Mortgage Lenders Are Playing Defense

Mortgage lenders have been squeezed by rising interest rates and falling volumes. Investors should pay attention to when they push back.

Mid-May home loan rates hit highest since 2009 on Freddie Mac‘S

The US weekly average for 30-year fixed-rate mortgages stood at 5.3%. That is an increase of more than 2 percentage points since the end of last year. The direction should come as no surprise as the Federal Reserve raises interest rates and shrinks its mortgage bond portfolio. But Freddie Mac’s mortgage average is up about three-quarters of a point this year compared with the yield on 10-year US Treasuries.

While higher rates are bad news for mortgage volume, the rate of increase could actually contain an indicator of some better news. One component of that hike in mortgage rates could be the extent to which mortgage lenders protect their valuations. One way it can be measured is by the difference – or spread in rates – between the rates that standard mortgage borrowers pay and those of the standard securitized mortgages that are making a profit.

It could be a representation of the available funds being held by the originators as a profit on sale after they sell those mortgages into the market. After accelerating during the Covid-19 pandemic, the spread started the year by falling about 1.1% below the 10-year average, according to data tracked by analysts at Autonomous Research. Spreads have been volatile lately but tend to be higher, averaging around 1.3 points in May.

In first-quarter results, however, the average return on revenue among banks and startups tracked by analysts at Piper Sandler continued to fall from its 2020 peak, when it more than 3%. It fell to 1.28%, although the sequential decline was slightly smaller than in the previous quarter.

Notably, however, are the two giant initiators, Rocket RKT -2.51%

Cos. And UWM Holdings,

UWMC -0.99%

was one of the companies that actually saw their profit margins increase from the fourth quarter. The biggest companies have long positioned themselves to benefit as small subsidiaries that expand during the pandemic retreat. Some of that may have finally happened, with layoffs recently announced in several mortgage players. U.S. employment in real estate credit and mortgage and non-mortgage brokerages remains well above pre-pandemic levels, but as of March, the combined categories are down compared to the peak of last year, according to the US Bureau of Labor Statistics.

Rising interest rates have greatly reduced the group of homeowners, for whom refinancing will save substantial amounts of money. But buying demand fell less than demand for refinancing – a move also fueled in part by high home prices and a shortage of available housing supply.

UWM, known as United Wholesale, has long been positioned to benefit from a more buy-in market, which it argues favors the mortgage brokers it works with. It hit a first-quarter record in purchases. In an analyst call last week, the company noted that homebuyers may be less sensitive to rates than those who are able to refinance, and that they have set a bottom margin that it believes will not. must fall below this level. So far, shares of United Wholesale are up about 8% in May, despite overall declines in financial stocks and the broader market.

Rocket attributed some of its gains to the one-time volatility in the bond market during the quarter. But it also noted on the analyst call that, in the homebuying market, “capacity is growing rapidly, and particularly in areas where people don’t have the strong resources to keep going. marketing”. Rocket said it had a record number of homebuyers booked in March.

Mortgage lenders are still facing some tough conditions as volumes are constrained by rising rates and supply shortages. Investors should also look for potential turning points.

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