Industry observers say the first few months of 2022 will represent a transition period to restore the supply and demand equilibrium in the mortgage industry, putting pressure on the stocks of the country’s biggest lenders.

“We assume more declines in the stocks this year, just because we haven’t already seen the real competition intensifying. In the next few quarters, we should see a more challenging market,” Bose George, mortgage finance analyst at Keefe, Bruyette & Woods (KBW), told HousingWire.

Goldman Sachs’s analysts wrote in a report to clients on January 6 that, overall, they remain negative on the group of nonbank mortgage originators for this year. They believe these companies will “remain range bound until the market gets comfortable with what refi will look like in a higher rate environment.”

To illustrate the challenge ahead, look no further than loanDepot’s fourth quarter earnings. LoanDepot, which was the first nonbank to report fourth quarter results, disclosed that it made just $14.7 million in profit in the last three months of the year, down 90.5% from the $154.2 million it made in the third quarter. A year ago, largely on the strength of refis, loanDepot made $547.2 million in profit.

The decrease in net income was primarily driven by a dramatic decline in gain-on-sale margins – 223 basis points, down roughly 60 bps from Q3. 

In an earnings call with investors, CEO Anthony Hsieh said loanDepot was “fishing from a lot more pond” than its biggest competitors –  more diversified in its channel mix, able to generate tens of millions of top-of-funnel leads. They’re positioned to capture market share in 2022, he said. 

Investors were nonplussed. LoanDepot’s stock at the close of business Wednesday traded at just $4.02 a share, an all-time low and down roughly 82% from this time last year. Whether it’s a harbinger won’t be known until others begin reporting fourth quarter earnings, but analysts generally expect a big correction across the sector.

Analysts at Cider Knoll Holdings, an equity research firm specializing in nonbank mortgage originators, project earnings per share for 10 nonbank mortgage companies to contract 30% in the fourth quarter, compared to the previous quarter.

The pessimism about nonbank mortgage lenders reflects market conditions. Since the Federal Reserve began to normalize its monetary stimulus to the economy in November, mortgage rates have begun to rise and origination volumes have slipped. According to the Mortgage Bankers Association (MBA), the 30-year fixed-rate will hit 4% this year, compared to 3.1% in 2021. Mortgage originations are expected to decline 33% year-over-year, to $2.59 trillion in 2022, according to the trade group.

Margins have been – and will continue to be – impacted. The industry built up the capacity to handle about $4 trillion in origination volume, but simply won’t have that much business to vie for in 2022. It’s simple economics.

According to JPMorgan Chase’s analysts, the primary secondary spread (the difference between newly originated mortgages and yields on securitized mortgage-backed securities), an indicator of profitability, has normalized after spiking in 2020. The spread, which was 1.94% in the second quarter of 2020, declined to 1.19% in the final quarter of 2021. Put simply, a wider spread implies greater profit margins for mortgage originators, less the agency guarantees and servicing fees.

The refi landscape also changes dramatically with higher rates. Goldman Sachs says that at present, one-third of outstanding mortgage balances have at least a 50-basis point incentive to refinance, and if mortgage rates were to rise by 25 basis points, the eligible base would fall to 24%. Analysts noted that 24% represents around $2 trillion in potential volume, still a ‘healthy’ amount. But, by way of comparison, the share in the third quarter of 2020 was 88%.   

Winners and losers

Despite a challenging landscape for all nonbank origination lenders, some are better positioned than others to weather the storm.    

Analysts are betting the biggest companies will fare better due to their scale and cash position. 

“We believe higher rates will add another cyclical headwind to already-pressured mortgage gain-on-sale margins while also leading to further normalization in refi volume. This should make profitability more challenging across the space but particularly for lower-scaled originators,” the Goldman Sachs’ team wrote in the report. 

Bose, from KBW, added: “Rocket is the biggest in the retail channel, United Wholesale Mortgage is the biggest in the broker channel, and Pennymac is the biggest in the correspondent channel. Within those channels, each of them will continue to be dominant. I feel like all three of those are kind of long-term winners because they’ve got such scale and efficient operations. The losers are a lot of the smaller players.” 

JPMorgan’s analysts wrote in a report their favorite name is Rocket, upgraded to overweight due to its ecosystem of personal lending and mortgage finance businesses, the largest and most profitable of which is Rocket Mortgage. “RKT’s defining opportunity is bringing scale and efficiency to a massive, fragmented, profitable, and proven market,” analysts said.  

In December, Rocket announced that it had acquired the personal finance app Truebill for $1.275 billion, a step toward creating a centralized platform for clients to manage their financial situations. It could be a big source of leads for a company that has ambitions far beyond mortgage – Rocket has its hands in solar, autos, title insurance, home search and likely isn’t done yet.

“Rocket is trying to transform themselves from a mortgage company into more of a fintech company, much like SoFi,” Kevin Heal, senior analyst and fixed income strategist at Argus Research, told HousingWire.

Besides size, origination channel is an aspect that analysts are taking into account, said Henry Coffey, a mortgage and housing analyst at Wedbush Securities. “Rocket is the largest mortgage originator in the country, but they are there mainly because of the size and substance of their retail direct lending, the call center,” he said. “That is a tough business for a purchase market. But they are putting a lot of resources into moving in that direction.”

Rocket didn’t respond to a request to comment on its stock performance. During the third quarter 2021 earnings call with analysts, executives said Rocket is investing in its purchase-focused operations, shifting its advertising for purchase and cash out refinance. The company is pursuing the goal of becoming the number one retail purchase lender by 2023 and has also made big strides in the wholesale channel, traditionally a gateway to purchase business.

As pure-play retail mortgage lenders go, Guild has been a bright spot. Its margins have been higher than competitors and the nonbank has been expanding into new territories over the last few years. Goldman Sachs maintained Guild’s overweight recommendation because its retail focus creates a differentiated model that should prove advantageous as the market shifts from refi to purchase. According to JPMorgan, Guild has a platform that offers back-office solutions for loan officers and capital market efficiency to attract smaller, independent originators seeking efficiency. “GHLD’s track record of successful acquisitions and integration may also create an opportunity for market share gains as the mortgage industry consolidates.”

Several other top lenders have outlined strategies that are expected to bring in additional revenue and create better efficiencies in the coming quarters. LoanDepot, for example, has expanded its in-house servicing portfolio. According to Joe Garrett, a mortgage consultant at Garrett, McAuley & Co., a sub-servicer can take 23% to 30% of servicing revenues – and finding places to trim becomes more critical as rates rise and margins narrow. LoanDepot announced in 2021 a decision to begin servicing Fannie Mae, Freddie Mac and Ginnie Mae loans in-house. It also reduced its expenses from $744.7 million to $694.1 million from the third to the fourth quarter of 2021, which likely stemmed from a decision to redesign compensation earlier in the year.

Home Point Capital, the smaller of the two publicly listed pure-play wholesalers, is in a fragile position, according to analysts. Goldman Sachs’ team changed the recommendation for the stocks to sell from neutral, believing that the wholesale channel gain on sale margins will remain pressured for the foreseeable future. The company has a higher cost structure, given its lower scale, compared to its competitors, notably UWM, whose stock has also sunk to a low point. According to the report, Homepoint’s management is working to lower the cost to originate a loan to $900 per loan in 2022 from $1,700 in the first quarter of 2021, largely through headcount reductions and process improvement. 

JPMorgan analysts also downgraded Homepoint to underweighted and suspended the price target, mentioning they see limited catalysts for growth, or a margin rebound. The profitability will remain a challenge, considering the relatively higher exposure to ongoing competition in the wholesale channel. The company declined to comment on analysts’ opinions.  

According to Argus’s Heal, it will take a multi-pronged approach to keep nonbank lenders’ stocks in fighting shape throughout 2022. For now, it’s a waiting game. “We won’t have an idea until at least the second quarter,” Heal said.