Rising rates are roiling nonbank mortgage lenders
Many rely on refinancings, some are selling themselves, shutting down or laying off staff
The decade of low mortgage rates is winding down. Its end will be particularly painful for the nonbanks that now control the bulk of the market.
Nonbank lenders—less known and less regulated than their bank counterparts—have enjoyed a yearslong renaissance, with many springing up or expanding after the financial crisis. That also means some of those lenders have never navigated an era like today’s, marked by rising rates and cooling home sales. Many are dependent on refinancings, which are shrinking rapidly. And already some lenders are selling themselves, shutting down or laying off workers.
It is a reminder of how rising rates are roiling the mortgage market in all corners. The average rate on a 30-year fixed-rate mortgage is 4.81%, according to data released Wednesday by Freddie Mac, up from 3.99% at the end of last year. For consumers, the higher rates have made homes less affordable and discouraged some would-be buyers. They have also cut into home sales, which has squeezed lenders’ profit margins.
“I tell ya, everybody is crying the blues,” said Tom Millon, head of Capital Markets Cooperative, an organization of about 500 mortgage lenders.
Nonbanks have become crucial to the market in recent years. As big banks have pulled away from the mass market to focus on wealthier borrowers, nonbanks are often the only route for firsttime buyers or moderate-income families to get a mortgage.
Though most nonbanks are little known outside the industry —even bigger players like Freedom Mortgage and loan Depot are hardly household names—they now account for more than half of U.S. mortgage volume. Nonbanks made more than 52% of $1.26 trillion (U.S.) in originations in the first three quarters of this year, according to industry research group Inside Mortgage Finance.
Unlike banks, these lenders don’t have deposits to fund themselves and generally don’t have other lines of business to buoy them when housing is slow. Instead, they usually rely on shortterm bank loans. If the housing market sours, banks could cut their funding, which doomed some nonbanks in the last crisis.
Already, banks are telling nonbank lenders to let them know if they are going to miss profit targets or other commitments on their borrowing agreements, bankers and other industry watchers said.
Ginnie Mae, the governmentowned mortgage corporation that guarantees certain mortgage securities, has warned some nonbanks to raise capital if they want to keep doing business with the government. The government guarantee is coming “with more strings attached” for some lenders, said Michael Bright, the agency’s chief operating officer.
Bankers and other industry watchers expect the ranks of nonbank lenders to keep shrinking over the next year or so. Smaller lenders, which don’t benefit from the economies of scale that are crucial to mortgage making, are particularly vulnerable.
Nonbanks have been growing for years, but their ranks are starting to shrink. The number of mortgage loan originators working at nonbanks dropped by about 7%, or more than 11,000 employees, from the end of last year to the middle of this year, according to the Conference of State Bank Supervisors, which operates the system that processes mortgage licenses and registrations. The number of nonbank mortgage lenders fell by about 3.5%.
Jeffrey Levine, a Houlihan Lokey senior banker who advises mortgage lenders, said he expects a continued uptick in dealmaking among nonbank mortgage lenders.
“Consolidation is a natural part of the cycle, and right now there’s too much capacity in the business,” Mr. Levine said.
Some lenders are selling their mortgage-servicing rights to raise money, though that means giving up a steady income
stream. Others are lending to borrowers they might have previously ignored, like those with slightly lower credit scores.
Mark Jones, chief executive of a Kalamazoo, Mich., nonbank lender called Amerifirst Home Mortgage, said he has seen competitors offering “crazy low interest rates” to try to drum up business. “You can only do that for so long before you’re either going to be dead or be bought by someone who will raise your price to what it needs to be,” he said.
The fortunes of nonbank lenders vary widely. At Quicken Loans Inc., for example, mortgage volume rose about 4% in the first nine months of this year from the same period in 2017, according to Inside Mortgage Finance. At Freedom Mortgage, volume fell 31%. Freedom said in a statement that rising rates and “a major decline in refinance activity” were affecting the entire industry.
But overall, nonbanks are continuing to gain share from the banks.
“Conventional wisdom is that a downturn hits nonbanks harder than it hits banks, because banks have other businesses to fall back on,” said Guy Cecala, CEO of Inside Mortgage Finance. “But nonbanks tend to be more flexible on their underwriting. They are willing to try new things.”
Many nonbank lenders rely heavily on refinancings, which were relatively quick and cheap to make amid low rates. But refi volume this year is expected to be less than half what it was in 2016, according to the Mortgage Bankers Association.
More than half of mortgage originations at loan-Depot were refis in the first half of this year, according to estimates by Inside Mortgage Finance. Refis made up more than two-thirds the volume at Quicken, the group estimated.
Quicken declined to comment on that estimate.
Dan Gilbert, Quicken’s chairman, said purchase loans are becoming a bigger part of Quicken’s business. When the company refinances borrowers, they often return to Quicken for a purchase loan when they are moving to their next homes, he added.
“Rising rates are headwinds to us. When rates go low, those are tailwinds,” Mr. Gilbert said. “But either way the plane has to fly.”