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End Of Refi Boom Creating Opportunity For Smaller Banks And Other Financial Firms

SNL Financial Report
By Hina Nawaz and Zach Fox

Regulatory data from the second quarter showed mortgage holdings continued to decline among banks through the second quarter, with the largest banks posting the most severe declines.

Mortgage origination volume has struggled after a rise in rates in the middle of 2013 put an end to a refinancing boom. In 2012, rates on 30-year fixed-rate mortgages fell to nearly 3.5% and rates on 15-year mortgages actually dipped below 3.0%. After spiking in the second half of 2013, rates on 30-year mortgages started 2014 at roughly 4.5% and 15-year mortgages at about 3.5%.

Since then, rates have ticked down some, but they are still well above the 2012 lows. As of the week ended Aug. 22, the average 30-year mortgage carried an interest rate of 4.26% and the typical 15-year mortgage was at 3.43%.

"It shows you how dependent the mortgage industry really is on refinancing," said Guy Cecala, CEO of Inside Mortgage Finance, an industry publication.

Inside Mortgage Finance reported refinancing constituted 36% of the mortgage market in the second quarter, the lowest share since the 1980s, Cecala told SNL. On Aug. 26, the Mortgage Bankers Association released a second-quarter report on independent mortgage banks and mortgage subsidiaries of chartered banks, showing a somewhat similar trend. The report's release only showed a purchase share, as opposed to refinance share, putting the purchase share at 59% in the second quarter for the mortgage industry as a whole.

Cecala said that over the last 25 years, the refinance share has generally stayed above 50%.

"Are we going to see it back up to 50% any time soon? Not unless rates suddenly drop dramatically, or there's an influx of well-heeled immigrants who we decide to qualify for mortgages - but nothing in the immediate future," he told SNL.

Declines in mortgage origination seem to be hitting the largest players the hardest, creating opportunities for nonbanks and smaller banks.

For example, Wells Fargo & Co. has seen retail mortgage originations tumble to $14.33 billion in the second quarter, down 71.02% from the $49.46 billion reported in the 2013 second quarter. Meanwhile, nonbank Freedom Mortgage Corp. said July 21 that the company had doubled its monthly volume over the last two years. And Inside Mortgage Finance reported originations for the company totaled $5.72 billion in the second quarter, up 31.1% from the prior-year period.

Generally, the weaker origination figures have also translated to declines in the amount of one- to four-family loans sold or held for sale by banks in the second quarter, relative to the prior-year period. The four largest, money-center banks - Wells Fargo, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. - all posted year-over-year declines of larger than 45% for both one- to four-family loans sold off the balance sheet, as well as such loans held for sale.

Breaking down the banking industry by asset size, it is clear that declines are hitting the largest players harder. Among bank holding companies with more than $10 billion in assets, residential loans sold in the second quarter totaled $97.66 billion, a decrease of 65.20% year over year in the second quarter, while such loans held for sale fell 42.08%. Among banks with asset size of less than $1 billion, residential loans sold in the quarter totaled $13.75 billion, a decline of 41.41%.

Inside Mortgage Finance's Cecala told SNL that the law of large numbers is playing a role - that the banks with the most volume a year ago had the farthest to fall. But he also said the shift toward more purchase activity and less refinancing volume favors smaller lenders.

"People buying homes tend to go with real estate agent recommendations, and that tends to be more local lenders," Cecala said.

While the year-over-year figures remain dour, the mortgage market showed definite signs of improvement in the second quarter relative to the start of the year. It should be noted that winter is generally the slowest season for home purchases.

Among the top five banking originators, as selected based on the most recent data available from the Home Mortgage Disclosure Act, all but one posted a quarter-over-quarter increase in retail mortgage origination in the second quarter, according to Y-9C regulatory filings for the quarter. Mortgage giant Wells Fargo posted a whopping 21.71% gain from the linked quarter, while JPMorgan was the one to post a decline, as its origination volume slipped to $4.70 billion, a 3.85% decline from the linked quarter.

The MBA report showed the second-quarter bump in origination volume also carried a return to profitability. The industry group's report, which relies on production data from 349 companies, showed a net gain of $954 on each loan originated in the second quarter, compared to a loss of $194 per loan in the first quarter.

Marina Walsh, vice president of industry analysis for MBA, said the swing to profitability was driven by the bump in origination volume, as well as lower expenses.

"It was an expense play more than a revenue play," Walsh told SNL. "It largely came from expenses going down after six quarters of going up."

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.