The mortgage boom is fading
The housing market is as hot as ever. The mortgage market, however, is in decline.
Homes are selling at a blistering pace unprecedented since before the financial crisis, pushing up home values in nearly every US zip code. Still, lenders are bracing for a slowdown in mortgage demand over the next few months, as rising interest rates make refinancing less attractive to a large portion of borrowers.
The predicted decline in mortgage loan volumes sparks price wars across the industry. It drives down profit margins and scares shareholders of mortgage companies that have gone public closer to the peak of the lending boom.
RKT rocket 2.39%
Cos., The parent company of Quicken Loans, said last week that it expects its selling profit 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 the shares of several non-bank lenders to double-digit losses last week, analysts said.
“The message from all the companies that have released financial information is that the competition has increased dramatically,” said Guy Cecala, Managing Director of Inside Mortgage Finance.
Last year was a banner year for the mortgage industry. Lenders generated a record $ 3.83 trillion in home loans in 2020, according to the Mortgage Bankers Association.
Mortgage rates that fell below 3% for the first time and changes in the way Americans work and live have pushed demand for refinances and loan purchases to levels that have strained many. lenders. To stem the influx of applications, lenders have raised rates. But their own borrowing costs have stopped. Profit margins have increased sharply.
This year, total creations are expected to fall to $ 3.3 trillion, down 14.2%. Yet at this level, 2021 would rank among the best years on record.
“This year should always be a great year, possibly the second best year in history,” said Bose George, analyst at KBW. “But it’s just that directionally, [mortgage volume] go down. “
One of the main reasons is a decline in refinancing activity. With a 30-year mortgage rate close to 2.97%, about 14.5 million Americans could reduce their monthly mortgage payments through refinancing, according to mortgage data firm Black Knight. Inc.
This is down from 18.7 million at the start of the year, when mortgage rates hit a record low of 2.65%.
Yet the good news for borrowers is that lenders are now fighting over customers by lowering the rates they charge.
This translates into lower profits for lenders. When lenders make mortgages cheaper, the gap between the rate they charge for the loan and what it costs them to do so narrows. Loans with smaller spreads are worth less when sold to investors in the secondary market. This reduces the profit margin on the sale, or the amount that lenders earn on each loan they sell.
Competition among lenders in the wholesale mortgage channel, where borrowers obtain loans through individual mortgage brokers instead of banks or non-bank mortgage lenders directly, is causing much part of the decline in lines of credit, analysts said.
Lenders who provide mortgages directly to borrowers are under less pressure. Retail network lenders, as it’s called, tend to have higher margins than their wholesale counterparts because they don’t share the earnings with brokers.
Rocket announced a margin of 3.74% in the first three months of the year, up from 4.41% in the fourth quarter of 2020. He also said he expects the measure to fall within a range of between 2 , 65% and 2.95% in the second quarter.
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“We’re sort of back to some of the long-term, historic margins we’ve seen, which on our platform are still very profitable,” Rocket CEO Jay Farner said on a call with analysts.
Rocket’s stock price fell nearly 17% to $ 19.01 the day after the company’s earnings were released.
UWM Holdings shares Corp.
closed at an all time high last week after Rocket’s gains. UWM, the nation’s largest wholesale lender, released its first quarter results on Monday.
Capital reception point Inc.
shares fell nearly 18% on Thursday after the company said its wholesale lending business broke even in April. HomePoint acquires most of its loans through wholesale loans.
Write to Orla McCaffrey at [email protected]
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