This year, big banks are making fewer mortgage loans than they did last year, and some of the former “major players” in the industry are moving away from mortgage loan origination rather than trying to resolve the problems they face. This represents a big opportunity for investors, but only if you understand the risks and rewards of getting into the lending side of real estate.
In mid-July, three major players in the banking industry, Wells Fargo, Citigroup, and JPMorgan Chase, all reported their financial results for the second quarter of 2017. For all three banks, mortgages were “not a significant driver of revenue.”
To put that in perspective, Wells Fargo reported its mortgage banking income was $2.376 billion for the first six months of 2017, compared to $3.012 billion in the first half of 2016 – a drop of 21 percent. In the grand scheme of the billions and billions of dollars Wells Fargo is making, that $2-billion-odd dollars is relatively “insignificant.”
However, given that in 2012 Wells Fargo made fully one-third of all the mortgage loans in the country (tripling the market share of JPMorgan Chase that quarter), that change in perspective on mortgage lending is significant.
Wells Fargo and Chase, where mortgage banking revenue is also down and has been trending downward for several quarters, do not appear to be giving up the fight for a share of the lucrative lending market. However, Citibank may be throwing in the towel.
At the start of this year, Citibank announced that it would essentially be ending its mortgage servicing business. At the time, Housing Wire reporter Ben Lane speculated, “Perhaps regulatory overhang became more than the bank could bear,” citing a Consumer Financial Protection Bureau find of $29 million that had just been assessed the week prior.
In the same release, Citibank stated that it would intensify its focus on mortgage originations in order to “simplify CitiMortgage’s operations, reduce expenses, and improve returns on capital.” Six months later, however, and it appears Citibank’s originations are down 50% from this time last year and they’ve been falling steadily.
Wells Fargo appears to be combating its falling originations by going digital, much as Quicken Loans did last year with the “Rocket Mortgage,” which essentially allows users to input a great deal of pre-qualifying information about themselves into the system digitally rather than talking to a real, live person while they’re still basically in fact-finding mode.
Rocket Mortgage permits an actual loan decision (if you put in accurate information) within minutes and without personal interaction, and, perhaps even more significant, it resulted in $7 billion in closed loans in 2016 (just over seven percent of Quicken’s total closed-loan volume that year). This would put Rocket Mortgage alone in the list with the top 30 lenders in the country.
Wells Fargo plans to roll out its digital mortgage experience in 2018 and hopes to snag some of that market share back from Rocket Mortgage in the process. Wells Fargo senior executive vice president of consumer lending observed, “72% of homebuyers and 80% of Millennials used their mobile device or tablet to search for a home” and that more than half of those house-hunting online seek mortgage preapproval online as well.
The success or failure of Wells Fargo or any other lender choosing to remain in the mortgage market will likely hinge on their ability to navigate the regulatory landscape. Although many in the business and financial worlds are still optimistic that the sitting president will follow through on campaign promises to lighten the regulatory load on banks in a variety of ways, at present the Consumer Financial Protection Bureau is still actively levying fines.
In fact, Richard Cordray, the head of the CFPB, who faced threats of firing from the president earlier this year, recently announced that it is implementing new regulations that will make it easier than ever to sue banks, credit-card companies, and other financial and business organizations if you have a customer-dispute issue that is mishandled. It seems probable that the “regulatory burden” of doing business is not likely to go away any time soon.
Many real estate investors have feared that their ability to make money by way of private loans made with real estate as collateral might diminish if banks were able to offer consumers more flexible terms on home loans. The larger issue likely will be if and how the federal government opts to crack down on long-term creative financing, which involves five-to-30-year seller-financing loans, lease options, and even subject-to loans, which involve essentially taking over mortgage payments for another party rather than taking out a new loan.
Real estate investors whose investing strategies hinge on creative financing will likely have a far easier time of it than big players like Wells Fargo, whose loaded coffers represent an attractive target for lawsuits, but you’ll still need to be careful not to run afoul of lending regulations in our sector.
If you are a private lender, working with a larger group to make loans may be the key to protecting your lending portfolio. Or, if you prefer a more passive investment, consider a private money lending fund where the manager handles the regulatory details.