Lower lending combined with continued margin decline could push non-bank mortgage lenders' profitability to levels last seen in 2018, Moody & # 39; s said.
In two of the four quarters of 2018, mortgage lenders lost money per loan, the Mortgage Bankers Association found. They had made record profits over the past year, largely due to unusually high profit margins.
However, margin compression weighed on the results of both banks and publicly traded non-bank lenders in the second quarter.
In 2018, about a third of non-bank mortgage lenders were unprofitable, according to Moody's estimates. This landscape could return in 2022.
"The spread between mortgage rates and mortgage-backed securities returns, a driver of profit margins, has returned to its five-year average of 1.08% after industrial capacity largely caught up with credit demand," said Moody & # 39; s. "We expect industry competition to intensify later this year and into 2022, which is likely to further reduce profit margins."
Falling interest rates in 2019 delayed the likely consolidation that would have occurred after the 2018 losses.
"With a number of non-bank mortgage companies going public recently, industry competition could become even greater in this market cycle, resulting in stronger and faster industry consolidation," the report said. "The largest, financially stronger companies are likely to be the main beneficiaries of any consolidation taking place."
Fortunately, among the 13 non-bank mortgage companies that Moody & # 39; s interest rates were to improve, capitalization should improve in the second half of 2021 and through 2022, after declining slightly to 13.7% from 14% in real assets under management in late 2020.
(Moody's compounded Finance of America, Home Point, LoanDepot, Mr. Cooper, New Residential, Ocwen / PHH, PennyMac Mortgage Trust, PennyMac Financial Services, Rocket, and United Wholesale Mortgage, along with Freedom, Planet Home, and Provident in Private property)
These companies should benefit from smaller balance sheets as less borrowing will reduce loans held for sale, along with a likely decrease in overdue Ginnie Mae mortgages that had to be repurchased and put back on the books.
"However, some of that benefit could be offset somewhat by recent changes by Fannie Mae and Freddie Mac that limit the amount of credit originators, particularly larger originators, can sell directly to the two government-sponsored companies," and they could so the balance sheet will stay longer, said Moody & # 39; s.
In addition, "some new public companies run the risk that some will aggressively redistribute capital through withdrawals that exceed profits, resulting in smaller capital buffers to absorb unexpected losses," the report said.