THOUGH HARDLY A NORMAL YEAR IN TERMS OF HOUSING STARTS, existing- and new-home sales, home-price appreciation and product innovations, 2004's theme song was a return to normalcy for origination volume. Primary market activity fell 34.5 percent in 2004 to $2.9 trillion. Nonetheless, it was the second-largest annual volume ever recorded and $600 billion higher than the third-best, $2.3 trillion in 2002. [??] Housing construction again contributed to gross domestic product (GDP) growth, and home-equity extraction fueled consumption via consumer spending. Along with volume, down went revenues, profits and FICO[R] scores. Expenses were up, as was speculation in real estate and loan-to-value (LTV) ratios. [??] Refi activity dropped in response to no new waves of even lower mortgage rates. Thirty-year fixed-rate mortgages (FRMs) hovered just under 6 percent all year. It was also a year that saw adjustable-rate mortgages (ARMs) proliferate. According to a recent Mortgage Bankers Association (MBA) survey, ARMs and interest-only (IO) loans accounted for 63 percent of originations in the second half of 2004. [??] Our sense of the mortgage banking industry's employment data is that there have been only moderate cutbacks in staff at lenders and mortgage brokerages, among Realtors and home builders, at title companies, appraisal firms and thus. Industry consolidation was ongoing as the number of major wholesalers continued to inch downward. This development will be detailed later in the article.
In the 17 years that I have been writing this annual serial article, the data has been captured and compiled by channel through a voluntary surrender of the data by the surveyed firms. Believe it or not, once upon a time there were 100 firms to survey. Other than the alternative-A and subprime lenders, and a few others led by Golden West Financial Corporation (World Savings Bank FSB, Oakland, California) and Ohio Savings Bank (Cleveland), this survey pretty much includes all the largest prime wholesale lenders.
Firms that are strictly retail, such as CTX Mortgage Co. LLC (Dallas), Regions Mortgage (Cordova, Tennessee) and Merrill Lynch Mortgage (Jacksonville, Florida), aren't surveyed, so several retail firms that would normally appear on a list of the top-10 retailers aren't included in our database. Speaking of Regions, earlier this year it did an interesting thing when it unexpectedly dumped the two wholesale channels it inherited from its year-earlier acquisition of Union Planters Mortgage (Memphis, Tennessee). No interest in wholesale there.
Merrill Lynch, meanwhile, has entered the correspondent channel, hiring an experienced and well-known sales group, and Charlotte, North Carolina-based Bank of America's new management team appears to have decided to return to the correspondent business, in part to complement the advent of its recent alt-A conduit. Does Wall Street smell opportunity from the troubles at Fannie Mae and Freddie Mac?
Having recently completed a major study of the alt-A sector of the mortgage market, we can say with some certainty that the lines between the prime and alt-A markets are blurry, as are those between alt-A and subprime. There is considerable leakage among and between these sectors. Much of the reason for this is due to Fannie and Freddie, who, for various reasons ranging from increasing market share to meeting affordability goals, have found it necessary to wade further and further into these nonprime sectors to grow revenue and income, and to satisfy the Department of Housing and Urban Development (HUD), the Office of Federal Housing Enterprise Oversight (OFHEO) and congressional demands to do more for low- and moderate-income Americans.
While this Who's Who in Wholesale survey has almost exclusively focused on prime wholesalers historically, more and more nonprime volume is seeping into the numbers. Calabasas, California-based Countrywide Financial Corporation's numbers, for example, are all-inclusive--meaning prime, alt-A, subprime and home-equity volume is all in there. But that's not the case in all situations.
For instance, O'Fallon, Missouri--based CitiMortgage Inc.'s volume doesn't include Baltimore-based CitiFinancial. So in that respect, we have a hodgepodge of products in the data. Nonetheless, you shall see our survey of 26 firms is a good, fair representation of the total market--a microcosm of the broader market.
This year for the first time we solicited volume data from several of the large alt-A and subprime lenders, such as Ameriquest Mortgage Co. (Orange, California), Aurora Loan Services Inc. (Littleton, Colorado), IndyMac Bank (Pasadena, California), New Century Mortgage Corporation (Irvine, California) and Impac Mortgage Holdings Inc. (Newport Beach, California). As the roster indicates, many declined my offer to include them in this article (see Figure 1).
Figure 1 is an alphabetical list of the wholesale lenders and their production volumes in 2003 and 2004. We define wholesale production as all originations obtained through table funding and closed-loan acquisitions. Retail is direct and wholesale is indirect, meaning not originated by an employee of the lender.
Notice that total wholesale volume fell 33 percent last year to $993.5 billion for those surveyed. However, as mentioned, aggregate home loan volume fell 34.5 percent from $3.9 trillion in 2003. So wholesale volume fell roughly in line with aggregate activity. At the same time, wholesale in 2003 as a percentage of total originations was 37.8 percent, and slipped to 34.3 percent in 2004, according to Wholesale Access' survey data.
The last point to make is that lenders are clearly into riskier products than ever before. Moreover, the risks are frequently layered, one atop another. For example, take an 80 percent first-lien three-year ARM that is amortized over 40 years with only principal paid for the first seven years. The loan was originated as a stated-income product and employed an adjustable-rate 20 percent second mortgage tied to the prime rate and amortized over 15 years. The borrower has a debt-to-income (DTI) ratio of 51 percent, $10,000 in savings and a 680 FICO. How will such mortgages perform in a higher interest rate environment or in a recessionary environment with 6.5 percent unemployment? Truthfully, no one knows--so the law of unintended consequences lurks over the scene.
Figure 2 ranks the firms by 2004 volume. Total wholesale production for the 26 surveyed wholesalers was $993.5 billion. In essence, the market has shrunk back to its 2002 size in the number of transactions, but volume has fallen.
2004 vs. 2003
Let's first look at the wholesalers that showed year-over-year advances despite a sharply downsized market pie. Only five of 26 firms showed gains from 2003. The five were American Home Mortgage (Melville, New York), up 151 percent; Aurora Loan Services, up 30 percent; HSBC Mortgage Corporation (Buffalo, New York), up 8 percent; GreenPoint Mortgage (Novato, California) and Taylor, Bean & Whitaker Mortgage Corporation (Ocala, Florida), both up 3 percent.
Of those five, nearly all concentrate on the alt-A sector. That is certainly true for Aurora, which is owned by Lehman Brothers Inc., New York, and for GreenPoint, the industry pioneer in reduced-document programs. HSBC's numbers include home-equity product sales and the inclusion of its Newport Beach, California-based Household Mortgage Services Inc. acquisition. One of Household's subsidiaries was Decision One Mortgage Co. LLC (Charlotte, North Carolina), an alt-A/subprime wholesaler. Taylor, Bean & Whitaker is a prime lender with a line of alt-A products.
Two firms' origination volumes slipped by 10 percent or less. They included CitiMortgage, off 10 percent; and First Magnus Financial Corporation (Tucson, Arizona), down 9 percent. Four firms saw production slip 20 percent to 30 percent, including Countrywide, down 23 percent; Bank of America, off 24 percent; Union Federal Bank of Indianapolis (Fort Wayne, Indiana), down 22 percent; and First Horizon Home Loan Corporation (Irving, Texas), off 30 percent.
Firms that experienced reduced production last year of 31 percent to 40 percent were Chase Home Finance (Edison, New Jersey), down 35 percent; Flagstar Bank (Troy, Michigan), off 40 percent; GMAC-RFC (Bloomington, Minnesota), off 34 percent; SunTrust Mortgage (Richmond, Virginia), down 36 percent; PHH Mortgage Services (Mount Laurel, New Jersey), down 40 percent; and EverBank (Jacksonville, Florida), off 39 percent. EverBank's mortgage...