With higher interest rates causing a slowdown in original mortgages and refinancings, market dynamics have tipped slightly in favor of regulated banks over non-banks as the cost of capital increases.
The current trend would reverse market gains by non-banks, which have shouldered their way into the mortgage and mortgage refinancing arenas in recent years.
Some non-bank lenders are starting to lay people off as well in a trend that may continue in 2022.
Non-banks took over a lot of the mortgage market during the low-rate period that recently ended, but now are facing the challenge of relying on funding that can be quite expensive, while banks have cheap deposits and plenty of cash.
While second-quarter numbers will emerge in coming weeks, first-quarter figures and recent industry data tell a dramatic story.
Primary mortgage rates increased 156 basis points in the first quarter, according to data compiled by KBW. The Mortgage Bankers Association said the typical mortgage rate rose to 3.8% at the end of the first quarter, up from 3.1% in the fourth quarter and 2.9% in the year-ago quarter. The MBA also projects second-quarter mortgage rates to clock in at 5.2%, a big increase from the first quarter.
In the first quarter, mortgage volumes fell 36% from the year-ago period among the largest bank and non-bank mortgage lenders, and came in worse than the MBA’s forecast for a drop of 23%.
As of Thursday, the average rate on a 30-year fixed-rate mortgage reached 5.23%, up from 5.09% a week ago, and well ahead of the 2.96% figure from a year ago.
In another sign of trouble, the Mortgage Bankers Association’s Market Composite Index fell to its lowest level in 22 years in the week to June 3, according to data released earlier this week.
In some cases, the higher rates are pushing home buyers to avoid mortgages entirely and seek other ways to pay such as marshaling up cash from relatives and then paying them back. National Association of Realtors reported that cash purchases amounted to about 28% of home real estate sales in March, the highest level in eight years.
While some signs indicate that inflation may be peaking, the U.S. Federal Reserve plans to continue its money-tightening approach to keep the economy from overheating. But jitters over a recession persist.
Also Read: Fed’s Mester says she doesn’t support pause in September
JPMorgan Chase & Co.
which originated about 3.6% of all mortgages in the first quarter, has flagged a trend of higher mortgage rates from private label mortgages currently.
CEO Jamie Dimon said June 1 at the Bernstein Strategic Decisions Conference that private label mortgage providers are 50 to 75 basis points higher than what retail banks are offering.
This is partly because banks have a lower cost of capital for loans via their own base of deposits, while non-lenders often tap credit from the leveraged loan market or the syndicated loan market, which have been less robust.
“The only way the other folks can finance it is by securitizations,” Dimon said. “This stuff is going to get worse if the markets get tighter and liquidity dries up a little bit. We will be prepared for it and so should you if you are smart.”
For its part, KBW said the current environment is offering some opportunities among mortgage stocks based on compelling valuations, but that cost-cutting will remain a theme in the current environment.
“We continue to see relative value in names that trade below book value” such as PennyMac Financial Services Inc.
which is currently valued at 0.75 times book value, analyst Bose George said in a May 22 research note.
In the first quarter, lenders started to back away from their growth targets, and some of the larger players in the industry have been reducing staff.
“While it remains somewhat difficult to measure capacity, we believe headcounts are declining,” George said.
PennyMac reduced head count to 6,308 in the first quarter from 7,208 in the fourth quarter and 7,075 in the first quarter of 2021, KBW noted. Loan Depot Inc.
ended the first quarter with 10,054 employees, down from 11,307 in the fourth quarter and 11,037 in the year-ago quarter. UWM Holdings Corp.
has cut its workforce to 7,800 at the end of the first quarter from 8,000 in the fourth quarter and 8,600 in the year-ago quarter.
Bucking the trend thus far is Ocwen Financial Corp.
which ended the quarter with 5,800 employees, up by 100 from the fourth quarter and up by 900 employees from the year-ago quarter.
Inflation continues to reshape the lending landscape, as banks get ready to report their second-quarter results in July.
While banks typically generate higher net interest income when interest rates rise, other factors have been impacting profit expectations such as a slowdown in investment banking amid a lack of initial public offerings and other capital raising; the cost of imposing Russia sanctions; and jitters around inflation and a potential recession impacting financial activity.
Against this backdrop, bank stocks have moved lower along with most other sectors in 2022.
Dow Jones Industrial Average
components JPMorgan Chase & Co. and Goldman Sachs Group Inc.
are down by 20.3% and 19.3% respectively in 2022, compared with a drop of 9.9% by the DJIA and a loss of 14.1% by the S&P 500
The KBW Nasdaq Bank Index
has lost 15.2% and the Financial Select SPDR ETF
is off by 12.2%.