Philadelphia-based Republic First Bancorp Inc. is exiting the mortgage origination business and focusing on core business lines, as it considers the aggressive pricing of long-term jumbo mortgages no longer fitting with its strategy of enhancing profitability. With plans to streamline its commercial lending activities in New York City and reduce its workforce, this move reflects the bank’s preference for shorter duration and besetter risk-adjusted return asset classes. However, further details of potential cost savings and revenue to be generated were not provided.
In the competitive environment where banks are looking to control costs and improve efficiency, many financial institutions are considering whether the mortgage lending business is suited to their long-term strategies. Additionally, an economic slowdown and detrimental external factors such as trade tensions between the US and China continue to trouble large US banks, which have been forced to reconsider plans for growth and expansion.
The mortgage origination business has experienced several setbacks in recent years. The major decline in interest rates has caused a shift in consumer demand and driven down the profitability of the industry overall. Many big-name banks and institutions have exited the business, including Bank of America and JPMorgan, while others, such as Wells Fargo and Citigroup, have significantly reduced their presence in the market.
Republic First’s exit from mortgage origination is likely to attract attention from both customers and investors alike. Its withdrawal, however, does not come as a surprise, considering the current market environment and the need for financial institutions to operate efficiently under enhanced regulatory scrutiny.
Furthermore, Republic First Bancorp’s decision to focus on its core business lines may be seen as a strategic move to set the bank apart from its competitors in the increasingly competitive banking sector. Transitioning the bank toward a more profitable and sustainable business model—one that emphasizes “shorter duration and better risk-adjusted return asset classes”—will help to enhance profitability and ensure its continued growth going forward.
The move away from mortgage origination also signals the growing importance of other loan products in driving bank profitability. According to recent data from the Mortgage Bankers Association, mortgage origination volumes declined throughout 2018, with the trend expected to continue in 2019. Despite this, banks with extensive mortgage origination portfolios, such as PNC Financial Services Group and US Bancorp, are still eager to participate in the business because they view the sector as essential to building long-term customer relationships.
Nevertheless, these banks have had to adapt their strategies to account for the changing market conditions. This includes shifting focus from mortgage refinance to purchase origination, as well as exploring opportunities in other areas of lending, such as small business and consumer.
In addition to Republic First Bancorp, other banks have made decisions to exit or scale back their presence in the mortgage origination business in recent years due to similar concerns about profitability and alignment with strategy. For example, Goldman Sachs reportedly laid off about 100 employees in its mortgage division earlier this year, and Fifth Third Bancorp also announced plans to retrench its mortgage operations.
One potential consequence of Republic First’s exit from the mortgage origination business is reduced availability of mortgage loans for consumers, which could lead to increased home prices and place further pressure on home buyers. However, the impact is likely to be limited, as new entrants such as online lenders and nonbank financial institutions, as well as the government-sponsored entities Fannie Mae and Freddie Mac, continue to cater to consumer demand.
In conclusion, Republic First Bancorp’s decision to exit the mortgage origination business and focus on core business lines instead reflects the need for financial institutions to make strategic moves in the current market environment. While the bank’s withdrawal may have some implications for both customers and investors, it is not without precedent, and other banks may well follow in its footsteps. Ultimately, it remains up to individual banks to assess their own unique circumstances and determine the best strategic path forward.
