Quicken Loans Inc. leapfrogged Wells Fargo & Co. for the No. 1 lender by mortgage originations, just in time for its IPO sales pitch.
The change at the top of rankings, as measured by data from the Home Mortgage Disclosure Act, follows a broader trend of nonbanks gaining market share in the mortgage market. Six of the top 10 spots went to nonbank originators. Nonbank lenders tend to have higher approval rates due to modestly looser underwriting and a more agile operating model that enables rapid hiring to meet demand.
It has been heady times for mortgage originators over the last year and appears likely to remain so through year-end. Historically low rates have contributed to a refinance boom that has generated significant revenue for lenders. Even though Wells Fargo's market share dropped by 27 basis points, the bank's funded loan amount jumped 26.2% from the previous year. That increase was simply outstripped by Quicken's growth of 73.9%.
"[Quicken is] more interested in building market share and building business than the big banks, particularly Wells. Wells is more focused on profitability and banking customers rather than just building mortgage originations for the sake of mortgage originations," Guy Cecala, publisher of Inside Mortgage Finance, said in an interview.
Cecala said his publication ranked Quicken as the No. 2 lender in 2019, behind Wells Fargo, likely due to a differing approach to correspondent lending. Correspondent lenders originate the loan but then immediately sell to a sponsor lender such as Wells Fargo. Inside Mortgage Finance attributes the origination to the sponsor lender while the federal HMDA database attributes the loan to the correspondent lender. However, Cecala said Quicken Loans overtook Wells Fargo as the No. 1 lender across all loan types earlier this year.
Michigan-based United Shore Financial Services LLC posted the largest year-over-year growth among top 20 originators with an increase of 159.2% to $107.95 billion in funded loans. United Shore — and virtually all other nonbanks on the list of top mortgage originators in 2019 — approved a much higher portion of applications than banks did. For example, United Shore approved 82.6% of its applications, compared to an approval rate of 28.2% at Wells Fargo.
While Quicken's approval rate was similarly high at 71.2%, the lender reported a weighted average credit score of 747 in its originations. Cecala said that even with the higher credit scores, the nonbank's standards tend to be looser than banks'.
As banks report second-quarter earnings, results from companies with significant mortgage operations suggest banks are likely continuing to focus more on profitability than volume in 2020. Mortgage banking results from JPMorgan Chase & Co. and Wells Fargo came in higher than expected, Bose George, an analyst for Keefe Bruyette & Woods wrote in a July 14 note. He wrote that Wells Fargo posted 23% linked-quarter volume growth while JPMorgan's volume declined sequentially, both well behind the industrywide estimate for a 54% linked-quarter increase in mortgage volume. However, both banks reported robust increases in gain-on-sale margins with Wells Fargo's margin jumping 96 basis points quarter-over-quarter and JPMorgan's margin increasing 193 basis points.
"For now, banks that have either outsized mortgage origination exposure or warehouse exposure are probably going to be nice beneficiaries" of the elevated mortgage market, said Michael Rose, an analyst for Raymond James, in an interview.
Few banks have as much relative exposure to the residential mortgage market as First Republic Bank, which on July 14 reported second-quarter net income of $1.40 per share, compared to a consensus EPS estimate of $1.17. Speaking on the housing market, executives said they saw few signs of softening prices in markets across the U.S. despite the pandemic-induced recession. In fact, management reported strength in suburban markets with weakness largely limited to New York City's Manhattan submarket.
On the other hand, Wells Fargo had a rough quarter, reporting a net loss of 66 cents per share in the second quarter. The bank committed to cutting expenses as its efficiency ratio ballooned to 81.6% in the second quarter, leading its CEO to say the bank needs to shave $10 billion off its annual expense budget.
Expense bases represent another key reason nonbanks have been able to overtake banks in mortgage origination, said Brett Rabatin, head of bank strategy for The Travillian Group.
"The banks are wary of the cycle, the ups and downs of origination volumes," Rabatin said in an interview. "They're leery of staffing up and staffing down. That does present an opportunity for nonbanks that are a little more agile in that space and can add or cut staff quickly."