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Lending

Small lenders finally make a mortgage bang

Prepare for more layoffs, but not at the smaller lenders

September 16, 2013
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The mortgage industry is bracing itself for another round of layoffs.

As usual, these are expected at the big boys, as incoming regulations and rising interest rates slow refinancing activity, taking a toll on the bottom line.

It will come as little consolation to former TARP leader Neil Barofsky, who was recently in the press complaining that the Too-Big-to-Fails are still too big.

Well, the TBTFs may be growing in other areas, but in the mortgage business the operations keep getting smaller.

Securitization analysts are bracing for mortgage originators to feel the impact of additional job cuts. These cuts could arrive at a volatile time, with the Federal Open Market Committee meeting taking place later this week to determine if the Fed will continue purchasing Treasurys and mortgage-backed securities at the current pace to pressure rates. It's anticipated with the Fed leadership role in flux, any easing will not be at the expense of interest rates.

"The MBS sector is increasingly priced to the view that the taper will exclude mortgages or will be benign in size to not occur at all," noted Bank of America Merrill Lynch (BAC) securitization research head Chris Flanagan.

This will be good news to the smaller mortgage lender, since it now has room to expand its share in the market. According to analyst Brian Klock at financial services firm Keefe, Bruyette & Woods lending trends now favor the small banks over the large. Lending overall is up more than 3% quarter-to-date (QTD).

"Growth has been driven by the small banks (+8.4%) as opposed to the large banks (+0.5%)," he wrote in a note to clients, adding that small bank annual 3Q growth includes $7.4 billion from Washington Federal's mid-July thrift conversion.

"Excluding these loans, QTD growth at the small banks would be 6.8% and overall growth at banks of all sizes would be +2.8%," he added.

And many of these lenders, not just the banks above, but also credit unions, are positioning themselves to improve market share. The credit unions are using correspondent lenders to close in their name and help increase mortgage originations, for example.

All of this is good news for the industry. The growth is going slow and staying conservative. The correspondents offer much tighter underwriting standards so loan quality is top-tier.

Barofsky is concerned that the TBTFs are still capable of creating another financial crisis. Well, that might be a risk, but that won't come from the mortgage lending side, that is for sure.

Barofsky may not like the state of the big banks today, but he'll like the state of smaller lenders in the future.