Scaled US Non-Bank Mortgage Lenders To Weather Housing Market Fallout

Drop in mortgage originations in 2022 continues to surpass Fitch Rating’s expectations

Mortgage Banker Magazine
Mortgage Banker Magazine
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Mortgage Originations, GOS Margins Continue To Fall

Layoffs, channel exits and asset sales have accelerated, even with better capitalized players. Citi, JPMorgan and Wells Fargo are reducing staff and operations, while Santander exited the U.S. mortgage market in February and partnered with Rocket to issue mortgages for its customers. Smaller players such as real-estate tech startup Reali and Sprout Mortgage have shuttered, while First Guaranty Mortgage Corp filed for Chapter 11 bankruptcy. LoanDepot exited the wholesale channel, with plans to sell its $1 billion pipeline and to refocus on consumer/retail channels.

Consolidated leverage ratios remain below rating downgrade triggers for the rated universe, supported by smaller origination pipelines and reduced warehouse borrowings. Corporate non-funding leverage is increasing for some issuers as mortgage servicing rights (MSR) balances grow and operating losses erode tangible equity, which could further pressure smaller, sub-scale players lacking capital.

Nonbank Mortgage Co. Unsecured Funding, Leverage

Rising rates and lower prepayment speeds increase the value of MSRs, and have resulted in incremental liquidity support for mortgage companies as they can sell MSRs or borrow against them using secured facilities. However, this could be tested if operating losses continue for an extended period.

Market risk exposure has risen in 2022 for rated mortgage companies with servicing operations, as MSRs now represent more than 100% of tangible equity on average. Valuation volatility in the MSR portfolio has a direct effect on leverage as fair value changes flow directly into the issuer’s equity base. There are limited positive potential adjustments to MSRs given prepayment assumptions are at historic lows of 6% - 8%, but any reversal would quickly inflate issuer leverage. Some mortgage companies partially or fully hedge those risks with derivatives while others utilize natural hedges with the origination platform, but leverage sensitivity varies widely across the sector.

Non-bank mortgage funding and liquidity profiles and heavy reliance on secured funding and non-committed credit facilities remain rating constraints. An inability to extend or refinance maturing debt facilities or to maintain sufficient liquidity to fund operational and contingent needs would be viewed negatively, as would higher levels of secured funding. Positively, near-term unsecured debt maturities are limited for the sector.

Mortgage Banker Magazine
Mortgage Banker Magazine
This article was originally published in the Mortgage Banker Magazine October 2022 issue.
Published on
Oct 18, 2022
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