Though the last few years have seen less concentration in mortgage market share, the era of expanding mega-lenders is likely to return.
In 1998, the 10 biggest home loan originators held less than 40 percent of the new residential lending market.
But by the time 2010 rolled around, the 10 largest mortgage lenders had thrust their collective share to nearly 80 percent.
As of the first-half 2013, the group controls just 60 percent of the market, according to the Fannie Mae report, Deconsolidation in the Primary Mortgage Market: A Temporary or Structural Trend?
“Market deconsolidation was driven largely by the withdrawal of large lenders, with only 5 of the top 20 single-family mortgage originators in 2006 remaining active in the market today,” the report states.
Among top-10 lenders from 2006 that have gone out of business are IndyMac Bank FSB, Residential Capital LLC and Washington Mutual Inc.
Countrywide Financial Inc. and Wachovia Corp. each avoided collapse by finding a suitor.
Fannie noted that economies of scale provide the biggest incentive for concentration. Direct servicing expenses for servicers of fewer than 2,500 loans are 13 percent higher than for servicers of more than 50,000 loans.
Another factor in favor of concentration is a wider array of financial services products that enable fixed costs to be distributed over a broader set of business lines.
Lower debt costs, commoditized market conditions and access to big lenders’ subject matter experts also play a role in driving concentration.
A return of the private-label mortgage-backed securities market would favor large lenders that have the ability to gather the required collateral and to perform the securitization and master servicing functions.
But there are factors that are pushing against consolidation.
A sustained shift to retail originations would likely lead to a more diversified group of originators since larger lenders tend to have greater capacity for wholesale origination, the report stated.
“We believe that the shift to retail originations since the crisis came from lender desire to have tighter control of underwriting and production, driven by comparatively weak performance and high manufacturing defect rates for wholesale originations during the crisis period,” Fannie explained.
But lenders are expected to become less concerned about poor loan performance and repurchase risk as the outlook for housing and manufacturing improve.
The ability of small lenders to quickly react to market changes is another factor going against concentration, as is the value of having a local expert from a community bank.
Small banks have less stringent capital requirements than their large counterparts, providing less incentive to grow bigger. Also hindering larger banks is Basel III, which will raise capital requirements for holding mortgage servicing rights.
Less consolidation is also likely as outstanding repurchase demands become less of a business issue.
At Fannie’s five-biggest lenders, repurchase demands fell 90 percent from the end of 2012 through Sept. 30, 2013. Better quality loans originated more recently are likely to keep repurchase costs down.
The Washington, D.C.-based company concluded that larger lenders are more advantaged than smaller players.
“Consequently, our assessment indicates that the recent decline in large lender share of the primary market is temporary, and principally a result of cyclical factors that caused larger lenders to pull back from the market,” the report states. “Absent a meaningful restructuring of the mortgage market (our analysis did not contemplate changes that may come from reform of the housing finance system, as we do not yet know the timing and shape of reform), we believe there is a significant probability that in the long-term large lender share of the primary market will increase compared to current levels.”
