The mortgage boom is fading

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The housing market is hotter than ever. But the mortgage market is losing momentum.

Homes are being sold at a rapid pace not seen before the financial crisis. raising household values in almost every US postal code. Nonetheless, lenders are preparing for a decrease in demand for mortgages in the coming months as a result of higher interest rates, which makes refinancing less attractive for a large portion of borrowers.

The expected decline in mortgage lending is causing price wars in the industry. This leads to lower margins and scares the shareholders of mortgage companies, who entered the stock exchange closer to the peak of the credit boom.

Rocket

RKT 1.07%

Cos., Parent company of Quicken Loans, said last week that it expects its sales profit – a measure of how much lenders earn from selling loans – to decline in the second quarter. The rate of return will be the lowest since the mortgage boom. The forecast led to double-digit losses in shares of several non-bank lenders last week, analysts say.

“All of the companies that published their financial statements said the competition has increased significantly,” said Guy Sekala, chief executive of Inside Mortgage Finance.

The past year has been a significant one for the mortgage business. Lenders provided a record $ 3.83 trillion in home loans in 2020, according to the Mortgage Bankers Association.

Mortgage rates, which fell below 3% for the first time, and changes in the way Americans work and live, have raised the demand for both refinancing and buying loans to levels that strains many lenders… To stem the flow of applications, lenders raised rates. But their own borrowing costs stood still. Profitability has skyrocketed.

Total shipments are expected to fall to $ 3.3 trillion this year, down 14.2%. However, at this level, 2021 will be one of the best on record.

“This year is expected to be a great year, possibly the second best year in history,” said KBW analyst Boz George. “But this is just a direction, [mortgage volume] goes down. “

The fall in refinancing activity is a serious reason for this. At a 30-year mortgage rate of about 2.97%, about 14.5 million Americans can lower their monthly mortgage payments through refinancing, according to the Mortgage Data Agency.

Black Knight Inc.

That’s down from $ 18.7 million at the start of the year, when mortgage rates hit a record low of 2.65%.

However, the good news for borrowers is that lenders are now vying for clients by lowering the rates they charge.

This leads to lower profits for lenders. When lenders make mortgages cheaper, the difference between the rate they charge for the loan and how much it costs them is reduced. Loans with smaller gaps cost less when sold to investors in the secondary market. This lowers the profit on the sale, or the amount that lenders earn on each loan sold.

Analysts believe that competition among lenders in the wholesale mortgage channel, where borrowers obtain loans through individual mortgage brokers rather than directly through banks or non-bank mortgage lenders, is leading to a significant decrease in loan margins.

There are several key players in the US mortgage market that play an important role in this process. Here’s what investors need to understand and what risks they take when investing in the industry. Telis Demos from WSJ explains. Photo: Martin Barro / Getty Images

Lenders who provide mortgages directly to borrowers are under less pressure. Lenders in the retail channel are known to generally have higher margins than their wholesale partners because they do not share profits with brokers.

Rocket reported a margin of 3.74% in the first three months of the year, up from 4.41% in the fourth quarter of 2020. He also said he expects the rate to fall to a range of 2.65% to 2.95% in the second quarter.

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“We’re kind of going back to some of the historic long-term profitability we have seen that is still very profitable on our platform,” Rocket CEO Jay Farner said in a call with analysts.

Rocket’s share price fell nearly 17% to $ 19.01 the day after the release of the income statement.

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UWM Holdings Corp.

closed at an all-time low last week after the Rocket report. UWM, the country’s largest wholesale lender, reported its first quarter results on Monday.

Home Point Capital Inc.

The stock fell nearly 18% on Thursday after the company said its wholesale lending business paid off in April. HomePoint purchases most of its loans from wholesale loans.

Write to McCaffrey’s eagle orla.mccaffrey@wsj.com

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