An indication hangs from a branch of Banco Santander in London, U.K., on Wednesday, Feb. 3, 2010.
Simon Dawson | Bloomberg via Getty Images
Banks and other mortgage providers have been battered by plunging demand for loans this yr, a consequence of the Federal Reserve’s rate of interest hikes.
Some firms shall be forced to exit the industry entirely as refinance activity dries up, in keeping with Tim Wennes, CEO of the U.S. division of Santander.
He would know: Santander — a comparatively small player within the mortgage market — announced its decision to drop the product in February.
“We were a primary mover here and others are actually doing the identical math and seeing what’s happening with mortgage volumes,” Wennes said in a recent interview. “For a lot of, especially the smaller institutions, the overwhelming majority of mortgage volume is refinance activity, which is drying up and can likely drive a shakeout.”
The mortgage business boomed throughout the first two years of the pandemic, driven by rock-bottom financing costs and a preference for suburban houses with home offices. The industry posted a record $4.4 trillion in loan volumes last yr, including $2.7 trillion in refinance activity, in keeping with mortgage data and analytics provider Black Knight.
But surging rates of interest and residential prices which have yet to say no have put housing out of reach for a lot of Americans and shut the refinance pipeline for lenders. Rate-based refinances sank 90% through April from last yr, in keeping with Black Knight.
‘Pretty much as good because it gets’
The move by Santander, a part of a strategic pivot to give attention to higher-return businesses like its auto lending franchise, now looks as if a prescient one. Santander, which has about $154 billion in assets and 15,000 U.S. employees, is a component of a Madrid-based global bank with operations across Europe and Latin America.
More recently, the most important banks in home loans, JPMorgan Chase and Wells Fargo, have cut mortgage staffing levels to regulate to the lower volumes. And smaller nonbank providers are reportedly scrambling to sell loan servicing rights and even considering merging or partnering with rivals.
“The sector was pretty much as good because it gets” last yr, said Wennes, a three-decade banking veteran who served at firms including Union Bank, Wells Fargo and Countrywide.
“We checked out the returns through the cycle, saw where we were headed with higher rates of interest, and made the choice to exit,” he said.
Others to follow?
While banks used to dominate the American mortgage business, they’ve played a diminished role for the reason that 2008 financial crisis wherein home loans played a central role. As a substitute, nonbank players like Rocket Mortgage have soaked up market share, less encumbered by regulations that fall more heavily on large banks.
Out of the top ten mortgage providers by loan volume, only three are traditional banks: Wells Fargo, JPMorgan and Bank of America.
The remainder are newer players with names like United Wholesale Mortgage and Freedom Mortgage. Lots of the firms took advantage of the pandemic boom to go public.Their shares are actually deeply underwater, which could spark consolidation within the sector.
Complicating matters, banks should plow money into technology platforms to streamline the document-intensive application process to maintain up with customer expectations.
And firms including JPMorgan have said that increasingly onerous capital rules will force it to purge mortgages from its balance sheet, making the business less attractive.
The dynamic could have some banks deciding to supply mortgages via partners, which is what Santander now does; it lists Rocket Mortgage on its website.
“Banks will ultimately must ask themselves in the event that they consider this a core product they’re offering,” Wennes said.
