Borrowing money

Layoffs nibble at mortgage sector as lenders absorb slowdown in housing finance

With rising interest rates leading to a slowdown in initial mortgage lending and refinancing, market momentum has tilted slightly in favor of regulated banks over non-banks as the cost of capital rises.

The current trend would reverse market gains by non-banks, which have made their way into the mortgage and mortgage refinance arenas in recent years.

Some non-bank lenders are also starting to lay off people in a trend that could continue into 2022.

Non-banks took control of much of the mortgage market during the low rate period that recently ended, but now face the challenge of relying on financing that can be quite expensive, while banks have cheap deposits and plenty of cash.

While second quarter numbers will emerge in the coming weeks, first quarter numbers and recent industry data tell a dramatic story.

Primary mortgage rates rose 156 basis points in the first quarter, according to data compiled by KBW. The Mortgage Bankers Association said the typical mortgage rate rose to 3.8% at the end of the first quarter, from 3.1% in the fourth quarter and 2.9% in the year-ago quarter. The MBA also expects second-quarter mortgage rates to come in at 5.2%, a sharp increase from the first quarter.

In the first quarter, mortgage volumes fell 36% from the prior year period among the largest bank and non-bank mortgage lenders, and were worse than the MBA forecast for a 23% decline .

On Thursday, the average rate for a 30-year fixed-rate mortgage hit 5.23%, down from 5.09% a week ago, and well ahead of the 2.96% figure a week ago. year.

In another sign of trouble, the Mortgage Bankers Association’s Composite Market Index fell to its lowest level in 22 years in the week to June 3, according to data released earlier this week.

In some cases, the higher rates cause homebuyers to avoid mortgages altogether and look for other ways to pay, such as collect family money then pay them back. The National Association of Realtors said cash purchases accounted for about 28% of real estate sales in March, the highest level in eight years.

While there are signs that inflation could peak, the US Federal Reserve plans to continue its monetary tightening approach to keep the economy from overheating. But nervousness about a recession persists.

Read also : Fed Mester says she doesn’t support September break

JPMorgan Chase & Co. JPM,
which generated about 3.6% of all mortgages in the first quarter, has currently signaled an upward trend in private label mortgage rates.

CEO Jamie Dimon said June 1 at Bernstein’s Strategic Decisions Conference that private label mortgage providers are 50 to 75 basis points better than what retail banks are offering.

This is partly because banks have a lower cost of capital for lending through their own deposit base, while non-lenders often draw credit from the leveraged loan market or the market. syndicated loans, which were less robust.

“The only way for others to fund it is through securitizations,” Dimon said. “It’s going to get worse if the markets tighten up and the liquidity dries up a bit. We’ll be prepared for it and so should you if you’re smart.

For his part, KBW said the current environment offers some opportunities among mortgage stocks based on attractive valuations, but cost cutting will remain a theme in the current environment.

“We continue to see relative value in names that trade below book value” such as PennyMac Financial Services Inc. PFSI,
which is currently valued at 0.75 times book value, analyst Bose George said in a May 22 research note.

In the first quarter, lenders began to drift away from their growth targets and some of the biggest players in the sector reduced their workforces.

“While it remains somewhat difficult to gauge capacity, we believe numbers are declining,” George said.

PennyMac reduced the number of employees to 6,308 in the first quarter, from 7,208 in the fourth quarter and 7,075 in the first quarter of 2021, KBW noted. Loan Deposit Inc. LDI,
ended the first quarter with 10,054 employees, compared to 11,307 in the fourth quarter and 11,037 in the year-ago quarter. UWM Holdings Corp. UWMC,
reduced its workforce to 7,800 at the end of the first quarter, from 8,000 in the fourth quarter and 8,600 in the year-ago quarter.

Bucking the trend so far is Ocwen Financial Corp. OCN,
which ended the quarter with 5,800 employees, up 100 from the fourth quarter and 900 employees from the prior year quarter.

Inflation continues to reshape the lending landscape as banks prepare to report their second quarter results in July.

While banks generally generate higher net interest income when interest rates rise, other factors have impacted earnings expectations, such as a slowdown in investment banking in due to a lack of initial public offerings and other capital raisings; the cost of imposing sanctions on Russia; and nervousness around inflation and a potential recession affecting financial activity.

Against this backdrop, banking stocks fell along with most other sectors in 2022.

Dow Jones DJIA Industrial Average,
components JPMorgan Chase & Co. and Goldman Sachs Group Inc. GS,
are down 20.3% and 19.3% respectively in 2022, compared to a 9.9% decline in the DJIA and a 14.1% loss in the S&P 500 SPX,

The KBW Nasdaq BKX banking index,
lost 15.2% and the Financial Select SPDR ETF XLF,
is down 12.2%.