A rush by U.S. homeowners to refinance at near record-low interest rates marks a rare bright spot for the mortgage industry, under attack for choking the economy with shoddy loans and botched foreclosures.
Wells Fargo & Co., the biggest U.S. mortgage lender, and a major employer in Minnesota, received $194 billion of loan applications in the third quarter, the second-most in its history, Chief Financial Officer Howard Atkins said last week. About 80 percent were to refinance. Bank of America Corp. CFO Charles Noski said lending margins are up and demand should remain robust through yearend.
As the Mortgage Bankers Association opens its annual conference today in Atlanta, lenders that survived the real estate crash are finding the pickup in refinancings overshadowed by a national foreclosure investigation and fresh investor efforts to force loan buybacks. They are also concerned that new consumer-friendly regulations will be burdensome.
"After 22 years of fielding our survey of attitudes and behavior, I have never seen lenders respond with such uncertainty," Jeff Lebowitz, founder of Mortech LLC, said in an e-mail after the Bend, Oregon-based research firm this month released its yearly survey of industry executives.
The report found that two-thirds of firms with annual lending volume of more than $5 billion expect that the issue affecting them the most in the next year will be adapting to rules created in response to the global financial crisis, which was triggered by record defaults on housing debt.
Mortgage lenders feel like comic-strip character Charlie Brown, John Courson, president of the Mortgage Bankers Association, said today at the group's conference. "We've got a lot of 'Lucys' in our life these days, people who, just as we think we're moving down the field, pull the football out from under us."
The Dodd-Frank bill passed this year seeks to rein in predatory lending by requiring banks to make a "reasonable and good-faith" determination that borrowers are able to repay some kinds of loans. It also instructed regulators to define which types of mortgages banks can make and package into bonds without retaining a slice. In addition, the bill created the Consumer Financial Protection Bureau, which will have the authority to regulate "unfair, deceptive or abusive" mortgage transactions and other credit products.
Changes related to mortgage disclosure and fee requirements in an update of the Real Estate Settlement Procedures Act are among the most challenging for lenders, said Wil Armstrong, chairman of Cherry Creek Mortgage Co. in Greenwood Village, Colorado, which made $3.4 billion of home loans last year.
"The industry can't absorb change after change after change," he said.
Refinancing applications have more than doubled since the start of the year, hovering for the past 10 weeks near levels not seen since May 2009, according to Mortgage Bankers Association data. Rates for 30-year fixed-rate loans declined to 4.19 percent in the week ended Oct. 14, according to Freddie Mac, the lowest since the McLean, Virginia-based company began tracking the data in 1971.
With fewer competitors in the market, per-loan profit on making and selling mortgages is rising, with the difference widening between average rates on new loans and yields on Fannie Mae-guaranteed bonds into which they can be packaged. The gap is about 1 percentage point, up from about 0.45 percentage point in the past decade, according to data compiled by Bloomberg.
Not all applications are turning into new loans. Many consumers can't qualify because of tightened lending standards or because their homes are valued at less than their existing mortgages, a situation known as being "underwater" that is a major obstacle to a real estate recovery.
Completed refinancings in the third quarter were an estimated 56 percent below the second quarter of 2004, after applications earlier that year touched similar levels, data from the bankers' group show.
“The industry can't absorb change after change after change.”Wil Armstrong, chairman of Cherry Creek Mortgage Co.
Meanwhile, home sales remain depressed.
Compared with a year earlier, existing home sales were down 19 percent in September before adjusting for seasonal patterns, the National Association of Realtors said today. Sales fell to a 4.53 million annual rate, exceeding the 4.3 million pace that economists forecast, according to the median projection in a Bloomberg News survey.
Ethan Gregory, a broker for First Coast Realty Associates in Jacksonville, Florida, said sales "fell off a cliff" after the first-time homebuyer tax credit expired earlier this year. Low interest rates haven't made a difference, he said.
'It's unbelievably low rates," he said in a telephone interview. "But activity because of that doesn't seem like much."
The Mortgage Bankers' meeting convenes a little more than a month after GMAC Mortgage stunned the industry by suspending foreclosure evictions in 23 states. The company, a unit of Detroit-based Ally Financial Inc., said it would review procedures amid allegations by homeowners that it employs teams of "robo-signers" to push through hundreds of repossessions a week without verifying the accuracy or existence of documentation. Lenders including Bank of America and JPMorgan Chase & Co. followed suit, while San Francisco-based Wells Fargo didn't, saying it stood by its filings.
GMAC and Bank of America, based in Charlotte, North Carolina, resumed foreclosures a few weeks later, saying they were confident their procedures were solid.
The attorneys general of all 50 states on Oct. 13 opened a joint investigation into foreclosures to determine whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures.
Other practices are also questionable, Harvard Law School visiting professor Katherine Porter said in a phone interview. "With all of those misbehaviors, it is utterly implausible to think any of the mortgage servicers have gotten that cleaned up in the past month," she said.
About $2 trillion, or a third, of the U.S. home loans bundled into securities from 2005 through 2007 have defaulted or eventually will, analysts at New York-based JPMorgan said Oct. 15. Among the bad loans being fought over are ones securitized by Countrywide Financial Corp., once the top U.S. home lender and now part of Bank of America.
Owners of some of the bonds, which now include Pacific Investment Management Co. of Newport Beach, California, and the Federal Reserve Bank of New York, have suffered almost $8 billion of losses on the mortgages, and more than $22 billion of the remaining loans are at least 30 days late, Bloomberg data show. The underlying loan balances, originally $105 billion, stand at $47 billion after defaults, refinancing and home sales. Pimco, New York-based BlackRock Inc. and the New York Fed are seeking to force Bank of America to repurchase soured mortgages, people familiar with the matter said last week.
Bank of America has said there is no need to take back loans that went bad because of the weak economy. "Each loan is different," Jerry Dubrowski, a spokesman, said in an e-mail.
Such battles have been good news for Imarc, one of the firms being hired to scour the files of defaulted loans.
The company has expanded to 150 employees and about $12 million in annual revenue, from six people and about $1 million in sales three years ago, according to Bob Simpson, president of the Santa Ana, California-based firm, formally known as Investors Mortgage Asset Recovery Company LLC.
"There's a lot of desire to find out what's in these loan files: Whether it's mortgage insurers or investors, people want to know like never before," Simpson said in a telephone interview. "I feel like we've really grown up. We've got a HR department, 401(k)s, health care for everybody."
Some lenders are turning to outsourcing companies such as Genpact Mortgage Services to help keep up amid refinancing at "overall volumes rivaling some of the highest they've ever seen," said Taylor Woods, president of the firm, a unit of Hamilton, Bermuda-based Genpact Ltd. Requests to Genpact for U.S.-based support work have risen about 30 percent in the past year, he said in an interview last month.
"The biggest issue for the industry other than bad loans and foreclosures is capacity," said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based firm that provides advice to home-loan companies.
The lack of staff industrywide stems in part from the difficulty that loan officers who don't work at banks are having obtaining state licenses under federal rules created this year, Lykken said.
It's possible that fixing foreclosures "starts to consume large amounts of originator/servicer resources," increasing the amount of time it takes to close on mortgages, Credit Suisse Group AG analysts led by Mahesh Swaminathan wrote in an Oct. 14 report.
Home-loan originations probably rose to $403 billion in the third quarter, according to the Mortgage Bankers Association, which is based in Washington. New loans may fall to $262 billion this quarter and total $1.06 trillion next year, down from $1.49 trillion in 2010.
Wells Fargo, Bank of America and JPMorgan accounted for almost 57 percent of new mortgages in the first half of this year, according to newsletter Inside Mortgage Finance. In 2006, the top three lenders, Countrywide Financial, Wells Fargo and Washington Mutual Inc., accounted for 35.4 percent. In 2008, Bank of America bought Countrywide before it went under and JPMorgan purchased most of Washington Mutual after it failed.
An almost 30 percent slump in U.S. home prices since 2006 shut the market for private mortgage bonds and limited banks' lending, leaving government-supported Fannie Mae and Freddie Mac, the Federal Housing Administration and other federal insurers to buy or guarantee about 95 percent of all mortgages, according to Inside Mortgage Finance. That's up from about half in 2005 and 2006.
While only one private securitization of new U.S. mortgages has been completed in more than two years, Wall Street firms are "gearing up for volume and there's pent-up demand" among consumers for loans that don't fit into government-backed programs, said Sue Allon, founder of Denver-based Allonhill, which provides due diligence on mortgages.