Smaller Lenders Eyeball Larger Share Of Origination Space

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Smaller lenders are out to prove that ‘bigger’ is not always synonymous with ‘better,’ especially when it comes to snagging a larger share of the residential mortgage originations market.

The nation's five largest banks, facing difficulties from servicing issues and repurchase demands, have retracted from mortgage lending and created an opening for smaller lenders to fill that void, according to Paul Miller, an analyst with FBR Capital Markets & Co., who adds that second-tier lenders – including PHH Mortgage, U.S. Bank, Quicken Home Loans, Provident Funding, BB&T and Fifth Third – have more than doubled their market share from 2007 to the third quarter of 2011.

Miller predicts in his new study, ‘Mortgage Banking: Deconsolidation of the Mortgage Market Benefits Smaller Entities,’ that the smaller lenders will continue to take a larger share of the originations pie going forward. Miller's study found that PHH increased its market share of mortgage originations from 1.6% in 2007 to 3.8%, while U.S. Bank's share grew from 1.3% to 3.5%, Quicken's increased from 0.5% to 2.1% and Flagstar's share edged up from 1.1% to 2.1%.

Some of the larger players have left the market completely or are offering less competitive pricing, according to Miller. Among the largest originators, only Wells Fargo has increased its market share. In contrast, Bank of America's dominance in the mortgage market has eroded since acquiring Countrywide in 2008. Bank of America's combined market share has declined from 25% to 10% as of the third quarter of 2011, and its falling market share accelerated last year as the company exited the correspondent lending channel after inheriting the business from Countrywide and taking huge losses from repurchase claims.
Bank of America's actions created a void that was quickly filled: U.S. Bank built up its correspondent lending volume by taking advantage of the decision of Bank of America and others to leave the correspondent business, says Dan Arrigoni, president of U.S. Bank Home Mortgage, who adds that the other banks' departure from warehouse lending has also allowed U.S. Bank to increase its originations volume by offering warehouse lines to mortgage bankers.

Arrigoni adds that when the bank provides a warehouse line to a mortgage banker, it seeks to purchase some of the banker's loans. While some mega-banks are now suffering reputation stains because of subprime loans they offered during the boom years, U.S. Bank avoided those products.

‘For that reason, we are better able to capture some of the business that others don't care to be in,’ Arrigoni says. ‘While forecasts call for a 20 percent to 30 percent decline in volume, we're in a position to not feel that decline.’
Bob Walters, chief economist at Quicken Loans, says that his company has also reaped the benefits of this changing environment.

‘The last couple of years have been a convergence to the middle,’ says Walters, noting that the nation's five mega-banks have mostly retrenched while the second-tier competition is well situated to increase their market share. ‘The mega-banks are right in the middle of a huge firestorm in this country. It's highly political, and it's highly charged.’

Plus, Walters adds, many mega-banks are already reducing their servicing portfolios to increase their capital reserves and meet Basel III rules that go into effect later in this decade. ‘Basel III has given them heartburn over capitalization of servicing rights,’ he says.
On the other end of the spectrum, however, brokers and many small mortgage bankers have been decimated by new licensing requirements and regulations. While smaller lenders will take a large piece of the mortgage originations pie, the size of the overall pie appears to be shrinking. For example, U.S. Bank will probably have about the same mortgage volume this year, Arrigoni says, but its market share will nonetheless grow even if its overall origination volume shrinks.

The Mortgage Bankers Association (MBA), Miller observes in his report, is predicting that the origination market will shrink by about 28% to roughly $935 billion in 2012, driven by a 40% decline in refinances due to higher interest rates and refi burnout.

The MBA forecasts $1.1 trillion of originations in 2013, but that number could change as a result of the second version of the Home Affordable Refinance Program (HARP).

‘We believe this forecast could prove to be conservative if the implementation of HARP 2.0 is successful and there is an accommodative monetary policy from the Fed,’ Miller writes in his report. ‘We believe some government initiatives, such as HARP 2.0, could produce an incremental $300 billion of mortgage originations in 2012.’

Michael Kling is a former editor of Secondary Marketing Executive and a financial journalist based in Stratford, Conn.


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