If President Trump’s deregulation plan is approved, it will have a large impact for big banks such as JPMogan Chase, Bank of America, and Citibank. According to a recent report by CNBC, deregulation could spur big banks to get back into the mortgage space.
CNBC also reported the de-regulation may have the opposite effect on nonbank lenders such as Quicken, LoanDepot, and Caliber Home Loans. These companies have led the home loan market in recent years, creating a revolution in home lending.
With the exception of Wells Fargo, the largest mortgage lender by a wide margin, big banks have become far less competitive in the overall mortgage market because they have had to shell out billions of dollars in fines and legal settlements resulting from the financial crisis. Big banks also continue to bear the brunt of mistakes in underwriting and, as a result, protect themselves by charging slightly more for home loans
“If the big banks return to the home loan market, they will need solid protections on reps and warrants,” Paul Miller, a banking analyst at FBR Capital Markets told CNBC. He thinks that financial due diligence must be done on both sides of a transaction before it can close.
Growth in nonbank lending increased from 10 percent of the mortgage origination market in 2010 to half of it today, according to Inside Mortgage Finance. Nonbank lending is dominant in government-insured loans issued by the Federal Housing Administration (FHA). This agency was particularly aggressive in holding big banks accountable for any mistakes in loan underwriting.
The government still provides 90-plus percent of mortgage financing, through Fannie, Freddie, FHA, and Veterans Administration loans. However, that practice is expected to change in the new administration.
Presently, all nonbanks are subject to all Dodd-Frank consumer protections, and they mostly sell their loans to Fannie Mae and Freddie Mac, so they are subject to strict underwriting rules. The same rules govern FHA, which nonbanks have moved into the most. Deregulation could create more competition, but, at the same time, some think that it could grow the mortgage business as a whole,
According to CNBC, the Trump administration has not put forward any specifics yet, but the banking sector is expecting changes in some of the more stringent restraints put on mortgage lending following the financial crisis.
Regarding anticipated changes, Anthony Hsieh, CEO of LoanDepot, a nonbank lender said, “We are prepared for any direction the new administration would want to take, but certainly I think providing more available credit to the country really is a good direction.”
Sanjiv Das, CEO of Texas-based Caliber Home Loans is not discouraged by the relaxation of mortgage banking regulations. “The independent lender will continue down the path of continuing to gain market share because they are substantially more nimble and more focused,” said Das, who headed Citigroup’s CitiMortgage unit from 2008 to 2013 during the worst of the housing and mortgage crisis. Caliber has been one of the first lenders to begin offering loans to borrowers with less-than-perfect credit.
Unfortunately for all lenders, rising mortgage rates will take overall mortgage origination volume down in 2017, deregulation or not. Refinance volume is already at half the level it was one year ago, and while home sales are expected to rise very slightly, that will not make up for the huge downshift in refinancing.