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Fitch: Non-Bank Mortgage Lenders Can Weather The Storms

David Krechevsky
Jul 06, 2023
Fitch Ratings

Ratings service says they are well-positioned to handle liquidity and funding challenges.

U.S. non-bank mortgage companies are well-positioned to handle liquidity and funding challenges in the face of recent bank failures, a looming recession, and stricter lending standards, Fitch Ratings said Wednesday.

Despite the deteriorating outlook for the sector in 2023, non-bank mortgage companies are expected to weather the storm thanks to strong leverage ratios and the reduction of warehouse borrowing resulting from lower originations caused by rising interest rates, Fitch said in its report.

The ratings company acknowledged the challenges faced by non-bank mortgage companies, including earnings pressure, industry overcapacity, potential credit performance issues for homeowners due to the rising risk of a recession, and periodic regulatory scrutiny. However, Fitch said, the mortgage-servicing businesses have provided some relief. The increase in interest rates and historically low prepayment speeds have increased the valuations of mortgage-servicing rights (MSRs), bolstering liquidity for mortgage companies. 

Stable cash flows from servicing portfolios have allowed these companies to sell MSRs or secure loans using these assets as collateral, Fitch said. Still, if operating losses persist and interest rates continue to climb, the upside potential of MSR valuations may diminish, potentially straining liquidity, the ratings company said.

The ratings of non-bank mortgage companies are limited by their heavy reliance on secured bank funding. Fitch's rated peer group, on average, relies on committed and uncommitted warehouse facilities and MSR lines that make up 60% or more of their balance sheets, Fitch noted.

While non-bank mortgage companies have not yet faced significant disruption from recent bank failures, weakening economic conditions, reductions in deposits, higher funding costs, and expected increases in regulatory capital requirements have prompted banks to tighten underwriting standards, potentially reducing credit availability, Fitch said.

Although banks have been scaling back warehouse lending due to tighter capital requirements, the retrenchment should not immediately affect mortgage market liquidity, Fitch said, since originations have declined and warehouse usage is currently low. 

Signature Bank and Credit Suisse, both prominent providers of secured lending and custodial deposit services, have been joined by Comerica Bank in announcing an exit from warehouse lending.

In 2020-21, Fitch-rated mortgage issuers successfully raised over $10 billion in unsecured debt funding, and none of these companies have any remaining debt maturities in 2023, the ratings company said. That has provided them with longer-term, reasonably priced financing and the flexibility needed to navigate the current economic cycle, it said.

Despite the favorable conditions, any weakness in the MSR market would increase concerns for ratings agencies, it added. 

MSR valuations play a crucial role in providing liquidity and contingent liquidity for originators and servicers. While banks are typically willing to provide facilities due to the high-quality collateral, they may become more cautious about lending conditions and less willing to grant covenant waivers in the face of ongoing operating losses in the sector, Fitch said. Another concern, it said, is the potential for weaker mortgage credit, although the majority of the market still adheres to higher underwriting standards, which helps maintain liquidity.

Issuers with strong market positions, however, are expected to withstand the current challenges. Their diversification through servicing cash flows, robust balance sheets, and access to liquidity provides the flexibility needed to mitigate operating losses, Fitch said. The industry is likely to see further consolidation and the exit of weaker, smaller players, as exemplified by the recent acquisition of Home Point by Mr. Cooper for approximately $324 million in cash, Fitch said.

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