United Wholesale Mortgage is hiring as mortgage lenders gear up, while big banks are reducing exposure to the retail home-financing business
The business of providing home loans is already showing signs of a turnaround after a tough couple of years, ahead of an expected drop in interest rates and a possible soft landing for the economy.
As lending to consumer homeowners picks up steam, the stocks of non-bank lenders have already performed strongly this year as they are expected to benefit from lower interest rates.
If financing activity tops expectations, stock prices could get a further boost once the Federal Reserve starts to cut.
To be sure, uncertainties remain.
While mortgage rates have fallen to their lowest levels in 15 months, buyer demand hit a six-month low this past week.
Nevertheless, financial firms have been preparing for more demand, especially refinancings from borrowers who inked deals during the past few years, which saw higher interest rates.
The 30-year fixed-rate mortgage averaged 6.49% as of Aug. 15. While that's up 0.2% from the previous week, it's still down from 7.09% in the year-ago quarter, according to data released by Freddie Mac. And refinancings have climbed 117% from year-ago levels.
Companies such as Rocket Cos. Inc. (RKT), LendingTree Inc. (TREE), Redfin Corp. (RDFN) and UWM Holdings Corp. (UWMC) - the parent company of United Wholesale Mortgage - will be in the spotlight, along with PennyMac Financial Services Inc. (PFSI), Mr. Cooper Group Inc. (COOP), Rithm Capital Corp. (RITM) and Guild Holdings Co. (GHLD).
Among the group, LendingTree leads in year-to-date gains with a 72% rise as of Tuesday, followed by a 39.4% advance by Mr. Cooper and a 34% jump by Rocket, which is the parent of Quicken Loans. United Wholesale Mortgage's stock has risen by 29% so far this year.
"It's a good time to be in the mortgage business again," Desmond P. Smith, chief growth officer at United Wholesale Mortgage, told MarketWatch.
The surge comes as banks have seen their role in the mortgage-lending business decrease, though the role is still a major one. At the same time, activity from non-bank lenders such as Rocket Mortgage (which changed its name from Quicken Loans in 2021), and United Wholesale Mortgage have geared up. (See 2023 rankings below).
These players are poised to handle potential refinancings of mortgages that have been closed in the past two or three years - worth trillions of dollars. Many of these refinanced mortgages will result in lower monthly payments.
Over the past three years, mortgage rates have ranged from the upper 7% level to a peak of just over 8%.
Lower interest rates could lead to mortgages in the 6% range, which would make it worthwhile for many homeowners to refinance.
As of Aug. 9, the average 30-year mortgage rate was 6.48%, which puts the number of U.S. borrowers that would benefit from refinancing (75 basis points of incentive) at 2.4 million, according to estimates from Intercontinental Exchange.
The 2.4 million ranks as the highest level since April 2022 and it's up about 60% or by 900,000 people from the prior week, according to ICE.
For the average U.S. mortgage of $350,000, the borrower's monthly payment goes down by about $200 with a 6.5% mortgage compared with 7.5% roughly a year ago.
Wells Fargo steps back
While good times may soon beckon for mortgage providers, some big banks have been stepping back from the business of providing home loans to consumers, but they often remain active in other ways such as the securitization of debt.
Banks have reduced their exposure to the retail mortgage business as they focus on higher-yielding sectors such as investment banking and wealth advising.
Industry players said big banks have done this partly because it's difficult for a bigger financial firm with many business lines to compete with smaller rivals that are laser-focused on mortgage products.
Another challenge to the mortgage business is the cyclicity of the market. When interest rates rise, there's less demand and the overhead is difficult to maintain for large banks and retail mortgage firms, an industry source said.
The cost of their overhead is often higher than for a wholesale lender, according to a source.
Among the largest U.S. banks, Wells Fargo (WFC) said in early 2023 it would scale back its mortgage business, which has contributed to the bank's overall drop in head count.
In the second quarter, Wells Fargo said its retail mortgage originations fell 31% from a year ago. The bank has reduced its staffing by about 45% since early 2023. A Wells Fargo spokesperson declined to provide a specific number of job cuts in the unit.
"We're focused on our customers, profitability, returns, and serving minority communities, not volume or market share," Wells Fargo Chief Executive Charles Scharf said last year. "The mortgage product is important to our customer base and the communities we serve, so it will remain important to us. But we do not need to be one of the biggest originators or servicers in the industry to do this effectively."
Other banks such as Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and U.S. Bancorp (USB) remain active in the retail mortgage business.
Big banks also provide warehouse lines of credit for non-bank mortgage companies to tap, and they also buy and sell non-agency loans such as jumbo loans, which are traditionally aggregated into private-label securitization (PLS) deals, a source said.
United Wholesale Mortgage is betting on a mortgage recovery
As Wells Fargo has scaled back, United Wholesale Mortgage has added staff.
Smith said the company saw an uptick in activity when bond yields dropped to near 4% during the market volatility in early August. That's one indicator that mortgage activity is poised to rise as the Fed readies interest-rate cuts as early as next month.
"We know it's coming," Smith said. "We're ready to go."
The company is achieving growth by offering high-quality loans at competitive pricing with rapid closing times, he said.
United Wholesale Mortgage averages 14 to 15 days for mortgage approval with an appraisal, while banks take 40 to 70 days. Its closing costs are often lower.
Alex Elezaj, chief strategy officer at United Wholesale Mortgage, said the company's growth is also due to its business model of using a network of independent brokers, which has won out over in-house mortgage providers such as rival Rocket.
"We're helping [consumers] purchase a home or refinance their mortgage and allowing the brokers that work with them to have a product that's better than a bank," Elezaj said.
All told, the brokers' share of the direct-lending mortgage market has risen to about 27% in the first quarter from 23.6% for full-year 2023 and from 19.7% for full-year 2022, according to industry data cited by United Wholesale Mortgage.
Jonathan Haddad, an independent mortgage broker based in Bingham Farms, Mich., and president of Next Door Lending, said he switched over from being a retail loan officer about five years ago.
For Haddad, working as an independent broker has more upside potential and it offers the advantage of having more products to offer to a wider universe of borrowers.
About 58% of his business goes to United Wholesale Mortgage, but Haddad works with nearly 80 different lenders.
As the environment improves, mortgage brokers have been staying in touch with clients who closed loans in the past couple of years to help them capitalize on lower rates, Haddad said.
"The pipeline looks good," said Haddad, who is also chief executive of the Association of Independent Mortgage Experts. "You're seeing a lot more smiles at industry events, optimism is much better than it was 12 months ago."
Much of this positivity has already been baked into stock prices of United Wholesale Mortgage and other mortgage providers, according to some pundits on Wall Street.
Wedbush analyst Brian Violino said in an email to MarketWatch that he's kept a neutral rating on United Wholesale Mortgage to reflect his view that the current rate dip is already priced into the company's relative valuation, which is at a premium to its peers.
Violino has buy ratings on PennyMac, Mr. Cooper Group and Rithim Capital. Guild Holdings also trades at a cheaper multiple than United Wholesale Mortgage, he said.
"We're definitely seeing some renewed optimism, especially for refinancings, with the recent dip in rates," Violino said. "And this is after almost two years of little to no ... refi activity."
No comments:
Post a Comment