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A Mortgage Industry Walk-around FNCE 332 – Prof. Harding . Jeff Lebowitz (301) 585-6640 www.mortech-llc.com. “The mortgage business is a dog!” – John Reed, Chairman Citicorp. The Mortgage Industry is a Management Nightmare. The mortgage industry is: Rippin’ large Unpredictable

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A mortgage industry walk around fnce 332 prof harding

A Mortgage Industry Walk-aroundFNCE 332 – Prof. Harding

Jeff Lebowitz

(301) 585-6640

www.mortech-llc.com

MORTECH, LLC


The mortgage business is a dog john reed chairman citicorp
“The mortgage business is a dog!” –John Reed, Chairman Citicorp

MORTECH, LLC


The mortgage industry is a management nightmare
The Mortgage Industry is a Management Nightmare

The mortgage industry is:

  • Rippin’ large

  • Unpredictable

  • Consolidating, but not enough

  • Not particularly profitable

  • Operationally fragmented

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Mortgage market is very large flow is highly variable and unpredictable
Mortgage Market is Very Large – Flow is Highly Variable and Unpredictable

Source: Fannie Mae

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Over two quarters volume estimates for 2002 increased 38
Over Two Quarters, Volume Estimates for 2002 Increased 38%

Source: Fannie Mae

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Rapid concentration of origination volume share of large lenders up 43 since 1996
Rapid Concentration of Origination Volume Share of Large Lenders Up 43% Since 1996

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Growing share of large mortgage companies is the talk of the town
Growing Share of Large Mortgage Companies is the Talk of the Town

  • Relative share of top 25 originators increased an average 11% per year over decade

  • Top 25 firms account for ~ 70% of loans produced in 2001

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Top 10 lenders take increased share are share gains meaningful
Top 10 Lenders Take Increased Share TownAre Share Gains Meaningful?

Concentration of Market Share

U.S.

Mortgage Originations

45%

Top 5

Top 6-10

40%

10%

9%

35%

8%

30%

7%

6%

25%

% origination volume

7%

20%

31%

31%

15%

30%

25%

24%

10%

18%

5%

0%

1995

1996

1997

1998

1999

2000

Source: Mortgage Bankers Association

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Mortgage banking industry profitability is erratic
Mortgage Banking Industry Profitability Is Erratic Town

  • Industry suffers uncertain profitability

  • Essentially all lenders have basic functional automation

  • Automation has not be a strong determinant of average industry profit

  • Calls for resolution of structural inefficiencies and new strategies/business models

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Margins are also unpredictable peer group margins bps all production channels
Margins Are Also Unpredictable Town Peer Group Margins (bps): All Production Channels

Lender segment - 2001

Average-all

Peer Group/

A

C

E

M

2001

2000

Revenues

188

199

192

163

167

148

Direct Expense

99

113

102

66

71

104

Production Support Expense

16

20

21

14

15

18

Corporate Admin Expense

21

17

24

10

12

20

Total Expenses

136

149

147

91

97

141

Pretax Margin

51

50

45

73

70

6

Segment key:

M = Mega ($48B); A = Large ($5B)

C = Small ($1.4B); E = Thrift ($1.9B)

42% vs 4%

Source: MBAA, Stratmor Group

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Industry Structure Changed as Value has Migrated Town

  • Industry has tended to “modularize” into specialized businesses.

  • Evolving technology and need to capture value will cause financial and process integration.

Mortgage Industry Business Model Changes

1960 - 1980

1980 - 1990

1990 - Present

Investor aggregation

Investment Bankers

GSE’s, Depositories

Pensions, REIT’S

Investment fulfillment

Thrifts

GSE’s

Risk transformation

Thrifts, Bank Holding Companies,

Mega -

wholesalers

Product creation

Thrifts

Mortgage Banks

Fulfillment

Mortgage Brokers

Consumer aggregation

Data infrastructure

Appraisers, credit repositories,

title co’s, tax services

Information

conglomerates

Technology infrastructure

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Alltel, Lomas

Alltel, Fiserv, Interlinq, GSE’s


Large lenders focus on two nominally profitable parts of the value chain

Wholesaler's Town

Fees

Servicing

Value

Large Lenders Focus on Two Nominally Profitable Parts of the Value Chain

  • Fragmented value chain

  • leaves little for aggregators

  • Services vendors (e.g. MI),

  • independent originators,

  • GSE’s take 60% of revenue

5.88% -- total fees

Third Party

  • Lack of substantial, predictable

  • profits will force industry

  • to restructure again

  • and blur lines of business

Originator

  • Lenders will be forced to take on additional interest rate and default risk.

Profit Contribution

Wholesaler

  • Lenders will also begin to resemble financial holding companies (ala Countrywide)

Lender's

less than .05%

Revenue

Servicing

Sources

less than .10%

Credit Risk Premium

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Major lenders have another challenge disappearing assets
Major Lenders Have Another Challenge – Disappearing Assets Town

  • Large lenders have grown – their ability to manage growth has not kept pace.

  • The four largest servicers have grown in excess of 30% per year in the 1990’s

  • WAMU grew at a compound rate of over 60%, mostly through acquisitions

  • But, the run-off of their servicing portfolios outpaced their abilities to replace lost assets internally

  • The major lenders have become heavily dependent on third party originations (brokers and correspondents)

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Where is value created at the gse s government sponsored enterprises
Where is Value Created – at the GSE’s Town(Government Sponsored Enterprises)

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Fannie mae and freddie mac expand their influence in the mortgage business
Fannie Mae and Freddie Mac Expand Their Influence in the Mortgage Business

  • GSE’s share of mortgage debt outstanding has accelerated over the past five years – to over 40% in 2001

  • GSE importance to housing finance industry grows commensurately.

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Reliance on fannie mae and freddie mac continues to grow
Reliance on Fannie Mae and Freddie Mac Mortgage BusinessContinues to Grow

  • Fannie Mae and Freddie Mac bought 40%+ of mortgages made

  • Industry’s increasingly relies on funding source

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Fannie mae grown at multiples of the industry and maintained super profitability
Fannie Mae Grown at Multiples of the Industry and Maintained Super Profitability

  • Fannie Mae has grown its assets almost 3x as fast as the industry in total

  • While maintaining a very steady and strong 25% return on equity

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The industry is as operationally complex as it is structurally fragmented
The Industry is as Operationally Complex as it is Structurally Fragmented

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RE Agent Structurally Fragmented(Buyer)

Buyer

Tax Assessor

Tax Collector

County Recorder

RE Agent(Seller)

Lender(Buyer)

Document Custodian

Servicer(Seller)

Process Relationships are Complex and Still Manual

Title Agent

Title Insurer

Title & RE

Info Providers

Investor

MortgageBroker

  • Closing

  • - Agent or Attorney *

  • Seller(s)

  • Borrower(s)

  • - Notary Public

Seller

Lender Services Providers

Total Process

Time:

Up to 45 Days

WarehouseLender

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* In escrow states, funding and closing functions are handled separately.


Online Ordering Structurally Fragmented

The Mortgage Lending Process Today

Is a Hybrid Paper and Electronic World

Application

Fulfillment

Closing/Post-closing/Recording/Delivery

Consumer

Loan Officer/Mortgage Broker

Lender

Appraiser

Title

Flood

MI

Others

Lender

Closing Agent/Attorney

County Recorder

Investor

Servicer

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Technology Providers Compete to Reorder Value Chain with Electronic Services

Custodial

Interface

Mortgage

Services

Vendors

Third Party

Service

Settlement

AUS

Servicers

Electronic Integrator

Originators /Sellers

Transaction

Security

Document

Mgt.

Document

Tracking

Investors

Product/

Price

Engine

Loan

Approval

Engine

Commitment

Mgt.

Conditions

Mgt.

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Number of transactional web sites indicates a growing maturity in web use
Number of Transactional Web Sites Indicates A Growing Maturity in Web Use

Note: Transactional web site = at least able to prequalify

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By trying we can easily learn to endure adversity another man s i mean mark twain
“By trying we can easily learn to endure adversity. Another man’s, I mean.” – Mark Twain

The Imperative to Change

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The Mortgage Industry Faces Fundamental Change -- MORTECH Identifies and Tracks these Changes

Mortgage Industry Driving Forces

Processes

Convergence

Early Adoption of Electronification

Fragmentation

Vertical vendors small, no architecture standards

Technology Supply

Industry Structure

Large Servicers Drive for Scale

Concentration

Value Migrates to GSE’s

Revenue Stream

Diverted

Lender Returns Become

Variable and Uncertain

Business Model

Failing

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As business conditions change lenders strategic positioning must change to capture value
As Business Conditions Change Lenders’ MORTECH Identifies and Tracks these Changes Strategic Positioning Must Change to Capture Value

Positioning Keys

Traditional

Customer View

Indicated

Grow Production

Competitive Effectiveness

Driving Force

Strategy Focus

Expanded Scale

Asset/Customer Management

Enhanced Service

Operational Objective

Cost Control

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