Smaller Lenders Are Optimistic

Mark Crawford
December 17, 2008 | COMMENTS

As recently reported by the Wall Street Journal, the current crisis in the lending markets is being viewed by smaller financial institutions as an opportunity to take market share away from their larger struggling competitors.

According to Inside Mortgage Finance, for the time period January-September 2008, the eight largest mortgage lenders in the country reported fewer originations than they did the previous year—led by Washington Mutual, which experienced a 72% decline.

Overall, for the third quarter of 2008, total mortgage originations were nearly 50% fewer compared to the third quarter of 2007, and 33% lower than the second quarter of 2008—not good news.

However, smaller lenders, who tended to be more cautious with (or avoided) subprime lending, are enjoying a less competitive marketplace and have money to loan to creditworthy individuals. For example, BB&T Corporation in North Carolina has increased mortgage originations in 2008 by 30% to over $15 billion. Another company bucking the national downhill trend is U.S. Bancorp, a regional bank in Minnesota whose mortgage originations increased 35% during the first three quarters of 2008.

"Customers seek stability, as well as a financial-services provider that is willing to provide the products and services they need," says U.S Bancorp CEO Richard Davis. “We are making loans to everybody who qualifies." U.S. Bancorp is even starting to explore jumbo loans (those that exceed the limits that are insured by Freddie Mac and Fannie Mae), a market segment that its larger competitors have mostly vacated (an exception is Bank of America that, despite an 8.4% drop in loan volume in 2008, continues to aggressively offer jumbo loans).

A number of other medium-size mortgage lenders are well-positioned to ride out the economic storm, or even make substantial gains, because they specialize in loans sold to government agencies. These loans are popular in the current market because securitization is essentially dormant. “Smaller banks also have higher capital-reserve requirements than larger rivals, which left them operating on better capital cushions going into this downturn,” points out Jay Brinkmann, chief economist for the Mortgage Bankers Association.