An Analysis of 6 Years of FHA 203(k) Endorsement Data
FHA's 203(k) loan is a specialty loan program designed to solve the problem of using a home's potential equity in order to improve the property, in either a refinance or a purchase transaction. Although many lenders write the standard FHA loan program, 203(b), a much smaller set of lenders write 203(k) loans. 203(k) loans have generally been seen as a niche product, and many lenders choose not to write them, because they are complicated, and require specialized knowledge in order properly originate, fund, and manage the draw and inspection process on the loans.
Similar to my earlier analysis of FHA HECM loans, we begin with the data. Each month, HUD issues a report for the program, called the Endorsement Summary Report, which comes out on the first of each month and reports the number of 203(k) loans endorsed by HUD for the prior month. The data is not as complete as an analyst might want, and is not compiled at the loan level. The report does not give us loan volume, but only units, broken down by the HUD office that issued the endorsements, and the number of endorsements received by each lender. It is, of course, possible to estimate loan volume by cross referencing from other data sources, such as HMDA, or the various deed data providers. In this analysis I have not bothered to do so; we will, for simplicity's sake, look at unit market share.
(Full disclosure: I have worked for several of the lenders that will be referenced in this article, including Wells Fargo, Bank of America, Prospect Mortgage, and HomeBridge Financial, and some of my responsibilities included supporting 203(k) lending managers. Nothing I discuss in this article contains any inside knowledge of these companies or their operations, but are simply observations made from and supported by the Endorsement Data, which is data available to the public on HUD's CHUMS site, https://apps.hud.gov/pub/chums/f17fvc/203k.cfm).
As with HECM, my methodology was to take the individual endorsement summary reports, covering January 2014 to December 2019 (the most recent month on record), pull them into a SQL Server database, and put a Tableau visualization on top of them. I also have built some reference tables which allow me to map the data at the state level. This is not a perfect process; the HUD offices are not necessarily confined to endorsing loans in the individual state in which they sit; so, for instance, the Kansas City, Kansas HUD office covers eastern Kansas and much of western Missouri. Nevertheless, each state does have at least one HUD office, so it is possible to roughly map 203(k) endorsements to the states in which the loans likely originated, and for our purposes, come up with unit market share figures at the State, Census Division, and Census Region levels.
(I have attached a summary report in PDF format that covers each year, and includes a page for national lender rankings and state rankings (rolled up, as outlined above, from the HUD field offices). You can download the reports by clicking the link after each section for a particular year. I can also break this data down to look at particular states, regions, lenders, and HUD offices, if it is of interest.)
When looking at market share data for 203(k), the last six years show a series of changes in leadership, missed opportunities, and dramatic market exits, combined with a broader decline in overall endorsements. There have been several different leaders in the market in six years, and no one has achieved strategic breakthrough or market domination.
2014: Wells Fargo Stands Atop The World
Wells Fargo was, for some years, the dominant 203(k) lender, and in 2014, the story was no different: Wells had more endorsements than any other lender in every single calendar month in 2014, and ended the year with 1,875 endorsements out of the 14,399 issued, capturing a 13.02% unit market share. This was nearly as many endorsements as the next three largest 203(k) lenders combined. California-based Prospect Mortgage was in second place, with 829 endorsements for a 5.76% market share, New Jersey-based HomeBridge Financial Services (the lender formerly known as Real Estate Mortgage Network, or REMN, adopted the HomeBridge moniker in early 2014), was in third, with 626 endorsements, for a 4.35% market share. American Financial Resources was fourth, with 460 endorsements and a 3.19% market share. PrimeLending was in fifth place, close behind, with 454 endorsements, a 3.15% market share.
Geographically, 203(k) has always had an East Cost, Rust Belt bias to it. K's exist in those markets which contain both a high percentage of FHA loans and a supply of older housing stock. It is the loan program of those places where the underlying land is valuable, even if the houses on top of it were put up sometime before the American flag had 50 stars on it. If you can leave the foundation in place (and in some cases you have no choice, because getting a zoning variance in urban markets can be tough), rip it down to the studs, and renovate it, then 203(k) is your product. It's not always pretty, but it gets the job done.
2014 was, from this point of view, a bit of an outlier, in that the top 203(k) market was Florida, with 1,177 endorsements, for 8.17% of the market. But after that, the next six states were Ohio (993 endorsements/6.09%), Illinois (819/5.69%), Michigan (732/5.08%), New Jersey (699/4.85%), New York (670/4.65%), and Pennsylvania (667.4,63%).
2015: Wells Fargo Loses Ground
In 2015, the overall 203(k) market jumped to 16,834 endorsements, a 16.91% increase, powered by a strong second half of the year -- 9,573 endorsements were issued in Q3 and Q4 of 2015, 56.9% of the total. Wells Fargo, though, did not profit from this increase in business. and saw both its overall endorsements and market share fall, to 1,585 endorsements and a unit market share of 9.42%. Prospect Mortgage increased endorsements to 886 overall, but did not gain market share, as the market moved faster than it did. For the year, Prospect posted a 5.26% market share. HomeBridge Financial remained in third, but gained ground both in real terms (886 endorsements) and market share (4.85%). American Financial Resources saw a big jump overall, to 679 endorsements and a 4.03% share. Movement Mortgage entered the top 5 (504 endorsements/2.99% market share), passing PrimeLending (471/2.80%), and gained steam as the year went on, with nearly 2/3rds of its endorsements occurring in the 2nd half of the year (331 of 504 endorsements).
Geographically, Florida remained the largest 203(k) market, with 1,461 endorsements for 8.68% of the total. Ohio remained in second place with 1,106 endorsements for a 6.57% share. New Jersey jumped to #3 (1,041 endorsements/6.18% market share), while Illinois fell to fourth (958/5.69%) and New York was fifth (872/5.18%). Michigan and Pennsylvania both fell out of the top 5, with Michigan falling to 9th place and Pennsylvania to 6th.
2016: The Decline and Fall of Wells Fargo in 203(k)
In 2016, the 203(k) market contracted slightly, to 16,526 endorsements, a decline of 1.86%. However, the year saw considerable changes in the 203(k) landscape, as a tectonic shift in the FHA landscape occurred.
Wells Fargo, along with some of the other major banks, had been rethinking its participation in FHA lending for some time. Since 2012, it had been defending itself from a federal lawsuit brought by the Southern District of New York under the Civil War-era False Claims Act, a law originally passed to prevent contractors for the Union Army from selling the Army defective muskets and substandard mules. In a novel use of the law, the SDNY used the False Claims Act to pursue Wells Fargo, Citibank, and a few other large banks for FHA insurance claims resulting from the housing market crash. In April, 2016, Wells settled the lawsuit and paid $1.2 billion to the federal government. Wells Fargo then made the strategic decision to wind down its FHA lending in order to mitigate future risk. Other large banks, such as Bank of America and Citibank made similar decisions, with the result that a considerable amount of FHA business began to shift to non-bank lenders.
In 2016 in 203(k), this meant that Wells went, in a few months, from being the dominant player in the market to being #5 as it wound down 203(k) business and headed to the exit. Wells had 504 endorsements (a 3.05% market share) for the year. Prospect Mortgage now moved up to be the #1 203(k) lender in the country, despite receiving fewer endorsements than it did in 2015 (867, a 5.25% market share). American Financial Resources experienced strong growth and finished second, with 849 endorsements and a 5.14% market share. Movement Mortgage made a similar move, receiving 793 endorsements for a 4.80% share. HomeBridge Financial lost ground, and fell to 746 endorsements for a 4.51% share.
Geographically, New Jersey moved into 1st place, with 1,446 endorsements, or 8.75% of the 203(k) units nationally. For a comparison, a quick glance at HMDA data for the year indicates that New Jersey finished 16th among the states in originated loans in 2016, and accounted for about 2.33% of units in the broader mortgage market. Florida finished second, with 1,098 endorsements and a 6.64% market share. New York (1,047/6.35%), Ohio (902/5.46%), and Illinois (877/5.31%) rounded out the top 5.
2017: HomeBridge Acquires Prospect
2017 saw a significant drop in 203(k) endorsements nationwide, reflecting trends in the broader mortgage market. Endorsements fell 10.17% to 14,846. But a bigger change in the 203(k) market was also underway. Late in 2016, HomeBridge Financial announced that it had come to an agreement to purchase the operating assets of Prospect Mortgage, and the transaction closed in February 2017. In the world of 203(k), this meant that the lenders who closed out 2016 as #1 and #4 would be combining forces. Prospect closed out its pipeline of 203(k) loans, receiving 158 endorsements for a 1.06% market share, while HomeBridge emerged as the dominant player with 1,220 endorsements and a 8.22% market share. Movement Mortgage continued to improve its position; even though its overall endorsements dropped to 721, it moved into second place and made a slight gain in market share to 4.86%. American Financial Resources finished third, with 705 endorsements, for 4.75% of the market. PrimeLending reentered the top 5 in fourth place with 444 endorsements, for 2.99%. LoanDepot entered the top 5 for the first time, ending the year with 417 loans for 2.81% market share. As it wound down its 203(k) business, the once mighty Wells Fargo 203(k) team still posted 309 endorsements and finished sixth with 2.08% of the "K" market.
Geographically, New Jersey retained 1st place in the 203(k) market, with 1,794 endorsements for a 12.04% market share. New York finished second, with 1,070 endorsements and a 7.04% share. Puerto Rico emerged as the 3rd biggest 203(k) market in 2017 with 873 endorsements for 5.33%. One might think this was due to Hurricane Maria, which hit the island in September with devastating Category 5 force, but endorsements in Puerto Rico, by quarter, were 272 in Q1, 271 in Q2, 234 in Q3, and a mere 96 in Q4. If anything, the hurricane's net effect was to temporarily depress 203(k) lending, as homeowners on the island focused on more important life and death matters, and the island struggled, for months, to repair its power grid and basic infrastructure, which the storm badly damaged. Massachusetts was the #4 market for endorsements in 2017, with 837 for 5.64%. Illinois was #5, with 794 endorsements for 5.34%.
2018: In a Declining "K" Market, The Non-Bank Lenders Reign Supreme
2018 was another down year for 203(k) lending nationally. One wonders if this was partially because of the exit of the major banks from the program over the prior 18 months; it is easier to popularize a program when there is a major advertising budget behind it; mortgage companies do not, as a whole, advertise as much as banks do, and while there are certainly major mortgage company offices in the major cities in America, they do not have the sheer presence that. say, a Bank of America or Wells Fargo has with a bank branch on seemingly every street corner. Endorsements in 2018 fell to 11,341, a decline of 30.9%. In a much reduced market, HomeBridge remained the market leader, with 855 endorsements, but a slightly reduced market share of 7.54%. LoanDepot continued to grow its 203(k) program, recording 518 endorsements for a 4.57% market share, and second place overall. Movement Mortgage's endorsements declined sharply to 477, a market share of 4.21% and good enough for third place. American Financial Resources posted 423 endorsements, for a 3.73% market share. PrimeLending remained in fifth place with 329 endorsements for a 2.90% share.
Geographically, the New Jersey HUD offices posted 1,757 endorsements, nearly keeping pace with 2017, and growing overall market share to 15.49%. Puerto Rico was in second place. with 889 endorsements, representing 7.84% of the market. New York fell to third place, with 839 endorsements and a 7.40% share, while Illinois passed Massachusetts for fourth place with 658/5.80%. Massachusetts had 589 endorsements for 5.19%.
2019: Continued Decline, New Leaders Emerge
In 2019, the 203(k) market further contracted, down to 9,110 endorsements, a drop of 19.7% from an already low number in 2018. While it might be premature to announce that 203(k) is dead as we know it, for it is far too useful a program to disappear completely, the decline in the program over the last six years is distinct, measurable, and apparently, separate from the trends of the larger mortgage market. While a lot of mortgage lenders struggled in 2017, the market recovered in 2018 and 2019. 203(k) simply did not participate in the recovery.
HomeBridge Financial saw its place as the market leader in 203(k) erode both in real terms, with endorsements falling to 560, and market share declining to 6.15%. LoanDepot recorded fewer endorsements (465), but solidified its position as the #2 lender in the sector, with a market share of 5.10%. The top five also saw a rankings shakeup as Home Point Financial entered the leaderboard in third place, with 347 endorsements and a 3.81% market share. Fairway Independent took over fourth place, with 306 endorsements for a 3.36% share. Movement continued to plug along in fifth place, with 305 endorsements for a 3.35% market share.
Geographically, the top 5 markets remained the same as they did in 2018: New Jersey (1,246/13.68%), Puerto Rico (834/9.15%), New York (727/6.98%), Illinois (556/6.10%), and Massachusetts (499/5.48%).
The Future
As I said in my article on HECM, it is never wise to speculate on the fortunes, year to year, of the mortgage industry, and even less wise to speculate on the future of a particular product, in this case, the FHA 203(k) Renovation Loan. Products tend to go through phases, and 203(k) will probably experience a renewal at some point in the next few years as lenders discover, or rediscover, the unique advantages the program offers. It only remains to be seen which company or bank will be the the one to return the program to its former glory.