NEW YORK – Some analysts are forecasting that the mortgage market will change dramatically in 2012 as the largest banks cede portions of the loan origination market to smaller lenders.
Big mortgage players, including Bank of America Corp. and Ally Financial Inc., are pulling back their correspondent lending and other operations in the face of regulatory scrutiny, bond investors’ lawsuits, and the dismal state of the housing market, reported American Banker, an affiliate of Credit Union Journal. At the same time, the subprime lenders who dominated a large part of the mortgage market before the financial crisis have largely disappeared, carving out a bigger void for the remaining mortgage companies.
Now some smaller competitors are stepping into that void and expanding, selling loans directly to the government-sponsored enterprises and even considering retaining the servicing of the loans they originate. Since 2007, regional banks and independent lenders, including BB&T Corp., Fifth Third Bancorp, PHH Corp., Provident Funding, and U.S. Bancorp, have each more than doubled their market share, according to FBR Capital Markets analyst Paul Miller.
“Given the cost to the large banks to service mortgages, we expect the smaller players to continue taking share,” said Miller. Miller added that large banks are allocating less capital to mortgage banking and have a limited ability to originate mortgages “at the pace they have in the past.”
Bob Walters, chief economist at Quicken Loans Inc., told American Banker the mortgage industry is going through “systemic and structural changes,” and “the prices being paid for servicing rights and whole loans has dropped dramatically.”
“It’s not necessarily [just] that Bank of America is writing fewer loans, but the bigger part is smaller to mid-sized lenders are dramatically affected by what’s happening with the Big Five lenders,” Walters said, referring to B of A, Ally, Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co.
Large banks are worried about the impact of proposed Basel III capital rules, which would allow banks to count mortgage servicing assets as only 10% of Tier 1 capital at most – much more stringent than the current 50% cap. If implemented, the new cap could hurt the capital ratios of mortgage-heavy institutions.
Regulatory changes also are reshaping the market. Large lenders are wrestling with revisions being made to the risk-retention rule mandated under the Dodd-Frank Act, attempts to eliminate Fannie Mae and Freddie Mac, and changes to mortgage servicing fees.
