Mortgage

Canary in the coal mine? Impac mortgage originations plummet in second quarter

Originations fall 42% from last year thanks to rising rates

Mortgage interest rates may have fallen ever so slightly in the last week, but on the whole, they’re on the way up and have been for quite some time.

And the rising interest rate environment is hitting one lender quite hard.

Impac Mortgage, which also operates CashCall Mortgage, revealed late Wednesday that its mortgage originations plummeted in the second quarter due to the rise in interest rates over the last several months.

According to Impac, in Q2 2017, the company originated $1.79 billion in mortgages through its various channels. In the same time period this year, Impac originated $1.03 billion in mortgages.

That’s a drop of 42% in just one year.

And the news wasn’t much better when looking at the second quarter of this year compared to the first quarter. According to Impac, its originations fell 22% from the first quarter of 2018 to the second quarter.

The bulk of the drop came from Impac’s retail originations, which are conducted by CashCall. In the second quarter of 2017, Impac’s retail channel originated $1.19 billion in mortgages. That’s more than the entire company originated in the second quarter of 2018.

In the Q2 2018, Impac originated just $459.9 million through its retail channel, which represents a drop of 61% year-over-year. The decrease is also seen quarter-over-quarter, where Impac saw a decline of 27% in retail originations between the first and second quarters of this year.

The cause of the sharp declines? Impac lays the blame squarely on rising interest rates.

“From January 2017 through the second quarter of 2018, interest rates have increased 125 basis point from the historically low interest rate environment the previous years, causing a sharp drop in refinance volume which has been the primary source of our retail originations,” the company said in a release.

The company noted that its origination of loans that don’t fit into the Qualified Mortgage box increased in the second quarter, likely the result of the company’s recent push to boost its non-QM lending through various outlets.

According to the company, its origination volume of non-QM loans rose to $306.1 million in the second quarter, compared to $248.2 million in the first quarter of 2018 and $232.5 million in the second quarter of 2017.

But that increase did not make up for the steep drop in retail originations.

In a statement, Impac Chairman and CEO George Mangiaracina said that the company is “optimistic” about its prospects despite the decline in the second quarter.

“We recognize that these are challenging times for residential mortgage originators, but our senior management team is up to the challenge and optimistic about our competitive positioning in the market,” Mangiaracina said.

“We are encouraged by the continued resilience provided by our mortgage servicing rights portfolio, and the progress we have made in repositioning the consumer direct business model,” Mangiaracina continued. “We continue to be enthused about the positive forward momentum we have created across all of our channels with respect to our non-QM business, which will be a key driver for our future success.”

Overall, the drop in originations and the rise of interest rates hit Impac’s bottom line, as the company reported a net loss of $97.4 million in the second quarter compared to net earnings of $6.4 million in the same time period last year.

The company blames its quarterly loss on a decline in revenue from gain on sale of loans as a result of a decrease in origination volumes as well as a reduction in margins.

According to the company, its gain on sale margins decreased by 24 basis points to 181 basis points in the second quarter of 2018, as compared to 205 bps in the second quarter of 2017, which the company said reflects margin compression resulting from the “historically low interest rate environment.”

The company said that CashCall is getting hit on the back end of the loan process as well, as investors are beginning to show “adverse demand” for CashCall loans based on its borrowers’ tendency to refinance.

“CCM has continued to experience declines in mortgage refinancing originations and margin compression, primarily a result of sustained increases in market interest rates from a historically low interest rate environment,” the company said in its release. “In addition, the business model of CCM has led to additional margin compression through adverse demand from investors, as a result of the borrowers propensity to refinance.”

The company said that the CashCall brand is also suffering a “material loss in value” due to several factors, including: the adverse treatment by capital markets participants; consumer uncertainty due to the use of a similar brand name by an unaffiliated financial services company; and substantial deterioration in brand awareness.

The company said that its management team, which is largely new, is taking steps to deal with these issues, but the company did not identify said steps.

Rising interest rates are hitting Impac hard. Time will tell if it’s an isolated case or a sign of more trouble to come.

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