Announcing the results of a periodic review of peer U.S. nonbank mortgage companies, Fitch Ratings signaled Friday “strengthening of the largest mortgage companies’ franchises as the market has consolidated over the last two years.” The Fitch-rated peer group includes PennyMac Financial Services, Mr. Cooper, United Wholesale Mortgage, Freedom Mortgage, Rocket Mortgage, and Provident.
Fitch anticipates profitability among this group to improve as lower rates drive higher origination volumes next year.
With forecasts from economists at Fannie Mae and the Mortgage Bankers Association (MBA) projecting year-end origination totals of $1.7 trillion growing to roughly $2.2 trillion in 2025, whether the industry meets projections largely depends on whether progress can be made toward improving affordability for younger first-time homebuyers and renters where new mortgage demand has bottlenecked.
Today’s report from Fitch suggests a larger share of the projected $500 billion of origination growth in 2025 will feed the industry’s largest mortgage lenders first. Fitch cited Inside Mortgage Finance (IMF) figures indicating the top-10 originators produced 40% of total mortgage volume through the first three quarters of 2024, compared to 38.5% in the entirety of 2023.
October's distorted employment data clouded observers’ end-of-year forecasts for the pace of rate cuts and easing affordability, but the Federal Reserve chose to lower its benchmark rate by 25 basis points at the conclusion of the Federal Open Market Committee's (FOMC) November meeting, Wednesday. How 10-year Treasury yields respond to U.S. presidential election outcomes also stands to influence mortgage rates, affordability, and dismal homebuying sentiment.
“Volatility in treasuries has been the bigger catalyst for recent mortgage rate movement as opposed to the Fed’s rate cuts so far,” commented Eric Orenstein, senior director of Nonbank Financial Institutions at Fitch, on the central bank’s decision. “Still, the Fed’s easing cycle should take pressure off origination volumes in 2025 as more mortgages become ripe for refinancing.”
The largest nonbank mortgage lenders have gained market share since 2022 “amid a reduction in capacity due to consolidation and the exit of smaller, sub-scale players,” Fitch reported. The rating agency expects an increase in originations to drive increased warehouse utilization and higher gross leverage ratios, though those indicators are “likely to remain below peak levels.”
Meanwhile, “broker and correspondent channels remain dominated by a few players,” retail operations have grown fragmented, and employment within the nonbank mortgage industry has fallen 35% compared to peak levels in 2021, per Labor Dept. data, Fitch says.
Multiple years of rising housing costs — from elevated mortgage rates to rapid home price gains to home insurance and property tax hikes — have left most sidelined borrowers hunting for homes for more than a year. As lock-in effects persist, an era of concentrated demand among first-time homebuyers and renters overlaps an era of increasing unaffordability.
Underscored by tripling rentership rates, the affordable supply-demand imbalance is widening among young home shoppers.
A trend among large nonbank mortgage lenders’ third-quarter earnings show declining incomes toward the end of 2024, but origination volumes higher across various channel leaders like of Pennymac, Mr. Cooper Group, and UWM. Rocket Mortgage reports earnings on Nov. 12.
Fitch expects origination volumes and gain-on-sale margins to improve in 2025, but GAAP-adjusted results “in the short term will likely be hindered by mortgage servicing rights (MSR) mark-downs for issuers that do not hedge their portfolios.” Falling mortgage rates that spur refinance volume should offset those MSR mark-downs to varying degrees, however, Fitch said.
Such impacts were observed in the fourth quarter of 2023 and third quarter of 2024 when declining mortgage rates left some issuers “with large write-downs in excess of increased production income.” Some mortgage lenders have reportedly begun hoarding their MSRs, eyeing the cash-flowing assets to boost operational liquidity as new production outlooks weaken.
