In the arena of residential mortgages, big banks are taking a big step back.
Commercial banks originated 74% of all mortgages in 2007, but in 2014, that share fell to 52%, according to data from the Mortgage Bankers Association. This change is reshaping a lending landscape that has seen major shifts since the housing bubble burst.
The regulatory environment in place since the crash is strict enough to scare banks from lending, even to customers with excellent credit. The private bond market for mortgages has essentially disappeared.
Many big bank execs, including BankUnited CEO John Kanas, have realized that the low-margin, volatile residential mortgage business simply isn’t worth it.
Chris Whalen, a long-time bank analyst now with Kroll Bond Rating Agency, said in a speech in early February the cost of capital and compliance has prompted bankers to decide that dolling out home loans to American families is no longer worth the risk. He predicts the four largest commercial banks will shrink or eliminate their business of originating and servicing residential mortgages.
The largest lender, Wells Fargo, originated $125 billion in mortgages in the 4th quarter 2012, compared to just $47 billion in the 4th quarter 2015. In the same time periods, J.P. Morgan Chase lent $51.2 billion and $22.5 billion, respectively.
Ginnie Mae president Ted Tozer thinks banks have already downsized to a mortgage output they will hover near, explaining many big banks won’t want to give up the opportunity to provide existing customers with full-service banking. He expects community banks and credit unions to fill the void, but regulations limit the amount of mortgage debt they can hold. The biggest players, instead, will be online lenders or “nonbanks.”
Such entities make up 4 of the top 10 originators of 2015: Quicken Loans, PennyMac Financial, PHH Mortgage, and Freedom Mortgage. These “independent mortgage bankers” accounted for 43% of all originations in 2014, seeing steady growth from 23% in 2007.
Ellen Seidman, a senior fellow at the Urban Institute, believes a split along age lines will emerge, with tech-savvy millennials often choosing nonbanks. Whether bad loan originators will be held accountable for their mistakes remains to be seen, she says.
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