Mortgage unit reflects 'maturation' of Luther Burbank Savings

SANTA ROSA - Luther Burbank Savings plans to launch a new residential mortgage division this October, employing a hybrid loan officer/broker approach that chief executive John Biggs said is "very unique" in the banking industry.

Based in Santa Monica and Newport Beach, the new division, Luther Burbank Mortgage, will oversee residential loan officers in each Luther Burbank branch by late 2013 or early 2014. In addition to facilitating loans provided under the $3.6-billion-asset Luther Burbank, staff will also arrange mortgages with other financial institutions.

Luther Burbank had funded residential mortgages through a handful of wholesale brokers in the past, but a swell of customer demand helped inspire the creation of an in-house service, Mr. Biggs said.

"What we're saying is -- we don't have a product. You can even go to another bank," said the CEO. "But they will be in our branches doing that."

The Santa Rosa-based lender hired Jay Robertson, formerly president of Los Angeles’ First Capital Mortgage and a well-known broker in Southern California, to head its new unit. The division is expected to originate $1 billion in new loans during its second year of operation, nearly doubling the entirety of new loans anticipated for 2013, Mr. Biggs said.

Luther Burbank's balance sheet composition is expected to remain largely unchanged, he said. As a specialist in apartment lending, around 67 to 68 percent of those assets are currently apartment loans. Around 25 percent are residential loans.

While the in-house broker approach has been seen in the world of commercial lending in the past, Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said that other lenders will likely be watching to see how the residential focus unfolds for Luther Burbank.

"In talking to some of our members, it sounds like it is a one-off thing," he said. "If it is successful, I can guarantee you that there will be people looking to copy it."

Luther Burbank will be able to diminish the fees it would normally pay to outside brokers in the new approach, and staff in the division will generate fee income from loans brokered with other institutions. Yet Mr. Biggs said that the revenue from those outside fees was relatively minimal, with the greater benefit being the ability to efficiently grow the direct services offered to customers.

"It's natural to do retail as you get bigger," he said. "It's the maturation of the bank. As we've grown, we don't need to rely so much on brokers."

Some lenders, including the residential mortgage giant Wells Fargo, have recently scaled back their home loan divisions as rising interest rates have lowered demand for refinancing. Yet Luther Burbank Mortgage is expected to focus largely on home purchase loans, aiming to address a pent-up demand for housing in the coming years, Mr. Biggs said.

The CEO acknowledged that the current regulatory environment for home lending has significantly raised the bar for those looking to expand their residential mortgage activities, requiring greater efforts in compliance. Luther Burbank Savings itself had agreed to a $2 million settlement with the U.S. Department of Justice nearly one year ago over allegations that a specialized wholesale residential mortgage loan product targeted for high-net-worth individuals had discriminated on the basis of race and national origin.

The settlement did not implicate Luther Burbank in any wrongdoing, and Mr. Biggs said that the new mortgage division was not connected to that agreement. Yet the ability for greater oversight through the in-house unit could help to address future concerns in a regulatory environment that continues to unfold in the wake of the recent financial crisis.

While the majority of the residential mortgage loans funded under Luther Burbank Savings will be sold to outside firms like the federally backed Fannie Mae and Freddie Mac, Mr. Biggs said that the lender is also considering a future where those institutions' role is uncertain.

"That's part of the reason I wanted to build up this unit -- people will still need mortgages," he said.

He added, "In the current regulatory environment, if you do single-family lending, you can't dip your toe in it. You have to do it all."

Luther Burbank Savings currently has eight branches throughout Northern and Southern California.

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