A “remote” between mortgage lenders is coming

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

Simon Dawson | Bloomberg via Getty Images

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

Some companies will be forced out of the industry entirely as refinancing activity dries up, according to Tim Wennes, CEO of Santander’s North American division.

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

“We were the first to move 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 refinance activity, which is drying up and will likely cause a shakeout.”

The mortgage business boomed during the first two years of the pandemic, fueled by ultra-low financing costs and a preference for suburban homes with home offices. The industry posted a record $4.4 trillion in loan volumes last year, including $2.7 trillion in refinancing activity, according to mortgage data and analytics provider Black Knight.

But rising interest rates and house prices that have yet to come down have put housing out of reach for many Americans and closed the channel for lenders to refinance. Fee-based refinancings plunged 90% through April from a year ago, according to Black Knight.

“As Good As It Gets”

Santander’s decision, part of a strategic drive to focus on higher-profitable businesses such as its auto lending franchise, now looks 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.

Most recently, the biggest home loan banks, JPMorgan Chase and Wells Fargo, have cut mortgage staffing levels to adjust to lower volumes. And smaller non-bank providers are scrambling to sell loan servicing rights or even considering merging or partnering with rivals.

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

“We looked at the returns 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 US mortgage business, they have played a reduced 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 affected by regulations that fall 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 newer players with names like United Wholesale Mortgage and Freedom Mortgage. Many of the companies took advantage of the pandemic boom to go public. Its shares are now deeply underwater, which could lead to sector consolidation.

Complicating matters, banks need to invest money in technology platforms to streamline the document-intensive application process to keep up with customer expectations.

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

The dynamic could make some banks decide to offer mortgages through partners, which is what Santander is doing now; features Rocket Mortgage on its website.

“At the end of the day, banks will have to ask themselves if they consider this a core product that they offer,” Wennes said.

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