B of A Merger to Alter Residential Lending Market : Real Estate: The combined bank will by far be the state’s biggest residential lender, a development with potentially far-reaching impact for consumers and competitors.
Last month’s announcement that BankAmerica Corp. will acquire rival Security Pacific Corp. spurred plenty of talk of global ambitions and the inevitability of nationwide banking.
But seemingly lost amid the news of the merger, a stock swap valued at more than $4 billion, was the fact that the combined bank will by far be California’s biggest residential lender. This development has potentially far-reaching impact for consumers and lending competitors in what historically has been a highly fragmented market.
In the second quarter, the $3.5 billion in total residential lending--defined as new home loans, refinancings and home equity loans--by the two banks totaled 9.3% of the overall market in California, according to Dataquick Information Systems in La Jolla. That share is nearly three times the total share of the banks’ next three largest competitors, Home Savings of America, Great Western Bank and World Savings & Loan.
“We’ve never experienced anything quite like this in California. This is breaking new ground to have someone that dominating in size with enormous marketing muscle,” said Herbert M. Sandler, chairman of Oakland-based Golden West Financial, the parent company of World Savings.
Adds Ray Martin, chief executive of Coast Savings Financial in Los Angeles: “No one has come close to this in my 30 years in the business. They will be a formidable, dominant player.”
No one believes that the new B of A will--or can even if it wants to--boost interest rates and fees significantly right after the merger is final in four to six months.
As big as the banks are, the combined institution would still control less than 10% of the total residential lending market, with dozens of thrifts, commercial banks and mortgage banking firms making up most of the rest. In addition, non-bank companies are growing more active in California’s competitive home lending market, led by the mortgage units of such companies as Weyerhaeuser, Sears Roebuck, General Motors and Prudential Insurance.
“This will not be a monolith in any way, shape or form,” said Leslie Appleton-Young, vice president of research and economics for the California Assn. of Realtors.
Still, consumer groups are worried by the growing concentration in banking and the eventual effect it will have on home lending in the nation’s most lucrative home lending market. They are especially concerned about the prospect of more mergers among the state’s largest banks and thrifts, something many experts believe is inevitable as the industry consolidates.
Ken McEldowney, executive director of Consumer Action in San Francisco, said he fears that the new B of A will become analogous to AT&T; in the long-distance market--such a strong company that it will take the clear lead in setting what consumers pay.
McEldowney said that the increased concentration does not necessarily mean mortgage rates will go up but that it may instead discourage banks from price slashings that would benefit consumers. Lenders that do cut rates may go unnoticed, he argues, because they will be overwhelmed by the marketing clout of the new B of A.
“With major players with even larger shares, it’s even less likely there will be competition in those areas. Everyone will be happy with their market share,” he said.
Robert Gnaizda, a San Francisco public interest lawyer active in lobbying banks to lend more in low-income areas, adds that his concern is that with increased concentration, lending standards on home loans will increasingly be set by a smaller number of institutions.
“When you’re stuck with one bank instead of four in an area, there is a lot less creativity,” Gnaizda said.
Another prediction--which reflects a common criticism of banks in general by consumer groups--is that the combined bank might one day become disenchanted with making home loans when more lucrative businesses such as commercial real estate eventually recover.
B of A spokesman John Keane said California will remain a competitive market even after the merger.
“We’re happy with our record in mortgage lending over the last few years and the leading position we have achieved. Still, our share of the market is relatively small. If you add in Security Pacific, that would still be the case,” Keane said.
Keane added that the bank has for decades been very active in mortgage lending and plans to remain so. Banking experts also note that federal rules on capital--the financial shock absorber that banks maintain to protect against losses--tied to the riskiness of loans and other assets will encourage the bank to make a significant amount of home loans.
BankAmerica and Security Pacific executives have also argued that a combined bank will operate much more efficiently, making it better able to provide more convenient and affordable banking products. Both have also been actively reassuring community action groups that they plan to abide by previous pledges to increase lending in low-income areas.
The emergence of a huge B of A/Security Pacific home lender will further transform a market that has changed dramatically in the past 10 years in California.
Savings and loans, which a decade ago practically owned the home loan market in California, have steadily lost ground to the state’s banks and mortgage banking companies over the years as the thrift industry’s troubles have grown. In the past six years, the share of new mortgages by S&Ls; slipped from nearly half to a little more than one-third now while banks and mortgage bankers gained, according to the California Assn. of Realtors.
Leading the bank charge into the market has been B of A. As part of its recovery from near-disaster in the mid-1980s, the San Francisco bank launched an aggressive consumer banking strategy, pushing new home loans, refinancings and home equity loans.
Even without Los Angeles-based Security Pacific, B of A itself is the biggest residential lender in the state. In overall residential lending, Security Pacific usually ranks in the top five. Together, the two banks’ portfolio of home mortgages will be $25.2 billion, according to a Salomon Bros. analysis.
The state’s two other major banks, which both declined comment on their plans, ranked well behind B of A and Security Pacific in overall residential lending in the second quarter. According to Dataquick’s numbers, San Francisco-based Wells Fargo was 10th in the state, with more than 2% of the market, while First Interstate in Los Angeles ranked 24th, with less than 1%. New York-based Citicorp’s Citibank unit was sixth, with 2.2%.
Angelo Mozilo, chief executive of Pasadena-based Countrywide Funding, the state’s largest mortgage banker, said he fears that theA could become overly aggressive in trying to gain a larger share of the market--as Citicorp has done in the past--causing other lenders to relax their underwriting standards to stay competitive.
“They could go the way of other larger institutions who get muscle-bound,” Mozilo said.
Citicorp has seen its mortgage delinquencies soar recently, which some critics of the firm say was the result of its overly aggressive strategy.
But Golden West’s Sandler, who is friends with B of A Chief Executive Richard M. Rosenberg and other members of the bank’s senior management, doesn’t see the executives doing that. Even still, he is reluctant to predict what will eventually happen.
“We are breaking new territory. If we try to forecast what is going to happen, we’d be kidding ourselves,” Sandler said.
California Residential Lending The merger of Bank of America and Security Pacific National Bank would make the new institution the largest player in statewide residential lending, including home mortgages, refinancing and home equity loans. Based on data from the second quarter ended June 30, the new Bank of America would control about 9.3% of the market.
Dollar Volume Market Rank Institution No. of Loans (in millions $) share 1 Bank of America 23,118 $2,503.8 6.63% 2 Home Savings 9,147 1,407.6 3.73 3 Great Western 9,805 1,236.9 3.28 4 Security Pacific 11,112 1,019.3 2.70 5 World Savings 5,497 953.5 2.53 6 Citibank 5,492 834.4 2.21 7 IMCO Realty Services 5,484 824.4 2.18 8 Sears Mortgage 3,015 814.0 2.16 9 Countrywide Funding 4,603 791.3 2.10 10 Wells Fargo 9,489 765.8 2.03
