Awaiting The Return of the Mortgage Giants

Almost a decade after the collapse of the American housing market—and the subsequent arrival of the Great Recession—there remains a good deal of ‘collateral damage’ that has yet to be fully repaired by the nation’s economic recovery.

With the arrival of a new Administration in Washington, and expectations running high about forthcoming deregulation of the financial services and lending industries, one of the remaining vestiges of the Great Recession—the absence of the largest banks from the mortgage business—may also soon come to an end.

Over the last half dozen years, the American mortgage industry has undergone a transformation, as big banks like JP Morgan, Citibank and Bank of America have been mostly sidelined, as non-bank lenders’ impact has grown in the mortgage sector. Industry experts believe that, if the Trump Administration moves forward with expected deregulation, the largest banks will be enticed to return en masse to the mortgage business.

Over the course of the last half dozen years, the emergence of ‘non-bank lenders’ has been noticeable—and rapid. A recent survey by Inside Mortgage Finance found that in 2010, non-bank lenders made up about 10 percent of the mortgage origination market; today, that number is about half of the same market. That reality is even more pronounced in government-insured lending by the Federal Housing Administration (FHA)—which has been aggressively holding big banks accountable for loan underwriting errors.

Adding to the reluctance of the big banks to aggressively re-enter the mortgage business is the fact that FHA loans tend to be seen as riskier, in that they require only a 3.5 percent down payment. With the exception of banking giant Wells Fargo, most big banks have remained on the sidelines during the housing recovery, in part because they are also still smarting from having to pay millions of dollars in fines and legal settlements resulting from the last financial crisis.

Enter the new Trump Administration, and promises of deregulation for the financial services sector.

Although the Administration has offered no specifics as to what rules will be repealed or altered, expectations are running high—including those of the mortgage industry. If the Trump Administration makes good on its pledge to repeal large portions of Dodd-Frank, or loosen regulations governing the lending sector, industry watchers agree it’s almost certain that the big banks will proactively return to mortgage lending.

Also watching with great interest at the forthcoming deregulation decisions by the new Administration are the non-bank lenders. Given that these lenders mostly sell their loans to Fannie Mae and Freddie Mac, they too have been greatly affected by the Dodd-Frank rules and stricter regulations. Should the Trump Administration aggressively move to deregulate mortgage lending, the non-bank lenders would find themselves in a vastly more competitive market; mitigating that fact, however, could be a considerable expansion of the number of lending customers, resulting from a loosening of underwriting standards.

Mortgage industry experts also expect the government’s role in financing mortgages is likely to decrease over the next four years, given the Administration’s penchant for deregulation.

Currently, the US government—via loans by agencies such as Fannie Mae, Freddie Mac, the FHA and Veteran’s Administration—is involved with over 90 percent of mortgage financing.

Most industry watchers expect that number to drop, perhaps significantly, during the Trump Administration, as the landscape of the American mortgage industry shifts– once again–over the next few years.