AFTER CONCLUDING, ALMOST AS AN INDUSTRY, THAT IT JUST can't get much better for the mortgage finance business than it was in 2002, the sky got bluer and the rainbow across the business got brighter last year. Activity established a new record high, eclipsing the prior high-water mark by 39 percent, according to the Mortgage Bankers Association (MBA), based on total industry origination volume in 2003 compared with 2002. And, on top of that, production profits fattened and the sector scored a touchdown for the economy. What's more consumers got manna from the heavens in the form of lower mortgage rates, reduced monthly mortgage payments, more disposable income and, for home-owners, a higher asset value to offset eroding in stock values. * What a year! Unexpected as it was, forecasters revised upward their predictions every few months. In October 2002, MBA's official forecast was $1.573 trillion of residential originations. Ultimately that forecast, like all others, was proven 250 percent too low. * Volume peaked in June 2003, when the 10-year Treasury dropped to 3.11 percent. Then interest rates bounced higher rather quickly through summer. Refi activity gradually slid from 70 percent to 40 percent of aggregate activity by year-end, reducing the annualized run rate to under $2 trillion in the second half of 2003. That slowing in volume led to staff reductions across the industry, but especially at the biggest firms. Washington Mutual, Seattle, for example, released 2,500 employees in fourth-quarter 2003. Countrywide Financial Corporation, Calabasas, California, let hundreds go, as did Chase Home Finance, Edison, New Jersey, and Wells Fargo Home Mortgage Inc., Des Moines, Iowa.
Residential finance contributed hugely to economic performance in 2003. It captured and generated investment and it got help from government expenditures, but mostly it generated consumer spending that was earned by home builders, Realtors, lenders, mortgage brokers, appraisers, title companies, inspectors and the plethora of others who are part of the housing and mortgage delivery system.
Since the first article in this "Who's Who in Wholesale" series 16 years ago, the landscape has changed dramatically in some respects, little in others. In looking down on wholesale, what is most different is the size of the business, the size of the largest firms and the sheer number of mortgage origination firms competing for the sources of mortgage business. The two other big changes are, first, how well-served mortgage consumers are and, second, how technology has advanced. Dividing total originations by 2003's average loan amount, there were approximately 22.3 million total home loan transactions closed by the industry in all channels. Twenty-two million! That's a lot of business, and the over-whelming number of those loans closed without a problem.
Since the beginning of this series, our focus has been exclusively on the prime mortgage wholesale market. However, beginning about five years ago the largest firms began branching into nonprime lending. That volume of activity has been growing exponentially in recent years, and more heretofore prime lenders have pushed into the sector.
Part of the reason for this trend has been the leadership of Fannie Mae and Freddie Mac, part was the collapse of the old subprime establishment and part was the quest for profits and market share. While the growth in subprime is somewhat beyond the scope of this article, it provides a window for noting that the production figures may vary by a few billion because some firms included their home-equity and nonprime production in our numbers, while others didn't--which is more a factor of what gets captured and where this occurs in a specific firm.
Our surveys (the source of our production numbers) were directed chiefly to the mortgage company in the case of large banking institutions with mortgage subsidiaries. In instances such as Branch Banking & Trust Co. (BB & T), Wilson, North Carolina, where there is no subsidiary, we went directly to the bank. In other instances, such as Countrywide, where there is a central clearinghouse for all the subsidiaries within the company, we went there for origination data.
In all cases we asked for closed volume for the calendar (not fiscal) year by production channel, with bulk as a setaside separate from correspondent--where it has historically been stored. We surveyed 28 firms, and 27 responded with completed questionnaires. Their wholesale volume for 2002 and 2003 is listed alphabetically by firm in Figure 1. The dollar amounts represent the volume of mortgage loans closed and funded.
By way of definition, by wholesale we mean purchased or acquired production. Put another way, it is indirect production in the sense that nonemployees are taking the applications and sourcing the business that the lender will either table fund or purchase as a closed whole loan or a pool for a mortgage security.
Most of the listed wholesalers are owned by large regional and national banks. Two are subsidiaries of foreign banks, five are owned by thrifts and one is a subsidiary of a publicly held insurance company. Two others are publicly held companies, one of a credit company and the other a subsidiary of a diversified financial company. It is a highly competitive group of firms operating in a perfectly competitive market--no dominant players, no entry barriers and little ability to affect price.
Figure 2 ranks the firms by 2003 volume. Total wholesale production for the 27 surveyed firms was $1.49 trillion. That amount compares with $1.08 trillion for the surveyed group one year earlier, a 38 percent gain year over year. According to industry estimates of total one-to-four-family originations, 2003 volume totaled $3.9 trillion.
2003's big gainers
Let's start by reviewing the wholesalers showing the largest increases in their 2003 production activity. The firms posting the largest advances were Irwin Mortgage Corporation (Indianapolis), up 130 percent; Chase Home Finance, up 94 percent; CitiMortgage Inc. (St. Louis), up 90 percent; Countrywide Financial Corporation, up 73 percent; Fifth Third Mortgage Co. (Cincinnati), up 69 percent; First Magnus Financial Corporation (Tucson, Arizona), up 51 percent; SunTrust Mortgage (Richmond, Virginia), up 44 percent; First Horizon Home Loan Corporation (Irving, Texas), up 43 percent; Bank of America (Charlotte, North Carolina), up 40 percent; and Union Federal Bank (Fort Wayne, Indiana), up 39 percent. All 10 firms grew at or above the mean growth for the total surveyed group of 38 percent.
Eleven firms grew by at least 20 percent, but less than the group average. They included: National City Mortgage (Miamisburg, Ohio) and Taylor, Bean & Whitaker Mortgage Corporation (Ocala, Florida), both up 37 percent; HSBC Mortgage Corporation (Buffalo, New York), up 35 percent; Homecomings Financial Network Inc. (Petaluma, California), up 31 percent; Washington Mutual and BB & T Mortgage (Wilson, North Carolina), both up 29 percent; Flagstar Bank (Troy, Michigan) and U.S. Bank Home Mortgage (Minneapolis), both up 28 percent; Principal Residential Mortgage (Des Moines, Iowa) up 25 percent; Cendant Mortgage Corporation (Mt. Laurel, New Jersey), up 23 percent; and Union Planters Bank (Memphis, Tennessee), up 22 percent.
The slowest growers last year were, in descending order: Wells Fargo Home Mortgage, Ohio Savings Bank (Cleveland), Guaranty Residential Lending Inc. (Austin, Texas), Green-Point Mortgage Funding Inc. (Novato, California), Wachovia Mortgage Corporation (Charlotte, North Carolina) and ABN AMRO Mortgage Group (Ann Arbor, Michigan).
Remarkably, four of the 10 fastest growers were among the big 10: Countrywide, Chase, CitiMortgage and Bank of America. This...