Mortgage lenders have been squeezed by rising rates and falling volumes. Investors should be paying attention when they push back.
Home-lending rates in mid-May hit their highest level since 2009 on Freddie Mac‘with
weekly US average of 30-year fixed-rate mortgages, at 5.25%. That is a climb of about 2 percentage points since the end of last year. The direction of travel should be no surprise as the Federal Reserve raises rates and moves to shrink its mortgage bond portfolio. But the Freddie Mac mortgage average has jumped roughly three-quarters of a point more this year than the 10-year US Treasury yield has risen.
Although higher rates have been bad news for mortgage lenders’ volumes, the rate of increase may actually contain an indicator of some better news. A component of that mortgage-rate rise might be a degree of mortgage lenders protecting their pricing. One way that can be measured is by the spread — or difference in rates — between rates that standard mortgage borrowers pay and what benchmark securitized packages of mortgages are yielding.
That can be a proxy for how much is available to be kept by originators as gain-on-sale margins after they sell those mortgages into the market. After surging during the Covid-19 pandemic, this spread started the year by dipping below its 10-year average of around 1.1%, according to figures tracked by analysts at Autonomous Research. Recently, the spread has been volatile but trending higher, in May averaging around 1.3 points.
Still, in first-quarter results the median gain-on-sale margin among banks and originators tracked by analysts at Piper Sandler continued its decline from the 2020 peak, when it was over 3%. It fell to 1.28%, although the sequential drop was a bit smaller than in the prior quarter.
Notably, though, two giant originators, Rocket RKT 5.27%
Barefaced. and UWM Holdings,
were among the firms that actually saw their margins grow from the fourth quarter. The largest firms have long positioned themselves as being able to benefit as small-fry that expanded during the pandemic retreat. Some of that might finally be happening, with recent layoffs announced at several mortgage players. US employment in real estate credit and mortgage and nonmortgage loan brokering is still well above prepandemic levels, but as of March the combined categories were down from last year’s peak, according to the US Bureau of Labor Statistics.
Rising rates have drastically reduced the pool of homeowners for whom refinancing would save significant money. But purchase demand is down less than refinance demand — a move also partly driven by high home prices and a shortage of available housing supply.
UWM, known as United Wholesale, has long been positioned to benefit from a more purchase-heavy market, which it argues favors the mortgage brokers it works with. It had a first-quarter record for purchase volume. During an analyst call last week, the company noted that home buyers may be less rate-sensitive than people who might be refinancing, and that it had set a bottom range for margins that it was confident it wouldn’t have to go below. United Wholesale shares are up about 5.6% so far in May, defying the overall decline in financial stocks and the broader market.
Rocket attributed some of its margin bump to one-time movements in the bond market during the quarter. But it also noted on its analyst call that, in the home-purchase market, “capacity is coming out quickly, and in particular, in areas where people don’t have the strong resources to continue to market.” Rocket said it had a record volume of home buyer preapprovals in March.
Mortgage companies are still facing some tough conditions as volumes are curtailed by rising rates and that supply shortage. Investors should also be looking for potential turning points.
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Appeared in the May 20, 2022, print edition.