It’s no secret the mortgage market is getting hammered.
Just look at last week’s stats on new home sales and pending ones and you immediately see the ramifications of 7% mortgage rates on housing activity.
But it’s not just skittish homebuyers who are smothering mortgage lenders. It’s largely the non-existent refinance market — down around 85% from last year — as nearly no homeowner wants to sacrifice their 3% mortgage rate they secured in the last two years. Overall, mortgage activity is at its lowest point since before the turn of the millennium in 1997.
For mortgage lenders — especially nonbank ones that don’t have many non-mortgage revenue sources — this is a big problem. For instance, Mr. Cooper (COOP) logged a 26.6% drop in originations in the third quarter from the previous one. Next to report earnings are Rocket Mortgage (RKT) on Thursday, United Wholesale Mortgage (UWMC) on Friday, and loanDepot (LDI) and Home Point Capital (HMPT) next week.
So how do these lenders keep on ticking beyond cutting workers? A few other line items may hold a lifeline through this slump.
While originations remain sluggish, the loans and refinances originated during the last two years of boom times still need to be managed. Mortgage servicing rights (MSR) of these loans have gotten a lot more attractive as an income booster, and lenders are capitalizing on them in two ways.
First, those that need cash are offloading these MSR portfolios of loans with historically low interest rates that are unlikely to be prepaid any time soon.
The biggest sellers of these portfolios so far this year are nonbank lenders: United Wholesale Mortgage, $107.4 billion; Home Point, $68.9 billion; Rocket Mortgage, $50.5 billion; and loanDepot, $25.3 billion, according to mortgage-data analytics firm Recursion.
On the other side, those who’ve been buying these portfolios are getting an incentive, too. That’s because the value of these MSR portfolios is increasing as originations tank.
“They mark up the value and take in income. It’s the natural hedge for a lending company,” Paul Muolo, executive editor of Inside Mortgage Finance, an industry trade publication, told Yahoo Finance. “That’s how the model is supposed to work. They can make a lot more money lending in boom times than servicing, but this can tide them over.”
Take, for example, Mr. Cooper. The company, the fourth top buyer of MSR portfolios this year at $78.8 billion per Recursion data, partly credited its quarterly net income with a “positive MSR mark,” Chairman and CEO Jay Bray said in the company earnings call, with CFO Jaime Gow noting that “MSR value increased by 5%… reflecting the recent rise in mortgage rates.”
Another bonus? The company was able to draw down an additional $90 million from its MSR lines, and continues “to use MSR lines for working capital needs and opportunistic MSR acquisition,” Gow said.
Some other nonbank lenders may be noticing. Both United Wholesale Mortgage and Rocket Mortgage, which have been big MSR sellers this year, have amended or entered credit facilities lately to include language on funding MSR portfolio acquisitions.
Speaking of credit facilities — that’s the other tactic some lenders are using as mortgage rates strangle the housing and refi market. They are cutting or eliminating warehouse credit lines with so-called Wall Street “repo” lenders that were used to help fund new originations — which as we’ve gone over — are in the toilet.
In September, loanDepot reduced a master repurchase agreement it entered into in June 2016 with JPMorgan Chase to $600 million. It also terminated a funding line with U.S. Bank the same month. Similarly, Home Point in September ended its master purchase agreement with Morgan Stanley early, and another with CS First Boston in October.
“When lending hits the wall like it has, they don’t need that borrowing authority and they go back to Chase — or whoever — and say I don’t need that $1 billion warehouse line anymore,” Muolo said. “If they close down the lines, they don’t have to pay those usage fees and can save money doing that.”
How much money? Typically between 12.5 and 25 basis points, according to Muolo. That may not sound like much, but with mortgage activity at a 25-year low, every penny counts.
