The Mortgage Boom Is Fading
May 09 2021 - 5:59AM
Dow Jones News
By Orla McCaffrey
The housing market is as hot as ever. The mortgage market,
though, is losing steam.
Homes are selling at a blistering pace unseen since before the
financial crisis, pushing up home values in nearly every U.S. ZIP
Code. Yet lenders are preparing for mortgage demand to cool in the
coming months, the result of rising interest rates that make
refinancing less attractive for a huge chunk of borrowers.
The anticipated decline in mortgage volume is setting off price
wars across the industry. That is driving down profit margins and
spooking the shareholders of mortgage firms that went public closer
to the height of the lending boom.
Rocket Cos., the parent of Quicken Loans, said last week that it
expects its gain-on-sale margin, a measure of how much lenders earn
when they sell loans, to decline in the second quarter. The profit
margin would be the company's narrowest since before the mortgage
boom. The forecast drove shares of several nonbank lenders to
double-digit losses last week, analysts said.
"The message from all the companies that have reported
financials publicly is that competition has increased
significantly," said Guy Cecala, chief executive of Inside Mortgage
Finance.
Last year was a banner one for the mortgage business. Lenders
originated a record $3.83 trillion in home loans in 2020, according
to the Mortgage Bankers Association.
Mortgage rates that dipped below 3% for the first time and
changes in the ways Americans work and live pushed up demand for
both refinancings and purchase loans to levels that strained many
lenders. To stem the influx of applications, lenders raised rates.
But their own borrowing costs stood still. Profit margins rose
sharply.
This year, total originations are expected to fall to $3.3
trillion, a 14.2% decline. Still, at that level, 2021 would rank
among the best years on record.
"This year is still expected to be a great year, probably the
second-best year in history," said KBW analyst Bose George. "But
it's just that directionally, [mortgage volume] is going down."
A drop in refinancing activity is a big reason why. With the
30-year mortgage rate near 2.97%, about 14.5 million Americans
could lower their monthly mortgage payments through a refinancing,
according to mortgage-data firm Black Knight Inc. That is down from
18.7 million near the start of the year, when mortgage rates
reached a record low of 2.65%.
Still, the good news for borrowers is that lenders are now vying
for customers by lowering the rates they charge.
That translates into lower profits for lenders. When lenders
make mortgages cheaper, the gap between the rate they charge for
the loan and how much it costs them to make it shrinks. Loans with
smaller gaps are worth less when sold to investors in the secondary
market. That reduces the gain-on-sale margin, or the amount lenders
earn on each loan they sell.
Competition among lenders in the wholesale mortgage channel,
where borrowers secure loans through individual mortgage brokers
instead of banks or nonbank mortgage lenders directly, is driving
much of the decline in lending margins, analysts said.
Lenders that extend mortgages directly to borrowers are under
less pressure. Lenders in the retail channel, as it is known, tend
to have higher margins than their wholesale counterparts because
they don't share the gains with brokers.
Rocket reported a margin of 3.74% in the first three months of
the year, down from 4.41% in the fourth quarter of 2020. It also
said it expects the measure to fall to a range between 2.65% and
2.95% in the second quarter.
"We're kind of back to some of the historical longer-term
margins that we've experienced, which on our platform are still
very profitable," Rocket Chief Executive Jay Farner said during a
call with analysts.
Rocket's stock price fell nearly 17% to $19.01 the day after the
company's earnings report.
Shares of UWM Holdings Corp. closed at a record low last week
after Rocket's earnings. UWM, the country's largest wholesale
lender, reports first-quarter results Monday.
Home Point Capital Inc. shares fell close to 18% Thursday after
the company said its wholesale-lending business broke even in
April. HomePoint acquires most of its loans through wholesale
lending.
Write to Orla McCaffrey at orla.mccaffrey@wsj.com
(END) Dow Jones Newswires
May 09, 2021 05:44 ET (09:44 GMT)
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