Lower Rates Have A Downside For Bank’s Mortgage-Servicing Rights (#GotBitcoin?)
The value of the right to handle mortgage payments falls at banks including Wells Fargo and JPMorgan Chase as rates decline. Lower Rates Have A Downside For Bank’s Mortgage-Servicing Rights (#GotBitcoin?)
Lower interest rates generally help banks’ mortgage businesses. Except when they don’t.
The value of mortgage-servicing rights, which are a key part of banks’ mortgage businesses, got hit by falling rates in the second quarter at Wells Fargo & Co., JPMorgan Chase & Co. and other lenders, weighing on what was otherwise a strong period for home-lending operations.
Mortgage servicing involves collecting payments and performing other administrative duties on home loans, but the value of the rights to service those mortgages usually drops when interest rates fall.
Wells Fargo, the largest bank holder of servicing rights, said the value of its mortgage-servicing rights dropped 9% from the end of the first quarter to $12.1 billion at the end of the second quarter. JPMorgan, the second-largest, said the value of its mortgage-servicing rights fell 15% over the quarter to $5.1 billion.
The moves show the flip side of falling rates, which generally spur borrowers to take out home loans or refinance. The average 30-year fixed mortgage ended the second quarter with a rate of 3.73%, down from 4.08% at the beginning of the period, according to Freddie Mac data. The Federal Reserve has signaled it is ready to cut rates after several years of raising them, in turn pulling down the cost of borrowing for mortgages and other debt.
But while lower rates can fuel mortgage making, they usually hurt the paper value of servicing rights. That is because lower rates make homeowners more likely to refinance their mortgages or otherwise pay them off early, which means the servicer loses that future income stream.
It might be a humdrum business, but it is important to many lenders. Lenders can service mortgages they have made or buy the rights to service mortgages made by other lenders. Some do so because they provide a steady source of income. Citizens Financial Group Inc., for example, doubled the amount of mortgages it services when it bought a lender last year, leading to a jump in mortgage-banking revenue.
In their second-quarter earnings reports last week, banks disclosed steep declines in the value of these assets. The banks that have reported earnings so far generally lost between 7% and 10% of fair value in their mortgage-servicing-rights portfolios, according to Mark Garland, managing director at SitusAMC, which advises on servicing transactions.
For servicing portfolios, it was the speed of the drop that caught many executives off guard.
“Mortgage companies do best when rates move steadily in a direction as opposed to rapidly in a direction,” said Stephen Lynch, a credit analyst at S&P Global Ratings, whose coverage includes mortgage firms. “We definitely saw a dislocation.”
Banks typically use derivatives to protect against volatility in the value of their servicing rights, a practice known as hedging. But that becomes more difficult when rates fall quickly. Some lenders disclosed getting wrong-footed by their hedges. “It was a tough quarter to hedge,” Mr. Garland said.
When banks service a mortgage, they can collect a small cut of the mortgage payment. Many banks take this job because it allows them to develop a relationship with the borrower and try to sell them other bank products, while also collecting income.
Banks serviced some $3.6 trillion of mortgages that have been packaged into Fannie Mae or Freddie Mac securities or otherwise sold on to other investors, according to data from the end of March by industry-research group Inside Mortgage Finance.
The business of buying and selling servicing rights became a hot trade last year as mortgage rates hit multiyear highs. Those trades have cooled as rates dropped this year. In the first quarter as rates were falling, $135.7 billion of Fannie, Freddie and Ginnie Mae servicing rights changed hands, down about $40 billion from the prior quarter, according to Inside Mortgage Finance.
Mortgage Industry Soars To Record With $4.4 Trillion In Loans
Nearly $4.4 trillion of home mortgages are set to be originated this year in the U.S., according to data provider Black Knight Inc.
That record amount is about $300 billion more than the most optimistic forecast among estimates from Fannie Mae, Freddie Mac, and the Mortgage Bankers Association.
The Federal Reserve has helped fuel a housing rally by keeping interest rates low and buying mortgage bonds to stimulate the economy.The previous originations record was set in 2003, when the Fed cut interest rates and spurred a boom in refinancings that led to $3.8 trillion of new mortgages that year.
Roughly 6.4 million homeowners have refinanced their mortgages this year through September, a figure that Black Knight experts to top 9 million by year’s end.
Profit margins are at record levels in the mortgage industry, prompting at least nine companies to either go public this year or plan to do so in the coming months.
Next year could be even better for the industry, with more than $4.5 trillion of projected originations, according to a team of mortgage researchers at Bank of America Corp. led by Satish Mansukhani.
Mortgage Originations Are On Pace For Best Year Ever
Record-low interest rates and strong demand for homes boost lenders during Covid-19 pandemic.
Americans are poised to take more mortgages this year than they did even during the run-up to the 2008-09 financial crisis.
In the first nine months of the year, lenders extended $2.8 trillion of mortgages, according to industry-research firm Inside Mortgage Finance. The boom has extended into the final quarter of 2020, prompting analysts to predict origination volume will exceed the prior record of $3.7 trillion in 2003.
The home-lending surge is an unexpected reverberation of the Covid-19 recession. The pandemic has put millions of people out of work and made it tougher to show homes to prospective buyers. But it has also ushered in record-low interest rates that prompted millions to refinance and lower their monthly payments or trim the length of their loans.
“2003 was a record that nobody thought would ever be achieved again,” said Guy Cecala, chief executive of Inside Mortgage Finance. That year low 30-year mortgage rates led to a surge in refinancings.
In the first three quarters of 2020, refis made up 65% of all originations, on pace to be the highest share since 2012, according to Inside Mortgage Finance.
As was the case in 2004, refinancing activity may fall next year unless rates drop significantly below their record low of 2.71%. That poses risks for the industry, in particular the nonbank lenders that extended the majority of mortgage credit so far this year.
Nonbanks including Quicken Loans, which is part of Rocket Cos., and United Wholesale Mortgage have grown aggressively during the pandemic, and a handful have gone public or made plans to do so, setting up high expectations for their businesses going forward.
When volume dropped off in 2004, lenders intent on continuing to grow loosened underwriting standards to bring in more business, writing loans that customers ultimately couldn’t repay. “If 2003 has any lessons for us, it’s that starting in 2004 and 2005, the seeds for the foreclosure crisis were planted,” Mr. Cecala said. The crisis that followed transformed mortgage lending, leading to regulatory changes meant to prevent a repeat.
Despite the pandemic, 2020 brought a confluence of good news for mortgage lenders. The 30-year fixed mortgage rate dipped below 3% in July and stayed there. That meant a swath of homeowners—more than nine million—saved money by refinancing this year, according to forecasts by Black Knight Inc., a mortgage technology and data company.
Jim Brennan of West Hartford, Conn., refinanced his 30-year mortgage into a 15-year mortgage over the summer, cutting his rate to 2.49% from 3.88%. The monthly payments on the Colonial he shares with his wife and son increased by a few hundreds dollars a month, but he expects to save tens of thousands of dollars by reducing the loan term.
“It’s certainly worth it given the amount of money you can save or the amount of cash you can free up,” he said. Some of his friends and family had refinanced right around the time he did, he added.
Other factors have supported the refi boom. Those waiting out the pandemic in their living rooms suddenly had time to do the paperwork. An industry accustomed to appraising properties and doing closings in person devised digital workarounds.
What’s more, homeowners have increasingly used refinancing this year to pull cash from their homes, according to Freddie Mac estimates. Cash-out refis generally increase the balance of a loan but provide money that can be used for renovations or to pay bills.
Mortgage lenders put in overtime trying to meet the refinancing demand. Michael Menatian, owner of Sanborn Mortgage Corp. in West Hartford, said his business doubled this year from the prior two years. “It’s been a fantastic year, and we needed it,” he said.
There have been some roadblocks. Mortgage companies that also service loans had to shell out money to front payments for struggling borrowers who entered forbearance programs after the pandemic hit, prompting concern that some lenders would run out of cash. But many of the companies with origination businesses more than made up for it by making new loans, analysts say.
This month Fannie Mae and Freddie Mac, the government-backed mortgage giants, began charging an additional fee on refinance loans that they purchase from mortgage companies. That fee stands to push up the interest rate for refis going forward, which could eat into demand.
Still, purchase demand is high. Americans stockpiled savings and trimmed their expenses when the economy effectively shut down, freeing up cash for down payments. Many people who didn’t lose jobs and decided they needed more space left cities for suburbs or bought second houses.
Zack Dagneau and his family moved from the Boston area to West Hartford and closed on a home in August. A new job prompted the move, as well as a desire to be closer to family and have more space.
“The pandemic really focused a lot of the reasons we had been looking to move in the first place,” he said.
The family of four traded in a three-bedroom, one-bathroom place for a six-bedroom, four bathroom Colonial. They got a 30-year fixed mortgage with a rate of 2.99%.