2000 Wasn't So Bad

As years go, 2000 was the fourth best ever for residential lenders. In total, about $1.05 trillion in purchase money and refinanced loans were written by mortgage lenders of all stripes. To many in the industry, "fourth best" might sound pretty good but to hear some mortgage bankers tell it, they're more than happy that Father Time has laid 2000 to rest.Last spring when Countrywide Home Loans chief Angelo Mozilo was asked about the state of the industry, his blunt response was: "It stinks." Asked recently about the state of residential lending, Mr. Mozilo couldn't have been happier. "I think 2001 is going to be a fantastic year for us. I think rates will stay low."Of course, it's too early to tell how good 2001 will turn out, but current projections on residential production range from $1.3 trillion to $1.6 trillion. Whatever happens, residential loan volumes will outstrip 2000. But was 2000 really that bad? According to statistics compiled for U.S. Banker, the top 50 residential lenders in the U.S.—including both prime and subprime firms—produced $776.1 billion in loans last year, an 11% decline from 1999. The top 100 lenders produced $971 billion, a decline of about 12% when measured against their performance from the previous year.A look at the top 10 residential lenders finds that just two firms among that group posted a volume increase while everyone else experenced a production decrease. Production declines among the top 10 range from 13% (Cendant Mortgage, Mt. Laurel, NJ) to 26% (HomeSide Lending, Jacksonville, FL).The two firms that experienced an increase in business include PNC Mortgage, Vernon Hills, IL (up 14%), and Washington Mutual, Seattle (up 6%). Once owned by commercial banking giant PNC Financial Services, Pittsburgh, PNC Mortgage was sold to WaMu in the first quarter of 2001. WaMu also recently purchased Bank United, Houston, (the 49th largest lender in 2000) and often has been mentioned as a possible buyer of non-depository Countrywide Home Loans, Calabasas, CA, the third largest lender in the nation.WaMu, it would appear, is one hungry mortgage company. One reason it did so well in 2000—compared with its competition, at least—is its adjustable-rate mortgage lending. WaMu is a major ARM lender, as well it should be, considering that over the past five years it bought two of the largest California-based ARM players, Home Savings of America, and Great Western Bank, FSB.It's anticipated that WaMu will continue to be a powerhouse in residential finance, and already is being mentioned as a possible buyer of Fleet Mortgage Group, Columbia, SC, the struggling mortgage subsidiary of FleetBoston Financial. (So far FleetBoston is saying little about its plans for FMG, but the bank's president, Chad Gifford, hinted at a recent investors conference that he was none too pleased with the mortgage banking business and its profit margins.)Among the top 20, the only other firms turning in decent numbers include ARM giant World Savings of Oakland (up an impressive 43%) and subprime behemoths Household Finance (up 43%) and Citigroup's Associates First Capital Corp., Irving, Texas (up 8%). Then again, getting solid production numbers from Associates and Household is never easy. The ones you see in this issue are estimates based on their servicing rights, which they do disclose.One thing is certain about Household and Associates: as the subprime sector has melted down the past three years, these two entrenched giants have benefited from all the fatalities. How so? When lenders go south it reduces competition and increases the profit margins of the remaining few.Associates, though, was bought by Citigroup in the first quarter, and Household could be a takeover target, though the firm has insisted that it will go it alone. Like the 'A' paper sector, the subprime niche has consolidated, but its future is a bit cloudy because bank regulators are cracking down on how much capital banks and their affiliates must hold against subprime loans and securities held in portfolio. Some analysts think this could drive depositories from the niche, but for now that remains to be seen. Obviously, mortgage banking is a counter-cyclical business. When interest rates rise—as they did last year—production falls and the servicing (fee income) side of the business prospers.Although many of the nation's top lenders produced fewer loans in 2000 than the year before, almost all the nation's top 20 servicers saw the dollar volume of their receivables increase, some quite nicely.The largest residential servicer, Wells Fargo Home Mortgage, Des Moines, saw its servicing grow by 60% to $452 billion. The bank-owned Wells unit did well not only because it is also a top five originator, but because it has been an active acquirer of bulk mortgage servicing rights.After Wells, the largest servicers at year-end were: Chase Manhattan Mortgage, Edison, NJ ($361 billion, up 16%); Bank of America Mortgage, Charlotte ($335 billion, up 14%); Countrywide ($284 billion, up 16%); and HomeSide ($187 billion, up 24%).The top five lenders include: Chase ($76 billion, down 18%); Wells ($66 billion, down 18%); Countrywide ($61 billion, down 18%); BankAmerica Mortgage ($51 billion, down 22%); and WaMu ($47 billion, up 6%).The top 50 servicers, as a group, control 70.27% of all outstanding mortgage debt in the U.S. The top 50 lenders accounted for 73.08% of all loans produced last year. It is no secret that the mortgage banking sector is consolidating. Many in the industry wonder how many firms will be left in five years. There is also sentiment in the industry that a few of the top lender/servicers could run into financial trouble by making huge hedging errors, or that margins will become so tight that many will exit the industry and the sector will "deconsolidate" to some degree. Whatever the case, it's bound to be interesting to watch.