Nonbank Lenders' Market Share is at a Two-Decade High. Here's Why

 Enlarge This ImageDepositories still dominate home lending, but nondepositories' market share is the highest it has been in at least two decades.

The nonbank share of total mortgage originations was 42% in 2014, according to an analysis of Home Mortgage Disclosure Act data by ComplianceTech and its LendingPatterns.com tool. Just five years before that, in 2010, nonbanks held only a 27% market share.

One reason for this is that banks' attraction to mortgages tends to be opportunistic.

"Banks have historically been very fickle about the mortgage lending market," said Maurice Jordain-Earl, managing director and co-founder of ComplianceTech.

While depositories' participation in the mortgage market has had periods of stability, that steadiness tends not to last.

"The banks do a lot of business, and then the nonbanks take over," said Ed Pinto, co-director of the American Enterprise Institute's International Center on Housing Risk. For example, banks' 70%-plus share of the market remained more or less steady between 1995 and early 2003, when mortgage rates trended downward.

With the exception of a little volatility in 1996 and 2000, the rate environment contributed to higher refinancing, total originations and depository involvement during this period. Some of the reasons that banks' market share fell after that include rate increases in 2003 and 2004 that dampened the refi wave, and subsequent nonbank competition in the form of historically loose underwriting between 2005 and early 2006.

Depositories' share rebounded for a couple years after that, due primarily to two reasons. Many nonbanks that had underwritten loans with little regard for consumers' ability to repay collapsed, and the nondepositories that remained became subject to 2008 licensing requirements that weren't equally imposed on banks, which historically had been the more heavily regulated of the two groups.

But a continuing downward trend in home prices from 2009 through 2011 served as a disincentive for depositories to participate in mortgage lending. So, too, did a growing number of government actions penalizing banks for mishandling of home loans in the next three years.