Mortgage lenders play defense

Mortgage lenders have been squeezed by rising rates and falling volumes. Investors should be careful when pushing back.

Home loan rates in mid-May hit their highest level since 2009 on Freddie Macit is

US weekly average of 30-year fixed rate mortgages at 5.25%. That’s up about 2 percentage points since the end of last year. The direction of travel should come as no surprise as the Federal Reserve raises rates and works to reduce its portfolio of mortgage bonds. But Freddie Mac’s average mortgage has jumped about three-quarters of a point more this year than the 10-year US Treasury yield has risen.

While the higher rates were bad news for mortgage lender volumes, the speed of the increase may actually hold an indicator of better news. One component of this rise in mortgage rates could be a degree of mortgage lenders hedging their prices. One way to measure is the spread – or rate difference – between the rates that standard mortgage borrowers pay and the yield of benchmark securitized mortgage pools.

This may be an approximation of the amount available to be retained by originators as sale gain margins after selling these mortgages in the market. After surging during the Covid-19 pandemic, that gap started the year dipping below its 10-year average of around 1.1%, according to figures tracked by analysts at Autonomous Research. Recently, the spread has been volatile but trended upwards, averaging around 1.3 points in May.

With the average 30-year mortgage rate hitting 5%, home ownership may now be out of reach for millions more Americans. Dion Rabouin of the WSJ explains the impact for potential buyers, sellers and the housing market. Illustration: Adele Morgan

Yet in the first quarter results, the median gain-on-sell margin among banks and originators tracked by Piper Sandler analysts continued to decline from the 2020 peak, when it was above 3%. It fell to 1.28%, although the sequential decline was a little smaller than in the previous quarter.

Notably, however, two giant creators, Rocket RKT -1.00%

cos. and UWM Holdings,

UWMC 1.02%

were among the companies that actually saw their margins increase from the fourth quarter. Larger companies have long positioned themselves as being able to benefit from the small fry that has developed during the pandemic’s retreat. Some of that could finally be happening, with recent layoffs announced at several mortgage players. U.S. employment in real estate lending and mortgage and non-mortgage brokerage is still well above pre-pandemic levels, but in March the combined categories were down from last year’s peak, according to the United States Bureau of Labor Statistics.

Rising rates have drastically reduced the pool of homeowners for whom refinancing would save a lot of money. But purchase demand is less down than refinancing demand, a development also partly driven by high house prices and a shortage of available housing supply.

UWM, known as United Wholesale, has long been positioned to benefit from a more buy-driven market, which it says favors the mortgage brokers it works with. It set a first-quarter record for purchase volume. On an analyst call last week, the company noted that homebuyers may be less rate sensitive than people likely to refinance, and that it had set a lower range for the margins it was convinced that she would not have to go below. Shares of United Wholesale have risen about 5.6% so far in May, defying the overall decline in financial stocks and the broader market.

Rocket attributed part of its margin increase to one-off movements in the bond market during the quarter. But he also noted on his call with analysts that, in the home buying market, “capacity is coming out quickly, and especially in areas where people don’t have the solid resources to continue to market”. Rocket said it saw a record volume of homebuyer pre-approvals in March.

Mortgage companies continue to face tough conditions as volumes are reduced by rising rates and this supply shortage. Investors should also be on the lookout for potential turning points.

Write to Telis demos at [email protected]

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Appeared in the print edition of May 20, 2022.

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