Despite a historic contraction in mortgage lending, Hudson City Bancorp (HCBK)
, a Paramus, N.J., thrift holding company, said Wednesday that it's seeing mortgage applications come in at a record pace. The trend continues fast growth in the first quarter: a review of the company's most recent filing with the Securities and Exchange Commission shows that origination volume surged 26 percent at Hudson relative to year-ago totals, reaching $820.4 million in Q1.
Hudson City said in a press statement
that mortgage production was up 17 percent through the end of May, compared to the corresponding period last year -- making the regional banking outfit one of the latest to show resilience as consumers move from large national lenders to smaller lending outfits for their mortgages.
Hudson CEO Ronald Hermance said that the thrift's growth is due in part to increased refinancing activity from borrowers whose original lenders have since left the business.
"During the first quarter of 2008, we received an 11 to 1 advantage of applications to refinance mortgages held by our competitors over mortgages held by Hudson City," he said. "In the second quarter of 2008 we continue to experience that favorable trend, but have begun to see an almost 50/50 split between home purchase loan activity and refinancings."
Despite growth, questions yet remain over the bank's long-term ability to grow its mortgage franchise. Sy Jacobs, a well-known hedge fund manager and founder of New York's JAM Asset Management
, indicated to Barron's in a recent interview
that his firm is short Hudson City despite the company's fast growth.
Jacobs cited the firm's reliance on favorable rate spreads to generate profit as potentially problematic, saying that because the firm holds primarily first mortgages and MBS, it primarily generates returns based on the steepness of the yield curve.
"Everything looks great for them now, if you a call 10% ROE great," Jacobs argued. "But they are not immune to credit risk in a recession and a weak housing market.
"I also think their loan-loss reserve at 0.15% is very low, relative to others. When the Fed rate-cutting cycle is over, I don't want to own a spread play with credit risk that's trading at two times book."
HW has noted repeatedly in covering earnings that under-reserving by banks and savings thrifts is a potentially problematic trend as housing losses mount; and it's one that the Federal Deposit Insurance Corp. recently warned member banks about
, as well.
Disclosure: The author held no positions in HCBK when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.