With rising interest rates slowing down initial mortgage lending and refinancing, market momentum has tipped slightly in favor of regulated banks at the expense of non-banks with higher cost of capital.
The current trend will reverse market gains by non-banks, which have made their way into the mortgage and mortgage refinancing arenas in recent years.
Some non-bank lenders have begun laying off or eliminating jobs through attrition, a trend that could continue into 2022.
Non-banks dominated a large part of the mortgage market during the recently ended low interest period, but now they face the challenge of relying on financing that can be very expensive, while banks have cheap deposits and have a lot of liquidity.
While second-quarter numbers will appear in the coming weeks, first-quarter numbers and recent industry data tell an exciting story.
Initial 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 quarter last year. The MBA also expects mortgage rates for the second quarter to reach 5.2%, a sharp increase from the first quarter.
In the first quarter, mortgage volumes fell 36% from the same period last year among the largest bank and non-bank mortgage lenders, worse than the MBA forecast of a 23% decline.
On Thursday, the average 30-year mortgage rate was 5.23%, down from 5.09% a week ago, and up from 2.96% last week.
In another sign of trouble, the Mortgage Bankers Association’s composite market index fell to a 22-year low in the week ending June 3, according to data released earlier this week.
In some cases, higher rates lead homebuyers to avoid mortgages entirely and seek other ways to pay, such as collecting money from relatives and then paying them back. The National Association of Realtors said that cash purchases made up about 28% of real estate sales in March, an eight-year high.
While there are signs that inflation may be peaking, the US Federal Reserve plans to continue its monetary tightening approach to prevent the economy from overheating. But recession anxiety persists.
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JPMorgan Chase & Co. JPM,
Which generated about 3.6% of all mortgages in the first quarter, currently indicates an upward trend in private mortgage rates.
CEO Jamie Dimon said June 1 at the Strategic Decisions Conference in Bernstein that private-brand mortgage providers are 50 to 75 basis points better than retail banks.
This is partly because banks have a lower cost of capital to lend through their deposit base, while non-lenders often seek credit from the leveraged loan market or debt market, and syndications which have been less robust.
“The only way for others to fund it is through securitization,” Damon said. It will only get worse if the markets tighten and liquidity dries up a bit. We’ll be prepared for that, as well if you’re smart.
For its part, KBW said that the current environment offers some opportunities among mortgage stocks based on attractive valuations, but that cutting costs will remain an issue in the current environment.
“We continue to see relative value in names that are trading below book value” such as PennyMac Financial Services Inc. PFSI,
It’s currently valued at 0.75 times book value, analyst Booz George said in a research note on May 22.
In the first quarter, lenders started moving away from their growth targets and some of the biggest players in the sector reduced their workforce.
“While capacity is still somewhat difficult to measure, we think the numbers are going down,” George said.
According to KBW figures, PennyMac reduced headcount to 6,308 in the first quarter, from 7,208 in the fourth and 7,075 in the first quarter of 2021, according to KBW. Loan Deposit Inc. LDI,
The first quarter ended with 10,054 employees, compared to 11,307 employees in the fourth quarter and 11,037 employees in the first quarter of last year. UWMC from UWM Holdings Corp.
The workforce attrition rate was reduced to 7,800 at the end of the first quarter, compared to 8,000 in the fourth quarter and 8,600 in the quarter last year.
Ocwen Financial Corp has bucked this trend so far. OCN,
Which ended the quarter with 5,800 employees, up 100 from the fourth quarter and 900 employees from the previous quarter.
Inflation continues to reshape the lending landscape as banks prepare to report second-quarter results in July.
While banks generally generate higher net interest income when interest rates rise, other factors have affected earnings expectations, such as a slowdown in investment banking due to a lack of initial public offerings and other capital raising; the cost of imposing sanctions on Russia; Nervousness about inflation and a possible recession will affect financial activity.
Against this background, bank stocks declined along with most other sectors in 2022.
The Dow Jones DJIA Industrial Index,
JPMorgan Chase & Co. Components. and Goldman Sachs Group Inc. GS,
down 20.3% and 19.3% respectively in 2022, compared to a 9.9% drop in the Dow Jones Industrial Average and a 14.1% loss in the S&P 500 SPX,
KBW Nasdaq BKX Banking Index,
Lost 15.2% and Financial Select SPDR ETF XLF,
It decreased by 12.2%.