Nonbanks pounce on mortgage market

Big banks pull back

Nonbanks are swooping in on the extra market share that megabanks are losing ground on. The nation’s two largest originators made 21% of home loans in the second quarter, the smallest combined share in more than a decade, down from 30% a year ago, according to an article in Bloomberg.  

Big banks are exercising caution to avoid losses if their home loans sour and government-controlled Fannie Mae or Freddie Mac force them to repurchase the mortgages. This week, JPMorgan head Jamie Dimon escalated the buyback issue between lenders and the government, saying he questioned whether his bank should end its decades-old relationship with the Federal Housing Administration, a last resort for lower-income Americans seeking mortgages. Nonbank lenders, hungry for mortgages to service, are expanding rapidly to fill the void left by banks.

The problem: “These guys continue to lose market share to the smaller guys because the smaller guys are able to take more risk and the bigger guys keep giving cookie cutter mortgages,” FBR Capital Markets Managing Director Paul Miller said. 

According to a report from the Federal Housing Finance Agency’s Office of the Inspector General, the number of loans that Fannie Mae and Freddie Mac have purchased from nonbank and smaller lenders has exploded in the last few years.

“According to Fannie Mae documents, 46.6% of its mortgages were purchased from nonbank mortgage companies in the first three quarters of 2013, which was up from 33.2% in 2011,” the FHFA-OIG report states. “Freddie Mac data shows that its share of mortgage purchases from nonbank mortgage companies more than doubled from 8.4% to 20.5% over that same period, but its share remains significantly lower than Fannie Mae’s share.”

Meanwhile, Wells Fargo (WFC) recorded a 30.6% increase in originations in the second quarter, growing from $36 billion in the previous quarter to $47 billion, with gain on sale revenue up $116 million. 

JPMorgan Chase (JPM) posted second-quarter net income of $6 billion, compared with net income of $6.5 billion in the second quarter of 2013, with earnings per share at $1.46, compared with $1.60 in the second quarter of 2013.

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