The two largest U.S. home lenders are feeling the bite of competition from smaller firms as mortgage originations tumble at the fastest rate since 2011.

New loans at Wells Fargo & Co. (WFC), the biggest, fell 38 percent to $50 billion in the fourth quarter from the third quarter, the bank said in a statement yesterday. At JPMorgan Chase & Co. (JPM) originations decreased 42 percent to $23.3 billion, outpacing the 27 percent fourth-quarter drop forecast by the Mortgage Bankers Association for the industry.

Big banks are facing dual challenges of increased competition and a plunge in home loan refinancing after the Federal Reserve said it planned to reduce monthly bond purchases and sent mortgage rates soaring. Smaller lenders are helped because the market is shifting to one led by mortgages for home purchases, favoring firms that can capture the buyers' attention, said Clifford Rossi, a former Citigroup Inc. (C) risk manager who now teaches at the University of Maryland's Robert H. Smith School of Business.

"A lot of these guys are using the internet and social media platforms to reach borrowers more directly," Rossi said. Due to their "ability to be more nimble and opportunistic in the marketplace, you will see more companies like that be able to do more."

Wells Fargo and JPMorgan, ranked No. 1 and No. 2 by originations, accounted for about 28 percent of the market in the third quarter, according to Inside Mortgage Finance, a Bethesda, Maryland-based trade publication. The next 10 lenders accounted for roughly 26 percent.

Amy Bonitatibus, a JPMorgan spokeswoman, and Ancel Martinez, a spokesman at Wells Fargo, declined to comment.

Fourth-quarter figures suggest the two banks lost about 4 percent in market share, according to Kevin Barker, an analyst with Compass Point Research & Trading LLC. Meanwhile, PennyMac Mortgage Investment Trust (PMT), Ocwen Financial Corp. (OCN) and NationStar Mortgage Holdings Inc. (NSM) have increased business over the past year and could continue to gain share, he said.

"Some of the smaller lenders are offering better pricing, which helps capture more business," Barker said.

PennyMac was started in 2008 by a group of executives from Countrywide Financial Corp. The lender grew to become the ninth-biggest mortgage originator in the U.S. in the third quarter, according to Inside Mortgage Finance, originating $8.1 billion of home loans, or about 1.8 percent of the market.

Stanford Kurland, chief executive officer of PennyMac and former president of Countrywide, said in a November conference call that lenders have focused on strategies such as more aggressive pricing to increase market share.

Christopher Oltmann, a spokesman for PennyMac, declined to comment, saying he couldn't discuss the company's strategy until after it reports earnings. John Hoffmann, a spokesman for Nationstar which counts Fortress Investment Group LLC as its largest shareholder, also declined to comment.

Nationstar fell 1.4 percent to $33.17 at 9:48 a.m. in New York trading, extending its losses this year to 10 percent.

Ocwen has grown as banks including Citigroup and Bank of America Corp. (BAC) retreat from the almost $10 trillion market for mortgage servicing rights, or MSRs, amid looming financial regulations that will force banks to pledge more capital for servicing rights they hold.

"We continue to view the big banks as an ongoing potential source of growth for our servicing business, both through MSR acquisitions and subservicing," Ocwen said in an e-mailed statement. "We are currently underleveraged and believe we have substantial access to additional capital to fund acquisitions."

Ocwen fell 0.4 percent to $52.55.

Refinancings accounted for 75 percent of the $511 billion mortgages made in the fourth quarter of 2012, according to the MBA. That declined to 53 percent in the fourth quarter of 2013, and the trade association predicts it may decline to as low as 34 percent in 2015 as borrowing costs rise. The rate on 30-year mortgages averaged 4.51 percent last week, up from 3.35 percent in early May, according to Freddie Mac.

"The market has changed," said Keith Gumbinger, vice president of, a mortgage data firm in Riverdale, New Jersey. "The refi market has dried up and because smaller lenders have become more active they are taking away share."

The refinancing business helped larger lenders because of their scale and the size of their mortgage servicing platforms, Rossi said. Wells Fargo and JPMorgan are the top two mortgage servicers, which handle billing and collections for loan payments. They will have to change their operations as the market shifts, he said.

"The big guys benefit from a refi boom from a scale standpoint and now they have to go through some heavy restructuring to wring out operational inefficiencies as refis dry up," Rossi said.

Wells Fargo, which made almost 28 percent of all mortgages in 2012, announced more than 6,200 job cuts last year. Its share dropped to less than 20 percent in the third quarter. JPMorgan has said it could fire as many as 15,000 mortgage employees.

One way Wells Fargo is trying to maintain volume is by creating a 400-person underwriting team to originate and hold home loans. The bank is training the group as a way to increase lending without losing control of quality, Brad Blackwell, head of portfolio lending for the San Francisco-based lender, said last year.

Profit at the company also rose 10 percent for the quarter from the year earlier period, as Wells Fargo cut expenses and had one-time gains. The shares rose 1.5 percent to $46.28 today and have risen 35 percent since the end of 2012.

Market-share declines are to be expected as the cycle turns, according to Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey.

"The greater the market share you had in re-fi, the more you have been punished and that's what happened to Wells Fargo," Bush said in a phone interview. "To me, it's natural."

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.