A mortgage industry rebound is far from certain, but this year's convulsive events could help determine which lenders profit next year and which ones languish.

The secondary market is now a government show. This year will be widely remembered for the federal takeover of Fannie Mae and Freddie Mac and other, increasingly aggressive interventions by Washington. In addition, the Federal Housing Administration and the Government National Mortgage Association, agencies that just a few years ago seemed in danger of becoming obsolete, have become industry kingmakers: With many borrowers' options limited, the ability to get loans insured by the FHA and securitized through Ginnie has become a valuable competitive advantage for lenders.

On the consumer-facing side of the business, origination and servicing are now concentrated in the hands of fewer companies than at any other time in recent memory. This consolidation — in large part a byproduct of upheaval in the broader banking system — may have given the top players more power to determine the ultimate shape of the business as it passes through the crisis and reorganizes.

For example, the balance of power between lenders and the government-sponsored enterprises has shifted.

"If Fannie and Freddie ever escape from the government … instead of looking at this very fragmented market, they're looking at customers who are much bigger and more concentrated," said Alex Pollock, a fellow at the American Enterprise Institute and a former chief executive of the Federal Home Loan Bank of Chicago. "You would have to think there would be a lot more customer power, bargaining power."

According to data from National Mortgage News, about 60% of production and servicing is now in the hands of four companies: Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., and Citigroup Inc. All four made deals this year to buy distressed companies with substantial mortgage operations (though Citi lost the bidding for Wachovia Corp. to Wells).

Such deals created "a small group of mega-originators who dominate the landscape," said Scott Stern, the chief executive of Lenders One, a cooperative of mortgage banks based in St. Louis. Additional consolidation among smaller entities is likely next year, he said. By merging with similar companies or with suppliers such as settlement services or technology firms, a lender can "save money, to build a business that can survive not just the tough times but then will do very well when the market turns."

Last month Freddie disclosed that JPMorgan Chase, after taking over the banking operations of the failed Washington Mutual Inc., had threatened to reject the GSE's demands to repurchase loans originated by Wamu. Some observers interpreted JPMorgan Chase's stand as a sign of its additional weight in a market characterized by weakness among some surviving competitors.

FHA lending surged this year to fill the gap left by subprime, which had long dried up. According to the Mortgage Bankers Association, the share of mortgage applications that sought loans insured by government agencies (mainly FHA) more than tripled from a year earlier, to 32.9% in October. The figure bottomed at 5.8% in 2005, at the height of the subprime boom. The trade group and others have said that a big reason the FHA has gained share is that it allows higher loan-to-value ratios and lower credit scores than the GSEs.

Issuance of mortgage-backed securities with Ginnie Mae's stamp tripled from a year earlier, to $29.6 billion in October. The figure was slightly more than Fannie guaranteed that month and nearly twice as much as Freddie did. (Ginnie securities are backed by loans insured by the FHA and other agencies.)

"If you're not originating FHA loans now, you should be accessing the capability to do so," Mr. Stern said. "It's going to be very critical that companies have the acumen to originate FHA loans, because it's going to continue to be a bigger and bigger product."

For Lenders One, "FHA lending was our most important product of 2008. It was the product where we had the most growth. … It really was the product that a lot of people say in many ways saved the mortgage industry."

Brian Fitzpatrick, an executive vice president at Lydian Data Services, a Boca Raton, Fla., private-label mortgage outsourcer, said the complex origination and fulfillment process for FHA loans is likely to cause a further shakeout among originators.

"Not a lot of lenders grew up in the FHA world, and they don't have the expertise," he said.

For example, Mr. Fitzpatrick said, two lenders were struggling to adapt to the complexities of FHA and had planned on outsourcing some of their processes to his outfit, a unit of Lydian Trust Co. In the past month the FHA revoked their approvals and the lenders went out of business. "If you lose your approval like that, you have to hang it up. You get taken out of the market," Mr. Fitzpatrick said.

In the current environment, FHA loans account for half to 85% of a lender's volume, he said.

Analysts with Barclays PLC have predicted that next year, 60% of the net supply of "agency" mortgage bonds — a catch-all term for securities guaranteed by the GSEs or Ginnie — will be guaranteed by Ginnie. The collateral for Ginnie's issues will include a "great deal of modified agency and nonagency loans" refinanced through the FHA, the analysts wrote in a report published last week.

The government loan market may be in line for a further boost.

During a Dec. 4 speech in which he floated a wide range of concepts, Federal Reserve Chairman Ben Bernanke raised the idea of Treasury purchases of Ginnie Mae mortgage-backed securities to increase "demand for the relatively illiquid securities." Such purchases would drive down interest rates on FHA refinancings under the Hope for Homeowners program, he said. (That program, created by legislation this year, is meant to help borrowers who owe more than their homes are worth.)

Using mortgage purchases to drive down rates has been a common thread of the most recent — and, it seems, the most effective — government ideas to juice the market.

Last month the Federal Reserve Board said it would buy up to $600 billion of debt and mortgage-backed securities issued by the GSEs. The Treasury Department has said it is weighing a plan to get mortgage rates for home purchases down to 4.5%. The markets responded favorably, and since mid-October, the average 30-year fixed mortgage rate tracked by Freddie has fallen by nearly a percentage point, to 5.47%; the MBA's index of refi applications has spiked.

But it remains uncertain if mortgages originated in recent years — an era of notoriously poor underwriting standards — can be made to fit with the chastened lending conditions that prevail today.

Jack Guttentag, a retired professor at the Wharton School of the University of Pennsylvania, said that lower rates help, but that borrowers outside the prime realm have been left out.

"A major factor in the market today is how tight the underwriting requirements have become, and that's not going to change by any market operations of government that's pushing interest rates down," he said.

Terry Wakefield, the chief executive of Wakefield Co., a Grafton, Wis., mortgage consulting firm, was also skeptical about the prospects for a full-blown market recovery.

"How many of these loans that were produced, let's say from 2003 to 2007, were based on fraudulent information?" Mr. Wakefield asked. "If these people want to refinance, and they were not honest about their income back then, their income situation probably has not improved. And this time around, lenders are going to have to verify income."

The only solution to the housing crisis, he said, may be "the passage of time. Until this foreclosure bulge is through our economy and until there is a sufficient number of qualified buyers to come in and buy real estate, we're going to be in a depressed market."

In a note to clients published Monday, bank stock analysts with JPMorgan Chase wrote that the drop in mortgage rates and an increase in originations would have mixed effects on mortgage-banking income. Lenders would generate higher revenues from increased volumes and wider gain-on-sale margins, the analysts wrote. But those gains would be at least partly offset by impairments to the value of mortgage servicing rights because of prepayments.

Mr. Wakefield said that without a secondary market for nonagency loans, mortgage lending as practiced by many local and regional banking companies has emerged as "the winning business model out of this crisis."

Such companies "are doing a lot of mortgage lending, putting the loans on their balance sheet," he said. "These guys who know how to block and tackle and underwrite good-quality loans … and have a strong deposit base" can "do quite well."

But "balance sheet capacity is always limited," Mr. Wakefield said, and efficiency is crucial for agency mortgages.

"The market's going to be dominated by products that have less profit margin," he said. At the same time, "the operational infrastructure of the industry continues to be very outdated, and, as a result, … its ability to produce a commodity product at a profit is very limited. It's not going to be a great year."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.