Big U.S. banks used to hold the lion’s share of mortgages, but competition from online lenders such as Quicken have narrowed profit margins and changed the landscape.
It’s now been over a decade since the housing bubble burst in 2007, causing a big spike in delinquency rates and forcing a lot of people to lose their homes. At the height of this crisis, the percentage of mortgages currently delinquent stayed above 10% for over 2 years, up from just 1.41% in the fourth quarter of 2004.
We can learn a lot about the health of mortgages generally by looking at delinquency rates, which actually started moving up as far back as January 2005, at a time where only the people on the fringe were warning that the sky may be falling.
We’ve seen a steady decline in this since 2012, and has moved down steadily since, now sitting at around 3% based upon the latest statistics available from 2018. We still have a way to go to get this back below 2% again, where it was before the housing crisis started to rumble, but we do seem to be headed there.
After the debacle that is held primarily responsible for the Great Recession hit home, more stringent lending requirements emerged, which was a big step up from virtually no requirements in practice with subprime lenders in general, when the tremendous appetite for mortgage securitization led to some turning a blind eye to any semblance of risk management.
A lot of the securitized mortgages were laced with high risk loans, which is ironic given how conservative mortgage-backed securities were seen back then, similar to bonds.
If we are dealing with prime mortgages which have traditionally been very low risk, then that’s true. However, when we polluted these securities with mortgages that were structured to require a big move up in home value to keep borrowers from defaulting, because they couldn’t afford to pay it down in the first place once the introductory rates ended, that’s just an accident waiting to happen.
Not surprisingly, securitization of mortgages only represents a very small share of the mortgage market now, and people are wiser to this now, even though the idea in principle still has merit. This was all about a lack of transparency really, and in theory anyway, close to full transparency should make this a viable investment.
Why Haven’t Big Banks Benefited from All This?
It’s 2019 now though, and this storm has not only blown over but the last remnants of it are disappearing. So why has the share of mortgages by the big banks decreased so much over the last few years?
The mortgage business is pretty healthy and thriving right now but this does not mean that a particular lender may expect to share in any expansion that may occur. This is especially true of the big banks.
The numbers are now in for the fourth quarter of 2018 and they portray a line of business that is in serious contraction for major banks. JPMorgan Chase, the country’s largest bank, reported a reduction of mortgage originations of 30%, which is a steep decline indeed.
This phenomenon isn’t unique to JPMorgan Chase though, as fellow U.S. banks Wells Fargo and Citi both saw a big drop in this as well, by 28% and 23% respectively.
This is not a new trend at all though as we have been seeing this for quite a few years now in succession. While lending standards have tightened up, they have for everyone, and the big banks simply aren’t getting the number of mortgages they used to not so long ago.
It isn’t just that the market share for mortgages is declining at the big banks, they are also less profitable, and the two do go together, because this lack of relative profitability will drive reductions in numbers of mortgages which also drives lower overall profit.
Home ownership rates, which have declined from 2004 to 2016, are finally starting to turn the corner, even though rates have been increasing over this time. Sure, we are only up a tiny bit since 2016, but it’s the first increase in all this time. Whether growing the base more will improve the major banks’ share of the mortgage market is another matter though, and right now it looks like it may not.
The Quickly Changing Mortgage Landscape
If we ask the banks why this transition is happening, they speak of the higher competition we see these days, especially from the online lenders, who now hold 59% of the share of the market for new mortgages. The internet has changed a lot of landscapes and the mortgage landscape is certainly one of them.
JPMorgan CFO Marianna Lake for instance, last Wednesday, used the term “highly competitive environment” to describe the situation as well as to explain to analysts why her bank’s home lending revenue has dropped so much.
Traditionally, people got their mortgages from smaller, typically local or regional lenders, and it’s only been fairly recently that big banks took over this market so much. We could say that we’ve reversed that course now, only the competition doesn’t rely on relationship building at all really, as this doesn’t play a role at all in online mortgage applications, and this is the complete opposite of that in fact.
An online lending company can simply price their lending more efficiently than a traditional brick-and-mortar bank, as well as reach people more efficiently as well by way of the internet. There is the source of the highly competitive environment in plain view.
In a sense, the new landscape may be preferable overall, if this means lower rates for people that is than traditionally would be offered. More competition is a good thing generally, even though your bank may not be that fond of the idea.