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A sign hangs from a branch of Banco Santander in London, U.K., on Wednesday, Feb. 3, 2010.<\/p>\n
Simon Dawson | Bloomberg via Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
Banks and other mortgage providers have been battered by plunging demand for loans this year, a consequence of the Federal Reserve’s interest rate<\/a> hikes.<\/p>\n Some firms will be forced to exit the industry entirely as refinance activity dries up, according to Tim Wennes<\/a>, CEO of the U.S. division of Santander<\/a>.<\/p>\n He would know: Santander \u2014 a relatively small player in the mortgage market \u2014 announced its decision to drop<\/a> the product in February.<\/p>\n “We were a first mover here and others are now doing the same math and seeing what’s happening with mortgage volumes,” Wennes said in a recent interview. “For many, especially the smaller institutions, the vast majority of mortgage volume is refinance activity, which is drying up and will likely drive a shakeout.”<\/p>\n The mortgage business boomed during 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<\/a> in loan volumes last year, including $2.7 trillion in refinance activity, according to mortgage data and analytics provider Black Knight.<\/p>\n But surging interest rates and home prices that have yet to decline have put housing out of reach for many Americans and shut the refinance pipeline for lenders. Rate-based refinances sank 90%<\/a> through April from last year, according to Black Knight.<\/p>\n<\/div>\n The move by Santander, part of a strategic pivot to focus on higher-return businesses like its auto lending franchise, now seems like a prescient one. Santander, which has about $154 billion in assets and 15,000 U.S. employees, is part of a Madrid-based global bank with operations across Europe and Latin America.<\/p>\n<\/div>\n More recently, the largest banks in home loans, JPMorgan Chase<\/a> and Wells Fargo<\/a>, have cut mortgage staffing levels to adjust to the lower volumes. And smaller nonbank providers are reportedly scrambling<\/a> to sell loan servicing rights or even considering merging or partnering with rivals.<\/p>\n “The sector was as good as it gets” last year, said Wennes, a three-decade banking veteran who served at firms including Union Bank, Wells Fargo and Countrywide.<\/p>\n “We looked at the returns through the cycle, saw where we were headed with higher interest rates, and made the decision to exit,” he said.<\/p>\n<\/div>\n While banks used to dominate the American mortgage business, they have played a diminished role since the 2008 financial crisis in which home loans played a central role. Instead, nonbank players like Rocket Mortgage<\/a> have soaked up market share, less encumbered by regulations that fall more heavily on large banks.<\/p>\n Out of the top ten mortgage providers<\/a> by loan volume, only three are traditional banks: Wells Fargo, JPMorgan and Bank of America<\/a>.<\/p>\n The rest are newer players with names like United Wholesale Mortgage<\/a> and Freedom Mortgage. Many of the firms took advantage of the pandemic boom to go public.Their shares are now deeply underwater, which could spark consolidation in the sector. \u00a0<\/p>\n Complicating matters, banks have to plow money into technology platforms to streamline the document-intensive application process to keep up with customer expectations.<\/p>\n And firms including JPMorgan have said that increasingly onerous capital rules will force it to purge mortgages<\/a> from its balance sheet, making the business less attractive.<\/p>\n The dynamic could have some banks deciding to offer mortgages via partners, which is what Santander now does; it lists Rocket Mortgage on its website<\/a>.<\/p>\n “Banks will ultimately need to ask themselves if they consider this a core product they are offering,” Wennes said.<\/p>\n<\/div>\n<\/div>\n‘As good as it gets’<\/h2>\n
Others to follow?<\/h2>\n