Private Aggregators Outpurchasing Government Agencies

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Private aggregators continued to take a significant chunk of community banks' secondary market loan sales, according to America's Community Bankers' (ACB) survey of 2005 real estate lending activity by member banks.

Conduits and wholesalers purchased 14% of the banks' loan originations, while Fannie Mae and Freddie Mac purchased only 7% each, or $1.5 billion for Freddie and $1.4 billion for Fannie. Four percent of the banks' origination volume was sold to the Federal Home Loan Banks, and 1% was sold to other financial institutions. The conduits used most often by survey participants were Countrywide, CitiMortgage, Washington Mutual, SunTrust and Wells Fargo.
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‘The aggregators have become a strong market force and, with the increasing competition among them, pricing has become more attractive,’ says Robert K. Davis, ACB's executive vice president and managing director of government relations. Davis presented the survey at ACB's National Real Estate Lending Conference in Scottsdale, Ariz., last month.

‘Also, Fannie Mae's and Freddie Mac's problems probably have resulted in some diversion of their purchase activity,’ he adds, referring to their accounting difficulties. ‘As those problems straighten out, they should divert their attention back to day-to-day business, rather than compliance.’

Another reason for the decline in sales to Fannie Mae and Freddie Mac – sales that represented 18% of all originations in 2004 and 32% in 2003 – is that 25% of originations were nonconforming loans, half of them jumbos, Davis points out. ‘This shift in originations also contributes to this continued shift to the aggregators,’ he says.

Jumbo and other nonconforming loans made up a growing portion of community banks' mortgage output in 2005, according to the survey. Conforming loans accounted for 75% of originations, down from 81% in the previous survey. Rising home prices helped to fuel a surge in jumbo mortgages, accounting for 13% of loan originations. In dollar terms, jumbos accounted for 23% of home mortgage production. Alt-A loans represented 3% of originations, and subprime loans, 1%.

The secondary market option

The survey also shows that community banks continued to sell loans into the secondary market last year, despite an increase in adjustable-rate mortgages (ARMs), which are more likely to be held in portfolio. ARMs accounted for 38% of originations, up from 30% in 2004. Fixed-rate loans accounted for 58% of originations, down from 70%.
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‘ARMs have grown in popularity, and most ARM products are held in portfolio,’ Davis explains. ‘Banks prefer to have ARMs available for sale. Since ARMs are adjusting all the time, they, especially one-year ARMs, have a liquidity advantage. They don't build up interest rate risk.’

Loans sold into the secondary market represented 34% of the banks' originations, the same portion as the previous year and slightly less than the 36% in 2003. Plus, 67% of banks surveyed were active sellers in the secondary market in 2005, down slightly from 2004. One-third retained all loans in portfolio.

Interest-only loans represented 21% of ARM originations.

‘You don't think of these institutions as interest-only lenders, but eight percent of originations were interest-only ARMs,’ Davis comments.

In addition, almost two-thirds of banks surveyed originated no-down-payment loans, and almost two-fifths originated no-documentation loans, reflecting the growing popularity of alternative mortgage products.

Home equity lines of credit (HELOCs) also represent a growing portion of originations – $22% of 2005 originations by dollar amounts. And 61% of bankers say they expect HELOC activity to increase this year.

Optimistic outlook

Forty-one percent of banks expect to see an increase in single-family loans this year, down from 48% in the previous year, and 22% foresee a decrease. But 37% anticipated stability in single-family originations, up from 31% in the previous survey. Many bank executives at ACB's real estate conference say they expect more loans because they serve markets in recreational areas, other regions with significant second home activity, or areas with increasing Hispanic and immigrant populations.

Online mortgage transactions continued to grow at community banks. Thirty-seven percent, versus 21% a year ago, accepted mortgage applications online, and 17% could render decisions online, up from 9% a year earlier. Plus, 7% of the banks obtained at least 10% of their originations from Internet channels, with one bank attributing 60% of its originations to the Internet.

‘While other players come and go, these community banks are in the mortgage business to stay,’ says Debra Cope, ACB's senior vice president for publishing. ‘Community banks are making an array of residential loan products available to consumers, expanding online mortgage services and capturing significant jumbo loan business.’

In addition, lenders remain relatively optimistic about the dollar volume of home equity loans and commercial real estate loans. Ninety percent of survey participants expect to do as much or more home equity business in 2006, compared with 97% in the previous survey. Ninety-two percent foresee doing as much or more commercial real estate lending in 2006.
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While the retail channel was the predominant source of originations for community banks last year, almost 9% of banks surveyed pulled in at least half of their origination volume through mortgage broker networks.

The survey also found that for the first time in several years, purchase-money loans accounted for a majority of originations – 63% versus 37% for refinancings.

The banking association notes that its ACB Business Partners program continued to help its member banks, especially smaller institutions that have traditionally retained mortgages, participate in the secondary market. Since the program began in 2001, participants have delivered more than $70 billion in mortgages.

The survey was compiled from responses by 239 community banks. It was conducted in the fourth quarter of 2005, with information from Jan. 1 to Sept. 30, 2005. The margin of error was 6%.

Jerry DeMuth is a freelance writer based in Chicago.

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