"In 2008, banks originated around 60% of mortgages and serviced about 95% of mortgage balances," reported The Wall Street Journal on Wednesday. "As of 2023, banks originated 35% of mortgages and serviced [collected payments and managed the accounts of] 45% of mortgage balances, according to the Federal Reserve."
Now, the Fed is looking for ways to encourage banks to re-enter the mortgage market. One of the primary reasons behind this policy shift is the fact that nonbank lenders don't have the same safety nets that banks do. One such mechanism, the WSJ explained, is the ability to take out government loans during an emergency crisis.
Then there's the fact that traditional banks are more diversified than companies whose primary purpose is mortgage lending. This diversification provides them with greater flexibility in the event of a financial downturn when large numbers of borrowers begin defaulting on their loans.
However, this proposed shift is far from set in stone, and the Fed intends to consult with all interested parties before taking action.
What Is the Federal Reserve Planning to Do?
The Fed's initial plans were laid out on Monday in a speech by Michelle Bowman, the central bank's vice chair for supervision. "This out-migration of origination and servicing has been costly for banks, consumers, and the overall mortgage system," said Bowman.
"In part, this results from over calibration of the capital treatment for these activities, resulting in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage. I see a path forward that incorporates both renewed bank participation in the mortgage market and a safe and sound banking system."
In other words, Bowman thinks that the extra regulation imposed on banks' mortgage lending after the 2008 debacle went too far. And she plans two major reforms:
- Reduce the amount banks are obliged to hold in reserve when a borrower makes an unusually large down payment.
- Change the accounting rule for how mortgage servicing rights must be treated on a bank's balance sheet.
Both of these moves should free up money that banks can reinvest into issuing more mortgages.
Bowman saw advantages to this for consumers. "Fewer banks engaged in mortgage origination and servicing has reduced the consumer choice and competition that drives down costs," she said.
"In addition, borrowers that experience financial distress seem to fare worse during financial downturns with nonbank servicers. During COVID-19, borrowers with bank servicers were more likely to receive forbearance on their mortgage payments than those with nonbank servicers."
What This Means for Consumers, Banks, and Nonbank Lenders
Banks haven't wholly withdrawn from the mortgage market. According to the Mortgage Bankers Association, JPMorgan Chase and U.S. Bank were the fourth- and fifth-largest mortgage lenders in the country in 2024.
However, some well-known nonbank lenders currently occupy the remaining top positions, including United Wholesale Mortgage, Rocket Mortgage, CrossCountry Mortgage, Guaranteed Rate, Fairway Independent, and Guild. And a significant return of banks to mortgage lending would inevitably erode their market shares, at least as a group.
Interestingly, banks (Citi, Bank of America, and Citizens) occupy the top three slots in the J.D. Power 2025 U.S. Mortgage Origination Satisfaction Study, while Chase and TD Bank score above the study's average.
In any event, the Fed's plan is intended to increase competition among mortgage lenders, which could potentially result in slightly lower rates and fees. And that would certainly benefit prospective homebuyers and existing homeowners looking to refinance.
Our only reservation? This is part of a broader effort to dilute the Dodd-Frank Act, which was enacted after the financial meltdown of 2007-08 to prevent such a catastrophe from happening again. Regulators and legislators must take great care that their reforms, some of which are no doubt necessary, do not sow the seeds of a future economic disaster.
