For those of you who doubted my thoughts on mortgage deconsolidation, I forgive you. But it had to happen—deconsolidation, that is.
Admittedly, I still have doubts that any type of significant deconsolidation will happen which means to some degree the megabanks may still dominate. The chief reason for this doubt? Answer: Wells Fargo & Co., the 800-ton gorilla of the residential finance industry which, as recently as the second quarter, had a production market share of almost 26% and servicing share of 20%. (Figures courtesy of SourceMedia’s Quarterly Data Report.)
Wells has dominated this business for so long—with a brief respite during the Bank of America/Countrywide amalgam—that some may think the only reason it is exiting wholesale is tied to boredom. But nothing could be farther from the truth.
Here’s one fact: Wells Fargo loves mortgage banking and it covets the cross-sell opportunities inherent in the business. (And from what I’ve heard, few banks are better at cross-selling than Wells.)
But if you’re looking for the real reason that Wells is exiting both the wholesale and channel and whittling down its Realtor mortgage joint ventures look no further than the coming Basel III accords which states that mortgage servicing rights can no longer count for 100% of capital for a federally insured depository institution. (Depending on which lawyer you talk to, the Basel III MSR cap eventually will be 10% or 15% of capital with a phase-in period of many years.)
Wells more or less saw the Basel writing on the wall. At midyear 2012 it had $101.7 billion in Tier I capital, $12 billion of which is in the form of the asset value of its MSR contracts. (Figures courtesy of Wells’ earnings statement.)
In time Wells would have to reduce the asset value of something it carries on its balance sheet, which might be no big deal for a bank of its size and earnings strength.
But something else may be afoot here. Even though Wells is exiting wholesale, it’s a channel that represents just 5% of its overall origination business.
(Of course, Wells accounts for 14% of all wholesale lending, but that’s a column for another time.)
It might be argued that Wells is scaling back in mortgages (somewhat) while it is simultaneously creating new MSRs that will be as pristine as Rocky Mountain water.
Down the road, if Wells needs—or wants—it can sell these MSRs in the secondary market for what could turn out to be an attractive price.
Yes, it’s no secret that buyers are hardly paying premium prices for MSRs these days, that’s a situation that’s expected to change over the next three years, provided that housing prices do not once again swoon and the nation doesn’t fall into another recession.
But getting back to deconsolidation issue: All of the so-called megabanks—JPMorgan Chase, Bank of America, Citigroup and Ally Financial—have slashed their presence in third-party lending and servicing.
All of these megabanks have blamed their scale-backs on legacy loans and investor pressure, but the benefit of this boils down to more market share (servicing and lending alike) being available to smaller and midsized firms the likes of Cole Taylor, Freedom Mortgage, Guaranteed Rate Inc. and others. Among these three the only depository is Cole Taylor.
It’s believed that the residential finance sector is going back to a time when nonbank mortgage firms will once again be dominant players in the business, presenting real competition and more choices for consumers.
To me, that’s a good thing. But keep in mind this one thought: Yes, we are deconsolidating to some degree, but the process is still early and the end result may not be what we think.
