Is It Time To Bring Banks Back To The Mortgage Business?

There’s no question that banks have played a steadily diminishing role in mortgage lending and servicing over the past decade. In 2016, the three largest mortgage lenders were Wells Fargo, JP Morgan Chase, and Bank of America, and depository institutions made up six of the top 10 mortgage lenders.

Fast forward to 2026, and only three of the top 10 – Chase, Bank of America, and U.S. Bank – are banking institutions. And the top three lenders – United Wholesale Mortgage, Rocket Mortgage, and Cross Country Mortgage – are all independent mortgage bankers (IMBs).

The story is similar in the mortgage servicing industry, where the Mortgage Bankers Association (MBA) reports that depository banks and IMBs have effectively changed places over the past 10 years. Banks handled 69% of mortgage servicing in 2016, while IMBs accounted for 31%. Today, the IMB share of market has grown to 61%, with the bank share of servicing declining to just 39%.

While this transition has been profitable for IMB shareholders, not everyone thinks it’s a good idea. Michelle Bowman, the vice chair for supervision on the Board of Governors for the Federal Reserve System, noted that “this out-migration of origination and servicing has been costly for banks, consumers, and the overall mortgage system,” and is advocating changes in the regulatory environment that she hopes will revitalize bank mortgage lending and servicing.

Specifically, Bowman is suggesting two changes to banks’ capital requirements.

First, taking a more rational approach to assessing risk by using loan-to-value (LTV) ratios to determine the appropriate risk weight for loans, rather than assigning the same risk weight for all loans. So, for example, a loan with a 60% LTV ratio would have a lower risk assigned to it than a 90% LTV loan.

Second, removing the current requirement to deduct mortgage servicing assets from regulatory capital, and adjusting the current 250 percent risk associated with servicing assets to something lower.

Both of these recommendations make a lot of sense, and would instantly make mortgage lending and servicing more profitable for banks. But the initiative raises at least a few interesting questions.

A solution in search of a problem?

Do we really need the banks back in the mortgage game in a more significant way, or is this just a solution in search of a problem? Mortgage origination volume peaked at $4.4 trillion in 2021 before plummeting to under $1.5 trillion in 2023, and the MBA forecasts that it will remain more than 50% below the recent peak in 2026 at $2.2 trillion.

Simultaneously, the MBA notes that the number of mortgage loans issued fell from 14.2 million in 2021 to under 5 million in 2023 and will remain under 6 million this year – 58% below the recent peak. Mortgage lenders have been competing fiercely for their share of this much smaller pie.

And in the absence of the banks, IMBs have filled the void nicely, building out more productive and efficient origination channels and servicing platforms while maintaining loan quality and minimizing risk, as evidenced by mortgage delinquency and foreclosure rates much lower than historical averages. Borrowers have no shortage of choices when it comes time to get a mortgage and lenders have more than ample liquidity to make those loans.

So why the urge to have banks re-engage in this segment of the business?

Bowman believes that banks and consumers have both suffered as the banks’ share of market has declined. Banks have lost revenues that would have been generated by their mortgage lending and servicing and have also lost a key opportunity for ongoing customer relationships that would have given them a means to offer a wide variety of financial and investment products and services.

For borrowers, she believes, “fewer banks engaged in mortgage origination and servicing has reduced the consumer choice and competition that drives down costs.”

Stability matters

Christopher Abate, chief executive officer of Redwood Trust, a leading provider of liquidity to the non-agency segment of the mortgage market, agrees. “I think from a stability perspective, having banks in the mortgage business is a good thing,” Abate said in an interview with HousingWire.

“Banks have always been leaders in the space. They have a suite of products that they can offer consumers. They’re safe hands, they’re strong lenders. Also, banks have local branches, and there’s a lot of people who appreciate that retail component to the relationship.”

MBA President and CEO Bob Broeksmit makes another important point about the benefits of relaxing capital requirements for the banks. “People are rightly concerned that IMB liquidity during times of stress is an issue, and if you have a situation where the economic clouds are forming and banks are de-risking a little bit, they’re going to make warehouse lending less available.

“But removing the disincentive for banks to play in that field creates a stability factor when financial markets are challenged. So, we think it’s a modest benefit to borrowers, but a significant benefit to the stability of our mortgage finance system.”

As for the lower costs Bowman believes might result from more bank involvement? Abate thinks that while it may be hard to quantify, “when you look at spreads, when you look at mortgage rates, you used to have banks act as anchors in the business. I do think it resulted in greater stability in mortgage rates and a stronger industry. “

Will looser capital requirements bring the banks back?

While it seems like the industry in general would welcome a more meaningful role for banks in mortgage origination and servicing, the consensus is that just relaxing capital requirements might not be enticing enough to lure banks back in large numbers. Bowman herself notes that “bank regulatory capital treatment…represents only a small part of the broader mortgage problem.”

Broeksmit said in our interview that he believes that there might be some mortgage PTSD lingering from the Great Financial Crisis, when board members were informed that “we’re stroking a $1 billion check to the government for false claims violations at treble damages.” But he also believes that loosening the capital restrictions will bring at least some banks back to the fold.

“Each bank has a unique set of circumstances and so each bank will react in a way that makes sense for them. But what I can guarantee you is that they will reassess. Now, they might reassess and say, okay, today, I don’t really originate anything to keep on my balance sheet because I think it’s an inefficient use of capital. But tomorrow, maybe I make 5/1 ARMs for my customers, and I keep them on balance sheet because the risk adjusted return on capital improves because my capital requirement drops.”

For his part, Abate thinks that rationalizing the capital weightings is a good step and a necessary precursor to banks getting back in the mortgage business in a big way. But he views it as “the starting gun rather than the finish line.”

Abate adds that “I don’t think it’s the only thing that we would need to see. I think banks are looking for not just rationalized capital charges, but also some certainty that lending and servicing rules today will be the rules going forward and that they can safely build long term businesses around them.”

Finally, while Bowman wants to see banks originate more loans and hold them in portfolio, neither Abate nor Broeksmit thinks that’s the most likely scenario.

“There’s convexity in mortgages, particularly 30-year mortgages, that’s a very tough risk to manage,” Abate says, while suggesting that banks might dial up the volume of their originate-to-sell businesses and simultaneously increase their issuance of hybrid ARMs which they may be more inclined to hold.

Broeksmit concurs. “Yes, I don’t think there are many banks in this country that are eager to take 30-year interest rate risk,” he said. But he also thinks banks may take another look at shorter duration loans and increased servicing volume if Bowman’s proposals go through.

“Our view broadly is that we want mortgage finance to be an attractive area for all business models and removing disincentives from banks to being able to compete, and make a reasonable financial choice about what products to offer, we think is good for the whole market.”