Life as a small bank is hard. There are endless regulations, compliance costs, capital constraints, loss provisions, technology investments, auditing expenses, overhead costs, etc.
Yet, there are mortgage lenders out there gung-ho about getting bank status.
Being a bank has benefits to a lender, no doubt. One is lower warehousing costs (the cost of holding mortgages until they can be sold off to investors). Another benefit is brand credibility. Another is increased-cross-selling opportunities and product offerings. And there are others.
Probably the most widely-cited benefit, however, is the ability to accept deposits. Deposits are seen as a cheaper source of mortgage funds than securitization and most alternative funding channels. In theory, that allows for a bigger spread (profit) on mortgage lending. Most mortgage lenders would agree that, without deposits, a bank license isn’t worth the hassle.
The challenge, however, is that everyone wants deposits. In fact, the deposit wars are as fierce as the mortgage wars. It’s even making some big banks do the unthinkable: offer competitive savings rates!
The result is twofold:
Net interest margins will fall
You’ll now find lenders with established brand names that can’t generate decent deposit growth.
How then, is a new mortgage bank with minimal recognition going to steal deposits from brand giants like ING, and from the Ally‘s of the world, with their monster marketing budgets and 3.30% 5-year GICs?
It’s most likely not going to happen. Most wanna-be-bankers might do better to redeploy their resources and simply partner with existing banks.