When margins evaporate
Lenders expected that 2022 will be one of the most challenging years on record due to higher rates, lower refi volumes and the need to shed capacity. But the market has deteriorated faster than they imagined, and some are even struggling to achieve profitability, especially after this past week’s extreme rate spike.
“What is the impact for the lender side? We have compression in the margins we are able to make on loans. We used to make money, and now we are just hoping to break even,” Jodi Hall, president at Nationwide Mortgage Bankers, said. “We hoped to be able to sell loans and make 25 bps to 50 bps through a securitization. Now, if you can execute at par, you are outperforming a lot of your peers.”
Hall explained that loans to be securitized are “sitting” on warehouse lines of credit, and lenders have to pay interest expenses for them – at least until it gets to the point that the financial institution doesn’t want them anymore, and lenders have to repurchase them for cash. “I’m extremely optimistic that the market will pivot before we get to that point,” she said.
The mortgage lender decided 45 days ago to extend its rate locks from 90 days to 120 days, but mortgage rates rising above the 6% level are making it difficult to offer this perk to borrowers.
Lenders offer borrowers to lock the mortgage rates for a period between the offer and the closing date, which vary according to their policies. However, during periods of instability, locking the rate for a long period puts downward pressure on lenders’ margins, hurting earnings. That’s been playing out over the last few months due to massive rate increases.
Nationwide expects to originate around $2 billion this year, mainly purchase and conventional loans, down from around $3 billion in 2021.
“We have still seen the purchase loans stay strong. What we believe will happen is we’re going to have a cool summer for selling homes, but we think that potentially could build up demand in the fall,” Hall said.
The lender expects to turn a profit this year by reducing costs upwards of 30% through a renegotiation of contracts, but not through layoffs.
More layoffs to come
Lenders, loan officers and economists who spoke to HousingWire this week said that the current volatility in the markets will reduce originations even further in 2022, bringing additional rounds of layoffs.
“The industry was already trying to rightsize from a $4 trillion market to a $2.5 trillion market, but now, just given the spike in rates, it’s going to be lower than that,” said Mike Fratantoni, Mortgage Bankers Association’s chief economist and senior vice president of research and industry technology.
He added: “A lot of lenders are trying to think about how big their organizations need to be for the size of the market today, and, as the market size comes down, we expect we are going to see additional layoffs.”
In its June report, the MBA forecast total originations at $2.4 trillion in 2022 and $2.3 trillion in 2023.
However, other economists and analysts are even more pessimistic about origination volume.
Fitch Ratings said the pace of falling originations had surpassed its expectations and is likely to fall short of the industry forecasts.
“Mortgage industry origination estimates continue to fall, with volumes for 2Q22 expected to drop 20-25% sequentially for many issuers,” Fitch’s team of analysts wrote in a report in late May. “This declining run rate suggests market originations for 2022 could fall closer to $2 trillion.”
A team of analysts from the credit rating agency Moody’s Investors Services also sees volumes coming down to around $2 trillion this year. At the same time, the excess capacity will remain in the market for at least the next year.
“We’ve seen some cost-cutting across the board. In our opinion, it’s likely not been as aggressive as it needs to be given the market movements we’re touching on,” Gene Berman, assistant vice president-analyst at Moody’s, said.
Fratantoni expects that, after this week’s Fed meeting and the removal of some of the market’s uncertainty over the path of rising rates, mortgage rates will settle back to something closer to 5.5%.
The Fed will have to push up short-term rates close to 4% by early next year to try to knock down the “abnormally” persistently high inflation, significantly slowing down the economy, he said.
The Fed’s move will bring the 30-year fixed mortgage rate a little bit down from the current market after the spike to 6%, he argued.
But Moody’s team still sees some uncertainties, even after Wednesday’s meeting.
“What’s really important is where the rates end, and there is a large amount of uncertainty around that because that will depend on the inflation print coming in,” Madhavi Bokil, senior vice president at Moody’s, said.
“Communication will be key for the Fed. At the same time, the Fed may not want to commit to a certain number to raise rates. We expect the policy will be data-dependent.”
Fast-rising mortgage rates are already making life very difficult for originators. They’re just hoping for stability.
“Friday was a bloodbath, yesterday was a bloodbath,” Melissa Cohn, a regional vice president of mortgage at Williams Raveis Mortgage, said on Tuesday. “I’m hoping for 100 [bps]. I think that if the Fed only raises by 50 bps, we’re just gonna see more of this bloodbath. if they raise by a point, I think that the markets could rally. If they raise by three quarters of a point, maybe things will stabilize.”
Cohn said she has three or four loans with clients who haven’t locked rates yet. “I go to bed at night worrying about it,” she said.
The rate-spike has made it harder for borrowers to qualify for loans, which has pushed some of them out of the market, said David Battany, executive vice president of capital markets for Guild Mortgage.
“The positive is the number of homes for sale, or the supply, has been increasing in the last few months,” he said. “So, it’s helped first-time homebuyers who are competing against all-cash buyers or corporate buyers.”
Steve Dominguez, a mortgage broker at Nexa Mortgage, estimates that in the Coachella Valley in California, borrowers’ monthly payments rose 31.5% over the last six months due to spikes in rates.
Six months ago, at a rate of 2.87%, borrowers would pay $2,497 per month for principal, interest, taxes and insurance on a $450,000 house. Now, with rates at 6%, the payment would be $3,286, an increase of $789.
More affluent clients can benefit from the current scenario, he said.
“I have a lot of high-end clients who have money in the bank. Instead of getting maximum financing (between 75%-80% loan to value), they are now putting much more down (between 35-50%),” he said.
Dominguez said his origination volume is up over the past few weeks due to increased inventory. Still volume is down significantly compared to the start of the year, when refis were still attractive.
As the industry is cyclical, lenders are still optimistic.
“In the bigger picture, if rates are 6% and fixed for 30 years, and inflation rates are 8%, your borrowing money is locked in for 30 years less than the rate of inflation,” Battany said. “There are rate cycles; you can always refinance when rates go back down. If rates go up, you’re protected with a fixed-rate loan. I think the demand for housing will still stay strong, even if rates go higher than they are now.”
James Kleimann contributed reporting to this story.