The big four banks combined to write $175.4 billion in new mortgages during the three months ended Sept. 30. That is 24% lower than what these lenders wrote a year earlier. Wells Fargo (WFC) remained the lender of choice for many borrowers, originating $89 billion in new mortgages, down 12% from the $101 billion last year. JPMorgan Chase (JPM) not only surpassed during the quarter Bank of America (BAC) as the largest bank by assets, but also as the second largest mortgage lender in the country. Chase originated $36.8 billion in new home loans, down 10% from the $40.9 billion in the third quarter of last year. BofA originated $33 billion mortgages in the third quarter, a 54% decline from $71.9 billion a year earlier. Citigroup (C) wrote $17 billion in mortgages during the quarter, down 8.5% from the $18.6 billion. These four firms combined for nearly 60% of the mortgage originations in 2010. Only Ally Financial (GJM), which has yet to report third-quarter earnings, was in the top five last year. New originations were up more than 17% from the previous quarter, but the housing market faces a long winter of still falling house prices, elevated unemployment and uncertain regulations such as the still pending risk-retention rule and the recent drop for the conforming loan limits. Paul Dales, the chief U.S. economist at Capital Economics, highlighted the excess supply of 3.2 million homes are on the market. While that is down 14% from last year and down more than 28% below the peak in 2008, it doesn't count the inventory of homes sellers are keeping off the market until prices improve. BofA CEO Brian Moynihan told investors Tuesday morning the bank anticipates another 2.6% drop in home prices between now and the end of 2012. Dales also pointed out the shadow inventory of 1 million vacant homes not even on the market and another 3 million homes, he estimates, set to reach the market through foreclosure. While many industry trade groups such as the National Association of Realtors are blaming large banks for being overly tight with lending, others point to a lack of demand as well. "At the aggregate level, there is certainly no shortage of supply," Dales said. "Instead, home sales are low because demand is being constrained by the weak economy and the inability of many households to qualify for a new mortgage." The still struggling economy caused the Mortgage Bankers Association to lower its 2012 projection for new originations down to $900 billion recently. MBA Chief Economist Jay Brinkmann said the inventory is starting to decline, and if housing does come back, the economy could follow back toward growth. "The odds of this scenario, however, are low and we think the most likely outcome is another year of frustratingly slow economic growth and stubbornly high unemployment," Brinkmann said. Write to Jon Prior. Follow him on Twitter @JonAPrior.