Builders feel more confident in the market, housing inventory data is positive and buyer demand for mortgages has increased — but don’t be fooled. The brutal low origination volume and industry consolidation that occurred for lenders in 2022 isn’t expected to turn around, at least not drastically, in 2023, according to Fitch Ratings.
“Our outlook for mortgage originators and servicers is deteriorating,” Shampa Bhattacharya, the director of the financial institutions group at Fitch Ratings, said during a non-bank financials outlook webinar on Wednesday.
Fitch Ratings expects a challenging 2023 — at least in the near term — while the industry right-sizes from the $4 trillion production volume that occurred during the pandemic boom years.
In addition, the credit rating agency expects mortgage rates to move even higher in 2023 and home prices to decline by up to 5%.
“We expect profitability to remain challenging in the near term as the industry capacity slowly adjusts to lower originations,” Bhattacharya said.
While the housing market looks a lot more robust than it did during the financial crisis in 2007, and there are quality loans and stricter underwriting guidelines with the Dodd-Frank Wall Street Reform and Consumer Protection Act in place to prevent lenders’ predatory lending practices, consumers face affordability challenges, Brian Brown, Rocket Companies’ chief financial officer said during the webinar.
“A small decrease from where we’re at today can be a really nice way to offset some of the affordability concerns with mortgage rates going up,” Brown said.
Home prices decelerated for seven consecutive months in October, according to the latest S&P CoreLogic Case-Shiller National Home Price Index, posting a yearly gain of 9.2%. Mortgage rates are now at their lowest level since September 2022, and are about a percentage point below the peak mortgage rate last fall, according to the Mortgage Bankers Association.
“A small offset or decline in home values, which we are starting to see, (…) can help that consumer who’s in the market for the first time,” Brown said.
Brown anticipates more consolidation in the industry on the mortgage production side, as “there’s less than one loan being done by a loan officer per month on average,” he said.
While pushing back on the idea of potentially acquiring a mortgage lender, Brown said Rocket Companies will be prioritizing rightsizing and cutting costs.
“If we hit our Q4 guide on expenses for Rocket Companies, and I compare that to the fourth quarter of last year, it’s about two and a half billion dollars, almost 40% of the cost base that could come out,” Brown said.
After reporting an adjusted net loss of $166 million in the third quarter following a slump in production, the Michigan firm made expense reduction a priority.
In the fourth quarter of 2022, Rocket anticipated that it would be cutting expenses of an additional $50 million and $100 million from the $1.188 billion posted in the third quarter, Rocket said in its most recent earnings call in November.
The mortgage servicing market (MSR) is an area that industry watchers, including Brown, are keeping an eye on — as lenders will be selling their MSR portfolios to fund working capital.
“For folks that require to sell the MSR asset to fund working capital, that can be a challenge because MSRs are liquid in some respects, but they’re not the most liquid. So, it’s definitely not like selling a loan to a GSE (government-sponsored enterprise). You need a buyer and seller,” Brown said.
Lenders sold off a large cache amount of MSRs supplementing lackluster revenue streams in the rate-rising environment. While higher rates negatively impact origination volume, it provides for substantial pick up in value of MSR assets.
Mortgage analysts say an excessive sale of MSRs is a red flag because it would mean that lenders are selling forward cash flow at a discounted rate.
“So it doesn’t take much pullback from an institutional buyer to all of the sudden have more supply than demand,” Brown said.
Fitch Ratings also expects the outlook for the U.S. mortgage insurance market in 2023 to deteriorate.
The sector outlook reflects expectations for a slowing economy in 2023, with a modest increase in unemployment and potential pricing corrections in the housing market. That will be offset by stable insurance in force, driven by increased persistency — a percentage that indicates the number of clients that an insurance company retained, the credit rating agency said in a separate report.
“Inflationary uncertainty and a deceleration in housing prices portend a deterioration in environmental conditions in the U.S. mortgage insurance sector,” Christopher Grimes, director of Fitch Ratings, said.
Several macroeconomic factors, including unemployment and changes in home prices, will largely dictate performance in the U.S. mortgage insurance sector, according to the report.
“Favorable macroeconomic conditions, such as low unemployment and rising home prices, are a positive for the industry because these factors reduce the likelihood that borrower will become delinquent on a mortgage and increase the borrowers’ ability to cure those delinquencies if they occur,” the report states.
A slowdown in job growth and rising unemployment in 2023 would worsen mortgage borrowers’ ability to stay current on their loans, raising the level of mortgage insurance claims, according to the report.
