|A Southern California wholesale lender that shut down well ahead of the mortgage meltdown is back.
In June 2005, Pacific Mercantile Bank closed its wholesale lending unit.
At the time, the Costa Mesa, Calif.-based company cited increased costs, inconsistent results and excessive capital required to improve the unit. Instead, it would concentrate its capital and other resources on expanding its commercial banking business.
"The wholesale mortgage division was good for us in the early years of the bank when there was a decline in the commercial interest rates and a slowing in the economy that led to declines in commercial loan demand," Pacific Mercantile Bancorp President and Chief Executive Officer Raymond Dellerba said at the time.
By the end of the following year, a crack in the foundation of the mortgage industry emerged. Eventually, more than 300 significant mortgage operations would fail or shut down.
But as commercial mortgage capital has dried up and the residential mortgage market has emerged as one of the few bright sectors of the U.S. economy -- the bank has apparently changed its strategy.
"We anticipate the demand for commercial loans will remain somewhat flat in 2009 and possibly longer," Dellerba said in an earnings report released yesterday. "At the same time, we expect that, in the coming months, there will be an increase in home purchases and a corresponding increase in the demand for residential mortgage loan products as prices for homes begin to stabilize and the economic recovery begins."
He added that loan quality has improved significantly as underwriting standards have been tightened and nonconforming products have disappeared.
The current conditions have created an opportunity that Pacific Mercantile hopes to capitalize on by re-entering the retail and wholesale mortgage markets. The lender hopes to duplicate the profitable run it had in the years following the 'Dot.com Bust' and the September 11, 2001, terrorist attacks -- when commercial activity slowed.
"Our plan is to initially offer mortgage loan products consisting of government and agency-quality one-to-four family first mortgage loans, which, in most instances we would fund at the time of origination and then sell off to investors in the secondary market," Dellerba explained. "In conjunction with that business, we will follow up with a retail residential mortgage loan division in the second quarter of 2009."
Pacific Mercantile, which plans to maintain its commercial lending operations, reported a $16 million fourth-quarter 2008 loss before taxes -- pushing the bank's capital down to $92 million.
Residential loans on its balance sheet were $65 million on Dec. 31, while commercial mortgage holdings -- including owner-occupied, nonowner-occupied and multifamily -- were $403 million.
In yesterday's report, however, Pacific Mercantile warned, "Our re-entry in the wholesale mortgage loan business may cause us to incur additional operating expenses and may not prove to be profitable."
Wholesaler Shutting Down
A Southern California bank is shutting the doors of its residential wholesale mortgage lending operation so it can focus on another business.