David Stevens calls it a watershed year for the nation’s mortgage originators.

Stevens, the head of the Mortgage Bankers Association, calls it a “systemic change” in the market. It’s one that is keeping lenders up at night, worrying about declining loan volumes, costly regulation and rising interest rates.

One mortgage consultant’s recent benchmark survey of independent mortgage bankers revealed that more than half of those it queried reported losses in the fourth quarter.

Lenders must fight harder to get a competitive advantage as the market shrinks. They’ll need to tap technology, find efficiencies, comply with a multitude of new regulations and employ marketing smarts to drum up business in today’s weak purchase market. 

They may even face extinction if their capital cushion isn’t strong enough to weather the storm. The news has been sobering as large lenders slash thousands of mortgage jobs, and origination volumes at the big banks plummet by as much as 60%. 

While smaller lenders aren’t making the headlines, they, too, are laying off workers and hunkering down.

“Are we going to have customers who want new loans?” asks Larry Walker, managing director of the Mortgage and Consumer Loan Practice Group at KPMG when asked about the challenges facing the origination space. “The secondary issues are really about cost and regulation and technology.”  

The decades-long decline in interest rates — a drop from a high of 18% in 1980 to a bottoming out at about 3.5% last year on a 30-year, fixed-rate mortgage, is over. The long ride created an enormous appetite for refinances. 

But the long-running refi boom is gone. While purchase mortgages are rising and the housing market is improving, it isn’t improving by enough to pick up the slack. Interest rates are predicted to creep upward, while new mortgage finance regulations add complexity and cost to originating new loans.

“This is a systemic shift in mortgage volume,” said Stevens. “It is causing pressure on corporate profit margins in the mortgage finance sector.”

Since the housing market crashed in 2007, more than 1,000 mortgage lenders have gone out of business, according to data collected under the Home Mortgage Disclosure Act. 

In 2013, lenders originated almost 1.8 trillion mortgages, but volume is expected to plummet by nearly 40% to about 1.1 trillion this year, according to the MBA.

It’s not an entirely dark and dismal world, of course. The economy continues to improve, albeit slowly, home prices have risen significantly over the past year, and the upside of new regulation is greater consumer transparency and safer mortgage products. 

Finally, credit availability, while still tight, has begun to loosen a bit.

The flipside is an endless “piling-on” of regulatory rules and policies from a multitude of regulatory agencies.


May F1-1This is a different world from the housing’s heyday of 2006 — prior to the foreclosure crisis and subsequent financial crisis. Only six of the top 20 single-family mortgage originators in 2006 remain active in the market today, according to Inside Mortgage Finance statistics for 2013. Most of the others in the top 20 from 2006 failed, were acquired, shut down or filed for bankruptcy.

Between 1998 and 2010, market share held by the top 10 originators grew from just below 40% to nearly 80%, according to Fannie Mae research on the origination market. However, over the last three years, top lender share retreated significantly — to slightly more than 60% of the market in the first half of 2013. 

Large lender share likely will return at some point as they tend to hold advantages over smaller players with more products and services. They can spread out fixed costs, such as labor, over more business lines for example, and generally have a lower cost of debt and broader access to funding in the bond markets than small lenders. 


But smaller to midsize lenders with gumption can and will take market share from the bigger players every chance they get. Some regional players see the current market as an opportunity to do just that. 

Atlanta-based mortgage lender Equity Loans, which primarily lends on the East Coast, is among those casting a wider net to gain a competitive edge. It added mortgage servicing and wholesale and correspondent lending channels late last year.

“It’s essentially another revenue stream, another asset,” said Eddy Perez, president of Equity Loans, of the new servicing portfolio. “If you build it up during tougher times in production, you don’t have to lean on production. That revenue will help sustain you.” 

KPMG’s Walker said servicing has become less valuable to big banks due to capital requirements and other reasons. As a result, large banks are paying smaller servicing premiums, leaving small to mid-sized lenders to consider whether it makes more financial sense to retain the servicing.

“A lot of our clients are asking about how to set up the ideal model,” Walker said. “How are we going to thrive in the future?”

Having a strong strategy for success is important, he said.

“Who will be able to romance the customer in the best way and provide the customer with the best experience?” Walker asked. Does the company have a strong mobile presence? Is it employing technology to make the origination process easier for the consumer?

“We are seeing demand for new thinking and new information and new approaches from our more strategic customers,” Walker said. 

He points to a Dallas bicycle manufacturer that offers custom design over the Internet as an example of what might be in store for the mortgage industry.

“Can we let the customer design his own mortgage product, design his own mortgage experience and his own mortgage process? And do it on his cellphone?”

Lenders who give the consumer a better experience will have the advantage in today’s competitive and challenging market, he believes.

Denver-based lender W.J. Bradley Mortgage Capital, which does business primarily on the West Coast as a retail lender, hopes to improve the customer experience to boost its competitive advantage.

Earlier this year, the company rolled out enhanced customer relationship management and marketing software in its 80 branches to help its 500 loan officers bring in new business and stay in contact with borrowers and real estate partners.

The software is designed to enhance the customer experience through the entire loan process, said Howard Michalski, executive managing director at W.J. Bradley. 

“We’ve always had a strong core origination platform,” Michalski said. “This year, most of our investments are in end-to-end workflow enhancements and business generation systems.” 

The idea, he said, is to go on the offensive, not on the defensive, while the market is down.

“I think we did a really good job getting our house in order in the late third and early fourth quarter. As we saw the market contracting, we were very quick to make sure we were retooling our business … and that meant making some tough decisions. We had to lay some people off.”

Now W.J. Bradley is prepared to grow should distressed mortgage shops decide to sell, Michalski said.

“There are some pretty nerve-wracking stories about the health of our competitors, so it could be a growth year for us (through acquisitions).”


Technology and automation will be key for lenders to compete in this contracted marketplace, said Jonathan Corr, president and chief operating officer at Ellie Mae, a mortgage technology firm.

“Every lender wants to service their consumer in a very cost-effective way,” he said. “Every lender wants to make sure the loan they are doing is compliant, high quality and won’t come back at them. That is what the business is about right now. How do you do that in a cost-effective fashion?”

Gross production expense (the cost to get a loan done, including personnel) has risen from $3,500 in 2009 to almost $6,000 last year, according to the MBA.

Some lenders have “thrown human spackle” at the new regulations in order to be compliant, said Corr, but using more people quickly squeezes out profit.

Keith May, managing partner with public accounting firm Richey, May & Co. in Englewood, Colo., said building compliance into the production model from loan application through post-quality review can be a costly proposition, but a necessary one in today’s market.

“It’s a significant burden for the smaller independents,” May said.

Richey, May & Co. does a quarterly benchmarking study of its mortgage clients, who are mainly independent mortgage bankers producing $500 million to $10 billion in loan production.

“Two key things we are seeing is that income margins in the fourth quarter were down significantly and over half of the participants actually ended up with losses in the fourth quarter,” May said. 

“I think we will see a lot more consolidation in the marketplace in 2014. We are starting to see smaller and weaker companies trying to identify companies they can merge into or be bought out by.”

LenderLive, a private-label originator, servicer and outsource provider based in Colorado, said compliance will be a major challenge for the industry’s smaller players this year. 

“They don’t have the staff or resources to keep up with the ever- changing environment. It’s gotten to the point now where they will have to turn to a service provider or stop doing mortgages altogether,” said Rick Seehausen, CEO of LenderLive. 

Shops doing fewer than 100 mortgages a month can’t afford to operate in this new regulatory environment, he said.

“This is not what the government intended. The government is against too big to fail,” he said. “We need the small lender. We need to be able to go into our local bank or credit union and be able get a loan.”


It remains to be seen how far lenders will dip their toes into the non-QM waters to build up their loan volume this year. Will there be a non-QM market beyond jumbo loans to well-qualified borrowers?

Mortgages with balloon payments, negative amortization, interest-only payments and certain adjustable-rate mortgages fall outside of QM but it’s unclear how many of these types of products will be offered this year.

Lenders are still asking themselves whether they should do non-QM loans, said Faith Schwartz, who heads up government solutions at data analytics firm CoreLogic.

It’s a valid question as non-QM loans open up added risk to the lender, she said. 

“It’s new risk, but maybe I want to do them,” she said. “Maybe there is a 40-year amortization that makes sense. Maybe it’s a lower credit (score) but I want to make it work. Is there a home for those loans if they fall outside of the government footprint?”

Lenders will — at some point — figure out a way to do non-qualified mortgages in a way that meets regulatory requirements, incorporates sound lending and makes a profit, Schwartz believes. 

To be sure, uncertainty remains about the investors’ risk appetite for non-QM loans, which are expected to drive up pricing due to potentially higher risks attributed to non-QMs and increased capital needs.

Still, lenders have expressed at least some interest. W.J. Bradley, for example, predicts it will be making non-QM loans other than jumbos before year-end.

No matter what lenders decide to do to build up their businesses, it will be tough out there, Schwartz said. 

“Everyone is going to be fighting for business and it has to be done well.”

Still, she’s hopeful that the strengthening housing market will keep mortgage lenders in the game. It’s what’s best for America’s consumers, she said.

“The more people in it, the better the competition,” she said. “The better the rates. The better the products. For all of us, we should desire a strong, robust, competitive and diverse mortgage market.

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