A “shattering” among mortgage lenders is coming

A sign hangs at a branch of Banco Santander in London, UK, Wednesday February 3, 2010.

Simon Dawson | Bloomberg via Getty Images

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

According to Tim Wennes, CEO of Santander’s US division, some companies will be forced out of the industry altogether as refinancing activity dries up.

He would know: Santander – a relatively small player in the mortgage market – announced its decision to discontinue the product in February.

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

Mortgage activity boomed in the first two years of the pandemic, driven by rock-bottom financing costs and a preference for suburban homes with home offices. The industry saw a record $4.4 trillion in lending last year, including $2.7 trillion in refinance activity, according to mortgage data and analytics provider Black Knight.

But soaring interest rates and yet to come down home prices have put housing out of reach for many Americans and closed the refinancing pipeline for lenders. Rate-based refinances are down 90% through April from a year ago, according to Black Knight.

“As good as it gets”

Santander’s move, part of a strategic pivot to focus on higher-return businesses like its auto-lending franchise, now seems prescient. Santander, which has about $154 billion in assets and 15,000 American employees, is part of a Madrid-based global bank with operations in Europe and Latin America.

More recently, the biggest mortgage banks, JPMorgan Chase and Wells Fargo, have reduced their mortgage workforces to adjust to lower volumes. And smaller non-bank providers are reportedly scrambling to sell loan servicing rights or even consider merging or partnering with rivals.

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

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

Others to follow?

While banks dominated US mortgage activity, they have played a diminished role since the 2008 financial crisis in which home loans played a central role. Instead, non-bank players like Rocket Mortgage have absorbed market share, less encumbered by regulations that weigh more heavily on the big banks.

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

The rest are new players with names like United Wholesale Mortgage and Freedom Mortgage. Many companies have taken advantage of the pandemic boom to go public. Their stocks are now deep underwater, which could trigger consolidation in the sector.

To complicate matters, banks need to invest money in technology platforms to streamline the document-intensive application process to meet customer expectations.

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

The dynamics could lead some banks to decide to offer mortgages through partners, which Santander is now doing; it lists Rocket Mortgage on its website.

“Banks will ultimately have to consider whether they consider this a commodity product that they offer,” Wennes said.

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