Posts

Study shows seismic shift in lending away from large banks to non-banks

Study shows seismic shift in lending away from large banks to non-banks continued in February By Stephen D. Oliner, Edward J. Pinto and Brian C. Marein.

A new study released by the AEI International Center on Housing Risk found that the seismic shift in home purchase loan originations away from large banks to non-banks continued in February.  Since November 2012, the large bank share has dropped from 61 percent to 33 percent (see the report below).  The share shift was unabated in February as the large bank share dropped 1.2 percentage points from  previous month.  The dramatic decline in the large bank lending share has been met point-for-point by an increase in the non-bank share, which has risen from 24 percent to 51 percent.  Large non-banks and other non-banks each have accounted for about half of the 27 point increase in share.

This shift is due to the fact that non-banks compared to large banks are more thinly capitalized and more lightly regulated, generally face less reputational and litigation risk, and tend to have a shorter term outlook. Additionally, their primary business is generally just mortgage banking as compared to the more diversified business lines of large banks.  Therefore they have a more limited ability to stay on the sidelines.

Key Takeaways:

  • The dramatic decline in agency market share for large banks continued unabated in February, offset by an equally dramatic increase in the non-bank 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 non-bank share from 24% to 51%. Large non-banks and other non-banks 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. Non-banks, 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 non-banks. But retail channel loans from non-banks 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.