A sign at a Banco Santander branch in London, England, Wednesday, February 3, 2010.
Simon Dawson | Bloomberg via Getty Images
Banks and other mortgage providers have been hit by a plunge in loan demand this year as a result of the Federal Reserve’s rate hikes.
Some companies will be forced to exit the industry entirely as refinancing activity dries up, said Tim Wens, chief executive of Santander’s U.S. unit.
Santander, a relatively small player in the mortgage market, announced its decision to discontinue the product in February.
Wenes said in a recent interview, “We were the first to move here, but others are doing the same math to see what’s going on with mortgage volumes.” Especially for smaller institutions, a large portion of mortgage volume is refinancing activity, which is drying up and likely causing a squeeze.”
The mortgage business experienced rapid growth during the first two years of the pandemic. This was due to the bottoming out of financing costs and the preference for suburban housing with home offices. According to Black Knight, which provides mortgage data and analytics, the industry recorded $4.4 trillion in loans last year, including $2.7 trillion in refinancing activity.
But with interest rates skyrocketing and home prices yet to fall, housing is out of reach for many Americans and lenders’ refinancing pipelines are shutting down. According to Black Knight, interest-based refinancing has fallen 90% from last year to April.
“Does not matter”
Santander’s move, part of a strategic shift to focus on profitable businesses like car-lending franchises, now seems far-sighted. With approximately $154 billion in assets and his 15,000 US employees, Santander is part of a Madrid-based global bank with operations in Europe and Latin America.
Most recently, mortgage giants JPMorgan Chase and Wells Fargo cut their workforce to accommodate lower volumes. The small non-bank his provider is also reportedly busy selling its loan servicing rights or considering a merger or partnership with a competitor.
“The sector was great,” said Mr. Wens, a 30-year veteran of banks including Union Bank, Wells Fargo and Countrywide, last year.
“We looked at returns over the cycle and where interest rates were headed and decided to pull out,” he said.
who else to follow?
Banks once dominated the US mortgage business, but their role has diminished since the 2008 financial crisis, when mortgages took center stage. Instead, non-bank players such as Rocket Mortgage are absorbing market share, easing the regulatory burden that has weighed heavily on the big banks.
Of the top 10 mortgage lenders by loan amount, only 3 are traditional banks. Wells Fargo, JP Morgan, Bank of America.
The rest are new players with names like United Wholesale Mortgage and Freedom Mortgage. Many companies took advantage of the pandemic boom to go public. Their stock is now very submerged and could trigger a consolidation of the sector.
Complicating matters, banks must invest in technology platforms to streamline document-intensive application processes and meet customer expectations.
And companies, including JP Morgan, say increasingly onerous capital controls will force them to wipe mortgages off their balance sheets, making their businesses less attractive.
This dynamic may lead some banks to decide to offer mortgages through partners. This is what Santander is doing now. We have Rocket Mortgage on our website.
“Banks ultimately need to ask themselves whether they consider this a core product they offer,” said Wenes.
