Anyone who reads the financial pages is well aware of the mortgage industry’s struggles, and the oft-cited statistics bear testament to a pervasive lack of oversight and due diligence at all levels--from mortgage brokers and lenders to regulators and secondary market investors.
Lax underwriting standards and an emphasis on volume rather than quality have led to over $380 billion in mortgage-related write-offs thus far, and some analysts have forecast even more losses.
According to the Mortgage Bankers Association, roughly 2.47 percent of mortgages were in foreclosure during the first quarter of 2008, up from 1.28 percent a year ago. Another 6.35 percent of borrowers were delinquent in their monthly mortgage payments over the same period, up from 4.84 percent last year.
And many analysts expect loan performance to deteriorate even further, as record declines in home prices--especially in formerly overheated markets such as Dade County, Florida, and Maricopa County, Arizona, and economically depressed areas in the Midwest--are preventing many overstretched borrowers from refinancing into more favorable terms. In some cases, price declines have been so precipitous that homeowners find themselves underwater--that is, in a situation where they owe more than their home’s current market value.
Needless to say, the industry has endured a significant contraction as the secondary market for private-label mortgage-backed securities (MBS) has virtually disappeared. In fact, whereas $76 billion of MBS were issued in the third quarter of 2007, this figure dwindled to a mere $6 billion in the first quarter of 2008.
These dire numbers are likewise reflected in analysts’ forecasts for originations over the next two years: The Mortgage Bankers Association expects annual loan production to decline by 18 percent this year and 27.2 percent in 2009, as compared to 2007.
Perhaps one of the most fascinating developments from the subprime
meltdown has been the resurgence of mortgage lending among community
banks.
At the peak of the mortgage and housing booms, many of these smaller
institutions remained on the sidelines, unable to compete with the
prices offered by the so-called “megalenders” that dominated the
marketplace with their national reach and vast networks of brokers.
But the economies of scale and reliance on third-party originators that
enabled the industry’s largest players to post record profits failed to
insulate these organizations from the inevitable reckoning.
For the most part, the nation’s largest lending institutions are
licking their wounds and scaling back their lending programs, in many
cases completely jettisoning their wholesale operations to focus
exclusively on the retail channel. Inside Mortgage Finance, one of the
industry’s most respected publications, estimates that of the top 30
mortgage lenders in 2007, almost half have seen their business wither
substantially.
And the prospects for the handful of survivors that have managed to
maintain their market shares are far from rosy. Although Countrywide
Financial continues to account for roughly 15 percent of aggregate
originations, the company narrowly staved off bankruptcy thanks to Bank
of America and has been widely criticized for its dubious lending
practices. Meanwhile, Wachovia and Washington Mutual have avoided any
substantial loss in market share, even though the companies’ stock
prices--and credibility among investors--have taken a considerable hit
because of sizable mortgage-related losses.
The majority of community banks, on the other hand, steered clear of
the subprime taint and now find themselves in a position to grow their
mortgage operations after years of ceding business to the mortgage
giants and their broker pipelines.
And unlike the industry’s key players that relied on teaser rates,
exotic payment-option mortgages and stated-income/stated-asset loans to
buoy lending volumes in 2006 and 2007, community banks are expanding
their mortgage programs without compromising their underwriting
standards.
There are several factors behind this resurgence in local lending.
For one, the wholesale origination model, which decimated community
banks’ mortgage programs, has become an increasingly unviable
proposition. Not only has the collapse of the secondary market removed
the pricing advantage previously enjoyed by mortgage brokers tied into
national lenders, but the number of brokerages--community banks’
primary competition--is also likely to decrease by about 30 percent by
the year’s end, according to research from Wholesale Access.
And with their ability to tap into low-cost funding from the Federal
Home Loan Bank system, smaller banks aren’t facing the credit crunch
experienced by their mortgage-broker peers.
Customer satisfaction has also played a role in these developments. The
reputational damage sustained by the larger lenders and financial
institutions at the heart of the mortgage boom has prompted an
increasing number of consumers to take their business to community
banks, many of which offer a more personal level of service.
Growth-minded medium-sized banks that are unburdened by toxic subprime
loans and located in areas with stable housing markets are aggressively
ramping up their mortgage operations, poaching top talent from
chastened mortgage lenders and joining co-ops to obtain better pricing
and margins when selling pooled loans to Fannie Mae and Freddie Mac.
Despite these inroads, many of these small- to mid-size institutions
will be hard-pressed to sustain these gains once the industry’s bigger
players right their balance sheets and return to the marketplace.
