For US banks, this is the welcome end of an era. Non-bank mortgage specialists, however, will groan. The US Federal Reserve this week raised interest rates for the first time since 2018. Six more increases are projected for this year as officials seek to rein in inflation from a four-decade high.
Shares in America’s biggest lenders, JPMorgan, Bank of America and Citigroup, all rallied this week. Investors anticipate higher borrowing costs will boost these banks’ net interest incomes.
But for non-bank mortgage lenders higher rates could smart. Having lived through the wave of low interest rates to two of its best years on record during the pandemic, the industry is now braced for leaner times.
Mortgage origination reached nearly $4tn in 2021, according to the Mortgage Bankers Association. This should drop by more than a third to $2.6tn this year, as refinancing activity withers.
Non-bank specialists account for the bulk of these. Owners who could refinance probably have done so in recent years. Meanwhile, rising house prices and tight inventory will give first time homebuyers pause.
Markets have priced in a shareholder exodus. Rocket Companies, which owns Quicken Loans, the US’s largest non-bank mortgage lender, has more than halved to $21bn in market value over the past 12 months. Rival UWM, the parent company of United Wholesale Mortgage, has endured a similar fall.
As the pool of customers shrinks, expect competition between lenders to heat up. That will squeeze profitability. Rocket’s gain-on-sale margin, a measure of how much it earns selling mortgages, was 3.13 per cent last year, compared with 4.46 per cent in 2020 and its pre-pandemic level of 3.19 per cent. At UWM, that metric fell by more than half to 1.14 per cent last year.
On the bright side, a shake-out among non-bank lenders looms. Rocket’s shares, at 10 times forward earnings, trade at a premium to peers such as UWM. That offers Rocket currency with which to play the consolidator. It could use this interest rate cycle to bulk up.
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