Wells Fargo announced on January 10th that it will decrease its involvement in the home loan market, while still continuing to offer mortgages to existing customers and working to close the racial gap in homeownership. The bank is expected to relinquish its position as one of the top mortgage originators in the country. According to Guy Cecala, publisher of “Inside Mortgage Finance,” Wells Fargo will remain in the mortgage business, but will not be a major national player.
Wells Fargo is joining other traditional banks in reducing their role as major originators of mortgages. This shift has allowed new, mortgage-focused companies, many of which operate primarily online, such as Rocket Mortgage, to take over the market.
What Does that Pullback Mean for Consumers?
In 2021, Wells Fargo originated 376,000 loans worth $159 billion, making it the fourth-largest lender in terms of volume and the third-largest in terms of loan value in the US, as per the Home Mortgage Disclosure Act data. However, in 2022, the mortgage industry faced challenges due to rising interest rates. Wells Fargo reported a 57% drop in mortgage revenue in Q4 2022 compared to the same period in 2021.
It is uncertain what the outcome will be for Wells Fargo’s reduced operations, but the bank has pledged to reduce its size. This could mean fewer options for borrowers, particularly those who are not Wells Fargo depositors.
According to Ken Thomas, a banking analyst and founder of the Community Development Fund in Miami, “When a competitor exits the market, it is not beneficial for consumers. Fewer competitors lead to higher prices, and some closing costs may also increase. There are various non-rate aspects of a mortgage that could be affected.”
In the current scenario, it is more important than ever for potential borrowers to shop around. By obtaining and comparing at least three mortgage offers from different lenders, one can save thousands of dollars over the life of the loan.
As per Cecala, “There will be fewer competitors in the market, but it is worth noting that traditional banks were not always the most competitive in terms of pricing.”
An Up and Down Relationship with Mortgages
Banks are still involved in the mortgage business, and they are focusing on jumbo mortgages, which are large-value loans for high-priced homes, to attract affluent customers. They also offer mortgage discounts and deals to their best customers.
However, in recent years, many borrowers have chosen non-bank lenders over traditional banks for their mortgages. This is because traditional financial institutions have been reducing their home financing operations. According to the federal Home Mortgage Disclosure Act data, only two banks (Wells Fargo and JPMorgan Chase) were among the top 10 most active lenders by number of mortgages originated in 2021.
According to Cecala, “Banks have had a complex relationship with mortgages for many years. After the real estate bubble and loose lending practices of the early 2000s, many banks suffered significant losses during the subprime mortgage crisis and financial crash of 2007-2008. Banks continue to struggle with the stricter regulatory guidelines that were implemented during the Great Recession.”
Despite the challenges, banks are likely to continue to be involved in the mortgage market, albeit in a limited capacity. Cecala states, “It is difficult for a bank to completely exit the mortgage lending market in the long-term as it is an integral part of their customers’ financial lives.”
Online Loan Originator Usage Is on the Rise
As traditional financial institutions have reduced their involvement in home financing, alternative lenders such as Rocket Mortgage, United Wholesale Mortgage, and LoanDepot.com have taken advantage and gained market share. In 2021, the top three originators of mortgages by volume were non-bank lenders, and the top two by loan value were also non-banks: Rocket Mortgage ($340 billion) and United Wholesale Mortgage ($227 billion).
Rocket Mortgage, in particular, has been a pioneer for alternative lenders and has become an industry giant, as per Thomas. He says, “They have dominated the market for so long, and no one can compete with them.”