The devastating economic environment has served as a purge on the mortgage industry, killing hundreds of mortgage banking businesses in Massachusetts. Now, some survivors, faced with a tangle of new regulations and sharp cost increases, are fleeing to the sanctuary of larger mortgage peers or banks. 

For smaller mortgage brokers and lenders, new regulations are more than daunting: An alphabet-soup of new regulations such as HVCC, RESPA, TILA have loaded the industry with red tape and paperwork – something many small lenders can’t afford to spend time on. In addition, new certification rules create more costs and barriers to entry, particularly for small, cash-strapped companies.

“It’s definitely happening,” said Leif Thomsen, head of Walpole-based Mortgage Master, of consolidations in the industry. Mortgage Master expanded significantly last year in neighboring Connecticut, partly as a result of phone calls to his office from companies or individuals looking for a buyer. Thomsen estimates that he spoke with 120 individuals interested in selling to his company in 2009, and has already been on the phone with approximately 20 more in 2010.

If brokers and lenders don’t simply close up shop, they may sell their business to a larger mortgage lender. Or, for a smaller but growing number, they can attract interest from a bank looking to expand its mortgage footprint.

An Intriguing Possibility

The idea has the attention of Denise Hawk, director of retail lending for Ware-based Country Bank for Savings. The bank is interested in expanding its mortgage footprint, and Hawk is willing to consider the possibility of a mortgage lender acquisition. After a bit more research, that is.

It’s not in Country Bank’s immediate plans, she said, and may not turn out to be viable when all the details are in. Still, “It is something that I found intriguing,” she said.

Buying a mortgage lending operation whole-hog has some advantages, said Thomas Grottke, president of Connecticut-based consultancy Northeastern Banking Services Group, which does a fair amount of business in Massachusetts. Grottke told Banker & Tradesman he saw industry consolidation gaining traction among some of his banking clients. Some bankers like the idea of taking on a bulk package of experienced personnel who can expand the mortgage business in one large chunk.

But while a growing number of bankers might be mulling the possibility, that group is decidedly in the minority, he said.

Many bankers don’t want the complications inherent in absorbing a team of new people, who come in with a ready-established culture that might not jibe with the bank.

What’s more, mortgage bankers often work differently compared to banks. Ever since the rise of mortgage banking roughly 15 years ago, he said, bankers have been making “plain vanilla” loans that they often keep on the books, whereas mortgage lenders come from a bulk-origination mentality, using aggressive marketing and rate-setting to plow through as many loans as possible, which they promptly sell.

Best Of Both Worlds

But there are always exceptions. South Shore Savings Bank took the plunge in November 2008, acquiring Cambridge Mortgage Group and moving its standing mortgage operations over to the new subsidiary.

The deal made sense, said Christopher Dunn, COO at Weymouth-based South Shore Savings, because the two companies had so much in common. South Shore knew the personnel at Cambridge Mortgage very well, having frequently bought loans from them.

In addition, South Shore was comfortable with the mentality of mortgage lending operations – the bank re-sold many of its loans on the secondary market.

The bank sought to adopt the type of entrepreneurial sales culture more typical of mortgage companies, but back it up with the strong regulatory and capital structure of a bank.

“We knowingly were trying to seek the best of both worlds,” Dunn said, adding that sometimes the strict banking culture limits opportunity for growth. Dunn is also happy with the acquisition’s results. In 2008, South Shore did $79 million in mortgage lending, according to data from The Warren Group, publisher of Banker & Tradesman. In 2009, the combined entities did $183 million.

Still, for many bankers, the idea just doesn’t fly. Harwich-based Cape Cod Five Cents Savings Bank saw rapid growth in 2009, with 125 percent more loans than in 2008, according to data from The Warren Group. Cape Cod Five Senior Vice President David Brennan said the bank is looking to grow its mortgage business, but agreed with Grottke that bank and mortgage company cultures often just don’t mix.

Banks are interested in selling other types of products, such as regular deposit accounts, instead of focusing solely on the mortgage business, he said. That mentality doesn’t really exist for mortgage companies.

“There is a cultural difference between a pure mortgage banking-orientated environment … and sometimes it’s difficult to make those cultures come together,” Brennan said.

Mortgage lending companies have been knocking on the door of Needham’s Greenpark Mortgage. But Paul Gershkowitz, president, indicated they were likely to get a wary reception there, too.

Gershkowitz echoed banks’ desire to hire individuals, not businesses, so he can fit those individuals more smoothly into the company as a whole. Plenty of unsavory characters are still operating in the mortgage business, and he’d rather grow slowly with the right people that he’s had a chance to check into, rather than taking on whole groups.

“Lots of people left in the industry are not as ethical as you want them to be,” he said.