The nation’s two largest originators made 21 percent of home loans in the second quarter, the smallest combined share in more than a decade, down from 30 percent a year ago, according to regulatory filings. They’re ceding ground to companies like Quicken Loans Inc., which grabbed the No. 3 spot from Bank of America Corp. (BAC:US) in the first quarter, and LoanDepot.com LLC, whose share surged more than three-fold in the following period.
Big banks are exercising caution to avoid losses if their home loans sour and government-controlled Fannie Mae or Freddie Mac force them to repurchase the mortgages. This week, JPMorgan head Jamie Dimon escalated the buyback issue between lenders and the government, saying he questioned whether his bank should end its decades-old relationship with the Federal Housing Administration, a last resort for lower-income Americans seeking mortgages. Nonbank lenders, hungry for mortgages to service, are expanding rapidly to fill the void left by banks.
“Mortgage banking may just be a smaller players’ game now,” said Paul Miller, a banking analyst at FBR Capital Markets Corp. in Arlington, Virginia. “They’re able to be more flexible.”
JPMorgan, the No. 2 U.S. mortgage lender, reported (JPM:US) this week that its second-quarter originations fell 66 percent to $16.8 billion, the lowest quarterly result since at least 2005, compared with the year-ago period. The New York-based bank’s share of the market dropped to 5.4 percent in the second quarter, according to data compiled by Bloomberg, from 8.1 percent in the first period. JPMorgan’s market share averaged 10 percent in the prior five years.
Much of the decline came from a falloff in FHA lending, Dimon said on the bank’s call with analysts. Banks have been in a dispute with Fannie Mae, Freddie Mac and FHA over rules that force the firms to repurchase mortgages that go bad.
“Our FHA volume was way down and we studied FHA and based upon the lawsuits and the premiums and stuff like that we’ve lost a tremendous sum of money in FHA,” Dimon said. “The real question to me is should we be in the FHA business at all and we’re still struggling with that.”
JPMorgan’s loss of market share is part of its long-term plan to pull back from the mortgage business and focus on making loans to the most creditworthy borrowers, said Miller.
“They’re making a strategic decision to shrink,” Miller said. “They don’t want to do marginal loans they could end up paying the piper on. They’re saying we paid a lot of money and we’re done with it.”
Wells Fargo last week reported that originations fell 58 percent to $47 billion from a year earlier, the lowest second-quarter result in more than a decade. The San Francisco-based bank’s market share declined to 15.2 percent in the second quarter, based on data compiled by Bloomberg, from 15.9 percent in the first period. The bank’s share averaged 23 percent in the prior five years.
Wells Fargo Chief Executive Officer John Stumpf said on a conference call last week that the bank wants to lend to more borrowers even if they don’t have pristine credit. He said Wells Fargo just needs clarity about what triggers a buyback demand.
Bank executives are having meetings with Melvin L. Watt, the director of the Federal Housing Finance Agency, about the rules, Stumpf said. FHFA oversees Fannie Mae and Freddie Mac, known as government-sponsored enterprises. Earlier this year, Watt introduced a sunset provision so lenders are not responsible in some cases if loans go sour after three years.
“You have low rates on one side encouraging borrowing and you have put-backs from the GSEs on the other side that make lenders less willing to lend money,” Stumpf said. “The goal is to get more credit appropriately to borrowers who want to own homes and who can afford homes.”
Nonbank lenders like LoanDepot.com that started after the housing crash in 2007 or didn’t make subprime loans are not burdened with the buyback issue, said Anthony Hsieh, chief executive officer of LoanDepot.com. The online lender, which is backed by private-equity firm Parthenon Capital Partners, began in 2010 in compliance with new mortgage regulations compared with established banks that had to adapt to the changes, Hsieh said.
“We had a clean canvas to build our organization post crisis in a new world of much heavier regulatory scrutiny,” said Hsieh, a former president of LendingTree.com. “The biggest banks have a much smaller footprint than before and that creates a lot of opportunity for nonbank lenders.”
LoanDepot.com, which collects payments on the majority of mortgages it makes, originated $3 billion in loans in the second quarter, a 58 percent jump from a year earlier, according to Hsieh. The Foothill Ranch, California-based firm’s market share rose more than threefold to 1.1 percent in the second period, Hsieh said.
Hsieh said the firm is selling products that are compliant with qualified mortgage guidelines, such as debt-to-income ratios below 43 percent. The company will soon announce an offering for loans without government backing to help sustain its rapid growth, he said.
Stonegate Mortgage Corp. (SGM:US), which was founded by Jim Cutillo and his wife Barbara in 2005, survived the subprime meltdown by avoiding these risky loans. The Indianapolis-based firm has been ratcheting up its market share by expanding to states such as California and Virginia, said Cutillo, who was a director for GMAC Residential Funding.
The lender and servicer, whose biggest investor is private-equity firm Long Ridge Equity Partners, last year hired a team from Nationstar Mortgage Holdings Inc. to expand its wholesale business -- lending through mortgage brokers.
The company’s mortgage origination volume, which includes FHA loans, jumped 27 percent to $2.4 billion in the first quarter compared with a year earlier. Cutillo plans to build the firm’s business in jumbo loans in places like Washington with more expensive real estate.
“If all the big players were deconsolidating and some small and mid-sized players didn’t have enough capital to build size and scale in any industry, wouldn’t you think there would be a huge opportunity?” Cutillo said. “We’re arbitraging that and filling a big void the banks have left.”
Plaza Home Mortgage Inc. mostly provides wholesale lending -- a business that banks like Wells Fargo exited. Plaza Home Mortgage has been able to increase its originations by working with brokers who focus on purchases.
That’s paid off as refinancing has waned, said Kevin Parra, Plaza’s co-founder. Refinancing, a traditional mainstay for banks, fell in April to the lowest level since 2008, according to the Mortgage Bankers Association.
The San Diego-based firm benefits from established relationships with mortgage brokers who in turn work with local realtors, Parra said.
“As the market has moved from refis to purchases, service becomes a bigger factor, and brokers will use us because they know us and trust we will get them to close on time,” said Parra.
Plaza Home originated $1 billion in mortgages for purchases in the second quarter compared with $780 million a year earlier, and increased its total market share to 0.6 percent, said Parra.
The market-share gain of small lenders is increasing financial risks for Fannie Mae and Freddie Mac, according to a report yesterday from the FHFA’s Office of Inspector General. The companies, which were on the brink of insolvency in 2008 and seized by the government, buy mortgages from lenders and package them into securities that are sold to investors.
“Some smaller lenders and nonbank mortgage companies have limited financial capacity,” the report said. If loans later prove to have errors in them, the companies may lack the ability to make good on buyback demands, resulting in losses for taxpayers, it said.
Fannie Mae and Freddie Mac have recovered almost $100 billion from lenders stemming from buyback demands since the 2008 financial crisis, the report said.
Banks may focus more on mortgage lending once there’s more clarity around buybacks and the housing recovery regains momentum, said Hsieh of LoanDepot.com.
“Wells will always be the 800 pound gorilla, but the nonbank upstarts will make headway and some will be here to stay,” said FBR’s Miller.
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