Last October, when MetLife left the mortgage origination and servicing business, I pointed out the sad fact that 70% of the home loans originated in 2010 were made by five large financial institutions. Since then, the concentration of power has only accelerated. On top of the dog pile is Wells Fargo, which made one-third of all home loans in the first six months of 2012. Wells, Chase, and U.S. Bancorp combined made half. According to a recent Bloomberg article, this concentration is starting to worry people in high places.
The concentration in the mortgage business has drawn warnings from the inspector general for Fannie Mae and Freddie Mac, the head of Ginnie Mae, Fitch Ratings, and congressmen, including one from Wells Fargo’s home state, about growing risks to borrowers, taxpayers, investors, housing markets and the financial system. Scenarios include a setback or strategy shift at Wells Fargo that could choke off credit for homebuyers and compel the U.S. to again pump in money to keep the housing market from seizing up.
“A concentration of issuers creates an oligopoly,” said Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut, whose firm invests in, creates and trades mortgage bonds and advises bondholders. The result will be “higher mortgage costs for generations, as well as slower economic growth. Housing is the keystone of our economy.”
While there's the obvious sense of irony when Aunt Fannie and Uncle Freddie bemoan the concentration of power in the residential lending sector resting in hands other than their own, our amusement shouldn't deter us from taking their warnings seriously. Notwithstanding those "experts" who think that the U.S. would be better off if there were just a few big banks left, akin to the situation in "Hoser Land" Canada, many of us in the land of the free prefer a "more's the merrier" approach to banking.
“The nation benefits from a broadly distributed mortgage- finance system,” said Stevens, whose organization represents more than 2,400 firms involved in housing. “If the market is too concentrated on one company, and if they were to change their strategy around mortgage originations or got into financial trouble and had to leave the market altogether you could have market disruptions.”
Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has said he’s concerned about concentration and urged officials in a May speech to consider changes. Freddie Mac -- with Fannie Mae, the recipients of nearly $190 billion in government aid --bought 82 percent of the single-family loans it purchased in 2011 from 10 firms, filings show, with 40 percent from Wells Fargo and JPMorgan.
Fannie Mae and Freddie Mac rely on Wells Fargo and other large servicers to collect payments for the loans they guarantee. That makes them vulnerable to the business practices and financial health of a few large banks, said Steve A. Linick, the Federal Housing Finance Agency’s inspector general. The top 10 serviced 75 percent of single-family mortgages guaranteed by Fannie Mae, according to company filings.
“A limited number of servicers poses a safety and soundness risk to the enterprises,” Linick said in a phone interview. This “ultimately could cause losses to taxpayers.”
The effect on servicing has also drawn the attention of Ted Tozer, president of Ginnie Mae, a government-owned corporation that guarantees mortgage bonds holding loans backed by the Federal Housing Administration and other agencies.
“If the quality of servicing deteriorates, you have to deal with it and that puts a lot of oversight responsibility on us, no question about it,” said Tozer, whose Washington-based operation guarantees more than $1 trillion of mortgage-backed securities. “That’s one of the big challenges.”
So, many "experts" agree this concentration is a bad thing. Therefore, what do they propose to do about it? The answer, for the time being, is Nada.
For now, regulators and lawmakers are more focused on keeping money flowing into home loans and are unlikely to force change, according to Bart Naylor, who works on financial policy at Public Citizen, a Washington-based advocacy group.
“To the extent a regulator wants there to be a thriving mortgage market,” they may defer to the largest lenders, Naylor said. “However, they should be cautioned that leading market share has led to oblivion.”
In other words, don't expect anyone to move to oppose this concentration anytime soon. In the interim (if the "interim" ever truly ends), expect the big to get bigger, concentration to continue unabated, and the lovers of the Canadian bacon banking system to have reason to feel warm and fuzzy.
It's not a question of our "fearless leaders" being asleep at the switch. It's that they see the train barreling down the tracks, know that there's a good chance that it may run off the rails, yet, instead of throwing the switch, they avert their eyes and pray for divine intervention.
I don't like the looks of this trend.