According to Bloomberg, many mortgage lenders are facing troubling times. Going back a few years to 2020 and 2021, we saw historically low interest rates and the demand for new mortgages, and people re-financing their loans at an all-time high. 

Times have changed, however, and as the central banks in the US and Canada have increased the interest rates, there has been a massive slowdown in the number of loan applications. The increase in interest rates was necessary to try and combat inflation, which is currently at decades-high levels. 

The lower demand for mortgages is therefore caused primarily by the higher interest rates, higher inflation levels, and high housing prices in the real estate market. 

It is, however, the smaller lenders who are at the greatest risk. These non-bank lenders typically do not have access to as much capital as bank lenders and do not have access to emergency funding. 

There have gradually been smaller, non-bank lenders coming into the market since 2008. Since the housing market crash of 2008, many banks pulled away from loaning money to certain pockets of the market, and smaller, non-bank lenders primarily fund these pockets of people. Many of these are non-QM loans, which are non-qualified mortgages and do not have government backing. 

“The non-banks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks, they are in trouble.” 

In 2004, approximately a third of the top 20 lenders were independent firms; however, last year, it was estimated that about two-thirds of all lenders were independent firms, accordingly to lendingpatterns.com, which analyses the mortgage lending industry. Since 2016, banks’ market share has shrunk to about a third, from half. 

The current situation spells bad news for the mortgage loan industry, which employs hundreds of thousands of workers, with many smaller lenders already feeling the pinch. Bank lenders are also not immune to feeling the crunch because although government baking is available, the Federal Reserve will usually only finance solvent institutions with a chance of recovering. 

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