Smaller mortgage lenders see opportunity

As many of the biggest U.S. banks continue to pare back their mortgage lending, some smaller financial institutions see global financial turmoil as an opportunity to pick up market share.

The eight largest mortgage lenders, as measured by total volume in the first nine months of 2008, reported declines in originations from a year earlier, according to Inside Mortgage Finance, a trade publication in Bethesda, Md.

At Washington Mutual Inc., of Seattle, which had its banking operations seized by the federal government in September and sold to J.P. Morgan Chase & Co., mortgage volume plunged to $33 billion, down 72 percent. Stronger lenders also saw a downturn, including Wells Fargo & Co., where mortgage originations fell 14 percent to $186.27 billion.

In the third quarter, total mortgage originations fell to $300 billion, down nearly 50 percent from a year earlier and a 33 percent drop from this year's second quarter.

The declines partly reflect lower demand as the U.S. economy slows down, as well as tighter credit standards by leery lenders. At the same time, traditional mortgage-loan giants are facing a tougher challenge from some lenders that usually don't get mentioned with the industry's heavyweights.

At U.S. Bancorp, mortgage originations by the Minneapolis regional bank's U.S. Bank Home Mortgage unit jumped 35 percent to $25.95 billion in the first nine months of this year. That was one of the biggest increases of any lender tracked by Inside Mortgage Finance. "We are making loans to everybody who qualifies," Richard Davis, the bank's chief executive, said in a conference call last month.

One reason for the bank's growing popularity: U.S. Bancorp has largely stayed out of the headlines in recent months as other lenders failed, racked up harrowing losses or were rescued by the government. Net income at U.S. Bancorp decreased by nearly 40 percent in the third quarter, but deposits rose 10 percent from a year earlier.

"Customers seek stability, as well as a financial-services provider that is willing to provide the products and services they need," Mr. Davis told analysts last month.

U.S. Bancorp is even venturing into areas that many rivals now avoid, including jumbo loans to consumers with strong credit. Jumbo loans have amounts that are higher than the limits that can be insured by Fannie Mae and Freddie Mac.

"We've had a concerted effort to try to take advantage of some of the challenges in the marketplace," says Clarke R. Starnes, chief credit officer at BB&T Corp. So far this year, the Winston-Salem, N.C., bank has increased mortgage originations by 30 percent to $15.08 billion.

While the up-and-comers generally avoided overextending themselves when the housing market was booming, they also were elbowed out of the way by mammoth mortgage lenders such as Washington Mutual and Countrywide Financial Corp. Countrywide was acquired earlier this year by Bank of America Corp., the second-largest U.S. bank in stock-market value behind J.P. Morgan.

With larger lenders now preoccupied with cleaning up the mess left when the housing bubble burst, the fact that other institutions are revving up their mortgage lending could help consumers who have had trouble finding anyone willing to lend.

Jay Brinkmann, chief economist for the Mortgage Bankers Association, says many medium-size mortgage lenders are well-positioned for the turbulent environment because of their specialization in loans sold to government agencies. Such loans dominate the current mortgage market, partly 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," Mr. Brinkmann says.

Some lenders who keep loans on their own books also are doing more business despite the turmoil. At ING Direct, a unit of ING Groep NV of the Netherlands, mortgage volume grew 2.5 percent to $17.54 billion in the first nine months of this year, according to Inside Mortgage Finance.

Bank executives didn't get into subprime lending, even when housing prices were rising, or rely on selling mortgages to investors, making it easier to adjust to market conditions.

"While everybody else was trying to rejigger their product offerings, we have not had to," says Bill Higgins, chief lending officer for ING Direct, based in Wilmington, Del. Delaware. The lender recently began requiring larger down payments, among other tightened standards, to reflect shrinking real-estate values.

Some large lenders insist they will defend their turf even though their mortgage volume has slipped. "We're making every loan we can across the spectrum," says Barbara Desoer, who runs Bank of America's mortgage business.

Volume in the first nine months of this year fell 8.4 percent at the Charlotte, N.C., bank's mortgage unit. Bank of America is aggressively wooing borrowers who qualify for government-backed loans, while making more jumbo loans in hopes of luring new customers.