A sign hangs from a Banco Santander branch in London, United Kingdom, on Wednesday, February. 3, 2010
Simon Dawson | Bloomberg via Getty Images
Banks and other mortgage lenders have been hit by a drop in demand for loans this year as a result of the Federal Reserve’s actions interest rate hikes.
He would have known: Santander — a relatively small player in the mortgage market — announced its decision to drop out the product in February.
“We were first here, and others are now doing the same math and seeing what’s happening with mortgage volumes,” Weness said in a recent interview. “For many, especially smaller institutions, most of the mortgage volume is refinance activity, which is drying up and likely to lead to a shakeout.”
The mortgage business boomed in the first two years of the pandemic, driven by low financing costs and a preference for suburban homes with home offices. The industry hit 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 home prices that have yet to come down have made housing unaffordable for many Americans and closed the refinancing channel for lenders. Interest-based refinancing sink 90% to April of last year, according to Black Knight.
Santander’s move, part of a strategic move to focus on higher-return businesses such as its auto lending franchise, now appears 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 largest banks in home loans, JPMorgan Chase and Wells Fargo, reduced mortgage staffing levels to accommodate lower volumes. Smaller non-bank providers also count stirring for selling loan servicing rights or even considering a merger or partnership with competitors.
“The sector was as good as it gets” last year, said Owens, a three-decade banking veteran who has worked at firms including Union Bank, Wells Fargo and Countrywide.
“We looked at the returns over the cycle, saw where we were headed with the higher interest rates and made the decision to exit,” he said.
While banks dominated the U.S. mortgage business, 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 soaked up market share, less burdened by regulations that fall more heavily on big banks.
The rest are newer players with similar names United Mortgage Wholesale and Freedom Mortgage. Many of the firms took advantage of the pandemic boom to go public. Their shares are already deep underwater, which could trigger consolidation in the sector.
Complicating matters, banks need to invest money in technology platforms to streamline the intensive application process to keep up with customer expectations.
And firms including JPMorgan have said increasingly onerous capital rules will force him to clear the 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 doing now; it lists Rocket Mortgage on it website.
“Banks will ultimately have to ask themselves if they consider this a core product that they offer,” Weness said.