Mortgage Banks Winners in the Bailout Sweepstakes
Prakash, Snigdha, American Banker
The home mortgage market isn't what it used to be.
Once ruled firmly by the nation's thrifts, the market was set on its ear by the Financial Institutions Reform Recovery and Enforcement Act of 1989.
Nowadays, thrifts account for just 22% of all new mortgages, down from 42% before the bailout law. The new leaders: mortgage banks and their government-sponsored partners -- Fannie Mac and Freddie Mac.
Mortgage banks like Countrywide Credit, previously known only to industry insiders, have become full-fledged financial celebrities. As a group, they now handle about half of all mortgage originations, up from about one-third in 1988.
"Mortgage banks are the real winners of FIRREA," says Gareth Plank, an analyst with Mabon Securities.
How did all this come about? For one thing, the bailout law thinned the ranks of the nation's thrifts by about one-third, to 2,100. And it restrained the surviving institutions with tough new capital rules.
That left a big opening for mortgage banks, which sell most of their new loans to Fannie Mae and Freddie Mac, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.
The new prominence of mortgage banks helped lift the agencies' purchase volume 356% in the five years through 1993, to $529.7 billion.
While the agencies' buying spree headed off a widely feared credit crunch in home loans, it put new pressure on even the largest of thrifts.
"Frankly, it's just harder to compete," says Robert Barnum, president of California-based American Savings.
As a result of implicit government backing, the agencies are able to buy mortgages with relatively low interest rates. Though that may help consumers, it clearly hurts thrifts trying to book mortgages for their own portfolios.
Profit margins at thrifts are 50 to 70 basis points lower than they were in the '80s, says analyst Thomas O'Donnell of Smith Barney.
The $17.3 billion-asset American Savings tries to compete around the agencies. It mines niches that mortgage bankers can't exploit, making loans that secondary market agencies won't buy.
For example, American goes after loans above the $203,000 loan limit of the agencies. Or it makes loans in inner cities on more flexible terms than Fannie and Freddie.
Some small thrifts, meanwhile, have pulled out of first mortgages altogether. First Federal Savings and Loan Association, Middletown, N.Y., now focuses on home equity loans to fulfill the mandates of its thrift charter.
A Question of Scale
"We looked actively at becoming a mortgage banker, and came to the conclusion that it was a scale business," says Ken Abt, president and CEO of the thrift. "We were just never going to meet the scale the competition was, and therefore we shouldn't get into it."
To be sure, the bailout law hasn't been the only factor in the rise of mortgage banks and the secondary market agencies.
The lowest interest rates in a generation sparked a refinance boom, as consumers rushed to lock in low rates through fixed-rate loans. Mortgage banks, which specialize in such loans, reaped a bonanza. …