New Emerging Players Gaining Prominence in the US Mortgage Market
August 2013
New Emerging Players Gaining Prominence in the US Mortgage Market Overview After dominating the US mortgage industry in the early 21st century until 2007, heavyweights lost their grip over the mortgage market, thanks to the 2008 global financial crisis. The crisis resulted in bursting of the housing bubble, which not only drowned big players in the torrent but also gushed away small players. But while some prominent retail mortgage banks like Citigroup, JP Morgan Chase, Wells Fargo and Bank of America enjoyed stimulus bailouts from the government to keep themselves afloat, many small mortgage lenders were forced to cease operations. The crisis also prevented most lenders from accessing the secondary markets to raise finance for their new and existing homeowners, leaving them with few business options. But even as mop up continued for the global mortgage industry, the 2008 global financial crisis turned out to be a real game-changer for several originating players within the US mortgage market. A new window of opportunity appeared for several smaller players who were previously, until 2007, sidelined by the big players. A sizable vacuum was created amid the collapse of the securitization market, the exit of hundreds of small mortgage companies and brokers, and the distractions of forced mergers among the biggest players in the market.
Current Scenario Few smaller lenders – including well-capitalized community banks, online channels and focused players – who all were able to hold on the restricted economy after the collapse of the mortgage markets have now gained prominence over the past few years, mostly during post crisis. The tide has turned in their favor as they snatch business from big banks. Emergence of smaller players over the years is a boon for US consumers as they offer loans at cheaper interest rates, lower costs and with quicker processing times. Such initiatives helped small lenders to offer aggressive pricing over large banks and thus acquire business from big players including Citigroup and Bank of America, who have retrenched after the financial crisis. According to a recent report by Inside Mortgage Finance, the big five US mortgage lending market players’ – Ally, Bank of America, Citigroup, JP Morgan, and Wells Fargo – combined market share has declined to just 53.2% in 2012, down from almost two-thirds of the total American home loan market in 2010. Moreover, a recent FBR Capital Markets report suggests that, by 2014, the combined market share could shrink to up to 40% of the USD1.8 Tn mortgage market. Currently (as of Q1 2013), Well Fargo leads the retail mortgage origination market with a market share of 12.1%, followed by JP Morgan Chase with 5.8% and Quicken Loans with 5.1% in
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the second and third place, respectively. Bank of America and Citigroup feature at the fourth and fifth spot with 5% and 3.3%, respectively (Refer Figure 1). A detailed list of the top 25 retail originators in the US is given in Appendix 1. Figure 1: Retail Origination Market Share – Q1 2013 Wells Fargo, 12.1% JP Morgan, 5.8% Quicken Loans, 5.1% Bank of America, 5.0% Others, 68.7%
Citigroup, 3.3%
Source: Inside Mortgage Finance
Why Emerging Players are Gaining Prominence? Some of the key reasons supporting that the emerging smaller mortgage players have gained prominence over the last few years are listed below: Bigger Profits Have Served Smaller Players Well In 2012, the US Federal Reserve announced that it was buying USD40 Bn of mortgages a month, which added to the demand for home loans in the country and thus increased profits for banks that made loans and sold them to investors. For instance, in January 2013, JP Morgan announced that the company’s margins from selling mortgage loans to investors have increased to about 1.60 percentage points, as compared to the historical level of about 0.65 percentage points. However, such margins serve smaller competitors better, as they give them enough room to cut rates and still make money. For example, in the end of January 2013, Guaranteed Rate offered a USD300,000 home loan for 30 years at a fixed rate of 3.5% and with upfront fees of USD1,250 on its website. The company also claimed that its offer was comparatively better than the countries’ three large banks – Wells Fargo, Citigroup and Bank of America – whose rates for same mortgage amount ranged from 3.625% to 3.75%, with fees starting at USD3,200. Small Lenders Taking Advantage of Federal Guarantees
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Today, several small lenders who are backed by private equity and hedge fund money are aggressively taking advantage of federal guarantees to make home loans geared toward lowincome borrowers – more so than the big banks. Such loans, which are insured by the Federal Housing Authority (FHA), require a down payment of as low as 3.5% of the purchase price, as compared to the usual 20%. No More Bailouts for Big Banks Since the crash of the housing market in 2008, big banks have enjoyed the major share of the mortgage market, mostly through their relationship with Fannie Mae and Freddie Mac. This in turn has been bolstered by the fact that big banks were kept afloat by the federal bailouts. But, now that many of these institutions have returned their federal bailout funding and the housing market is heating up, the big banks have not been able to keep up with the volume. Emergence of New Regulations Unfavorable for Big Banks The housing market crash in 2008 gave rise to several new regulations, which have made bank operations more cumbersome and expensive. One of these regulations that will affect credit approvals for big banks is the coming implementation of certain provisions on mortgage lending in the Dodd Frank Wall Street Reform Act of 2010. In January 2013, the Consumer Financial Protection Bureau (CFPB) released the new mortgage lending guidelines, or “Qualified Mortgage Rule” scheduled to go into effect in January 2014. Some of the salient features of the guidelines are listed below:
A borrower may not have a debt-to-income ratio of more than 43%,
Fees and points should not exceed 3% of the loan amount,
Lenders must verify a borrower’s income, and
No mortgages greater than 30 years and no interest-only or negative amortization loans.
Effects of Basel III on Loan Servicing Basel III is the new international guideline that defines the several bank metrics including capital adequacy, leverage ratios, loan stress testing and liquidity requirements. Although the large US banks are well positioned to satisfy these regulations, there are quite a few new mortgage servicing regulations which appear quite arbitrary. For instance, the amount of capital required by banks to hold against servicing rights was increased dramatically. Also, the new requirement has made servicing of delinquent loans much more expensive. This has resulted in driving down the banks servicing business to such low levels that many have opted to exit the mortgage business. However, it should be noted that specialty loan servicing companies are not subject to similar high standards of capital requirements like big banks.
Who are these Emerging Small Players? Emerging small lenders in the US mortgage market include well-capitalized community banks, online channels and focused players. These small lenders are those players who were able to
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hold on the collapse of the US housing meltdown of 2008 and were able to do business in the restricted economy thereafter. Some of the key players’ profiles are listed below: Quicken Loans, Inc. Quicken Loans is a Detroit-based online mortgage lender founded in 1985 by Dan Gilbert. Quicken is one of the fastest growing mortgage lenders in the US, whose origination grew to USD70 Bn in 2012 from USD12 Bn in 2008, with a growth of 483% (Refer figure 2). The company attained the highest year-on-year (y-o-y) growth of 133% in 2012. According to Inside Mortgage Finance 2013 first quarter estimates, Quicken Loans, which operates only online with no brick-and-mortar infrastructure, ranks as the nation’s third-largest residential mortgage lender, closing in on No. 2 JP Morgan Chase. Quicken originates nearly 5.1% of all retail residential mortgages in the US, and is still growing in a highly fragmented market. The company also remains as the largest online retail mortgage lender in the US. Quicken employs around 10,000 workers, with more than 8,000 now working in the city of Detroit. The most important factor behind Quicken’s growth was its ability to acquire market share from other lenders, who were badly hit by the 2007-08 sub-prime crisis in the US. Record-low interest rates have helped, spurring a refinancing boom and thus resulted in boosting Quicken’s profits. Moreover, Quicken distanced itself from the worst sort of mortgage practices that punctuated the nation’s housing meltdown. Figure 2: Quicken Loans Mortgage Volume (USD Bn)
Quicken Loans Growth During 2008-12: 483%
USD70 Bn $24.9$25.5 $20.1
USD29 Bn
USD25 Bn USD12 Bn $4.2
$6.8
$8.7
$7.9
$2.7 $2.1 $3.0
$6.2 $4.1
$5.0 $5.1
$10.2
$13.9 USD30 Bn $10.8$10.9 $8.4 $5.3 $5.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008
2009
2010
2011
2012
2013
Source: Inside Mortgage Finance
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Guaranteed Rate, Inc. Guaranteed Rate is a Chicago-based online residential mortgage company founded in 2000 with a single office by Victor Ciardelli. Guaranteed Rate offers low rates and fees, and has the ability to evaluate the total cost of a home loan to consumers, which helped it become Chicago’s largest independent mortgage lender within three years. Currently, Guaranteed Rate operates through more than 140 offices nationwide and has licenses in 49 states. The company employs approximately 2,600 people. According to the company’s Chief Executive, Guaranteed Rate hosted most of the growth in 2011 and 2012. "…We've hired over a thousand people over the last year and we're trying to hire a ton more..." –
Victor Ciardelli, President & CEO, Guaranteed Rate
As the tenth largest retail mortgage company in the country and with a market share of close to 1% (according to Inside Mortgage Finance 2013 first quarter estimates), Guaranteed Rate has provided in excess of USD14.7 Bn in home loans in 2012 alone – more than double of 2011’s total – with a 96% customer satisfaction rating (Refer Figure 3). Guaranteed Rate is one of scores of independent mortgage lenders and community banks pushing up through the rubble of the housing collapse, as profits rise amid improving demand for home loans for new purchases or mortgage refinancing. They are acquiring business from large banks such as Citigroup or Bank of America that have retrenched after the financial crisis. Figure 3: Guaranteed Rate Mortgage Volume (USD Bn) $4.9 $4.1
$4.1
Q2 2012
Q3 2012
$4.3
$2.5
Q1 2012
Q4 2012
Q1 2013
Source: Inside Mortgage Finance
Mortgage Master, Inc. Mortgage Master is a Massachusetts-based mortgage company founded in 1988 by Leif Thomsen. Since inception, the company has grown to become one of the largest volume lenders on first mortgages in Massachusetts, US. Today, Mortgage Master is one of the US’
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largest privately-owned mortgage companies with origination volume in excess of USD7.3 Bn in 2012 (refer Figure 4) — a y-o-y growth of 41%. The company which has consistently originated over USD5 Bn loans since 2009 employs more than 700 people nationwide, with over 255 loan experts providing loans and services through 33 licensed branches spread across 22 states. According to Inside Mortgage Finance 2013 first quarter estimates, Mortgage Master is ranked 19th in the list of top retail originators in the US. Mortgage Master originates nearly 0.4% of all retail residential mortgages in the US, and is still growing in a highly fragmented market. Figure 4: Mortgage Master Mortgage Volume (USD Bn) $2.0
$1.9
Q2 2012
Q3 2012
$2.1
$2.2
Q4 2012
Q1 2013
$1.7

Q1 2012
Source: Inside Mortgage Finance
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Road Map to Success in the Mortgage Market Like all other financial industries, the home mortgage industry is very competitive. As a mortgage lender, one should have clear strategy in place to counter competition from the existing players and thus increase its own market share. The below illustration exhibits the success roadmap that a mortgage lender should adopt to stay ahead of its competitors. Keep the interest rates low
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The first and foremost criterion a potential buyer looks at while considering a mortgage is the headline interest rate. Mortgage companies need to reduce a few fractions of a percentage point of their rates to bring prices below to what the competitors in the market are charging. This way mortgage companies can increase their chances of attracting more customers.
Offer attractive deals
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Today, customers look for security in addition to saving money. Mortgage lenders should start offering generous fixed-rate deals alongside their adjustable and variable products to buyers who are worried about increasing interest rates. This will help attract potential customers if rates are due to go up. A company can also acquire market share from its competitors, if it can offer customers a more attractive long-term fixed rate than its competitors. Reduce arrangement fees
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Mortgage companies need to analyze price structure for their mortgage loans. Lowering of arrangement fees and offering more value for the same price is one strategy for increasing the market share. If a mortgage company is looking to aggressively pursue a larger market share, then it should consider waiving off arrangement fees altogether for a set period of time.
Relax the lending criteria
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Relaxing the lending criteria can be a risky tactic, but it is likely to increase the market share. Accepting applicants with lower incomes or less-than-perfect credit scores will undoubtedly help increase the number of loans but can also result in higher defaults further down the line. One of the least risky ways to relax the lending criteria is to raise the loan-to-value ratio that a company is willing to accept from customers who qualify for a mortgage under the existing rules. Increase marketing spend
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Mortgage lenders should expand their marketing strategy to more than just making cold calls to generate leads to increase their market share in the industry. Companies should start investing more to buy media space in local commercials and search marketing advertisements which will help them promote their offerings when visitors look up mortgage loans online.
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Conclusion In the long term, the increasing business for emerging small lenders could be cut short as big banks have started to ramp up. The top two players of the current mortgage industry in the US – Wells Fargo and JPMorgan Chase – have been gaining market share in the recent times. Also, other big players including Citigroup and Bank of America, who had pulled back from the market during the financial crisis, have started hiring loan officers in an effort to regain their lost share. Moreover, the recent increase in mortgage rates could ultimately cut into demand for home loans in the country. However, for now, small lenders and industry experts expect that the ramp up by large banks is not enough to make up for all of the business they shed.
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Appendix 1 Top Retail Originators Q1 2013 (USD Bn)
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References 1. Inside Mortgage Finance 2. Mortgage Bankers Association 3. Mortgage Professional America 4. Detroit Free Press 5. Company Websites 6. The Houston Chronicle 7. Boston Business Journal 8. Forbes 9. Reuters 10. The Wall Street Journal 11. Sutherland Analysis
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