A sign hangs on a branch of Banco Santander in London, Britain, on Wednesday February 3, 2010.
Simon Dawson | Bloomberg via Getty Images
Banks and other mortgage providers have been hit this year by falling credit demand as a result of the US Federal Reserve’s rate hikes.
According to Tim Wennes, CEO of Santander’s US division, some companies will be forced to exit the industry altogether if refinancing activity slows.
He would know: Santander — a relatively small player in the mortgage market — announced its decision to discontinue the product in February.
“We were a first mover here and others are doing the same calculation now and see what happens with the mortgage volume,” Wennes said in a recent interview. “For many, especially the smaller institutions, the vast majority of mortgage volume is funding activity, which is drying up and likely to lead to a market shakeout.”
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. According to mortgage data and analytics provider Black Knight, the industry saw a record $4.4 trillion in lending volume last year, including $2.7 trillion in refinancing activity.
But rising interest rates and home prices that have yet to fall have put housing out of reach for many Americans and closed the refinancing pipeline for lenders. Interest-based refinancing through April was down 90% from last year, according to Black Knight.
‘It doesn’t get any better’
Santander’s move, part of a strategic pivot to focus on higher-yielding businesses like its auto loan business, now appears prescient. Santander, which has approximately $154 billion in assets and 15,000 US employees, is part of a Madrid-based global bank with offices across Europe and Latin America.
More recently, the largest home loan banks, JPMorgan Chase and Wells Fargo, have reduced mortgage headcounts to accommodate lower volumes. And smaller, non-bank providers are reportedly looking to sell credit service rights or even consider merging or partnering with competitors.
“The sector was as good as it gets,” said Wennes, a three-decade banking veteran who has worked for firms including Union Bank, Wells Fargo and Countrywide.
“We looked at returns over the cycle, saw where we were going with higher interest rates and made the decision to exit,” he said.
While banks used to dominate America’s mortgage business, they have played a lesser role since the 2008 financial crisis, in which home loans played a central role. Instead, non-bank players like Rocket Mortgage have gained market share as they are less burdened by regulations that hit big banks harder.
Of the top 10 mortgage lenders 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 used the pandemic boom to go public. Their stocks are now deep under water, which could trigger a consolidation in the industry.
To make matters worse, banks need to pour money into technology platforms to streamline the document-intensive application process and keep up with customer expectations.
And firms like JPMorgan have said increasingly stringent capital regulations will force the company to take mortgages off its balance sheet, making the business less attractive.
The momentum could see some banks decide to offer mortgages through partners, which Santander is doing now; it lists Rocket Mortgage on its website.
“Banks will ultimately have to ask themselves whether they see this as a core product that they offer,” Wennes said.