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Report: Increased Regulation to Boost Profitability in Coming Years

Standardization and market stability brought on by increased regulation will pave the way for a bright future for mortgage banking and related industries, ""FBR Capital Markets"":http://www.fbr.com/ speculates in a recent report.

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The report, titled _Future of the Housing & Mortgage Markets: Winners & Losers,_ examines the impact of heightened scrutiny and changing markets to determine where the industries will head in the next five years.

According to the forecast, FBR believes that ""companies directly involved in mortgage banking or housing, or involved in a derivative of the two, such as homebuilders, housing rental companies, mortgage/title insurance, and reverse mortgages, should enjoy strong profitability, less volatility, and better valuations relative to historical expectations."" At the same time, portfolio lenders and private-label securitizers ""will be at a strategic disadvantage.""

While many mortgage professionals have been expressing anxiety about certain aspects of proposed regulations, FBR points to the end result: a more stable market with higher underwriting standards and lower risk from ""exotic"" mortgage products such as low/no-doc loans and prepayment penalties.

""The capacity constraints created by increased barriers to entry and regulatory oversight, coupled with the standardization of the mortgage product and the [COLUMN_BREAK]

continued dominance of the government guarantee, should produce a more stable and consistently profitable mortgage origination market,"" the report reads.

Although the mortgage industry as a whole is expected to benefit from the increased regulatory oversight, some proposed regulations--particularly those related to qualified residential mortgage (QRM) rules--are expected to give preference to loans securitized by Fannie Mae and Freddie Mac. These risk retention requirements may stifle any private securitization activity and potentially keep out new entrants who could otherwise bring down underwriting standards.

In addition, with larger banks like ""Citigroup"":http://www.citigroup.com/citi/, ""JPMorgan Chase"":http://www.jpmorganchase.com/, and ""Bank of America"":https://www.bankofamerica.com/ scaling back their lending operations (leaving behind an estimated $1.3 trillion in annual origination capacity), ""the opportunity set for smaller players in the origination and refinancing market has increased."" While ""Wells Fargo"":https://www.wellsfargo.com/ continues to dominate the market, FBR notes the biggest lender's originations are flat relative to pre-crisis levels. As a result, about 60 percent of the market will still be driven by smaller players.

""We believe the largest opportunities in mortgage originations are with a smaller, mortgage-concentrated model,"" the report says. ""This model will allow lenders to have the appropriate local knowledge to understand their market risk while maintaining the necessary regulatory quality controls.""

At the same time, originations are expected to continue growing as a demographic shift supports a healthier purchase market. With the average homebuying age at 34, the market is squarely in the hands of the large ""echo boom"" generation, or the children of the baby boomers. This phenomenon will lead to a boom in construction (with an estimated 1.3 million to 1.7 million additional housing units expected to be demanded in the next several years) and home purchases.

As a result, the recovering purchase mortgage market could expand to exceed $1 trillion, creating a net for the industry as refinance volume falls. In total, FBR anticipates overall originations between $1.5 trillion and $2.0 trillion over the next five years.

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