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Retreat of Smaller Lenders Adds to Pressure on Housing (#GotBitcoin?)

Many nonbank lenders are dependent on refinancings, which are shrinking rapidly. Some are selling themselves, shutting down or laying off workers.

Small and midsize U.S. mortgage firms are trimming staff, putting themselves up for sale and closing up shop at a clip not seen in years, a sign of the mounting pressure on the housing market as interest rates rise and a long economic expansion matures.

The number of nonbank mortgage lenders was down by about 3.5% at midyear from the end of 2017, according to the Conference of State Bank Supervisors. Mortgage-loan-originators at those firms dropped by more than 11,000 workers, or 7%, according to the group, which operates the system that processes mortgage licenses and registrations.

The declines follow years of significant growth for nonbank lenders, which have taken mortgage-market share from traditional banks by being nimble and sometimes knowing local markets better. Led by larger firms such as Quicken Loans Inc., Freedom Mortgage and loanDepot, nonbanks made more than 52% of $1.26 trillion in originations in the first nine months of 2018, according to industry research group Inside Mortgage Finance.

Bankers and other industry watchers expect the ranks of smaller nonbank mortgage lenders to keep shrinking in coming months, as rising rates dry up the once-lucrative mortgage-refinancing business and make home purchases costlier. The nonbanks’ retreat adds to the concerns swirling about the health of the economy, particularly in the housing sector, which has slowed this year. Housing and lending are both major employers and widely followed leading indicators of future economic activity.

Though U.S. unemployment has fallen this year to its lowest level since 1969, financial markets are grappling with signs that growth is slowing as rising interest rates ripple through the economy.

The average rate on a 30-year fixed-rate mortgage is 4.81%, according to data released Wednesday by Freddie Mac . That ranks among the highest rates since the financial crisis and is up from 3.99% at the end of last year.

The Dow industrials have dropped each of the past three trading sessions and are down 1% for 2018, after recording more than a dozen new highs earlier this year.

“Rising rates are headwinds to us,” said Dan Gilbert, chairman of Quicken, the largest nonbank lender and one of the largest mortgage providers in the U.S., according to industry rankings. “When rates go low, those are tailwinds. But either way the plane has to fly,” he said.

The shakeout also reflects the straitened economics of the housing industry, where sales are slowing amid concerns about declining affordability, and rising costs for materials and labor are helping to narrow the pipeline of future construction projects.

“I tell ya, everybody is crying the blues,” said Tom Millon, head of Capital Markets Cooperative, an organization of about 500 mortgage lenders.

Though few nonbanks have well known brands or high profiles outside the industry, they have become crucial to the housing market in recent years. As big banks focus on wealthier borrowers, nonbanks are often a preferred route to a mortgage for first-time buyers or moderate-income families.

Unlike banks, these lenders don’t have deposits to fund themselves and generally don’t have other lines of business to buoy them when housing is slow. Instead, they often rely on short-term bank loans. If the housing market sours, banks could cut their funding—a move that doomed some nonbanks in the last crisis.

Already, banks are telling nonbank lenders to let them know if they are going to miss profit targets or other commitments, bankers and other industry watchers said. Ginnie Mae, the government-owned mortgage corporation that guarantees certain mortgage securities, has warned some nonbank financial firms to raise capital if they want to keep doing business with the government.

Adding to the pressure, many nonbank lenders sprung up in the years after the financial crisis, and thus have never navigated an era marked by rising rates and cooling home sales.

Jeffrey Levine, a Houlihan Lokey senior banker who advises mortgage lenders, said he expects a continued uptick in deal-making among nonbank mortgage lenders: “Consolidation is a natural part of the cycle, and right now there’s too much capacity in the business.”

The fortunes of nonbank lenders vary widely. At Quicken, for example, mortgage volume rose about 4% in the first nine months of this year from the comparable period of 2017, according to Inside Mortgage Finance. At Freedom Mortgage, volume fell 31%. Freedom said that rising rates and declining refinance activity were affecting the entire industry.

Some lenders are selling their mortgage-servicing rights to raise money, though that means giving up a steady income stream. Others are lending to borrowers they might have previously ignored, like those with slightly lower credit scores.

Many nonbank lenders rely heavily on refinancings, which were relatively quick and cheap to make amid low rates. But refinancing volume this year is expected to be less than half what it was in 2016, according to the Mortgage Bankers Association.

More than half of mortgage originations at loanDepot were refinancings in the first half of this year, according to estimates by Inside Mortgage Finance. Refinancing made up more than two-thirds the volume at Quicken, the group estimated. Quicken declined to comment on that figure.

Mr. Gilbert said purchase mortgages are becoming a bigger part of Quicken’s business. When the company refinances borrowers, they often return to Quicken for a purchase loan when they are moving to their next homes, he added.

Some in the industry say that sort of flexibility is what will save the nonbank industry and cushion the economy as the housing sector slows.

“Conventional wisdom is that a downturn hits nonbanks harder than it hits banks, because banks have other businesses to fall back on,” said Guy Cecala, CEO of Inside Mortgage Finance. “But nonbanks tend to be more flexible on their underwriting. They are willing to try new things.”

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Your questions and comments are greatly appreciated.

Monty H. & Carolyn A.

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