2001 Great, But Not Perfect

IF YOU'RE WONDERING exactly how amazing 2001 was for residential originators, try this tasty statistic on for size: Wells Fargo Home Mortgage produced just shy of $200 billion in home loans last year. In 1990, the entire market produced $450 billion. Stated differently, Wells produced about 45% of what the entire industry did a decade ago.Yes, 2001 was a barn burner of a year, an amazing year—a record-busting year. It was so good that most lenders are relieved it's over because, quite frankly, the demand was almost too great to fulfill.According to figures compiled for U.S. Banker by Quarterly Data Report (like USB, a Thomson Financial Media affiliate), residential lenders from coast-to-coast produced $2.066 trillion in loans in 2001. It was not only a record, but a 94% increase in volume from the previous year. The industry's previous best year was 1998, when falling interest rates sparked $1.55 trillion in originations. But rates fell even further in 2001 than they did in 1998. On average, the rate on 30-year fixed rate conventional loans (those bought by Fannie Mae and Freddie Mac) averaged 6.96% in 2001, compared with 7.02% in 1998. And depending on exactly when you asked for a rate quote, some lenders were making loans as low as 6%, based on how many points the consumer was willing to fork over.Bank-owned Wells Fargo Home Mortgage produced $195.61 billion in loans last year, ranking (not surprisingly) first. Not too far behind was Chase Manhattan Mortgage, Edison, NJ, with $183.7 billion, followed by Washington Mutual, Seattle ($175.5 billion); Countrywide Credit Industries ($138.2 billion); and Bank of America Mortgage, Charlotte, NC ($84 billion).Among the top 10, the growth rates ranged from a low of 62% (the cost-conscious BofA) to a high of 244% for the aggressive and fast growing ABN AMRO Mortgage, Ann Arbor, MI. There are a few footnotes to consider though. WaMu's volume does not include its recently completed purchase of Dime Bancorp. (ranked 9th in 2001), and its pending purchase of HomeSide Lending (ranked 10th). All totaled, if the production volume of these two were added to WaMu, the combined entity would have produced a stunning (and mind-boggling) $272.5 billion, which would give the giant West Coast-based thrift a market share of 13.19% of all loans written last year.It should be noted that among the top 10, seven firms are owned by commercial banks or bank holding companies, two are thrifts, and the lone non-depository among the group is GMAC Mortgage, whose parent makes those four-wheeled things invented by Henry Ford.The top ten lenders, as a group, had a combined market share of 51.52%, according USB/QDR, compared with 39.55% a year ago. Five years ago, the top 10 had a market share of 30.31%, which indicates how much the residential sector has consolidated over the past half-decade.As noted in previous reports in USB, the big question for many is how much more the origination sector will consolidate. Keep in mind that lenders can produce loans through three different channels: retail (direct to consumer); wholesale (through independent intermediaries); and correspondent (the purchase of a loan someone else has already funded). In the fourth quarter, retail lenders accounted for 41.7% of all loans produced, wholesale 29.1%, and correspondent 29.2%. If you compare these figures to ratios in the fourth quarter three years ago, channel production has remained—more or less —unchanged. That means there will be plenty of room for both “mega” lender/funders and thousands of small to medium-size players.That said, another big question for the industry is how originations will fare this year. It's generally assumed that production will fall compared with the banner year that ended three months ago. Industry estimates range from $1.4 trillion (the Mortgage Bankers Association) to $1.6 trillion (Fannie Mae).In an historical perspective, either of those numbers would be darn good, but the idea for most lenders is to keep growing, regardless. “I think there's no question we've peaked,” said Sandler O'Neill analyst Mike McMahon.McMahon, who covers such mortgage-related stocks as Countrywide, Fannie Mae and Freddie Mac, predicted that the new year will be good, nevertheless. “I think it will be good in terms of profitability, but probably not as high as in '01,” he said.One industry advisor said Wells Fargo Home Mortgage produced $22 billion in loans in January, which, annualized, translates into $264 billion in new loans. But the January rate is less than its third-quarter rate, and with rates showing signs of increasing, chances are production at Wells and elsewhere will slip. (A Wells spokesman declined to discuss its January numbers.)The residential mortgage business is actually two businesses: the production side and the servicing of loans. Even though originators were popping champagne last year, those who manage the servicing departments were not.The reason is simple—rock bottom rates mean that refinancings swelled and that housing receivables (servicing rights) were running out the back door. Refis accounted for about 57% of all new loans last year, compared with 21% the year before —a huge difference.While some lenders grew their production volumes by 100%, 200% and even 300%, their base of receivables grew by comparatively meager amounts (see tables). The only servicer showing healthy growth in receivables was WaMu and that's because it acquired a handful of competitors—BankUnited, Fleet Mortgage, and PNC Mortgage, to name three.One top 10 servicer, Bank America Mortgage, actually saw its servicing portfolio decline by 4%, not a good sign. Also, some firms lost so much in servicing—HomeSide for instance—that they had to write down the value of their housing receivables. HomeSide's writedown was so large, $2.2 billion, that its parent, National Bank of Australia, decided to toss it overboard by selling most of it to WaMu. Yes, 2001 was a great year, a terrific year—but it wasn't a perfect year.