A “shakeout” is coming among mortgage lenders

A “shakeout” is coming among mortgage lenders

A sign hangs from a Banco Santander branch in London, Britain, Wednesday, February 3, 2010.

Simon Dawson |: Bloomberg via Getty Images

Banks and other mortgage providers have been hit by lower demand for loans this year as a result of the Federal Reserve’s interest rate hikes.

Some firms will be forced out of the industry entirely as refinancing activity dries up, according to Tim Wennes, chief executive of Santander’s US division.

He would know. Santander, a relatively small player in the mortgage market, announced its decision to drop the product in February.

“We were the first mover here, and others are now doing the same math and seeing what’s happening with mortgage volumes,” Vennes said in a recent interview. “For many, especially smaller institutions, the vast majority of mortgage loan volume is refinancing activity, which is drying up and likely will lead to a shakeout.”

The mortgage business boomed during the first two years of the pandemic, driven by higher funding costs and a preference for suburban homes with home offices. Last year, the industry posted a record $4.4 trillion in loan volume, including $2.7 trillion in refinancing activity, according to mortgage data and analytics provider Black Knight.

But rising interest rates and housing prices that have yet to fall have put housing out of reach for many Americans and clogged the refinancing pipeline for lenders. Rate-based refinances are down 90% through April from last year, according to Black Knight.

“As good as it gets”

Santander’s move, part of a strategic pivot to focus on higher-margin businesses such as its auto lending franchise, now looks predictable. Santander, which has about $154 billion in assets and 15,000 U.S. employees, is part of the Madrid-based global bank with operations in Europe and Latin America.

Recently, the largest home loan banks, JPMorgan Chase and Wells Fargo, have cut mortgage staffing levels to accommodate lower volumes. And smaller non-bank providers are reportedly looking to sell off loan servicing rights or even considering mergers or partnerships with rivals.

“The industry was as good as it gets,” said Vennes, a three-decade banking veteran who served at companies including Union Bank, Wells Fargo and Countrywide.

“We looked at yields over the cycle, saw where we were going with higher interest rates and made the decision to exit,” he said.

Others to follow?

While banks used to dominate the American mortgage business, they have played a lesser role since the 2008 financial crisis, in which home loans played a central role. Instead, non-bank players like Rocket Mortgage have grabbed market share, less burdened by regulations that fall more heavily on the big banks.

Only three of the top ten mortgage lenders by loan volume are traditional banks: Wells Fargo, JPMorgan and Bank of America.

The rest are newer players with names like United Wholesale Mortgage and Freedom Mortgage. Many companies took advantage of the pandemic boom to go public. Their shares are now in deep water, which could lead to consolidation in the sector.

Complicating matters, banks must invest in technology platforms to streamline the document-intensive process to meet customer expectations.

And firms including JPMorgan have said increasingly onerous capital rules will force it to remove mortgages from its balance sheet, making the business less attractive.

The dynamic may lead some banks to decide to offer mortgages through partners, which Santander is now doing. it features Rocket Mortgage on its website.

“Banks ultimately have to ask themselves if they consider the core product they’re offering,” Vennes said.

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