A 'shakeout' among mortgage lenders is coming, according to CEO of bank that left the business

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Banks and other mortgage providers have been battered by plunging demand for loans this year, a consequence of the Federal Reserve's interest rate hikes.

Some firms will be forced to exit the industry entirely as refinance activity dries up, according to Tim Wennes, CEO of the U.S. division of Santander.

He would know: Santander — a relatively small player in the mortgage market — announced its decision to drop the product in February.

«We were a first mover here and others are now doing the same math and seeing what's happening with mortgage volumes,» Wennes said in a recent interview. «For many, especially the smaller institutions, the vast majority of mortgage volume is refinance activity, which is drying up and will likely drive a shakeout.»

The mortgage business boomed during the first two years of the pandemic, driven by rock-bottom financing costs and a preference for suburban houses with home offices. The industry posted a record $4.4 trillion in loan volumes last year, including $2.7 trillion in refinance activity, according to mortgage data and analytics provider Black Knight.

But surging interest rates and home prices that have yet to decline have put housing out of reach for many Americans and shut the refinance pipeline for lenders. Rate-based refinances sank 90% through April from last year, according to Black Knight.

The move by Santander, part of a strategic pivot to focus on higher-return businesses like its auto lending franchise, now seems like a prescient one. Santander, which has about $154 billion in assets and 15,000 U.S. employees, is part of a Madrid-based global bank with operations across Europe and Latin America.

More recently, the largest banks in home loans, JPMorgan Chase