Bank executives face a range of complex, interconnected decisions regarding their mortgage businesses: whether to pursue growth opportunities, improve profitability, prepare for future market cycles, or potentially reduce their presence in a competitive and evolving industry.
These decisions can’t be made in a vacuum; it’s important to consider the broader market dynamics at play. The refinancing boom and a shift in market share toward nonbank lenders over the past few years have given way to rising interest rates and housing affordability challenges, which have moderated growth prospects and increased competitive pressures.
Banks need to carefully evaluate the risks and benefits of various strategic options, balancing short-term performance with long-term goals while adapting to the cyclical nature of the industry. To address these challenges, banks can consider three strategic archetypes for their mortgage business: operating it as a stand-alone business, using it as a relationship anchor, or treating it as an accommodation. Success factors differ markedly between these three business models, and the archetypes can help bank leaders navigate these high-impact decisions in a more systematic way to chart a path back to growth and profitability.
How three archetypes can help bank leaders choose the right mortgage path
1. Mortgage as a standalone business is a strategic imperative
Despite its challenges, the mortgage business is uniquely positioned as a consumer lending business for banks. The industry isn’t dominated by scale players as in credit cards. The distribution of mortgages hasn’t been relegated to third parties, as is the case with auto finance, so lenders can interact with customers directly and build meaningful relationships. It is also much bigger than the remaining consumer lending segments.
Banks looking to position their mortgage enterprise as a stand-alone profit center must overcome two major hurdles. First, how to stand out in a crowded, fragmented market of lenders to win an outsized share. Second, how to deliver attractive returns in a cyclical industry marked by inevitable boom and bust cycles.
2. From transaction to trust — mortgage as a relationship anchor
As one of the largest financial commitments in an individual’s life, purchasing a home represents a critical inflection point in a customer’s financial journey. Instead of just executing a transaction, banks have a rare opportunity to begin or deepen a long-term financial relationship spanning multiple products and services with a high-value customer.
Currently, the mortgage journey is largely transactional for both borrowers and lenders. Customers focus primarily on affordability and a good experience when selecting a lender. More than half the time, the customer chooses a nonbank lender, and neither the customer nor the lender intends to have a relationship beyond the mortgage. It is also commonplace for a lender to hand over the customer relationship to a mortgage servicer after the loan closes.
Most loan officers are not empowered or incentivized to foster broader relationships beyond home loans. Their efforts are directed toward generating mortgage leads and guiding applicants through the process. The performance of the mortgage business at banks is often viewed in isolation, without considering ways to enhance customer relations or bolster acquisition and retention. The benefits of relationship-deepening mortgages are often not well understood or are viewed as disappointing.
Fundamental changes are necessary to reorient mortgage distribution and operations in support of deeper relationships. Two critical factors will determine success: 1) customers must want to have a broader and longer-term relationship with the lending institution, and 2) bankers must be willing and able to provide compelling and comprehensive levels of engagement and services.
3. An accommodative approach to mortgage demands intentionality
A bank may choose to deprioritize mortgages because it sees more attractive growth opportunities elsewhere, but it may be hesitant to exit the business entirely due to the high customer salience. Completely exiting the mortgage business may also not be viable for banks without a strong presence in other high-growth areas, such as credit cards or auto finance. There is also concern that the inability to assist customers during this important life event could undermine the bank’s broader value proposition and create a risk of customer attrition.
While this strategy might seem straightforward, maintaining mortgages as an accommodative product with minimal investment is not necessarily a safe or easy approach. Complacency can quickly turn into justification for financial losses, subpar customer experiences, and elevated risk.
The future of mortgage belongs to banks with a clear strategy
As the mortgage landscape evolves, banks must commit to a clear strategic posture — whether scaling, deepening customer relationships, or maintaining a presence with minimal investment. Success will depend on aligning mortgage operations with institutional goals, embracing agility, and delivering differentiated value to customers.
