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By Andrew C. Arbesman, CFA, CPA
Big banks’ retreat from the mortgage market could have negative economic and social consequences.
After two prosperous years since the COVID-19 pandemic struck, banks are beating a retreat from the mortgage market. Those moves could yank capital from borrowers just when they need it most.
In fact, this trend has been unfolding since the Great Recession. In 2014, large banks accounted for 25%-30% of all mortgage originations; today, that number is 10%.
One big reason: New technologies have enabled nimble financial-technology companies and other non-banks to enter the market. Also, mortgage banking has become less profitable for banks due to onerous and restrictive origination and servicing rules, as well as higher capital requirements.
Recently, Wells Fargo (WFC) announced plans to shrink its mortgage business, which once underwrote approximately one-third of U.S. mortgages. Beset by regulatory probes and weaker margins, Wells Fargo is no longer committed to being the nation’s leading mortgage underwriter and is expected to cut ties with outside mortgage firms that generated one-third of its $205 billion in new home loans last year.
JPMorgan (JPM) also plans to reduce its mortgage exposure in an effort to comply with more onerous capital requirements, which will increase in October and then again in January 2023. To comply with higher capital requirements, JPM expects to reduce “risk-weighted assets,” which are basically assets on the balance sheet that require capital to be held against them. Mortgages is one asset JPMorgan’s CEO, Jamie Dimon, looks to reduce on JPMorgan’s balance sheet to meet higher capital requirements.
The banks’ retreat could have negative economic and social consequences. If Wells and JPM, now with a combined $5.7 trillion in assets, do pull back from the mortgage market, lower-income borrowers with fewer funding options could suffer disproportionally in a recession. Although it is unclear whether these risks would materialize, it does raise the question whether current regulatory requirements for mortgages need to be tweaked to continue to protect consumers as well as help contribute to economic growth in the U.S.
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