Origination News Feature Story

Consolidation, Refinancing May Not Last That Long

By Mark Fogarty & Bonnie Sinnock

CHICAGO-The questions consolidation raises for the future of mortgage bankers and brokers, the refi "boom" and what might restore the credit markets were among topics we covered in our roundtable discussion with industry executives attending the recent Mortgage Bankers Association National Secondary Market Conference here.

Participating were: Scott Stern, CEO/founder of Lenders One mortgage cooperative; Mike Margolf, executive director, AllonHill; Ed Fuchs, CFO/head of capital markets at NetMore America; Les Parker, president of Parker & Co.; and Nicholas Bratsafolis, senior managing director, structured refinance at Lend America.

MARK: We've seen tremendous consolidation, the top five lenders on the origination side controlling 50% of the market and on the servicing side even more they control two-thirds of the market. Do you guys see that trend continuing?

NICK: As long as the big five or the larger shops are the ones providing the warehousing and providing the secondary market it's very tough to escape them unless you can do something on your own you can do your own securitization. So I do think, at the current time, it will increase until more people come into the marketplace providing warehousing and then secondary outlets.

ED: I think I would agree with that. Certainly until also the market opens up with some investment capital I think a lot of the smaller mortgage banks that are privately held or non-bank/non-depository banks are at a lot of their lending capacities and without the ability to go out and raise additional funds really don't have the ability to take advantage of some of the current opportunities that are out there. But as that investment capital becomes more accessible to mortgage companies and allows them to ramp up some of their operations at that time I do think that you will a lot of these small or midsized players aggressively grow their volumes and you'll start to see those percentages come down.

MARK: How about in the wholesale channel? You've seen a tremendous decrease in mortgage broker share from like about 60% down to about 15%. Is that going to continue? Are brokers still viable?

LES: I think it's very difficult to see how brokers can survive in the long-term environment here where there's going to come some type of legislation requiring - the buzz term is "skin in the game." I believe that the model that's going to develop is the model that was in the early '80s which was the traditional mortgage banking model where the mortgage originator also has to service and that will be their skin in the game. They have the commitment to the long-term performance of that consumer on the mortgage. ... I think we're going to see a major shift in how compensation is for loan officers to move away from a single transaction compensation structure to a deferred compensation structure that's based on the performance of the consumer in the long term. Those are the long-term trends. ... People are going to have to be retaining servicing. You're going to get a greater diversity of players in the servicing space. An additional item that's seriously being addressed not just in the United States but at the international level, what are we doing to do with these institutions that are too big to fail and some say too big to succeed? We are probably going to see some type of diversifying of some of these financial institutions or shrinking of those financial institutions over time.

SCOTT: I'd like to address the issue of brokers from my perspective. My group is a group of mortgage bankers, but with that being said I think mortgage brokers did get a bit of a bad rap. They originated products, which were developed by Wall Street, were rated by the rating agencies and serviced by the big banks. Mortgage brokers originated them and have been widely cast sort of as a scapegoat in this issue for originating those loans. But nonetheless, they've been scapegoated and that label has stuck. ... So I think the broker model is in danger. ... I think mortgage bankers probably can survive for one reason - they can service loans. So I don't see mortgage bankers going the same way as the independent drug store or the independent hardware store. Because they have a way to control their own destiny and if they need they can use an agency, they can service loan. ... I think we'll come to a point, we're almost getting there, where companies will look at retaining servicing again. So as things move too far to one side, where the big servicers dominate servicing, the small companies say, "You know what? Maybe I should service loans again," and you compare that with historically low servicing rates and now's about the time when we're hearing people say they're swinging back to servicing loans on their own and then I think that shifts the percentages back away from consolidation back into diversification of servicing.

NICK: To kind of continue on that line: I think the current market is certainly very challenging for a broker, no doubt about it. But I do think that it does present some real opportunity for companies that want to go into correspondent lending and create new relationships with these one-time brokers and maybe small mortgage bankers and give them another way to do business through providing warehouse lending, through providing an outlet to sell product that can't be purchased today in today's secondary market so, for example, if a company wanted to create a career model where they provide the warehousing and allowed certain people with whom they had developed a relationship to do the type of loans that FHA permits currently. I think there is an opportunity there.

ED: There is no doubt that the current model has to change and it has been changing and it will continue to change. It also presents a lot of opportunity for companies that have developed net branching opportunities as I sort of see that as a hybrid between the broker model and a traditional retail branching model and certainly there are a lot of net branching companies out there that are HUD compliant, that do an enormous amount of compliance, checking and looking at the loans, making sure the structure is done correctly and we're certainly see a big demand for brokers to get more involved on the banking side through that kind of a relationship. So while the broker model may be changing, I do think that there's an opportunity for them to be out there and not necessarily involved in a traditional retail channel.

LES: I think Scott described it well concerning mortgage bankers and mortgage brokers. ... They have been scapegoated and it is a disappointment. Personally, I've used brokers for almost every loan I've had over the last 10 years. ... But two comments on that. One is the new brokers are credit unions and community banks in the sense of just originations and sales. The other comment is in terms of the history we look at, mortgage bankers have been acting as brokers in that they originate and sell as brokers originate and sell. I really think the model we're going to, as I said earlier, will be to go back to where it's origination, sell and service.

MARK: The MBA's forecasting a big refi boom this year with total originations of $2.7 trillion, which should be like the fourth best year ever. Do you guys see this current refi activity sustaining to that level?

LES: Well why would you fight the Fed? I mean, the Fed's sustaining mortgage-backed security prices so it's hard to see how you wouldn't continue to have refinance volumes. The biggest challenge is the appraised values.

MARK: A lot of apps are being denied.

LES: Because of appraised values, largely. [For] some, it is income and income stability.

ED: I certainly see the refinance activity continuing through the year. I think we're seeing so much consumer demand and mortgage companies not being able to meet that demand. Certainly if you go back over interest rates for the last couple of years there's hardly a consumer out there that couldn't benefit from the rates that are in place, even if you did a 30-year fixed rate two years ago. ... If you have value in your home and you have some job security I think almost anyone out there could benefit from today's rates. Even with a small increase in rates, that demand's going to continue certainly through the end of this year.

SCOTT: I do think you need one other thing in order to get to the $2.7 to $3 trillion market. Typically these large cycles have a drop and then another drop where a borrower might refinance two or even three times in a year. So I think if rates stabilize in the 4.75% to 5% range you'll have a lot of people refinance once. The question is will that go down to 4.25% to 4.5% which [may get some] borrowers who you know don't have credit problems and where there aren't appraisal problems to refinance maybe one more time. That's bad for servicing retention but it will really help the borrower.

BONNIE: I wondered, with this refinancing, whether capacity issues will continue, and, if so, what will bring the credit markets back?

MIKE: Speaking for the distressed asset side anyway. We have a lot of clients ... with a lot of money sitting on the sidelines right now. They're gearing up. ... We're starting to see some confidence come back ... in light of the Treasury's announcements and the public-private partnerships and things like that. We're starting to see more confidence. We do know people that are ready to get back into that game, purchasing loans, and we're seeing bond positions trade that we're excited about ... as are our clients on the whole loan side.

SCOTT: I have heard more conversation in the past few weeks than in the previous six months about jumbo lending returning. Not as much as we'd like. But I've said recently I think jumbo lending has been the most discriminated against lending sector because it has performed well. Unlike alt-A and subprime, ... jumbo ... I think has been unfairly persecuted. I see that returning. ... There are pretty healthy spreads between conforming and jumbo.