Orig­i­na­tion

Con­sol­i­da­tion is com­ing in the mort­gage in­dus­try, but a pro­tracted timetable will con­tinue to con­strict in­dus­try prof­its.

National Mortgage News - - Contents - By Bon­nie Sin­nock

Shake­out among mort­gage lenders could take time to ma­te­ri­al­ize

The ex­pected right­siz­ing of the mort­gage lend­ing in­dus­try will take time to play out, and un­til it does, the hous­ing fi­nance in­dus­try’s mar­gins will re­main com­pressed.

“Mort­gage sucks,” Henry Cof­fey, an eq­ui­ties an­a­lyst at Wed­bush, said in an in­ter­view. “Ev­ery­one’s wait­ing for the shake­out.”

The home mort­gage in­dus­try is ex­pect­ing more con­sol­i­da­tion to po­ten­tially oc­cur in the fourth quar­ter of this year, or the first quar­ter of next year. Both are pe­ri­ods when lenders tend to pro­duce fewer loans, and may be un­der more pres­sure to sell.

“We’re cer­tainly aware of a num­ber of trans­ac­tions and con­ver­sa­tions which have been in process,” Ken Richey, head of Richey May’s merger and ac­qui­si­tion ad­vi­sory ser­vices divi­sion, said in an in­ter­view. “If things con­tinue to be soft in the first quar­ter, as they typ­i­cally can be, we cer­tainly ex­pect to see some ac­tiv­ity.

“There just seems to be a greater level of uncer­tainty about the fi­nan­cial ef­fects that a soft first quar­ter will have, and there are some com­pa­nies that didn’t make any money or lost money in 2018.

“I think there is more uncer­tainty around whether they can make it through the dis­tressed pe­riod un­til they get to the spring when vol­umes typ­i­cally pick back up.”

But even if more con­sol­i­da­tion oc­curs in the next cou­ple of quar­ters, it might not be enough to re­lieve mar­gin pres­sure im­me­di­ately, ac­cord­ing to Cof­fey.

By the end of 2017, only 80% of in­de­pen­dent mort­gage bankers were gen­er­at­ing a profit, ac­cord­ing to Mort­gage Bankers As- so­ci­a­tion sta­tis­tics Wed­bush an­a­lyzed in its midquar­ter up­date. More re­cent num­bers sug­gest that the share is even lower this year, and prob­a­bly the low­est it has been since 2008. That year, just 59% of mort­gage bankers were prof­itable.

Be­cause mort­gage orig­i­na­tors’ mar­gins are un­der pres­sure, their spend­ing power is di­min­ished.

So among less-fa­vor­ably po­si­tioned com­pa­nies in the cur­rent cy­cle are their tech­nol­ogy providers, which count on lenders to in­vest in their prod­ucts.

Although there has been in­ter­est in dig­i­tal mort­gage sys­tems de­signed to im­prove cus­tomer out­reach and ef­fi­ciency, with mort­gage lenders’ spend­ing power con­strained, “the loan orig­i­na­tion sys­tem is get­ting com­modi­tized,” Cof­fey said.

Thin mar­gins are a big­ger con­cern than lower orig­i­na­tion vol­umes, but de­clin­ing pro­duc­tion lev­els are con­tribut­ing to lenders’ di­min­ished profitabil­ity and spend­ing power, he noted.

There could be a more than 8% de­cline in orig­i­na­tions this year and a 1.5% de­cline in 2019, ac­cord­ing to Wed­bush, which noted that it is fore­cast­ing slightly steeper drops for these pe­ri­ods than the MBA.

Home mort­gage orig­i­na­tions could be on the rise again by the time 2020 rolls around, but only by 0.5%, Wed­bush’s es­ti­mates show. The MBA also is fore­cast­ing a re­turn to higher vol­umes by 2020, but it is more op­ti­mistic about the ex­tent to which orig­i­na­tions could rise.

Although delin­quen­cies re­main low so far, there is some con­cern about new mort­gage prod­ucts lead­ing to looser credit in the mar­ket. Ex­am­ples in­clude low down­pay­ment prod­ucts and in­vestor loans. Other credit con­cerns in the mar­ket in­clude the fact that many first-time home­buy­ers are strug­gling with higher rental bur­dens, stu­dent debt, and lim­ited sav­ings.

While the mar­ket will be chal­leng­ing for many mort­gage com­pa­nies, there will be some that fare well in the cur­rent en­vi­ron­ment, ac­cord­ing to Wed­bush.

Among the most fa­vor­ably po­si­tioned mort­gage busi­nesses in this eco­nomic cy­cle are ser­vicers and in­vestors in mort­gage ser­vic­ing rights, such as real es­tate in­vest­ment trusts. These com­pa­nies could ben­e­fit from the cycli­cal shift to higher in­ter­est rates.

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