A Mortgage Cartel of 2

Angelo Mozilo, the former Countrywide Financial chief, once dreamed of achieving a 30% market share in residential lending and servicing for his No. 1 ranked company, a goal that to some looked unachievable. Countrywide’s origination share never edged higher than 15% while its receivables topped out at 20%.Although Mr. Mozilo spends his retirement years fending off lawsuits tied to his stock sales (and Countrywide’s lending practices) what’s left of his company is now the property of Bank of America, which under its mortgage chief Barbara Desoer is continuing to gain share as weaker companies fold and federal regulators scramble to find merger partners for ailing depository behemoths.It’s unclear how much more market share Bank of America Home Loans can garner but in terms of lending and servicing it’s already at 20% in each category and the field is wide open. Nonbank lender/servicers appear to be a dying breed, witness the recent bankruptcy of Taylor, Bean & Whitaker of Ocala, Fla., plus all those alt-A and subprime nondepositories that went bust the past two years.Why all this emphasis on market share? As any seasoned mortgage veteran well knows it’s all about pricing power and economies-of-scale. When it comes to servicing, the more units you collect on, the lower your cost per loan. When it comes to lending, less competition means you can charge higher fees and rates. It all translates into profits.In the current financial climate the big are getting bigger and the weak are getting weaker. Nonbanks without strong ties to a depository should consider buying one, partnering with one, or getting out.It’s not just BoA’s 20% share they should fear, it’s the fact that bank-owned Wells Fargo Home Mortgage also has a 20% share (more or less) and together the two are within in sight of 50% if the grinding wheel of industry consolidation continues unabated. The word “mortgage cartel” has come up more than once to describe the lock the top four — BoA, Wells, Chase and Citigroup — have.But a close look at the numbers (collected by this newspaper) show that Chase and CitiMortgage, at least when it comes to lending, are a distant third and fourth. It also might be pointed out that Wells and BoA achieved a combined production market share of 42% in the second quarter, in part, because they continue to use loan brokers who source loans to them. Chase is out of the broker market and Citi has cut its wholesale production by 90%. (So, maybe there is still a benefit in using brokers?)It stands to reason that based on the latest rankings BoA and Wells constitute a cartel of two. This is great news if you work there but if you happen to be a small to midsized competitor it means less of the mortgage pie for you.There’s a growing fear in the industry (among nonbanks and smaller players) that the cartel, if they choose, can cut off warehouse funding to nonbanks, therefore putting them out of business and leaving yet more business for their retail branches. (As retailers BoA and Wells have a 46% share.)BoA and Wells are active warehouse providers but since they won’t disclose any information on that business it’s hard to say how large they are. Chase and Citi are bit players in warehouse lending. There are roughly 1,000 nonbank mortgage lenders of varying sizes left in the U.S. Without a continued and uninterrupted flow of warehouse credit (the key word being uninterrupted) they’re toast.Meanwhile, on the servicing side of the business there are both pros and cons to being a giant. Economies of scale and leveraging technology can boost profits handsomely but when a refi tsunami strikes receivables can run off much more rapidly than can be replaced, resulting in much lower revenue. Then again, if a mega-servicer is also a mega-lender (which most are) then replacing old loans with new ones may not be the headache it once was, especially with less competition around. And that’s the beauty of being a cartel with a monopoly: less is more.