As the big banks grapple with increased regulation, a slowing economy, and other lingering effects of the financial meltdown, they have been steadily backing away from mortgage lending. Bloomberg notes that lending decreased by nearly 5% in the first quarter of 2012 from the same time two years ago. Since the biggest banks have dominated that sector for several years, this has caused a bit of a credit crunch.

The good news is that competition, in the form of regional banks, is stepping up to take on the business that Bank of America, (NYSE: BAC), JPMorgan Chase, Citigroup, and even Wells Fargo are turning down. In fact, smaller banks have seen their share of the mortgage business increase by nearly 10%.

Regional banks are stepping up
This turn of events has helped raise the profiles of regionals such as First Niagara Financial (Nasdaq: FNFG), which has been the recipient of business that might have formerly gone to the big guys. First Niagara has been busy tidying up its own house, too, and has received kudos for disposing of more than $3 billion of mortgage-backed securities and paying down debt.

Other regionals are lending more as well. Huntington Bancshares (Nasdaq: HBAN) has bulked up its mortgage portfolio by 10% over the past two years, and US Bancorp (NYSE: USB) has moved up to become the nation's seventh-largest lender by increasing lending by 45% since 2010, overtaking both Citigroup and B of A for the first quarter of 2012. During the same time period, Fifth Third Bancorp plumped its loan portfolio by 36% and BB&T (NYSE: BBT) wrote 39% more mortgages.

Fool's take
Are the big banks likely to get back into mortgage lending once the economy settles down, elbowing the smaller guys aside? I don't think so. Bank of America was burned the worst by the mortgage crisis and has made a great effort to divest itself of consumer lending units. Last fall, CEO Brian Moynihan went so far as to say that the mortgage business was keeping the bank from moving forward.

Wells Fargo, currently the mortgage origination king, may also rethink its strategy as it faces criticism that it's taking on too many loans that will be much less valuable when interest rates begin to climb.

Even if the big guys decide to return to mortgage lending once interest rates rise again, these regional banks will have already carved out their corner of the market. If you're looking for banks that can turn a profit at the same time they keep risks in check, these regionals certainly seem to have the right stuff.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, Fifth Third Bancorp, Bank of America, Citigroup, Wells Fargo, and Huntington Bancshares and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.