The finances at nonbank mortgage companies will remain under pressure in 2024, despite some relief in mortgage rates, according to a new Fitch Ratings report.
But the credit ratings agency has a “moderately deteriorating” outlook for the sector because earnings – along with origination volumes – “have likely reached trough levels.” In addition, companies should see modest improvement in operating results from reduced expense bases.
The report, published on Monday, shows that the return on average assets – an indicator of how well companies use their assets to generate profits – reached 1% in the second quarter of 2023 for six lenders, compared to -2% in the previous quarter.
The data includes Rocket Mortgage, United Financial Mortgage, Pennymac Financial Services (PFSI), loanDepot, Finance of America and Pennymac Mortgage Investment Trust.
Regarding the industry’s volumes, Fitch based its report on Mortgage Bankers Association (MBA) data, which shows a $1.9 trillion origination production for 2024, an increase of 19% compared to 2023 but still lower than the 2020-2021 highs.
“While we expect rates to decline before year-end 2024, it will not drive significant refinance volume, as refi opportunities on the majority of existing mortgages will remain firmly out of the money,” analysts at Fitch wrote in the report.
Mortgage servicing portfolio
Many companies in the sector have servicing and origination segments that act as natural hedges against interest rate volatility.
In the current higher-for-longer rates landscape, for example, lower prepayment assumptions increase mortgage servicing rights (MSRs) mark-to-markets, partially offsetting origination declines and reductions in gain-on-sale margins.
In the third quarter of 2023 earnings season, the servicing segment drove most of the earnings at Pennymac Financial Services, Mr. Cooper and Rithm Capital.
Looking ahead, rate declines expected by the end of 2024 could pressure MSR valuations. Valuation changes could drive modest increases in leverage, especially if earnings from originations remain weak, Fitch said.
The report shows that balance sheet exposure to market risk is rising above historical levels for some companies. MSRs as a share of equity went from about 80% in 2020 to more than 180% in Q2 2023 at PFSI; from about 80% to 140% at United Wholesale Mortgage; and from 40% to 100% at Rocket, the data shows.
However, Fitch said it does “not expect meaningful MSR write-downs in the near term given interest rate forecasts.”
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