TheMReport — News and strategies for the evolving mortgage marketplace.
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34 | Th e M Rep o RT o r i g i nat i o n s e r v i c i n g a na ly t i c s s e c o n da r y M a r k e t Department ORIGINATION Q2 Wrap-Up: Mortgage earnings lift off low Base The major banks performed as expected. a small resurgence in home purchase lending in the second quarter helped drive up mort- gage earnings at some of the na- tion's top firms, but the picture still looks sparse overall. With the second-quarter earnings season mostly done, financial services firm Keefe, Bruyette & Woods (KBW) reports that mortgage bankers tracked in its coverage—including bigger names like Wells Fargo and JPMorgan Chase, as well as a handful of smaller companies—saw a 22-percent increase in volumes from the first quarter to the second. "We view the mortgage results for the banks that have already reported Q2 earnings as largely in line with expecta- tions," KBW commented. With market share shifting from banks to non-bank lenders, KBW estimates in- dustry volume was likely up by nearly a quarter when factoring in those compa- nies not covered in its report. Mortgage application numbers were also up nearly 26 percent among those companies reporting. The increase primarily reflected higher purchase volumes, KBW said. As refinance activity has fallen off from its recent boom, the share of purchase activity in the market has steadily grown—though actual origina- tion numbers overall have been unable to make up for the lack of refinances, as evidenced by the nearly 60 percent year- over-year decline in originations in Q2. Among the banks tracked in KBW's report, Wells Fargo held on to its spot as the top originator in the second quarter, growing its market share nearly 1 percent- age point over the year to 43.4 percent. The next biggest home lender was JPMorgan Chase with a market share of 15.5 percent, down from 18.6 percent last year. Bank of America, U.S. Bancorp, and Citigroup followed with estimated market shares of 10.2 percent, 7.3 percent, and 5.7 percent, respectively. 80% of lenders shy away from non-QM Business Risky seas are keeping small vessels in port. W hile regulatory guidelines intro- duced this year have had little effect on lenders' strategies so far, most still anticipate a tougher oper- ating environment ahead, accord- ing to an analysis of responses in a recent Fannie Mae survey. Earlier this year, the Consumer Financial Protection Bureau (CFPB) implemented the Qualified Mortgage (QM) and ability-to-repay rules, which restrict certain loan features and require lenders to take greater steps to ensure a borrower's abil- ity to repay their mortgage. In a follow-up piece on the company's inaugural Mortgage Lender Sentiment Survey, Li- Ning Huang, senior manager of Economic and Strategic Research at Fannie Mae, found that most of the lenders surveyed don't plan to change their current strategy in response to those rules, with 46 percent saying they plan to "wait and see" what happens in the market before acting. More than one-third of lenders surveyed said they don't plan to pursue any business that doesn't fit under the QM umbrella, while few- er than one in five plan to actively go after that part of the market. Larger institutions, more secure in their ability to take the risk of non-QM lending, were more likely to say they want to expand in that direction, while smaller and mid-sized firms were more likely to say they plan to stay away from that segment. Those results follow Fannie Mae's initial survey report and the Federal Reserve's most recent Senior Loan Officer Survey, which both showed larger institutions are opening up their credit standards as the mortgage market continues to look weak compared to recent history. Overall, Fannie found the vast majority of firms—84 percent—ex- pect to keep their non-QM share at 10 percent or less of their total single-family originations. While regulatory changes may not have had a huge impact on business strategy, they have boosted quality control (QC) efforts. Out of all lenders surveyed, 85 percent said their costs for QC- related activities have increased over the last year as they push to enhance the quality of their loans, mitigate repurchase risk, and prevent fraud. Looking ahead, 74 percent said they expect costs to rise in the next year as a result of the QM rules. For all of that money spent, however, only about 74 percent of lenders agreed that QC invest- ments will have an impact in reducing repurchase risk, with smaller firms less likely to join in on that optimism.