Some U.S. banks are trimming their exposure to home lending after mortgage activity collapsed under the pressure of Federal Reserve rate hikes.
Over the past year, high interest rates and home prices have put downward pressure on refinancing and home-buying activity and created challenges for banks with exposure to mortgage. As such, some banks are scaling back their involvement in the industry while others are cutting their exposure completely.
First Internet Bancorp decided to completely cut ties with consumer mortgage after looking at the potential for $6 million in losses over the next three years, Chairman and CEO David Becker said on the company's fourth-quarter 2022 earnings call. The company tried to run scenarios in which it cut back on sales, marketing or staffing, but "we couldn't even get it close to break-even basis," the CEO said.
"This was a difficult but ultimately necessary decision," Becker said. "Every economic outlook we have reviewed, it points to prolonged sluggishness across mortgage banking."
The Mortgage Bankers Association estimates overall mortgage originations in 2023 will total about $1.888 trillion, down from originations of $2.245 trillion in 2022 and $4.436 trillion in 2021.
While some banks are opting to completely exit the lending segment due to the grim outlook, others are only trimming their exposure.
When New York Community Bancorp Inc. announced its acquisition of Flagstar Bancorp Inc. in April 2021, the company was bullish on the growth opportunities in Flagstar's mortgage business. But after an 18-month regulatory approval process and the recent mortgage industry downturn, New York Community Bank decided to "swiftly restructure" the business.
The company is cutting all of Flagstar's mortgage offices outside of its branch footprint, or about 69% of its mortgage offices overall, and laying off 10% of its combined company headcount by reducing its mortgage origination workforce to less than 800 employees compared to a high of 2,100 in 2021, President and CEO Thomas Cangemi said on the company's fourth-quarter 2022 earnings conference call.
Flagstar had already made cuts, but New York Community Bancorp wanted to avoid losing money in the current environment and position itself to benefit if industry conditions improve, Cangemi said.
"These decisions are among the most difficult our senior leadership team has to make," Cangemi said. "However, they are necessary to ensure the long-term success and viability of our mortgage business."
The restructuring will generate $12 million to $13 million of charges and additional cost savings of over $100 million, Lee Smith, president of mortgage, said during the call.
Umpqua Holdings Corp. also announced plans to restructure its mortgage business during fourth-quarter 2022 earnings. The company plans to convert its mortgage business to a retail bank model as opposed to a traditional mortgage operation in response to contracting mortgage demand, President and CEO Cort O'Haver told analysts on the company's fourth-quarter 2022 earnings call.
The company began making changes to the structure of its mortgage operation at the beginning of this year. Umpqua has reduced the headcount of its home-lending business to the high 300s, down from 650, and will continue to reduce that count to between 200 and 250 people, Umpqua Bank President Torran Nixon said.
The moves come after Umpqua recorded its second consecutive quarterly net loss in its mortgage banking segment, reporting a loss of $12.9 million in the fourth quarter of 2022, a significant increase from its third-quarter loss of $2.2 million, according to an investor presentation.
Despite downsizing, "mortgages remain an important product for the bank and for our customers," O'Haver said.
Before the start of the fourth-quarter 2022 earnings season, Wells Fargo & Co. announced plans to cut the size of its mortgage servicing portfolio and exit its mortgage correspondent business, which buys loans from third-party lenders.
Due to the small size of Wells Fargo's mortgage correspondent vertical, the exit will have a minimal short-term impact on the company's revenue and the reduction in mortgage servicing will have long-term benefits, President and CEO Charles Scharf said during the company's fourth-quarter 2022 earnings call.
"The real benefit comes over time as we reduce the size of the servicing business," Scharf said. "It's not just reducing expenses, but it's not profitable for us today in a whole bunch of these segments where we continue to have the servicing."
Still, Wells Fargo remains focused on originating conforming and nonconforming mortgages for its customers, Scharf said.
"We're focused on our customers, profitability, returns and serving minority communities, not volume or market share," the CEO said. "We're not interested in running and having a business which is focused on a stand-alone mortgage product."