Shakeout among mortgage lenders could take time to materialize

Mortgage

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.

Mortgage banker profitability

“We’re certainly aware of a number of transactions and conversations which have been in process, and we’re heading into the fourth quarter where volumes are typically softening up, so we’re certainly seeing a pickup in those conversations,” Ken Richey, head of Richey May’s merger and acquisition advisory services division, said in an interview.

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 Association 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.

While the market will be challenging until then for many mortgage companies, there will be some that fare well in the current market 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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