Researchers at the American Enterprise Institute’s International Center on Housing Risk have posted a study that shows a “seismic shift in lending away from large banks to nonbanks.” (1) The key takeaways are
- The dramatic decline in agency market share for large banks continued unabated in February, offset by an equally dramatic increase in the nonbank share.
- Since November 2012, the large bank share has dropped from 61% to 33%, a move of 28 points, including a 1.2 point drop in February, a dramatic decline that has been met point-for-point by a 27 point increase in the nonbank share from 24% to 51%. Large nonbanks and other nonbanks have participated equally in the increase, accounting for 14 points and 13 points respectively.
- Large banks have reduced the riskiness of their agency mortgage originations over the past few years. Nonbanks, in contrast, have shifted toward riskier loans as they have increased their market share.
- Loans originated through the retail channel are less risky than loans originated through the broker and correspondent channels. This is true both for large banks and for nonbanks. But retail channel loans from nonbanks are substantially riskier than such loans from large banks.
- The bottom line is that large banks attempting to regain market share would have to move well out the risk curve. (1)
While these findings are presented as negative developments, it is unclear to me that they are. Market share among big players in the mortgage market does vary dramatically over time. Given the new regulatory environment imposed by Dodd Frank, it is not surprising that the industry would readjust in some ways and that specialized nonbanks might increase market share once the financial crisis subsided. It is also unclear that moving out the risk curve is bad in today’s environment. Today’s lenders are quite conservative compared to the pre-crisis ones and there is good reason to think that lenders could safely loosen their underwriting somewhat. This is not to say, of course, that they should return to the bad old days. Just that there are more creditworthy borrowers out there.