Maybe 2010 Won't Be So Ugly After All for Lenders

Two months ago I was talking to researcher David Olson from Access Research (formerly known as Wholesale Access) who let me in on a not-so-little secret: that a handful of top-ranked lenders were contemplating an ugly 2010 in terms of originations. "How ugly?" I asked. His reply: "$1 trillion ugly."

Last decade, a $1 trillion year would not seem so awful but when you consider that during the "Roaring '00s" we've had three, $3-trillion-plus years and one just shy of $4 trillion that, yes, a $1 trillion year looks like a complete disaster of Biblical proportions. But let's put things in perspective. When Mr. Olson told me about the $1 trillion prediction it was far from certain that the government would extend the much ballyhooed $8,000 first-time homebuyer tax credit. It was also before the national unemployment rate began falling.

So, at this juncture in time does 2010 look like a $1 trillion year? The Mortgage Bankers Association is projecting that home lenders will fund between $1.5 trillion and $1.6 trillion in loans, a view that's not too far off the mark from estimates made by Fannie Mae and Freddie Mac. According to figures compiled by this publication and the Quarter Data Report, mortgage bankers originated $2 trillion in 2009, a decent year by all counts.

I'm no economist (though I did take Econ 101 in college) but I would venture that (hopefully) MBA's projection might be a tad low - maybe by $200 billion or so. With a little luck, the industry could see $1.8 trillion in originations in 2010 which would be a Godsend. Why do I think things will be a bit better? Answer: continued low rates, a somewhat improved job picture, but most importantly a desire by home sellers to unload inventory while the getting-is-good. Translation: a continuing process of home prices being slashed, creating bargains for many. Americans love a good bargain.

Mortgage bankers shouldn't focus so much on the overall dollar volume being discussed - they should concentrate on the number of transactions. Hear me out. Home prices have fallen by 40% to 60% in some markets which means the size of mortgages is dropping. Lenders get paid per transaction. Translation: even though the dollar volume is declining, a borrower is still going through the toll. And yes, 2 points on a $300,000 loan translates into less origination fee income than on a $400,000 mortgage but let's face it: there is a lot less competition these days than there was a year ago, two years ago, three years ago. Less competition allows residential lenders of all stripes (bank, nonbank, thrifts, credit union) to charge higher fees for their services. Higher fees translate into larger profits.

In the quarters ahead the industry's weaker players will stumble and fall, leaving more business for the survivors. This comes at a time when now, more than ever, lenders are enjoying their best profit margins in years. The way things stand, the Federal Reserve isn't about to hike short-term rates until the summer. (And yes, the Fed will keep buying Fannie and Freddie MBS and debt.)

In the past I've written about the "cartel-like" hold Bank of America and Wells Fargo have on both the servicing and origination sides of the business. At last check their combined market share was about 40% of originations.

The No. 3 ranked lender, JPMorgan-owned Chase of Iselin, N.J., had a market share of 7.63% with its next closet competitor, the ailing Residential Capital Corp. of Minneapolis at 3.06%.

Outside of BoA and Wells it can be safely assumed that origination side of the business is up for grabs. Keep in mind that Chase threw its wholesale division overboard a year ago, which means it will struggle to keep pace with the big boys.

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