The biggest nonbank mortgage lenders in America saw improved performance in both origination and servicing segments in the second quarter, capitalizing on the continued mortgage pullback from banks. As we’ve reported, that trend looks sticky, which could help change the fortunes of top independent mortgage banks sooner than expected.
In this week’s edition of DataDigest, we look at the landscape for top mortgage lenders, their strategies and when the real opportunities might begin.
Let’s start off by acknowledging that the mortgage industry still faces big headwinds even if we’re past the bottom of the cycle. Overall lock volumes are up 4.8% over the last three months but remain 30% below the comparable period a year ago, according to Black Knight. Purchase lock volumes are up 5.7% over that same period but 25% below the volume of July 2022. Refi share of lock volume remained at 12% in July as rates climbed to the 7% range, where they look poised to remain well into the fall.
As such, it’s unlikely that we’ll reach $1.8 trillion in origination volume this year. But the other side of the equation – expenses – is showing meaningful movement. Most of the publicly traded IMBs cut costs in the first half of 2023, and several pledged to keep sharpening their knives. That alone suggests better days ahead for IMBs, even if rates don’t fall into the 6s for a few more months, the secondary market remains a mess, and seasonality results in low volume in the first quarter of 2024.
We’ve also heard that some smaller lenders are bowing out, whether through M&A or simply closing business lines. This should contribute to the biggest IMB lenders gobbling up additional market share, even if no single lender is at 10%.
The ‘Goldilocks’ moment in servicing & originations
Origination volume has predictably nosedived in the wake of the Federal Reserve’s rate hikes. The speed of the rate hikes has shrunk gain-on-sale margins because mortgage companies haven’t contracted quickly enough to offset falling demand. But servicing performance has been exceptional. Prepayment rates hit all-time lows, delinquency rates are miniscule and earnings from the segment are in great shape.
Top IMBs have also seen big mark-ups on their MSR assets, which pushes up earnings. Look no further than Pennymac and Mr. Cooper, whose bottom lines have been majorly bolstered by servicing. Mr. Cooper could eclipse $1 trillion in MSRs by the end of the year.
“Industry originations volumes increased 39% QoQ and GOS margins have begun to creep up closer to longer-term averages,” analysts from Jeffries wrote in a research note last week. “We highlight the current environment as a bit of a ‘goldilocks’ environment where there is a path for both operational segments to remain sufficiently profitable.”
Servicing is going to remain a great business for the foreseeable future. Prepayment rates are likely to remain historically low for at least another year, homeowners’ equity positions are extremely strong, millions of homeowners have rates under 4%, and COVID-era loss mitigation tools give distressed borrowers loads of new options.
How much of that servicing business can result in new loans in a couple years when rates drop? That’s the trillion-dollar question for originators.
The purchase ground game
Though smaller than its publicly traded rivals, Guild Mortgage has long prided itself on being purpose-built for a strong purchase market. Guild doesn’t have a refi wrecking ball like Rocket Mortgage or a loyal network of adoring broker fans like UWM, but it has quietly assembled an impressive collection of retail branches in key markets in recent years.
Guild originated $4.5 billion in mortgages in Q2, up 65% from $2.7 billion the prior quarter. With the boost from several acquisitions and a recruiting blitz in California, also Guild gained market share in Q2. More than 94% of its loans were purchase in the second quarter, far exceeding industry norms. While margins shot up 30 basis points, Guild’s originations segment lost $21 million in the quarter, underscoring the persistent challenges in a tight-margin environment.
Still, I’m intrigued by Guild’s strategy of picking up small- and mid-sized purchase-focused lenders and selling niche products targeted at first-time homebuyers. The goal is to stay above the purchase market, and that’s a hard thing to do operationally. Most recently, the firm bought Cherry Creek Mortgage and, according to CEO Terry Schmidt, integrated 500 new employees in 45 days. The various acquisitions have already accounted for a good chunk of Guild’s volume and helped the lender win market share in New Mexico and Colorado. More acquisitions are likely coming, too.
What’s encouraging is the company’s in-house servicing platform was responsible for Guild turning an overall profit of $36 million. Its in-house servicing is helping extend the client life cycle, something that bigger players have used to great effect with refis. Guild managed a purchase recapture rate of 27% in the second quarter, which is pretty decent.
Of course, the risk in winning purchase business in a volatile, high-rate environment is that other lenders could snag your client as soon as rates drop just months later. It’s something to keep an eye on.
Let’s talk about the top dogs.
UWM is proving that it doesn’t need hyper-aggressive pricing to be a purchase market monster. UWM originated $31.8 billion in mortgage loans in the second quarter of 2023 “despite a historic decline in industry-wide origination volume during 2023,” according to CEO Mat Ishbia. In fact, UWM did more purchase business in Q2 ($28 billion) than any other lender did in mortgages overall, and the wholesaler is on pace for an all-time record purchase year.
With ‘Game On’ pricing in the rearview, UWM anticipates third quarter production to be between $26 billion and $33 billion. Gain-on-sale margins are expected to be between 75 bps and 100 bps. For all the rhetoric and sports jargon around UWM ‘winning,’ the lender’s actual superpower is its efficiency. No one comes close to matching its cost management.
Meanwhile, executives at UWM’s biggest rival, Rocket Mortgage, told analysts that its local loan officer recruiting initiative doesn’t represent a mortgage strategy change. That the company is adding 500 loan officers this year to exclusively go after real estate agent referrals underscores how serious they’re taking the current environment. But it also speaks to Rocket’s discipline. If Rocket wanted to really capture a huge amount of purchase business (and greatly increase costs in the process), they’d buy another retail lender or hire thousands of distributed LOs. They’re not going to do that.
Interim CEO Bill Emerson said Rocket’s purchase market share grew on both a year-over-year and quarter-over-quarter basis but didn’t disclose further details. Purchase market share gains came from both the direct-to-consumer and Rocket Pro TPO channels, he said.
“We’ve seen growth in both channels. It’s not specific or exclusive to one or the other and we’re actually happy about the growth in both,” Emerson said.
One product in particular has helped move the needle: Buy+ and Sell+ products, which allow borrowers to save money when doing business with a Rocket Homes partner agent.
“We’re seeing referral numbers to Rocket Homes up significantly. So that indicates to us that Realtors are interested in what we have to offer and passing that on to their clients (…) We have been excited to see that increase. I know Rocket Homes has been happy to see it. So it seems like the real estate community is reacting positively to this particular program,” Emerson told analysts.
The company shaved about $150 million-to-$200 million annualized in the quarter, and shut down Rocket Auto and its solar business, so they’re not precious about ending business lines that don’t move the needle.
Rocket hiring Varun Krishna, a dyed-in-the-wool fintech leader, as its next CEO suggests to me that they’re not diverging from the overall mortgage strategy. The company is going to put up more of a fight in purchase with boots on the ground while it perfects its funnel.
loanDepot has shed a ton of costs and CEO Frank Martell in Q2 hinted at more cuts to come. The lender has already closed its wholesale channel, focused heavily on purchase business and restructured multiple business lines. The result? A gain in origination volume, increased revenues and better financial health, though LD did lose $50 million GAAP in Q2. loanDepot has more than $700 million in cash to play with; I think they’ll be ready for the next cycle.
Pennymac will also feel good about the future. No IMB lender is better positioned to capitalize on Wells Fargo exiting the correspondent market. With pricing normalizing in correspondent, Pennymac should perform well in future quarters even if it lost market share in Q2, according to Jeffries.
There will be a refi boom. The question is… when?
Few observers believe the Federal Reserve will be cutting interest rates anytime soon. Goldman Sachs economists predict that the cut will come by the end of June 2024.
Ishbia says 2022 and 2023 are the grind-it-out years and 2024 will be a bit better. His prediction is that 2025 and 2026 “will be off the charts.” Ishbia’s goal is to get the broker channel back to 33% overall market share.
“It depends on the refi boom and purchase market and how the brokers react,” he told HousingWire’s Flávia Furlan Nunes in June. “But we feel pretty good about how many LOs converted from retail to wholesale. We watch those numbers closely, but we feel pretty good about that target.”
The size of the lending opportunity in the upcoming years is hard to figure at the moment. The ultra-low mortgage rates from 2020 to 2022 undoubtedly removed inventory from the board for probably the better part of the decade. Lenders will be jumping out of their skin to refi homeowners who got 6% and 7% rates in 2022 and 2023, but there aren’t a ton of them out there. The industry’s retention rate is usually around 20% to 25%, so quite a few loans will be up for grabs. The purchase market depends on how many homeowners feel compelled to move when rates are in the 5% range.
The trend lines in the second quarter make me think the top IMB lenders are poised to capture more market share in the years to come. They have suitcases full of cash, servicing income and flexibility that comes with MSRs, and some are positioned to scoop up loans that banks are no longer competing for. They’ve not just surviving; they’re planning for future cycles.
Ultimately, competing lenders are going to have to get a lot more disciplined about their cost structures, better at harvesting their own service portfolios, and have LOs embed with real estate agents if they stand a chance to capitalize on the next boom market, whenever that may be.
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