Over the past six years, big banks like Citigroup and JPMorgan Chase have moved out of the mortgage market and nonbank lenders such as Quicken, loanDepot and Caliber Home Loans have moved in.
But as CNBC reports, that may change if President Donald Trump’s administration removes regulations on the big banks and stops sending bad loans back to the banks for repayment. Paul Miller, a banking analyst at FBR Capital Markets, says he believes big banks will return to the market, “but they will need solid protections on reps and warrants”—the financial due diligence that’s done on both sides of the transaction before a deal can close. He adds that banks will also need rules concerning the ability to repay bad loans to be relaxed.
The growth in nonbank lending is staggering, from just 10% of the mortgage origination market in 2010 to half of it today, according to Inside Mortgage Finance.
Its share is dominant in government-insured lending by the Federal Housing Administration, which was particularly aggressive in holding big banks accountable for any mistakes in loan underwriting.
FHA loans, CNBC reports, are riskier by definition because they require just a 3.5% down payment. Big banks have moved out of FHA loans almost entirely, and banks that are still in the market are much less competitive in pricing, ultimately dropping in market share.
The Trump administration has not put forward any specifics yet, but the banking sector is expecting changes in some of the more stringent rules put on mortgage lending following the financial crisis. If deregulation happens, nonbank lenders who were able to grow market share so easily will face tougher competition.
