The effect of nonbanks in the mortgage space

Josh Prejean and David Rozas

Josh Prejean (right) of Bank of Zachary, here with mortgage client David Rozas, says community banks must compete through customer service.

Nonbank institutions continue to be serious contenders in the home lending space. We look at how community banks can counter nonbanks’ offerings through streamlined technology, customer service and other strategies.

By Beth Mattson-Teig


In the highly competitive mortgage arena, bankers are looking for strategies that will give them an edge in capturing business as originations pull back from peak levels.

Quick Stat

$4.4 trillion

The amount of annual mortgage origination surpassed this figure in both 2020 and 2021

Source: Fannie Mae

The low interest rate environment fueled a frothy residential lending market in 2020 and 2021, with annual origination topping more than $4.4 trillion each year, according to Fannie Mae. But after two years of record-high activity, demand is slowing, and the pie is set to get a lot smaller. The agency is forecasting that mortgage originations will drop to $2.98 trillion this year and $2.72 million in 2023.

Although mortgage originations remain at healthy levels by historical standards, community banks are battling stiff competition from megabanks and nonbank institutions.

Nonbanks are also gobbling up a bigger percentage of market share. Nonbanks originated $2.6 trillion in mortgages in 2020—nearly two-thirds of total origination activity—and made double the number of residential mortgages in 2019, according to Home Mortgage Disclosure Act data collected by S&P Global Market Intelligence. In addition, among the top 10 mortgage lenders in 2020, seven were nonbanks; Quicken Loans led with a total of $314 billion in loans funded, according to S&P Global.

“A lot of those nonbanks are competing strictly on price, and as a small community bank, we can’t do that. We have to compete on service. We have to be faster, and we have to be more responsive.”
—Josh Prejean, Bank of Zachary

The jump in volume for nonbanks was partly due to consumers’ shift to digital solutions during pandemic-related lockdowns. However, the growing market share for nonbank institutions is a continuation of a trend that was in place prior to COVID-19, notes Nathan Stovall, principal research analyst for banking at S&P Global Market Intelligence. Nonbanks are riding several tailwinds, including the broader shift to digital channels for a lot of basic financial services. In addition, mortgages are more of a commoditized product these days. Stovall adds that customers often focus on convenience and price, which tends to favor nonbank fintechs.

“A lot of those nonbanks are competing strictly on price, and as a small community bank, we can’t do that,” says Josh Prejean, senior vice president of loan production at $330 million-asset Bank of Zachary in Zachary, La. “We have to compete on service. We have to be faster, and we have to be more responsive.”

Community banks can set themselves apart in their customer service, being able to move quickly and working with customers on loans that don’t conform, agrees Stovall. Banks also need to continue investing in technology to bring more efficiency to the process, he says. “The cake is sort of baked on this trendline,” adds Stovall. However, it’s also possible that the shift away from refinance activity, where consumers are shopping for the lowest rate, will keep banks more in the game to win mortgage deals, he adds. A new home purchase can be more complicated, and consumers may want to lean on an existing banking relationship to help navigate that process.

Service as a strategic edge

Residential mortgages are often viewed as a “bread and butter” product for community banks. Even though recent low rates weren’t attractive enough to hold those loans on balance sheets for the next 15 to 30 years, selling those loans in the secondary market helps to generate fee income. Mortgage business also creates opportunities to attract new customers, build relationships and bring new deposits to the bank and cross-sell products.

Brentwood Bank in Bethel Park, Pa., generated steady residential mortgage volume in 2020 and 2021 with roughly 200 loans per year totaling $55 million, which is about 50% more than the volume it did in 2019. Despite the slowdown in market activity, the community bank’s strategic plan calls for ramping up residential mortgage loans within its loan portfolio.

Two of the areas Brentwood Bank is focused on to generate new business are construction loans and jumbo loans. Thomas Bailey, president and CEO at the $850 million-asset community bank, notes that once you get into either type, it can be a more complicated process. “We try to help customers understand some of the things they need to be thinking about,” he says. “Being able to sit down and partner with the customer can be a really important part of the relationship for some borrowers.”

Bailey is quick to point out that Brentwood Bank does not compromise on credit. However, it can assist borrowers on deals where there are some unique aspects involved, such as financing a home that has a well on the property or a home with a lot of acreage. “Because we do warehouse some loans,” he says, “we can do some things that some of the online lenders aren’t interested in because they don’t fit the Freddie Mac or Fannie Mae guidelines specifically.”

Community banks can differentiate themselves in working with borrowers on deals that don’t fit into the typical box, adds Stovall. For example, mortgages are underwritten based on income, and if the income is not adequate, an underwriter from a big bank might not care if a client has a high level of savings. “That’s where a community bank can work with a customer by looking at things a little differently,” he says. Other examples might be high-net-worth customers who might be looking to obtain a mortgage on a vacation home or an investment property. Those situations are more challenging to underwrite in the post-Great Recession market. “A community bank can come in and look at that with a more concierge type of approach,” Stovall adds.

Carving out a niche in construction

Some community banks are finding opportunities to provide construction loans to customers building homes in the supply-constrained housing market. According to the U.S. Census Bureau, housing starts on 1-4-unit homes jumped 17% year-over-year to 1.27 million in February.

“Doing the construction loans has been a way for us to increase our mortgage business, without having to go out and compete directly with the nonbanks,” says Prejean. About 60% of Bank of Zachary’s $182 million loan portfolio is secured by loans to 1-4-unit homes. The shortage of existing for-sale homes and rising home prices is driving construction building in the Baton Rouge market. For example, a house that sold for $300,000 a few years ago now might sell for $450,000, notes Prejean. “People are getting a little bit of sticker shock and saying, ‘If I’m going to pay $450,000 on this house, I might as [well] just build my own house and have it be perfect and brand new and exactly what I want,’” he says.

However, construction loans tend to be more complex than a purchase or refinance, which is where lender expertise can make a difference, notes Prejean. For most borrowers, building a home is a new experience. People don’t realize that Bank of Zachary doesn’t just give them all the money up front. They must reach certain milestones in the project before the bank can do inspections and then lend money based on the value of the work that has been done. The bank also needs to see home plans and a detailed cost breakdown that shows where they are spending money before it even approves the loan.

Bank of Zachary’s lending team not only has expertise in construction lending; several of its lenders have also built their own houses. “That expertise in construction lending really sets us apart from the banks and credit unions we compete with in our market, and I think we have become a premier construction lender in the Greater Baton Rouge area because of this,” Prejean says. Landing the construction loans also creates an opportunity for the community bank to do the permanent home loan once the home is completed.

Community banks also rely on relationships with realtors and builders in their local communities to generate referrals. “For us, it really starts with the land loan. So, we’ve created a niche as also being one of the premier land lenders in the market,” says Prejean. Once the bank has the land loan, it retains the construction loan the overwhelming majority of the time, opening the door to also originating the permanent loan. “It’s all about pipelining deals and getting in on the front end when they buy the land. That is the key.”


2020 HMDA data overview

Overall home loan originations saw an increase in 2020, while nonbank mortgage lenders continue to be a competitive force in the lending space. They doubled originations from the year prior and saw a higher loan approval rate than did all originators.

Nonbank originations

All originations

Data compiled June 30, 2021. HMDA = Home Mortgage Disclosure Act. Based on data filed by lenders under the Home Mortgage Disclosure Act for 2020. Analysis reflects the aggregate funding amount requests, broken down by funded and unapproved applications for nonbank institutions. Credit: Augusto Justiniaro Jr. Source: S&P Global Marketing Intelligence.


Beth Mattson-Teig is a writer in Minnesota.