HomeStreet Bank will attempt to sell its stand-alone mortgage business and portfolio of servicing rights, acceding to an activist investor’s demands to exit home lending.

HomeStreet Inc., the Seattle community bank’s parent company, cited rising interest rates and home prices that have lowered demand for mortgages, as well as ongoing regulatory challenges, for the move.

“Single-family mortgage loans remain an important part of our asset diversification strategy and part of a broad array of products that we offer to our customers,” Mark Mason, HomeStreet’s chairman, president and CEO, said in a press release. “Assuming the sale of our mortgage banking business, we will continue to offer mortgages, but the scale of this business line will be substantially smaller, focused on our retail deposit network and regional markets, and positioned for ongoing profitability.”

Blue Lion Capital, which has engaged in a long-running dispute with the $6.9 billion-asset company, has pushed for HomeStreet to close any mortgage lending office that is unable to earn its cost of capital and shed its portfolio of mortgage servicing rights, or MSRs, based on claims that the business lacks scale and is based in the expensive Seattle area.

“We commend the board for taking this meaningful first step and look forward to the additional steps that will be required to realize the opportunity available to the bank, its customers and its shareholders,” Blue Lion Capital said in a press release. “In addition to freeing up more than $100 million of capital, divesting the mortgage segment will greatly simplify HMST’s operations, allow for meaningful cost reductions at the commercial bank and lead to significantly higher returns on capital.”

Among the catalysts for the move were higher costs related to loan-officer compensation in a competitive market; rising home prices that are reducing demand for purchase loans; and housing inventory constraints, according to HomeStreet. An uneven playing field between banks and nonbanks resulting from the differences in the regulatory environments they operate in also was cited as a concern.

HomeStreet plans to source mortgages for its remaining mortgage operation through its branch network, online banking services and affinity relationships after the sale.

The company had been working to improve the profitability of its mortgage banking business over the past two years in hopes of a turnaround, and also had hoped that a proposal to provide capital relief for MSRs would come to fruition.

“Unfortunately it’s still unclear when, and to what extent, industry conditions will improve,” Mason said.

HomeStreet said in June that it would close 18 mortgage offices and reduce space in a regional processing center. It said it expects to fire 127 people, or roughly a tenth of the employees in its mortgage business.

The company had already cut 107 mortgage jobs before announcing June’s cuts, including 37 positions in April.

HomeStreet also agreed in July to sell the servicing rights to $5 billion in unpaid balances for single-family mortgages. It did not identify the buyer or disclose the price of the deal.

While a recent decline in average mortgage rates may create an opening for some borrowers to refinance, the mortgage lending business’ declining profits and servicing’s capital constraints have diminished banks’ interest in investing in housing finance.

In addition to HomeStreet, JPMorgan Chase and Wells Fargo have been cutting jobs in their mortgage operations. Meanwhile, a number of mortgage companies have acquired smaller lenders, while others, like IBM, have completely exited the mortgage industry altogether.

Paul Davis contributed to this report.