A sign hangs from a Banco Santander branch in London, UK, Wednesday, February 3, 2010.
Simon Dawson | Bloomberg via Getty Images
Banks and other mortgage providers have been hit by a drop in demand for loans this year as a result of the Federal Reserve raising interest rates.
Some firms will be forced out of the industry entirely as refinancing activity dries up, according to Tim Wennes, CEO of Santander’s US division.
He would know: Santander – a relatively small player in the mortgage market – announced its decision to scrap the product in February.
“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, particularly smaller institutions, the bulk of mortgage volume is refinancing activity, which is drying up and likely to cause a shock.”
The mortgage business boomed during the first two years of the pandemic, fueled by low funding costs and a preference for suburban homes with home offices. According to mortgage data and analytics provider Black Knight, the industry posted a record $4.4 trillion in volume last year, including $2.7 trillion in refinancing activity.
But rising interest rates and housing prices that have yet to fall have put housing out of reach for many Americans and closed the refinancing pipeline for lenders. Rate-based refinances were down 90% through April from a year ago, according to Black Knight.
‘The better it gets’
The move by Santander, part of a strategic pivot to focus on higher-margin businesses such as its auto lending franchise, now looks like a prescient move. Santander, which has about $154 billion in assets and 15,000 American employees, is part of a Madrid-based global bank with operations across Europe and Latin America.
Recently, the biggest banks in home loans, JPMorgan Chase and Wells Fargo, have reduced mortgage staffing levels to match the lower volumes. And smaller non-bank providers are said to be trying to sell credit servicing rights or even considering mergers or partnerships with rivals.
“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.
“We looked at returns over the cycle, saw where we were going with higher interest rates and made the decision to exit,” he said.
Others to follow?
While banks once dominated the US 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 absorbed market share, less encumbered by regulations that fall more heavily on the big banks.
Of the top ten mortgage providers 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 firms took advantage of the pandemic boom to go public. Their shares are now deeply underwater, which could spur consolidation in the sector.
Complicating matters, banks need to invest in technology platforms to streamline the document-intensive application process to keep up with customer expectations.
And firms including JPMorgan have said increasingly tough capital rules will force it to clean mortgages off its balance sheet, making the business less attractive.
The dynamic may lead some banks to decide to offer mortgages through partners, which Santander now does; it lists Rocket Mortgage on its website.
“Banks will ultimately have to ask themselves if they consider this a core product they’re offering,” Wennes said.
