Competition becomes a two-horse race

8 March 2010 | By Paul Muolo

When it comes to residential loan volumes it’s all relative. Here in the US a $1.5trillion production year would normally be considered a disaster but if the previous year’s volume was $1trillion it would feel, well, not so bad.

Don’t get me wrong, the residential loan market in the US is still recovering. It’s not a pretty sight but at least it’s not as god-awful as 2008 when just $1.6trillion in loans were produced by banks, non-banks, savings and loan outfits and credit unions. These four institution types are known collectively as our mortgage industry.

The final numbers from last year have just arrived, courtesy of the newspaper and website I work for- National Mortgage News. It appears that 2009 was a decent year - $1.9trillion in new mortgages funded on our side of the pond, representing a 19% gain on 2008.

But as we all know 2008 was a disaster - the year when the housing bubble finally popped and credit markets froze over. Not to mention the failures of financial superstars Lehman Brothers and Bear Stearns - the latter was more or less a failure as it was sold to JPMorgan Chase - and the government’s seizure of mortgage investment giants Fannie Mae and Freddie Mac.

It transpires that 2009 was the second worst year in terms of volume for the past decade, clearly showing that 2008 was the pits. But mortgage bankers don’t always like to look in the rear view mirror. It’s not what you did yesterday that counts in their world, it’s more a matter of what the next 12 months will bring. And therein lies the problem.

Wells Fargo and Bank of America are gobbling up origination market share, with 46.3% between them

Mortgage rates on 30-year fixed loans have been ranging between 4% and 5% for the past 12 months. These are the lowest numbers for four decades.

The anticipation is that rates will rise in the late spring and summer, hurting loan volumes and scaring off consumers - those who actually have jobs - from buying homes or moving into bigger ones.

Meanwhile, the refinancing market which accounted for about 65% of all new loans last year is in so-so shape and will probably continue to plod along.

Many consumers who would like to refinance can’t at the moment because the value of their homes has declined to such an extent that to do so would be next to impossible without putting more money down.

For example, if a couple bought a home in California for $500,000 three years ago with a 10% down payment and are now trying to refinance that same property they will discover that it’s worth only $400,000 and their down payment has evaporated. You get the picture.

But getting back to loan volumes, the current year will not be like 2009. Housing and mortgage economists estimate that loan production will range between $1.2 trillion to $1.7 trillion. So matter which way you look at it 2010 will be a down year.

The only positive for mortgage bankers is that profit margins continue to be strong. After all, when your cost of funds is 1% to 2% and you’re bringing in 5% on your loans it’s a beautiful thing.

The only other saving grace is that so many lenders have failed in the past three years that competition has been greatly reduced. Of course, less competition means a greater ability to charge higher rates and fees.

Besides their concern that originations will be weak this year US lenders have another worry - Wells Fargo and Bank of America. These two mega-banks continue to gobble up origination market share.

In Q4 2009 BoA and Wells originated $184.8bn in family loans between them, giving the lenders a combined production market share of 46.3% - the highest ever recorded. In the previous quarter the two banks had a 44.3% share and a 36.4% share in Q4 2008.

Wells’ share alone is 23.92%, with BoA close behind. Chase is third with 9.02% and after that the numbers pretty much drop off the table. By the time you get to the 20th largest lender, Regions Mortgage of Alabama, the market share figure is a meagre 0.49%.

Small to medium-sized lenders are continually fretting about the domination of BoA and Wells but while their profit margins remain strong the situation is not quite so irksome for them.

Some mortgage managers believe that if loan volumes decline significantly this year the companies with the largest branch networks and full-time employee costs will suffer most because their fixed costs will drag down profits.

As mortgage volumes fall, the same number of workers will be billed against declining production.

Of course, the only way to resolve this is to cut headcount. And which lenders have the largest retail networks? Yes, BoA and Wells.