'e System. Washington. I) C., September 19",'8, pp. 198 -200.
Bank Holding Company Affiliation
277
published to date. In that study, Rhoades (1975) focused specifically on lending activity between 1968 and 1972, but made no reference to monetary conditions during the period. Growth rates of servicing volume ~ for 16 BHC affiliated mortgage bankers over the four-year period were compared with those of 16 independent firms. The relationship tested was G = f (An, S) where G = growth in mortgages serviced (1969-1972)~ A N = 1 if the mortgage banking firm was affiliated with a bank holding company, and A N = 0 if it was not affiliated; S = size of ser,dcing portfolio at the beginning of 1969. Since neither variable proved to be statistically significant, it was cow,eluded that affiliation with a BHC did not cause mortgage bankers to improve their growth performance. Rhoades also found that there was no adjustment in the mortgage holdings of the affiliated commercial bank that would offset changes in the lending activity of the affiliaied mortgage banker. The purpose of this study is to determine whether BHC affiliation has a positive effect (i.e., countercyclical) on the lending capacity of mortgage bankers during periods of tight money. The improvement over the earlier study is tha~ annual mortgage originations (rather than accumulated servicing volume) are used to measure growth during the years 1973-1975. It is hypothesized that the dollar volume of mortgages originated by BHC affiliated mortgag: bankers during tight money period~ will decline less than that of other mortgage bankers. It has been a matter of public policy in the United States for the government to support and encourage home ownership. During the period under study, mortgage bankers played a significant role in financing residential purchases in tl,at they serviced about one-sixth of all mortgages closed. The mortgage banking indust~y was the second largest factor in the real estate financing field as discussed in Trends Report, Number 21 t 1977). Under the circumstances, if it were found that BHC affiliatea morro,age bankers helped to offset t:~e decline in mortgage originations during periods of tight morley, this would be regarded as a benefit to the public.
!II. Sample and D~tta The sample used for testing consists of 33 mortgage bankers. Twenty of these are affiliated with banking organizations a and 13 are not. Each of these companies appeared on the American Banlcer list of the " 1 0 0 largest Mortgage Servicers in the U . S . " for 1973.9 These particular companies were selected because they were among those that responded to a request ~° to provide copies of their annual "Financial Statement Survey.' 'j~ Those companies that provided both originations data and servicing totals for each of the years 1973-1975 were included in our sample. Data for other years were too incomplete to be used in the study. The firms in the sample range in size
' As the a~.thor acknowledged, changes in tool.gage originations would have been a more desirat'~e growth measure since servicing portfolios reflect several years of lending activity. It should also be noted that changes in servicing volume might merely reflect growth throagh merger or by outright purchase of mortgages originated by other.,. 8Sixteen are BtiC affiliates and four are subsidiaries of a bank. 9American Banker, May 6, 1974. ~0The request was made by R. MichaelRice in connectionwith a research project he was conductingat the Federal Reserve Board. ~ These standardized financialstatements are prepared each year by the MortgageBankersAssociationto assist its members in monitoringindustry trends and companyperformance.
2"/8
J. Burke and S. A. Rhoades
from $1. I billion-S34.1 million in origir ations (1973) with an average size of $164.7 million. The key data provided in the financial statements are dollar volume of originations and servicing. The years covered in the analysis are based on two considerations. First, the year 1974 was one of very tight money while the years 1973 and 1975 were marked by moderate to easy money conditions. ~2It is necessary that this analysis cover a time. span characterized by both relatively tight and relatively easy money. Second, a unique set of data was available for these years. ~3 The basic purpose of these tests is to compare the growth of mortgage originations during a year of relatively tight money (1974) with a period characterized by relatively (or,easing conditions)easy money (1975) for a set of BHC affiliated mortgage bankers and a set of independent mortgage bankers. Consequently, growth in mortgage originations (December 1973-December 1974 and December 1974-December 1975) is the dependent variable in the regression analysis. The key explanatory variable in the analysis is a binary variable distinguishing between those mortgage bankers that are independent and those that are affiliated with a BHC. Subject to d~tta availability, other variables that may influence growth in mortgage originations are included as control variables. For example, large mortgage bankers, irrespective of affiliation, may be able to obtain funds more readily than smaller mortgag,: hankers even during periods of tight money. The larger firms may have superior ban~" lines as well as access to the commercial paper market that might allow them to originate mort:gages countercyclically. ~ Consequently, the size of the mortgage banker is included as an independent variable. It is measured by the dollar ~alue of the servicing portfolio for the year under study. Similarly, larger parent organizations may have easier access to funds than smaller parent firms. Therefore, the asset size of the parent firm is also included in the eouation. ~5 IV. Tests and Results The model is intended primarily to test the hypothesis that mortgage bankers affiliated with a BHC will increase (or decreast~,) mortgage originations more (less) "hP,, independent mortgage bankers despite tight monetary conditions. The most complete model tested using least squares regression analysis based on 33 observations is: G O : f ( S M , SP, HC),
where G;t9 = Growth of mortgage originations S M = Size of mortgage banking firm
L: This is suggested by the Federal flmds rate. The average monthly rate was 8.7%, !0.5%, and 5.8% for 1973, 1974, and 1975 respectively. Further, the period from the fourth qt aner of 1973 into the first quarter of 1975 is generally regarded as one of extreme monetary stringency. J3 Data was not available for each office of these firms. Since most of the firms operate in many local markets and usually in sever~.~ states, it was not possible to control for geographic differences in demand conditions or usury ceilings. i, Since bank credit is used by n~ortgage bankers to warehouse mortgages before resale to institutional investors, access to sh¢rt-term credit is a significant consideration. is Of t~he ! 3 mortgage bankers that were not affiliated with a banking organization, 7 were affiliated with a larger corporation.
Bank Holdin3 Company Affiliation
2"19
SP = Size of parent company ,6 H C = 1, if the mortgage banker is a BHC affiliate (or bank sub) t7
= 0, otherwise Tests were conducted on 1) the overall sample of 33 muctgage banking firms, 2) a subsampie of 20 mortgage bankers affiliated with banking organizations plus 6 mortgage bankers that are strictly independent, and 3) a subsaml, le of 20 mortgage bankers affiliated with banking organizations plus 7 mortgage bankers that were affiliated with a nonbank -orporation. t8 Tests were conducted for each sample group for both tight and easy money periods. Results for each of the samnles covering the tight money period (1974) appear in Table 1 .J9 Recall that our hypothesis is that during periods of tight money the growth of mortgage originations by bank affiliated mortgage bankers will exceed that by other mortgage bankers. Test results in Table I provide weak support at best, for the hypothesis. In particular, the binary variable (HC), which distir~guishes J
T A B L E I . C o m p a r i s o n o f Mortgage O r i g i n a t i o n Growth Between BHC Affiliated and O t h e r Mortgage Bankers D u r i n g Tight Money (1974) , Regression coefficients of independent variables (t-values in parentheses) Sample Size
Dependent Variable
Size SM
33
(;074
26
G074
27
G074
-0.0025 (0.2075) -0.0036 (0.2654) 0.0040 (0.1655)
Parent Size SP -0.0007 (0.2919) -0.0011 (0.4084) -0.0009 (0.3220 ~
BHC AffiliateNonaff'fliate HC
Consta n t
#2
0.3103 a (1.5475) 0.3209 (1.1305) 0.3109 (1.1976)
0.91320 (5.0632) 0.9281 b (3.4226) 0.8648 b (3.1231 )
0 0 0
a Indicates the coefficient is statistically significant at the 10% level b lndicatt's the coefficient is statistically significant at the 1% level.
t6 Both of the size variables, SMand SP, were tested in log form as well. The results were essentially the same but there was a high degree of collinearity between the log of size and the H C v~_ri.~ble. The size variable was scaled (divided) by 100,000. t, Tests indicated there was no difference in growth rates between the 16 mortgage bankers affiliated with a BHC and the 4 that were subsidiaries of a bank. A mortgage b~mking firm controlled by a banking organization may be operated as a holding company subsidiary or as ~ acpartment or subsidiary of a commercial bank. Many o~ the mortgage banking firms acquired or ope:ated by n ttional banks prior to the 1970 amendments subsequently became holding company subsidL~des by appl.~ink to the Federal Reserve B~ard for permanent retention under Section 4(c) (8). Four ~f the twenty MBs in our sample were still bank subsidiaries at the time of this study. ts The two subsamples permit us to determine whether the performance of strictly independent mortgage bankers differed from those affiliated with other types of corporatio~ts when compared with the 8HC affiliated firms. ~9Test results using a model similp.r to the one used in Rhoades' earlic;r study, based on all 33 obs~.rvations, yielded results similar to thos,.~in Table 1. Thus, fcJ,rthe period 19"/3-1974:
GO,, = 0.8908 - 0.0008SP + 0.'~ 142HC. R z = 0.02 (6.26"~8) (t3.3304) (I.5997) (t-valu~ in parentheses) Similar results bold for the entire p~.~od 1~'7.~- 1975 using either the reduced model shown above (sinfil ~r ;o Rhoades' study) or the larger muct,'A~hown :n Tables 1 and 2.
280
J. Burke and S. A. Rhoades
T A B L E 2. Comparison o f Mortgage Origination Growth, Between B H C Affiliated and Other Mortgage Bankers During Easy M o n e y (1975) Regression coefficients of independent variables (t-values in parentheses) Sam pie Size 33
Dependent Size \'aria hie SM ............................................ (;07 s
26
(;075
27
GO 75
- (~.0158 a
( 1.6001 ) 0.0134a .~ (! . 3 0 9 5 ) , - " --0.0342"; ( 1.8151)
Parent Size
BHC AffiliateNonaffiliate
SP
tIC
Constant
/~2
-0.0271 (0.1664) -0.0905 (0.4263) 0.0146 (0.0715)
1.1745 b (8.0047) 1.1935 b (5.8851 ) 1.2644b (5.7878)
0
_-:- .... 0.000"~
!6:!215) 0.0010 (0.5000) 0.0010 (0.4"79)
0 .01
a Indicates coefficient is statistically significant at the 10% level. /~ Indicates coefficient is statistically significant ',it the 1% level. c Indicates ~:oefficient is statistically significant at the 5% level.
BHC affiliates from other mortgage bankers is statistically significant in only one equation out of three and there it is statistically significant at on!!y the 10% level. The size variables (SM and SP) are not statistically significant. Thi~ means that the servicing portfolio size of the mortgage banker (SM) and the asset size of the parent to the mortgage banker (SP) do not have a systematic influence on the growth of the mortgage banker during a tight money period. :° Table 2 shows regression results for the easy money year 1975. During a period of easy money there is no apparent reason to expect BHC affiliates to grow faster than other mortgage bankers. Independents should experience little difficulty obtaining bank credit during such a period. The results confirm these expectations--the coefficient on the HC variable is not statistically significant. However, in contrast to the findings in Table l, the results in Table 2 provide some indication that the size of the mortgage banker, in terms of servicing portfolio, has a statistically significant inverse effect on originations growth. This means that, during periods of loose money, small mortgage bankers can grow more rapidly than large ones. The results in both tables generally exhibit/~ 2s of zero indicating that the model explains virtually none of the variation in growth of mortgage bankers. This is basically consistent with the findings of the earlier study of this issue. But the key finding is that affiliation with a BHC does not stimulate growth during an easy period and there is very little indication that it does ..~oduring a tight money period. Finally, the size of the banking organization that controis the mortgage banking firm has no apparent effect on originations. The findings thus cast doubt upon one of the principal claims made by BHCs seeking to affiliate with mortgage banking firms--tbat the flow of funds to the housing sector will, as a resMt of affiliation, become more cyclically stable.
:~ Results were essentially the sa~ae regardless of whether BHC affiliates, strictly independent firms, or ':aongage bankers affiliated with n~nbank corporations were compared with tests using different subsam#es. as in Table 1 and 2, or whether ~,ests were based on the entire sample (33) and the three classes of firms *ere distinguished with dummy variables.
Bank Holding Compary Affiliation
281
The views expressed ~er~in are the authors" and do not necessarily reflect the views of the Federal Re,rye Board or its stttff. We extend thanks to Karen EcEert t:.qd.MargaretH. English for conducting the tests in this study. An unidentified referee made several helpful commen~s.
References Mortgage Bankers Association of America. Oct. 1977 Trends Report Number 21. Rhoades, Stephen A, July ! 975, The effect of bank ho,ding company acquisitions of mortgage bankers en mortgage lending activity, Journal o f B ~zsiness 344-348. Rhoades, Stephen A. Oct. 19813. The performance of bank holding companies in equipment leasino~. Journal of Comm¢'rcial Bank Lending 53-61. Rhoades, Stephen A., and Boczar, Gregory E. 1977. The performance of bank holding compan~ affiliated finance companies. Staff £conomic Studies, No. 90. Rutz, Roger D. Jan, 1981. The tax benefits of forming one-bank holding companies under the Fed's new guidelines, Banking Law Journal 24-46. Talley, Samuel H. July 1976. Bank holding company performance in consumer finance and mortgage banking. Magazine o f Bank Administration 42-44.