Indymac Pulls Back–Is Lending Industry Becoming an Oligopoly?

IndyMac issued this announcement this morning “Today, Indymac Bank is announcing the suspension of residential Construction- to-Permanent (CTP) loan production effective February 1, 2008. As you may know, Indymac has been committed to the CTP product for 13 years, and it has been and continues to be a well-performing product for us, both in terms of profitability and credit performance. However, given our need to carefully manage our balance sheet and preserve our strong capital position (in light of current market conditions), we need to limit our loan production almost exclusively to products that are immediately saleable into the secondary market and, therefore, have independently decided that this is a prudent step to take at this time.”

According to the Mortgage Lender Implode-O-Meter, 225 major lending operations have recently gone down the tubes. Those still around have severely curtailed the products they are willing to offer. A CTX Mortgage loan officer commented that “practically all we can sell are 30 year conforming loans, FHA and VA stuff.”

Anyone who has taken an economics class knows the correlation between decreased competition and increased pricing for consumers. For those still in business, less competition means more compensation. Wholesalers scaling back leaves fewer options for borrows and brokers. Recently, B of A joined others and pulled out of wholesale lending in November of 2007, citing the following reasons according to BlownMortgage.com.

• The delinquency and foreclosure rates of mortgage broker originated loans were 4-6 times the levels of BofA retail originated loans.
• Wall Street’s secondary market for mortgage securities has almost gone over to tiered pricing for mortgage broker originated (if not stopped buying broker originated loans) versus retail employee originated loans.
• Increased outright fraud with mortgage brokers.

And the biggie– no buyback obligations from mortgage brokers for bad loans that everyone else out there is on the hook.”

Brokers in particular will fell the pinch as wholesale funds continue to dry up. The passage of HR3915 in the House Financial Services Committee will also make life more complicated for brokers. It addresses some loopholes that needed closing, for example requiring licensing and registration of all originators. While some states and wholesalers already apply stringent guidelines to those who wish to become mortgage originators, others have been quite lax and the result was the massive influx of the incompetent or dishonest into the industry. HUD will have responsibility for this and hopefully licensing will require that originators demonstrate that they have attained a certain level of expertise and ethical behavior. The law’s most controversial provision is the prohibition of brokers from receiving yield spread premiums as compensation. It also abolishes prepayment penalties on subprime loans.

These provisions may make it more difficult for consumers to find loans, and by lessening competition, could make mortgage financing more expensive for borrowers. Curtailing yield spreads will take away the borrowers’ option to pay the loan fees by accepting a higher rate, making it more difficult for cash strapped buyers to get a home, in turn making it harder for home sellers. The dearth of programs for lenders to sell and provisions that make it tougher for brokers to compete with banks means that the few lenders left can–and probably will–charge more. Testimony from Mortgage Bankers Association Senior Vice President before the House Financial Services Committee expressed the organization’s opposition to certain provisions in the bill because it is “fraught with the danger of unintended consequences,” effectively locking many out of the housing market who could successfully handle a home purchase. For Realtors, lenders, home buyers, and sellers, these trends could effectively take the cooling housing market and throw it in the deep freeze for years to come.

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