TheMReport — News and strategies for the evolving mortgage marketplace.
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TH E M R EP O RT | 39 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 ORIGINATION THE LATEST Housing Industry's Nonbank Participation Highest in 20 Years Some have attributed the increase of the role of nonbank institutions in the mortgage market to nonconventional lending and a willingness to originate riskier mortgage loans. N onbank participation in the mortgage market reached its highest level in 20 years during 2014, according to Freddie Mac's October Insight & Outlook report released last month. The market share of non- depository, independent mortgage companies tumbled after the Great Recession with the collapse of the mortgage and secondary markets— especially those companies that were focused on subprime lending. In 2014, the market share of inde - pendent mortgage companies rose to 47 percent for home purchase loans and 42 percent for refinance loans, the highest those shares have been at any point in the last 20 years, meaning nonbank mort - gage companies have more than regained their market share they lost due to the Great Recession. In 2009, the peak year for industry concentration, the top five mortgage originators accounted for 62 percent of all mortgage loans; five years later, in 2014, the market share of mortgage loans for the top five firms had tumbled to just 34 percent, according to Freddie Mac. While some have attributed the increase of the role of nonbank institutions in the mortgage market to nonconventional lend - ing and a willingness to originate riskier mortgage loans, data from the Home Mortgage Disclosure Act showed that the increase has been broad-based across differ- ent loan types and demographic groups. There are several reasons why the large commercial banks have lost market share in the mortgage industry, according to Freddie Mac. The mortgage industry is less profitable for big banks due to increased capital requirements;· • Profitability for big banks in the mortgage market has been re - duced due to increased regula- tion from the CFPB, which has increased big banks' concerns about liability for missteps; • Big banks are more cau- tious about lending due to bad memories over the 2013 representation and warranty settlements, despite the FHFA and GSEs taking significant steps to provide lenders more certainty about rep and war- ranty exposure; • Like Fannie Mae and Freddie Mac, big banks are still trying to resolve substantial legacy portfolios; high costs of servic- ing the troubled loans in those portfolios have caused some banks to reduce their participa- tion in the mortgage market. "We expect the GSE share will continue to decrease over the next few years," Freddie Mac wrote in the report. "Many lenders have signaled an increased willingness to hold loans in portfolio rather than sell them into the secondary market. The increasing market share of small banks and credit unions will support this trend. Historically, small banks and credit unions are more likely to hold conventional conforming loans in portfolio than large banks. We also expect jumbo loan originations to increase, boost - ed by solid house price appreciation, and the majority of these loans also are held in portfolio. "The recent emergence of small Internet lenders, or "marketplace lenders," is a development to watch, according to Freddie Mac; some of these marketplace lenders were launched using crowd funding, but have begun to attract traditional venture capital. Millennials who grew up entirely in the digital age may be attracted to those market - place lenders; the authors of the report said it is "entirely too early" to tell if this will be the case, but said they intend to watch it closely. Purchase Mortgage Loan Activity Spiked By High- Credit Borrowers THE DATA SHOWED THAT PURCHASE LOANS INCREASED 11 PERCENT YEAR- OVER-YEAR IN THE THIRD QUARTER, P urchase mortgage origina- tions rose significantly in 2015, driven by high-credit borrowers, according to Black Knight Financial Services' November Mortgage Monitor Report. The data showed that purchase loans increased 11 percent year- over-year in the third quarter, while purchase originations were 15 per- cent higher in the second quarter of 2015 compared to the prior year. In addition, in June 2015, purchase lending reached its highest point since June 2007. "The increase in purchase origina- tions is being driven entirely by high- credit borrowers," the report stated. Meanwhile, only 20 percent of purchase loans in the past three months have gone to borrowers with a <700 credit score, the lowest level in over 10 years. On the other hand, in the third quarter, compared to a year ago, pur- chase loans have fallen 5 percent, the report found. In the second quarter 2015 purchase origination volumes from sub-700 credit score borrowers were flat compared to last year. Black Knight also found that re- finance origination rose 57 percent in the second quarter of 2015 from 2014 and 17 percent in the third quarter of 2015, but since March 2015, the number has declined. "This decline signals a degree of 'burnout,' as those both interested in and able to take advantage of currently low interest rates have likely already refinanced," the re- port said. "The recent reduction in average credit score, which at first glance gives the false impression of loosening credit, is actually being driven by a decrease in high credit score refinance volume while lower credit score volume has remained unchanged." As far as adjustable rate mort- gages (ARM) are concerned, this share remains near 5 percent, but before the housing boom in 2004 to 2007, a 5-10 percent ARM share was considered normal activity, the data showed. "We expect the GSE share will continue to decrease over the next few years."