Seattle’s HomeStreet Bank has sold a quarter of its mortgage-servicing business to a bank in Atlanta. It’s a sale that moves $3 billlion worth of mortgage relationships out of state.
HomeStreet is among the first in Washington state to make this decision ahead of a new step in banking reform. Starting next year, all banks have to hold more money in reserve, or they have to stop handling mortgage payments.
The goal is to improve bank stability. However, the Federal Reserve has acknowledged that community banks are already stable.
Many large banks have already sold their mortgage servicing businesses in preparation for the change. However smaller banks build their business by offering customers enduring relationships. And that is the problem.
Cathy Edens holds a mortgage from HomeStreet, a bank she had chosen after her loan from Countrywide was moved to a succession of other servicers. HomeStreet promised to be different. “I was assured by the good people at the branch that they had never done that, and that they did not intend to,” she said in an interview.
Edens said she understands HomeStreet has to comply. “However they also have a kind of a moral and ethical obligation to their customers. Which is, they sell their services on the basis of them being a local bank.”
“Many of our customers are very upset with us, and I feel horrible,” said Mark Mason, the chief executive of HomeStreet Bank. He said the bank’s business was built on its relationship with customers. Being a lender that kept enduring ties with its customers by taking mortgage payments and dealing with any issues that arose made sense.
But the new capital requirements have forced the bank to decide between keeping that business, or holding more money in reserve -- a difficult choice for a lender.
Larger banks have already decided to part with their mortgage servicing businesses altogether. Rick Riccobono, the director of banking for Washington’s Department of Financial Institutions, said many banks are selling to non-banks. The banking reforms designed to protect consumers do not apply to the non-banks.
Mason said HomeStreet had been able to sell to SunTrust, which is a bank and will be subject to rules. SunTrust was, however, fined $968 million for past abusive mortgage practices. Mason said he would prefer to keep the remaining three-quarters of HomeStreet’s mortgage servicing in-house.
“We hope this is a one-time occurrence,” Mason said in an interview. “But the reality is we don’t know.”
That’s because the banking reforms are only about halfway through, even though it’s been six years since the financial crisis that triggered the legislation. So there could still be more rules.
Riccobono said the new regulations are having unintended consequences. “It’s all now coming home to roost as these things are being published and put into effect,” he said. “All well-intended to protect the consumer but in reality it’s denying consumer flexibility and credit.”
It’s expected homeowners affected by HomeStreet’s decision will lose flexibility. The mortgages HomeStreet parted with were low interest rate loans.
HomeStreet CEO Mason said customers who want to move their mortgage to an in-state lender won’t be able to do that without paying a lot more. “So they’re going to live with this new servicer for the length of the time they own their homes.”
