Ariad consumers who choose a bank or credit union to originate or refinance a residential mortgage are becoming increasingly in the minority. According, of the top-10 U.S. mortgage lenders for 2021, only Wells Fargo & Co. (fourth) and JPMorgan Chase & Co. (sixth) were traditional banks.
The rest were online mortgage specialists, such as No. 1 Rocket Mortgage (formerly known as Quicken Loans), or independent mortgage brokers, such as No. 2 United Shore Financial and No. 5 Freedom Mortgage.
The foremost example of the marketplace shift is Wells Fargo, which as recently as 2012 had a 33% mortgage lending market share as the top lender.
Wells Fargo chief executive Charlie Scharf told analysts during the bank’s second-quarter earnings call on July 15 that the bank has shifted its focus on mortgage lending.
“If you just go back and look at how big we were in the mortgage business, we were a hell of a lot bigger than we are today,” Scharf said.
The bank reported $287 million in mortgage banking fees for the second quarter, down 59% from the first quarter and down 79% from a year ago. Bank officials cautioned that another decline in mortgage revenue is likely in the third quarter.
“So, we have been all along just reassessing what makes sense for us to do, how big we want to be both in the context of what our focus should be in terms of our primary focus should be on service – serving our own customer base,” Scharf said.
Scharf said customer demand will “dictate the appropriate size” of its residential mortgage lending going forward.
“When you look at how much we’re originating versus the size of our servicing business, the servicing business over time will become smaller. I think that’s a smart and good thing for us for many reasons.
“We’re going to focus on products that make sense for us in the context of where we can make money over the cycles, given all of the complexities and all the requirements that banks have that not necessarily everyone else has, and make sure we’re getting the right returns for it.”
Meanwhile, JPMorgan reported on July 14 that the value of second-quarter mortgage origination volume was down 45% to $22 billion.
JPMorgan chief executive Jamie Dixon told analysts in July that “we’ll originate (new mortgages), but the balances in the books will probably come down.”
“Look, we reserve the right to change that. But that’s a portfolio decision.
“If it doesn’t make sense to own mortgages, we’re not going to own them.”
There’s always been a natural ebb and flow to residential mortgage lending, based largely on the rise and fall of interest rates and the supply and demand of new and existing housing.
Riding on that ebb and flow can be tens of thousands of bank jobs tied to mortgage originations and refinancing.
That workforce tends to surge when interest rates are low and housing inventory is plentiful, and experience sharp job cuts when rising interest rates and tight inventory supplies discourage buying and refinancing.
Analysts say Wells Fargo and other national and super-regional banks have lost market share to online financial institutions, such as Rocket Mortgage, United Shore Financial, and Loan Depot.
Wells Fargo trailed those lenders in loan originations during 2021,, with Rocket Mortgage at 1.2 million loans, United Shore Financial at 654,000, Loan Depot at 390,000, and Wells Fargo at 376,000.
When measured by the value of loans, Wells Fargo was third at $159 billion, JPMorgan was fifth at $134 million and Bank of America Corp. was seventh at $85 billion.
Bloomberg News reported in an Aug. 14 article that Wells Fargo is pulling back from providing funds for mortgage loans made by third-party lenders, as well as serving Federal Housing Administration loans.
“To the extent that we have efficiencies, it makes sense for us to do other business,” Scharf said.
“But, I guess my point was we’re not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business.”
The combination of more fintech lenders tightened lending standards since the housing bubble burst of 2008-11, and a sharp fall-off so far this year in refinancing activity has other banks questioning their role and size in the sector.
The latest Mortgage Bankers Association’s mortgage report, released Aug. 22, found all mortgage originations have dropped 48% from 3.55 million in the second quarter of 2021 to 1.85 million in the second quarter of 2022.
There are forecasts of a 53% decline in both the third and fourth quarters.
Trust Financial Corp. reported on July 19 that second-quarter residential mortgage income fell 36.7% to $74 million.
It represented a continuation of a trend in which residential mortgage originations dropped by 10% during 2021.
Trust chief financial officer Daryl Bible said during the bank’s conference call with analysts that higher interest rates are pressuring loan volumes and gain-on-sale margins.
Trust chief executive Bill Rogers told analysts that mortgage “probably (will be) a little flat second half of the year (compared with) the first half of the year.”
Tim Wennes, chief executive of the U.S. division for Santander, told CNBC that the bank’s decision to exit residential mortgage lending in February was driven primarily by the decline in mortgage volumes. It has put its lending focus on automobile loans, which are offering higher yields.
“For many, especially the smaller institutions, the vast majority of mortgage volume is refinanced activity, which is drying up and will likely drive a shakeout,” Wennes said.
A quick and streamlined approach is the main competitive advantage that fintechs have over traditional banks, credit unions, and other traditional mortgage lenders.
Fintechs have based their existence on better utilizing “big data, data analytics, complex algorithms, and artificial intelligence – which enable alternative lenders to better assess borrower’s creditworthiness and reach historically under-served populations,” wrote Sandra Lankford in a July 22 blog for the research firm Wolters Kluwer.
“Essentially, they offer products and services to a wider audience.”
Langford said fintech companies “have changed the way borrowers interact with the lending process.”
“Individuals and businesses fill out their information online or through an app, upload documents electronically, and have one point of contact with the lender.”
These companies often permit electronic signatures, remote online notarization, and e-closings.
Lankford cautioned that “the traditional bank vs. fintech competition isn’t over.”
“Alternative lenders aren’t the right choice for all residential or commercial borrowers. Customers shop for the best interest rates and terms, which can still come from banks.
“Although fintech companies are known for technological advancements and providing services like digital mortgages, information security remains a top concern,” she said. “Additionally, the federal government doesn’t regulate non-bank financial institutions as tightly as banks.”
Many traditional banks and credit unions have responded to the fintech competition by trying to embrace some of the same big data analytics.
For example, Trust has been expanding on a digital-first approach launched in 2019 by predecessor BB&T Corp. and its chairman and chief executive Kelly King.
Initially called “Disrupt or die,” the bank softened the phrase to “Disrupt and thrive” as it plugged in artificial intelligence and robotics into its back-office, customer service and compliance operations.
On Aug. 22, Trust announced it had expanded its reach in artificial intelligence by acquiring a series of assets from Zaloni, including its Arena platform. Trust said the acquisition will “accelerate its data governance, metadata management, advanced analytics, and artificial intelligence and machine learning (AI/ML) programs.”
Meanwhile, Truliant Federal Credit Union became December the first North Carolina-based financial institution to complete an eClosing, according to N.C. Secretary of State’s office.
An eClosing is a “fully digital and fully remote electronic mortgage closing.” It was the first eClosing in the state in which the buyer – a homebuyer in King – notary, and attorney were in different physical locations.
The requirement typically requires N.C. notaries to provide final “wet ink” signatures in person with homebuyers.
Beth Eller, Truliant’s vice president of Mortgage Services, said that as a digitally driven credit union, the remote online notarization option is a “must-have offering for us in the mortgage area.”
National residential real-estate research firm Attom said second-quarter mortgage originations nationally were down 13% from the first quarter and 43% from a year ago.
It was the fifth consecutive quarterly decline with the 43% drop-off the biggest annual drop since 2014.
“The decline resulted from another double-digit downturn in refinancing activity that more than outweighed increases in home-purchase and home-equity lending,” Attom said.
“Mortgage rates that have virtually doubled over the past year have decimated the refinance market and are starting to take a toll on purchase lending as well,” said Rick Sharga, executive vice president of market intelligence at Attom.
“The combination of much higher mortgage rates and rising home prices has made the notion of homebuying simply unaffordable for many prospective buyers, which threatens to drive loan volume down even further as we exit the spring and summer months.”
Attom cited that the 941,000 residential loans that were rolled over into new mortgages during the second quarter was down 36% from the first quarter and down 60% year over year.
As a result, for the first time since early 2019, refinance activity in the second quarter did not represent the largest chunk of mortgages, dropping to 39% of all loans, Attom reported. That was off from 53% in the first quarter and from a recent peak of 66% in early 2021.
The retrenching of mortgage lending by national and super-regional banks is not a surprising trend, said analyst Greg McBride.
“This is the resumption of a trend that has been underway since the financial crisis of 2008,” McBride said. “Where bigger banks pull back, other smaller lenders quickly fill the void.
“Because the vast majority of mortgages are in government-backed programs, there is a little measurable impact on borrowers.”
McBride cautioned that the big banks pulling back on mortgage lending “are still very active in mortgage servicing so they retain the consumer touch point without the regulatory risk of originating the loan.”
“The mortgage business has always been a cyclical, very rate sensitive business. When volumes plunge, lenders retrench or re-evaluate.
“Fast forward a couple of years and if the environment is more conducive to a hot mortgage market, the big banks will be back.”
Tony Plath, a retired finance professor at UNC-Charlotte, said banks are being challenged by “too much loan supply and insufficient loan demand.”
“The latest supply cutback is a response to the supply-side imbalance in today’s mortgage market, and the sudden collapse of the scale economies that drive mortgage loan profitability.”
Plath, however, is optimistic that the cyclical nature of residential mortgage lending will swing back enough to entice national and super-regional banks to stay active in the sector.
“Once we complete this latest down phase of the mortgage lending cycle, and loan rates are once again lower with housing supply more plentiful and favorably priced, all of the banks currently pulling back from the industry will jump right back in with both feet,” Plath said.
Plath said when that happens, banks, fintech, and other lenders that continue to evolve and advance their digital mortgage offerings will reap the benefits.
“The really exciting change that’s occurring today is the evolution toward electronic, online mortgage origination and loan closing that’s displacing the physical mortgage loan distribution channel,” Plath said.
“The move toward electronic origination and closings will completely change the scale economies of the industry going forward, and that’s going to have a huge impact on the way consumers buy, and finance, residential property in the near future.”
