A few years back there was a growing school of thought—and factual proof—that the entire mortgage banking landscape would be 90% controlled by just five lenders and servicers, mostly megabanks.
But that was before the bubble burst on housing and foreclosures soared to record levels.
Even though five firms—Wells Fargo, Bank of America, Chase, Citigroup and Ally Financial—continue to control 60% of the servicing market, there's a growing belief (hope) that the historic march toward consolidation is reversing somewhat and that more small to midsized companies will have room to post handsome market share gains.
Much of the talk of “more being available” to smaller players hinges on what the megabanks do in regard to their residential mortgage operations. Bank of America, obviously, is a key focus of speculation because it has exited the wholesale channel, thrown its reverse lending business overboard and is actively trying to sell huge chunks of its (troubled) servicing portfolio. (See related story in this issue.)
“Everyone is watching B of A because they could benefit from an increase in market share if they continue to retreat,” said Paul Hindman, a senior vice president of Management Advisors International, which among other chores provides staffing services to mortgage bankers.
B of A, clearly, is de-emphasizing mortgages—both originations and MSRs. In the first quarter while loan volume blossomed somewhat every top five ranked originator posted double-digit growth rates, except B of A whose production plunged by 20%.
And it's no secret that many of the bank's top performers are looking at opportunities elsewhere or have already left. When a handful of B of A's senior warehouse and lending officials departed in the early summer for PennyMac, a small publicly traded REIT, tongues were clucking in the industry that it was only a matter of time before yet another shoe dropped at the bank. In short, B of A says it is still committed to mortgage banking but few in the industry believe the company.
PennyMac, headed by former Countrywide Financial president Stan Kurland, is a perfect example of a small firm with no legacy issues and big plans to steal share away from established players. The irony, of course, is that CFC's legacy business is at the heart of B of A's problems, though Kurland was forced out of that company before its problems escalated.
Midsized lenders the likes of U.S. Bank Home Mortgage, Branch Banking & Trust and Fifth Third also are poised to reap the benefits of deconsolidation should it happen. These banks, all of which have established mortgage affiliates, mostly avoided nonprime lending during the go-go years and have few legacy issues.
Meanwhile, there is a growing chatter about private equity money sitting on the sidelines, waiting and salivating at the opportunity to buy into mortgage banking on the cheap. “You have the REITs talking about jumbos, and there's lots of talk about PE money out there,” said one New York-based advisory. “There's lots of talking, yes, but it's just that.”
The biggest fear about investing in nonbank lenders is whether they will have enough capital to deal with higher minimum net worth requirements from the GSEs and FHA, and whether they can compete against banks in regard to compliance costs and testing for loan officers.
At least one investor, David Fleig of Financial Analysis Partners, Sugar Land, Texas, is putting his money where his mouth is. A former warehouse executive, Fleig has started a new fund to buy into nonbank lenders with established track records. In a recent interview Fleig described himself as a firm believer that the industry could be in for significant change. “The subject of deconsolidation dovetails precisely into the investment thesis of the private equity fund we are launching,” he said.
Among other things he points to Basel III capital rules that will make it less advantageous for the megabanks to keep MSRs. “The potential impact of Basel III on bank MSR ownership, the dominant market share of the large banks (they have had an oligopoly since the financial crisis hit) and the looming impact of financial regulations has created a secondary market environment which we believe heavily favors well managed ‘middle market' mortgage bankers,” Fleig said.
