The recovery has been underway in the banking industry for nearly five years, with asset quality improving, loan balances expanding and fewer unprofitable institutions.
However, obstacles continue to weigh on lenders, including mortgage rates, which are pushing refinance application volumes down, leading to the largest nominal decline in the value of available-for-sale securities during a quarter since 1994, said Federal Deposit Insurance Corp. chairman Martin Gruenberg in a recent speech.
On a similar note, Compass Point Research & Trade analysts Kevin Barker and Steve Seperson said given the expectation for rates to remain at current levels or potentially move higher, the boom the market experienced over the past decade has extinguished.
"Over the long-term, we expect this to result in a smaller, albeit more stable, market for mortgage originators if the market can effectively adjust capacity," Compass Point analysts said.
They continued, "However, in back half of 2013, we expect mortgage production revenues to be 20%-to-30% lower than we saw in the first half of the year due to declines in both volume and margin."
Consequently, the headwinds in the mortgage market will continue to pressure companies heavily reliant on origination volume through the end of the year.
FBR Capital Markets managing director Paul Miller pointed out that many borrowers are having a hard time qualifying for loans under the new Dodd-Frank rules, especially when it comes to debt-to-income ratio requirements.
"A lot of people are saying that the purchase market is getting tough to compete in, but you’re still seeing decent quarterly numbers," Miller stated.
He added, "Tell me what rates are going to do and I’ll tell you if it’s going to get tougher or easier for lenders. For instance, if rates go back down again, you’re back running with the bulls."
Lenders that tend to originate more purchase volume than refinance volume, or have access to a larger pool of HARP-eligible borrowers will see a smaller decline in volume, according to Compass Point.
Additionally, these lenders will tend to have a stronger gain on sale margins, considering borrowers are less price sensitive when buying a home or refinancing an underwater mortgage.
Going forward, the heavyweights for the remainder of the year will be the bigger banks such as Wells Fargo (WFC) and PNC Financial (PNC), BB&T Corporation (BBT) and UBS AG (UBS) because they are able to run their expenses through earlier, leaving room for less exposure to market pressures, Miller explained.
Additionally, Nationstar Mortgage Holdings (NSM) and Walter Investment Management Corp. (WAC) stand out as having a large amount of HARP-eligible borrowers in their servicing portfolios, which should be less impacted by rising mortgage rates, Compass Point analysts said.