Consumer Lending

The U.S. mortgage lending industry totaled $10.5 trillion in loans outstanding at the end of 2007.

Over the last 3 years, the mortgage debt outstanding grew at a 10.3% compound annual growth rate. However, the growth rate has gradually been declining. Annualized growth of mortgage debt was 13.1% in 2005, 11.1% in 2006, and 6.6% in 2007.

There are over 50,000 mortgage brokers in the United States, originating over 50% of mortgage loans. Thousands of banks originate home loans and home equity lines of credit. However, the mortgage lending industry is largely dominated by Fannie Mae and Freddie Mac, with Fannie Mae having $2.8 trillion in mortgage debt held or securitized at the end of 2007 and Freddie Mac having $2.1 trillion (or 23.8% and 17.8% of the total mortgage debt outstanding, respectively).

$2.4 trillion in new single-family mortgages were originated in 2007, down from $3.0 trillion in 2006 and $3.1 trillion in 2005. Total originations by the mortgage lending industry may drop below $2 trillion in 2008 due to slowing economic growth, falling home prices, and the continuing credit crunch which has resulted in more stringent approval criteria for mortgage applications than in recent years.

Approximately 21% of mortgage originations in recent years were subprime mortgages, up significantly from 9% of total originations from 1996 through 2004.

This post uses data from various government publications, the Mortgage Bankers Association, Moody’s, and the National Association of Mortgage Brokers.

The analysis on the size of the consumer lending industry has been updated.

Consumer credit grew at an annualized 2.1% rate in December, or $4.5 billion. Revolving credit rose $2.1 billion, or 2.7% (annualized), while non-revolving credit rose $2.4 billion, or 1.8% (annualized).

Consumer Credit Release

Rising levels of troubled loans in all major loan categories, but most notably in residential mortgage portfolios, led to a steep jump in expenses for bad loans in the third quarter. These higher costs, combined with sharply lower trading revenue, caused industry earnings to fall 24.7 percent from a year ago to $28.7 billion — the lowest level for industry earnings since the fourth quarter of 2002. This is the first time since 2003 that quarterly earnings have been below $30 billion. The industry’s return on assets (ROA) for the quarter was 0.92 percent, the lowest ROA since the fourth quarter of 1992. Slightly fewer than half of all insured institutions (48.5 percent) had ROAs of 1 percent or higher. A year ago, 54.4 percent of institutions attained this benchmark. The year-over-year decline in industry net income was fairly widespread; almost half of all institutions (49 percent) reported lower quarterly earnings compared to the third quarter of 2006.

Read the full QBP here

The Federal Reserve released the Beige Book today, which summarizes comments made to the Fed by businesses, bankers, and others.

The Fed reports tightening mortgage lending standards but limited impact to the broader economy outside of the real estate sector.

Most Banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around. While several Banks noted that commercial real estate markets had also experienced somewhat tighter credit conditions, a number commented that credit availability and credit quality remained good for most consumer and business borrowers. Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.

Beige Book

Industry earnings remained strong in the second quarter of 2007, despite an operating environment that was decidedly less favorable than in earlier quarters. A flat yield curve, rising levels of troubled loans, and a weak housing market all made the task of improving earnings more difficult. Insured commercial banks and savings institutions reported $36.7 billion in net income for the quarter, a decline of $1.3 billion (3.4 percent) from the second quarter of 2006, but $772 million (2.1 percent) more than they earned in the first quarter of 2007. The decline in earnings compared to a year ago was caused by higher provisions for loan losses, particularly at larger institutions, and by increased noninterest expenses.

[snip]

Net charge-offs totaled $9.2 billion in the second quarter, the highest quarterly total since the fourth quarter of 2005, and $3.1 billion (51.2 percent) more than in the second quarter of 2006. This was the second consecutive quarter that net charge-offs have had a year-over-year increase. The loan categories with the largest increases in net charge-offs included consumer loans other than credit cards (up $757 million, or 60.9 percent), commercial and industrial (C&I) loans (up $577 million, or 71.4 percent), residential mortgage loans (up $422 million, or 144.3 percent), and credit card loans (up $393 million, or 12.1 percent). All of the major loan categories posted both increased net charge-offs and higher net charge-off rates.

[snip]

The amount of loans and leases that were noncurrent (loans 90 days or more past due or in nonaccrual status) grew by $6.4 billion (10.6 percent) during the quarter. This is the largest quarterly increase in noncurrent loans since the fourth quarter of 1990, and marks the fifth consecutive quarter that the industry’s inventory of noncurrent loans has grown. Almost half of the increase (48.1 percent) consisted of residential mortgage loans.

Quarterly Banking Profile (pdf)

As defaults pummel the home-loan industry, Mr. Shaikh represents an extreme case of one of the big vulnerabilities in the business: mortgage brokers. In recent years, these middlemen have assumed a crucial role in handling surging volumes of business for lenders. Today, mortgage brokers are involved in about 58% of home loans, up from 40% a decade ago, according to Wholesale Access, a research firm in Columbia, Md.

Mortgage brokers originate about half of loans made to borrowers with good credit. Their presence is even greater in other segments of the mortgage market where defaults are rising. Brokers originate about three-quarters of subprime mortgages made to borrowers with scuffed credit, according to Wholesale Access. They also originate 70% of so-called Alt-A mortgages, a gray area that falls between prime and subprime.

[snip]

Mortgage brokers didn’t set the standards for the many aggressive loans that are now going sour. But they provided the low-cost sales force that made it possible for lenders to quickly ramp up production without hiring employees. As business surged, some brokers put borrowers into loans they didn’t understand, couldn’t afford or were otherwise ill-suited for, one reason defaults have skyrocketed. In the worst cases, brokers have been known to falsify information and resort to other fraudulent means to get mortgage loans approved. Critics say regulators and lenders haven’t done nearly enough to insure the quality and integrity of this independent sales force.

[snip]

Around the country, efforts are now under way to improve quality control of mortgage brokers. Lenders are beefing up their scrutiny of mortgage brokers and other third parties. The Conference of State Bank Supervisors is setting up a national database that would allow consumers and regulators to check whether brokers are licensed or have been subject to regulatory enforcement actions. Sen. Schumer of New York in early May introduced legislation that would establish a fiduciary duty for brokers and others who arrange home mortgage loans to look after their customers’ interests.

WSJ article

Mortgage applications increased a seasonally adjusted 0.6% from last week. Mortgage applications were also up 9.4% from the same week last year.

Mortgage Bankers survey

Countrywide Financial Corp. on Thursday said first-quarter profit fell 37 percent, and it cut its 2007 earnings forecast, reflecting difficulties for the largest U.S. mortgage lender in a weakened housing market.

Net income for Calabasas, California-based Countrywide, which competes with Fannie Mae and Bank of America, fell to $434 million, or 72 cents per share, from $683.5 million, or $1.10 per share, a year earlier. Revenue fell 15 percent to $2.41 billion.

Analysts on average had expected profit of 77 cents per share on revenue of $2.51 billion, according to Reuters Estimates.

Reuters via CNNMoney

After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.

A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody’s Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9% in the 12 months through March, well below the 21% average annual growth rate of the past five years.

During the housing boom, demand for home-equity lines of credit climbed sharply as property values rose, interest rates fell and lenders made it easy for borrowers to tap their equity for everything from home improvements to vacations. Borrowing against home equity freed up roughly $187 billion in cash per year between 2001 and 2005 that was used to pay off other debts and for new spending, according to a recent paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

Full story (WSJ subscription req’d)