The banking industry continues a wholesale retreat from the origination and servicing of residential mortgages, according to a client note from Kroll Bond Rating Agency.

Since November 2012, the large bank share of the mortgage origination market has dropped from 61% to 33%, a move of 28 points, according to a study published by American Enterprise Institute.

Even more dramatic and revealing: More than half of the top mortgage originators and servicers in the top 25 are now non-banks.

“Despite the significant change in the composition of the mortgage lending sector, overall mortgage loan origination volumes, both for purchase and refinance transactions, continue a secular decline, this despite falling yields for key market benchmarks and related mortgage rates,” KBRA’s analysts find. “Whereas a year ago many observers were anticipating an increase in purchase loan volumes, 2014 ended with declining volumes for purchase loans and just a small uptick in refinance volumes. In fact, at $1.2 trillion in total production, 2014 marked nearly ten years of falling mortgage industry origination volumes even though interest rates have been at record low levels.”

KBRA’s analysts say investors and policy makers need to recognize that the connection between lending volumes and interest rates has largely broken down, suggesting that structural and regulatory factors are playing a significant role in falling loan origination volumes.

“The fear of rising mortgage rates has been firmly embedded in the housing market discourse. There has been way too much hand-wringing over their inevitable increase and we should have been more concerned about other economic issues and their potential impact to housing,” said real estate veteran, and CEO of Miller Samuel, Jonathan Miller in a note in mid-March. “Mortgage volume has been falling for nearly a decade while mortgage rates have been declining so the challenge to housing has not been mortgage rates themselves. Unemployment, wages and access to credit have always been the key determinant of the direction of the market.”

KBRA also points out that the fair value of MSRs held by Federal Deposit Insurance Corp.-insured banks has declined by 50% since the peak in Q3 2008, from over $80 billion to just $40 billion at year end 2014.

“Part of the reason for the drop in the aggregate valuation of bank-owned MSRs relates to declining fair value marks due to lower interest rates, a situation KBRA finds puzzling given the apparent breakdown in the relationship between interest rate movements and changes in prepayments,” KBRA says. “MSR sales to non-banks also are a factor, this due to the secular decline in mortgage servicing due to normal prepayments and falling loan origination volumes.”

Given the changing landscape for originations and servicing, KBRA says that going forward this year, regulators need to take the experience of the past several years and work with the mortgage industry to restore operational stability and profitability so investors will once again view the mortgage market as an attractive opportunity rather than a source of unquantifiable risk.

Regulatory moves to punish commercial banks for originating and servicing mortgage loans made prior to the 2008 financial crisis have pushed the bank share of mortgage lending down sharply and consequently non-bank seller/servicers have moved into the ascendancy in both mortgage origination and servicing.

And thus today the industry sees regulators and policy makers fretting about the risk from non-banks.

“KBRA believes that regulators and policy makers need to take a step back and deliberately assess their long-term objectives for protecting consumers and maintaining the financial health and stability of the U.S. mortgage market,” they note. “These two objectives are not mutually exclusive and, indeed, we believe that they must become complementary if the current trends of falling loan origination volumes and servicing capacity are to be reversed.” ?