In the boom time of housing, there were an abundance of lenders spreading funds to all sorts of borrowers. As everything unraveled, many of those firms went underwater or escaped bankruptcy through last minute deals, such as the Countrywide acquisition by Bank of America (BAC). But with major mortgage lenders including BofA, Citigroup (C) and Morgan Stanley (MS) today burdened by MBS liability and tough mortgage memories, there may be a shortage of willing lenders, especially at the margin of borrower qualification. As demand for mortgages ramps up, a lack of commensurate supply could prove a factor behind higher mortgage rates. Such a change could impede the real estate recovery, though perhaps only temporarily until supply demand dynamics balance.
Many major mortgage lenders are still heavily in the game with Wells Fargo (WFC) leading in terms of mortgage lending market share and JPMorgan Chase (JPM) and U.S. Bancorp (USB) pushing for more, but others including BofA and Citi have shied away a bit. Costs in the mortgage servicing business may also be serving smaller players willing to pick up scraps, as major banks have the impact to overall shareholder returns to consider.
With an absence of lenders at the margin due to the real estate and financial crisis baggage still born by BofA and others, there's an allure for new players to enter the field. They have been, as indicated by the slipping market share of the five largest mortgage lenders as mortgage demand picks up. The share of those largest lenders is down from two-thirds of the market in 2010 to roughly 53% last year, according to Inside Mortgage Finance. However, if mortgage demand picks up faster than new lenders fill missing capacity, then rates could rise faster than normal market dynamics might otherwise dictate. Indeed, the Mortgage Bankers Association last week showed that interest rates on 30-year fixed rate mortgages have increased for seven out of the last eight weeks.
An opportunity has thus availed itself for relatively young firms filling the void, including for instance Guaranteed Rate, an independent mortgage lender. However, the increasing importance of smaller firms may also indicate a return of risk taking, though hopefully to a lesser extent than in the relatively recent past. Community banks and independent mortgage companies are making more use of the FHA than the larger banks. Furthermore, the management teams of smaller companies may be less seasoned than those on the big stage, which begs to question whether risk taking is ramping up again and whether the lessons of the crisis are perhaps already lost to newborn greed. Of course, the government has acted to safeguard against problems, but its protection is relatively untested. The Consumer Financial Protection Bureau (CFPB) will do its best to ensure consumers are not had. It's also supposed to ensure that certain higher lending standards are employed, but whether it has the real resources, capacity, will and skill to do so is yet uncertain.
One thing is certain: the shares of companies in the mortgage business are on fire. Tree.com (TREE), with its leading brand LendingTree.com, for instance, boasts a 164% 12-month appreciation after dividends and splits. Players like Impac Mortgage (IMH) are back from the flatline, with its shares 350% higher than last year. Everything mortgage finance and investment related is revived from the dead today, and some of the best yields in the market are offered by Mortgage REITs like Annaly Capital (NLY) and American Capital Agency (AGNC), though we've expressed our concerns about those very specifically recently.
For real estate investors, homeownership affordability may face several threats in the months and years ahead, but one thing is for certain today. Homes are extremely affordable for those who have the resources and staying power to cover the expenses that come with it. I've tried to voice my opinion on this subject as loudly as possible in recent months (It's Time to Buy Real Estate and Real Estate for a Powerball Jackpot for instance). Yet, in the near term, those bottom dollar mortgage rates we've gotten used to may come under pressure from simple supply demand dynamics. So here's yet another reason to act on real estate today.