Mortgage rates are rising, home inventory is low, and home affordability has fallen again. The good news is that, due to low buyer participation, home sellers are deciding to drastically reduce the prices of their home listings. With mortgage rates recently exceeding the 6 percent threshold, home sales are cooling significantly and the fear of a recession looming across the country, the housing market appears to be firmly in “correction territory.” Wholesalers UWM and Homepoint, for example, are developing new products for unqualified mortgage borrowers, including bank statement loans for self-employed borrowers and cash flow loans for investors. The mortgage business boomed during the first two years of the pandemic, driven by extremely low financing costs and a preference for suburban homes with home offices.
Mortgage companies keep a portion of the value of the loans they originate and, therefore, when volumes increase, so do profits. The dynamic could cause some banks to decide to offer mortgages through partners, which is what Santander is doing now; it includes Rocket Mortgage on its website. But it's not just volumes that drive mortgage profit cycles, but margins inject another layer of cyclicity. In a more competitive environment, originator companies are also changing their product range, offering reverse mortgages, home equity loans and home improvement loans.
Few industries are as cyclical as the U.S. mortgage industry, and these companies were selling ahead. Bank (53.3% of the mix), CrossCountry Mortgage (54.6%), Guild Mortgage (52.8%), multi-channel lender Fairway Independent Mortgage (61.7%) and Movement Mortgage (67.3%). Now that rising interest rates are turning off the refinancing faucet, a new generation of specialized mortgage lenders is in the line of fire.
A recent ICE Mortgage Technology survey revealed that 31% of borrowers were more likely to choose a bank and 25% a broker to close their loans. Finance of America (FoA) has been particularly active in diversifying its product portfolio, mainly through reverse mortgages, investor loans and commercial loans. Mortgage originators, including Interfirst Mortgage, triggered by the COVID-19 pandemic, a “gray swan” phenomenon that led to interest rates close to zero and the central bank to acquire mortgage-backed securities, spent the last two years building their capacity to generate trillions of dollars in refinancing. Woodward quickly got a job as an LO at American Pacific Mortgage, a California-based lender that had just opened a branch in Fort Wayne.
Analysts at Credit Suisse Group AG estimate that only about 1% of mortgages represent at least 50 basis points “in the money to refinance”, and it is not clear, given that they have not yet done so, whether these borrowers are going to refinance or not. Encouraged by generationally low mortgage rates, millions of borrowers refinanced, generating record volumes.