EDITOR NOTE: The mortgage market, specifically the mortgage volume demand for refinancing, may be slowing, but the housing market remains hot. With booming demand amid historic short supply and a rise in lumber among other input costs, it’s unclear whether the current construction boom will be sufficient to satisfy demand, particularly among Millennials reaching peak buying age, at least enough to cool the market. But as American purchasing power gets eroded across a wide swathe of consumer products, the demand for housing and other products may loosen. Mainstream pundits are of the opinion that home inflation will cool; taking a note from the Fed that what we’re seeing in the current price surge is transitory. But again, the Fed has a poor history of forecasting, let alone controlling, inflation. What many analysts are somewhat in consensus about, is that the inflation may be with us at least for the remainder of the year. And if you want to preserve your purchasing power in the meantime, an investment in physical gold and silver may be your most prudent opportunity to inversely transform dollar erosion into financial growth.
The housing market is as hot as ever. The mortgage market, though, is losing steam.
Homes are selling at a blistering pace unseen since before the financial crisis, pushing up home values in nearly every U.S. ZIP Code. Yet lenders are preparing for mortgage demand to cool in the coming months, the result of rising interest rates that make refinancing less attractive for a huge chunk of borrowers.
The anticipated decline in mortgage volume is setting off price wars across the industry. That is driving down profit margins and spooking the shareholders of mortgage firms that went public closer to the height of the lending boom.
Rocket Cos., the parent of Quicken Loans, said last week that it expects its gain-on-sale margin, a measure of how much lenders earn when they sell loans, to decline in the second quarter. The profit margin would be the company's narrowest since before the mortgage boom. The forecast drove shares of several nonbank lenders to double-digit losses last week, analysts said.
"The message from all the companies that have reported financials publicly is that competition has increased significantly," said Guy Cecala, chief executive of Inside Mortgage Finance.
Last year was a banner one for the mortgage business. Lenders originated a record $3.83 trillion in home loans in 2020, according to the Mortgage Bankers Association.
Mortgage rates that dipped below 3% for the first time and changes in the ways Americans work and live pushed up demand for both refinancings and purchase loans to levels that strained many lenders. To stem the influx of applications, lenders raised rates. But their own borrowing costs stood still. Profit margins rose sharply.
This year, total originations are expected to fall to $3.3 trillion, a 14.2% decline. Still, at that level, 2021 would rank among the best years on record.
"This year is still expected to be a great year, probably the second-best year in history," said KBW analyst Bose George. "But it's just that directionally, [mortgage volume] is going down."
A drop in refinancing activity is a big reason why. With the 30-year mortgage rate near 2.97%, about 14.5 million Americans could lower their monthly mortgage payments through a refinancing, according to mortgage-data firm Black Knight Inc. That is down from 18.7 million near the start of the year, when mortgage rates reached a record low of 2.65%.
Still, the good news for borrowers is that lenders are now vying for customers by lowering the rates they charge.
That translates into lower profits for lenders. When lenders make mortgages cheaper, the gap between the rate they charge for the loan and how much it costs them to make it shrinks. Loans with smaller gaps are worth less when sold to investors in the secondary market. That reduces the gain-on-sale margin, or the amount lenders earn on each loan they sell.
Competition among lenders in the wholesale mortgage channel, where borrowers secure loans through individual mortgage brokers instead of banks or nonbank mortgage lenders directly, is driving much of the decline in lending margins, analysts said.
Lenders that extend mortgages directly to borrowers are under less pressure. Lenders in the retail channel, as it is known, tend to have higher margins than their wholesale counterparts because they don't share the gains with brokers.
Rocket reported a margin of 3.74% in the first three months of the year, down from 4.41% in the fourth quarter of 2020. It also said it expects the measure to fall to a range between 2.65% and 2.95% in the second quarter.
"We're kind of back to some of the historical longer-term margins that we've experienced, which on our platform are still very profitable," Rocket Chief Executive Jay Farner said during a call with analysts.
Rocket's stock price fell nearly 17% to $19.01 the day after the company's earnings report.
Shares of UWM Holdings Corp. closed at a record low last week after Rocket's earnings. UWM, the country's largest wholesale lender, reports first-quarter results Monday.
Home Point Capital Inc. shares fell close to 18% Thursday after the company said its wholesale-lending business broke even in April. HomePoint acquires most of its loans through wholesale lending.
Original post from MorningStar