Mortgage Finance: High Time for IMBs to Become Banks?

April 13, 2026 | Updated | The US-Israeli war with Iran has created a lot of negative headwinds for the global economy, but in the US one of the bigger casualties is the residential mortgage industry. After more than a decade of subsidy by the Federal Open Market Committee via massive open market purchases of securities or "QE," the world of mortgage lending is in an extended drought. But drought may be the new normal. 

Whereas in the early part of the year, mortgage lenders were looking forward to lower interest rates and higher lending volumes, the start of hostilities in Iran suddenly reversed this narrative. As we discussed this week in our podcast with Julia LaRoche, the war with Iran will likely keep inflation and interest rates elevated for months or even years to come.

Refinance volumes reached a three-year high in 2025. The first two months of 2026 were also strong for mortgage lenders, but March has become a disaster for many IMBs and also some large vendors, both in terms of per-loan business volumes and hedge market results. The uptick in mortgage rates and the related drop in volumes means that the mortgage sector is facing a renewed push for consolidation and even survival.

Literally dozens of vendors and professional service providers, for example, who meet the operational needs of residential lenders that have recently combined with other firms will be forced out of the industry. Some of the larger issuers in our mortgage surveillance group had been maintaining excess capacity in the hope of eventually, eventually generating some outsized profits to catch up. This tendency to tolerate operating losses is partly a legacy of the easy money made in the COVID years and partly wishful thinking. Mortgage people are the quintessential American dreamers. 

United Wholesale Mortgage Corp | 2025 10-K

Exhibit A in the loss leader category is United Wholesale Mortgage (UWMC), which just lost an important all stock acquisition to retail channel leader CrossCountry Mortgage. Buying Two Harbors (TWO) would have added valuable assets and income to UWMC. Now the prize is going for cash to privately held CrossCountry, one of the more aggressive platforms in the industry and a rare mortgage business focused on the retail channel.

Among public mortgage firms, UWMC has a lot of company when it comes to tolerating operating losses to preserve capacity in the hope of future profits. The best performing and also most volatile stock in the sector is loanDepot (LDI), which has been reporting net losses for years. The low dollar price of LDI makes it an easy vehicle for speculating on moves in the housing sector.

The table below shows the summary statement of cash flows for LDI from the 2025 10-K (Pg F-76). Note that in 2022, coming out of COVID, LDI actually generated significant positive operating cash flows.

loanDepot | 2025 10-K

The fact of higher mortgage rates in March of 2026 means that volumes are likely to be quite weak in Q2 2026. This sad circumstance is going to give even more advantage to the top three to five mortgage firms that have large servicing books and have also maintained operational discipline, and thus operating profits.  Consider some of the recent M&A deals in the mortgage sector over the past year:

• Last year hyper-efficient Guild Mortgage was acquired by privately held industry leader Bayview Asset Management (“Bayview Acquires Guild Mortgage”). We have written positively about Guild over the years because of the firm's intense focus on maintaining profitability. Bayview's mortgage business is financed primarily by large institutional investors.

  
  

• Also last year, Mortgage Cadence was acquired by PartnerOne from Accenture. Mortgage Cadence was a prominent, award-winning financial software company, but mortgage software has no more value today than in other tech sectors. Everybody in the mortgage industry has software, but when you buy a mortgage company, only assets with cash flow matter.

  
  

• As already noted, Two Harbors was acquired last month by CrossCountry Mortgage, taking an important transaction away from industry volume leader UWMC.  With the Two Harbors deal, CrossCountry gets a servicer and $200 billion in additional unpaid principal balance (UPB) of servicing assets. CrossCountry has been an aggressive buyer of MSRs, according to Inside Mortgage Finance.  

  
  

• Seneca Mortgage Servicing was acquired from EJF Capital by Freedom Mortgage in March, adding further heft to Freedom’s already dominant market position in government mortgages and servicing.

“This deal signals Freedom’s shift toward becoming an investor-facing platform as much as a retail lender,” notes Jennifer McGuinness-Lubbert, “a move echoing what you are seeing from Pennymac and Rocket Mortgage to stay competitive in a lower-volume market.” As we've noted for some time, successful IMBs must have asset management capabilities to survive.

• Direct Mortgage was acquired by non-QM issuer Lendermac. The target was reported to be experiencing significant operational, technological, and financial distress, including a proprietary software suite. In the mortgage industry, software is an expense, period. 

• The PHH unit of Onity Group (ONIT) sold its Liberty HECM portfolio to Finance of America (FOA), an issuer that specializes is reverse mortgages. As the table below from the company’s 10-K illustrates, FOA has had an operating cash deficit for the past two years, as shown in the table below from the firm's 2025 10-K.

Finance of America | 2025 10-K

As we noted earlier (“The Wrap: The Flight from AI; PennyMac + Cenlar FSB = Strike Two”), PennyMac Financial (PFSI) announced the purchase of Cenlar FSB earlier this year. We see the PFSI deal for Cenlar as a value destroyer in an industry that is already bleeding red ink. Why? Because we expect most of the legacy Cenlar servicing business to move to another provider.  

“The acquirer's financial services company will pay $172.5 million upfront for Cenlar's portfolio and operations with a $85 million contingent consideration,” according to Bonnie Sinnock at National Mortgage News. “Cenlar will surrender its bank charter and Pennymac will operate without one,” she adds.

The fact that PennyMac did not have the vision to retain the federal thrift charter of Cenlar is very significant. After low lending volumes, the biggest pain point for mortgage lenders today is the compliance onslaught of state regulators. As a result, the most frequent inquiry from IMBs to legal counsel in Washington over the past year is about the potential of getting a national bank charter to escape state regulation.

With the lobotomization of the Consumer Finance Protection Bureau by the Trump Administration, state regulators have intensified their focus on independent mortgage banks (IMBs), creating a regulatory environment what one CEO describes as “a nightmare.” But sad to say, few IMBs have the financial resources or the vision to actually navigate the process of acquiring or merging with a bank. 

We have advised several IMBs on establishing or acquiring a depository in recent years, but none have come to fruition. Establishing or merging with a bank is not a trivial undertaking. Yet in the low-volume environment that confronts all IMBs, public or private, one of the most significant areas of potential cost reduction is funding. Merging a mortgage business with significant servicing assets into a bank is a strategy for long-term survival. 

While the new Basel III proposal promises to reduce the regulatory capital cost of holding 1-4 family mortgages and mortgage servicing rights (MSRs), we doubt whether the change will encourage banks to re-enter mortgage lending and servicing in a serious way. After all, there are less than three dozen tiny US banks that currently are above the 10% cap on MSRs as a percentage of CET1 capital.

Source: FDIC/BankRegData

Can an IMB migrate to a bank business model without killing the unique entrepreneurial environment that makes mortgage firms far more efficient than banks? Maybe. Countrywide certainly did, but that story did not end well. IMBs are orders of magnitude more productive than depositories, both as lenders and servicers. But the bigger question may be whether mortgage lenders can survive without being a bank in an interest rate environment where loan coupons and also LT funding costs remain elevated.

Basel III, QE & IMBs

We have always believed that the interest rate and business environment after the GFC in 2008 that encouraged the growth of IMBs to acquire two-thirds market share in residential lending and servicing was an anomaly created by the Federal Open Market Committee. 

During QE, when the Fed was a buyer of most new issue government and conventional MBS, loan rates were suppressed and with it the cost of debt capital for IMBs. COVID took this example to an extreme, as shown in the chart from FRED at the top of this comment. But when QE ended in 2021, IMB profitability plunged. The chart below shows the pretax profitability of IMBs since 2002 (h/t Garrett McAuley).

Source: Mortgage Bankers Association

When the Fed first started QE in November of 2008, it forced the profitability of mortgage lenders up dramatically. But QE also lowered mortgage rates and thus the risk-adjusted returns on 1-4 family loans to levels that were unattractive for banks to retain loans in portfolio. IMBs make and sell loans and, hopefully, retain the servicing asset. That is why the proportion of 1-4s vs total bank assets has been falling for two decades.

Source: FDIC/WGA LLC

As Chicago Booth Review noted last year:

“The Federal Reserve's quantitative easing (QE) programs functioned as a massive, sustained effort to lower long-term interest rates, essentially acting as a "subsidy" that reduced borrowing costs for households, businesses, and the U.S. government. By purchasing over $5.6 trillion in Treasurys between 2008 and 2023, the Fed pushed bond prices higher and yields (interest rates) lower.”

Today, however, with the end of QE and now an intractable war in the Middle East, long-term interest rates have risen. The $40 trillion in public debt owed by the United States is a larger concern. Indeed, there is a growing suspicion among bond investors that long-term interest rates may remain elevated even after peace is achieved with Iran.

Higher long-term interest rates are bad for mortgages, private credit and corporate issuers more generally. The strong possibility of higher mortgage interest rates is especially true if the federal debt continues to grow and a new Fed Chairman named Kevin Warsh pursues a smaller balance sheet at the central bank, effectively making the Fed a net seller of mortgages. 

We wrote recently in National Mortgage News ("What President Trump can do about mortgage rates") about how Fannie Mae and Freddie Mac could push mortgage rates down by repurchasing COVID era securities. The same applies to Ginnie Mae, of note. But in the absence of QE, the bias in long-term interest rates must be higher. 

Thus the astute mortgage banker with a decent-size servicing book must ask: How do I survive in a lower volume, higher mortgage rate environment for the foreseeable future?  The answer is to become either a non-bank depository or a full blown national bank, the latter of which gives you shelter from the partisan idiocy of state regulation via federal preemption. State-chartered, FDIC-insured banks give you some shelter from the partisan antics of state regulators.

If Fed Vice Chairman Miki Bowman pushes through changes in capital requirements for whole-loans and MSRs, then the benefits of bank ownership for IMBs become compelling.  Commercial banks may not want to reenter the world of mortgage lending, especially third-part loan aggregation. And being a loan servicer is now a business that requires scale (> $500 billion in UPB).

But IMBs that are able to combine with a depository while preserving the flexibility and operating efficiency of an IMB could be the long-term survivors in the world of residential lending. There is a strong argument for IMBs to migrate into a bank charter, creating a new generation of mortgage specialization institutions that have the profitability and liquidity to survive the new normal of higher interest rates.

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