Are Smaller Lenders A Disappearing Species?

by Jeffrey Hogue
March 18th, 2008

We all know by now that Bank of America has said that it intends to acquire Countrywide. What you may not have known is that a greater number of larger banks and lenders are acquiring smaller struggling lenders. Many believe that this is a sign that big banks are preparing to make efforts to soften the blow of the persisting sub-prime meltdown.

In addition to initiatives like “Project Lifeline” (a home loss prevention program initiated by six of the country’s largest servicers), consumers and professionals hope that big banks will help clean up the way the industry does business by acquiring and sterilizing the struggling lending companies that, history would suggest, did not have adequate loan due diligence or home loss prevention programs in place.

Skeptics, on the other hand, believe that the recent and proposed acquisitions of struggling mortgage lenders will result in fewer resources being spent on foreclosure prevention. They argue that as acquiring banks take-on struggling lenders, they will be even more pressured to increase the bottom line in order to prove the acquisition a “smart move.”

By way of illustration, in January, Bank of America’s CEO, Kenneth Lewis, came under fire for his then likely decision to move forward with the purchase of Countrywide at a price many believe is too high. The critics argue that the overpayment for a sinking company like Countrywide will result in Bank of America going down with the Countrywide ship. If the critics are correct, Bank of America will indeed have a difficult time throwing more money at foreclosure prevention programs as it tries to keep the Countrywide ship afloat.

So, what effect will the big fish swallowing the little fish have in the national mortgage marketplace? Will this help clean up the subprime mess, or will the big lenders keep running their newly acquired businesses as usual, devoting almost all resources to selling new loans and relatively few resources towards mitigating and preventing defaults and foreclosures? Further, what effect will this trend have on government programs such as FHA mortgages? Will we start to more loan products meeting FHA guidelines, or will we remain with the status quo?

We believe that the bigger banks acquiring smaller struggling lenders will ultimately prove beneficial. We see these acquisitions as a chance for much needed reform in the mortgage industry, and a chance for the industry to clean itself up. It makes sense that when there are fewer subprime lenders in the marketplace there will be a smaller number of “bad apple” lenders putting out bad loans. Additionally, we see this big lender swallowing little lender trend as increasing the popularity of FHA loan products. We suspect more first-time homebuyers will explore what FHA has to offer when many of the smaller subprime lenders who were, for all practical purposes, “giving” loans away are gone. However, only time will tell.

Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.

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