NEW YORK (MainStreet) — Big banks are inching away from mortgage lending, increasingly replaced by non-banking lenders.
According to the Americans Enterprise Institute, 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% and 13%, respectively.
The AEI also reports that big 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 increase their market share. "This shift is due to the fact that nonbanks 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," the AEI says.
Consumers are starting to catch on. According to a 2014 Grant Thornton study, 61% of respondents say they are already using non-bank lending alternatives.
Eugene Danilkis, chief executive at Mambu, a cloud banking platform, says the non-bank consumer lending trend is gaining steam domestically and internationally, and technology is "playing a huge rule" in that growth. "As small businesses and individuals embrace alternative lending sources, technology will be the deciding factor that determines the success of the 'non-bank' and the future of the banking industry," Danilkis says.
For consumers, non-bank mortgage options offer an alternative route to a home purchase they increasingly cannot get through a large, traditional bank. "The non-banking mortgage loan trend does exist, and is assuredly a means to fill in the gap left by the liquidation of the wholesale mortgage division that was liquidated subsequent to the 2008 crash," says Matt Reischer, owner of FlushingHomes.com, a mortgage services provider. "Generally speaking, the rigid conforming loan standards of the major banks are too conservative, and there is thus a market need for an alternative mechanism for home financing."
Mortgage buyers are getting creative with non-bank loans, too. Reischer is seeing more first-time borrowers and those with sketchy credit go the alternative route to get started on a home loan, then refinance into a "major bank conforming loan" within 18 months after they've been able to show on-time mortgage payments.
For direct help getting a non-bank loan, consumers should seek out a trusted mortgage broker to steer them in the right direction, says Casey Fleming, a mortgage advisor and the author of The Loan Guide: How to Get the Best Possible Mortgage.
"Unlike bankers, brokers can see mortgage pricing disparities in real time and can move your loan to a lender that wants the business enough to price it a little better than the next lender," Fleming says. "Additionally, a bank loan officer does not have an array of lenders to choose from, and is often uncompetitive," he adds. "Plus, bank loan officers are not paid much, and have to do 10 to 20 deals a month to make a living. They can't afford to take the time to understand your needs, concerns and goals and tailor their advice to you."
— Written by Brian O'Connell for MainStreet