The housing market is hotter than ever. The mortgage market, however, is losing momentum.
Homes are selling at a breakneck pace not seen since before the financial crisis, pushing home values in nearly every US zip code. Still, lenders are bracing for a drop in mortgage demand in the coming months, as a result of rising interest rates making refinancing less attractive to many borrowers.
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Cos., The parent company of Quicken Loans, said last week that it expects its profit margin on the sale, a measure of what lenders earn when they sell loans, to decline in the second. trimester. The profit margin would be the company’s narrowest since before the mortgage boom. The forecast drove the shares of several non-bank lenders to double-digit losses last week, analysts said.
“The message from all companies that have publicly released financial information is that the competition has increased dramatically,” said Guy Cecala, Managing Director of Inside Mortgage Finance.
Last year was a banner year for the mortgage industry. Lenders generated a record $ 3.83 trillion in home loans in 2020, according to the Mortgage Bankers Association.
Mortgage rates that fell below 3% for the first time and changes in the way Americans work and live have pushed demand for refinancing and loan purchases to levels that have strained many. lenders. To stem the influx of claims, lenders have raised rates. But their own borrowing costs have remained stable. Profit margins have increased sharply.
This year, total creations are expected to fall to $ 3.3 trillion, down 14.2%. Yet at this level, 2021 would rank among the best years on record.
“This year is always expected to be a great year, possibly the second best year in history,” KBW analyst Bose George said. “But it’s just that directional, [mortgage volume] descend. »
One of the main reasons is a decline in refinancing activity. With a 30-year mortgage rate close to 2.97%, about 14.5 million Americans could reduce their monthly mortgage payments through refinancing, according to mortgage data firm Black Knight. Inc.
That’s down from 18.7 million earlier this year, when mortgage rates hit a record low of 2.65%.
Yet the good news for borrowers is that lenders are now fighting over customers by lowering the rates they charge.
This translates into lower profits for lenders. When lenders make mortgages cheaper, the gap between the rate they charge for the loan and the cost of the loan is reduced. Loans with smaller spreads are worth less when sold to investors in the secondary market. This reduces the profit margin on the sale or the amount that lenders earn on each loan they sell.
Competition among lenders in the wholesale mortgage channel, where borrowers obtain loans through individual mortgage brokers instead of banks or non-bank mortgage lenders directly, is causing a much of the decline in lines of credit, analysts said.
Lenders who provide mortgages directly to borrowers are under less pressure. Retail channel lenders, as is known, tend to have higher margins than their wholesale counterparts because they do not share the earnings with brokers.
Rocket said 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 measure to fall within a range. between 2.65% and 2.95% in the second quarter.
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“We’re sort of back to some of the longer-term historical margins we’ve seen, which on our platform are still very profitable,” Rocket CEO Jay Farner said on a call. with analysts.
Rocket’s stock price fell nearly 17% to $ 19.01 the day after the company’s earnings report.
Actions d’UWM Holdings Corp.
closed at an all time high last week after Rocket profits. UWM, the country’s largest wholesale lender, released its first quarter results on Monday.
Home Point Capital Inc.
shares fell nearly 18% on Thursday after the company said its wholesale lending business collapsed even in April. HomePoint acquires most of its loans through wholesale loans.
Write to Orla McCaffrey to [email protected]
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