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Nonbanks’ profitability to decline in the coming quarters: Moody’s

Profitability will likely be lower in Q4 2023 and Q1 2024 before improving in Q2 2024, analysts predicted

Nonbank mortgage companies increased their profitability as a group in the third quarter of 2023, compared to the previous quarter, due to the performance of their servicing and origination businesses. It’s good news in the current shrinking market. 

Analysts at the credit rating firm Moody’s Investors Services wrote in a report on Monday that they don’t expect further improvements in the following quarters amid high mortgage rate levels and a depressed supply of homes for sale.  

“Because of the increase in mortgage rates since the summer and a coming seasonal decline in purchase originations, profitability will likely be lower in Q4 2023 and Q1 2024 before improving in Q2 2024,” analysts wrote in the report. “But the seasonal decline will be less than it was historically, given the already low level of purchase activity.”  

According to the data, the core profitability of 12 U.S. nonbank mortgage finance companies rated by Moody’s – measured as the pretax earnings, excluding fair value marks and nonrecurring items, divided by average adjusted tangible managed assets – improved to an average of 1.7% in the third quarter of 2023, compared to 1.2% in the second quarter and 0.4% in the first quarter. 

Meanwhile, the group’s net income relative to the average assets improved to 2.4% from July to September, compared to 1.8% in the previous quarter. Excluding the two unprofitable firms – Finance of America and loanDepot – it averaged 3.4% in Q3.

The analysis includes Rocket MortgagePennymac Financial ServicesUnited Wholesale MortgageMr. CooperFreedom MortgagePennymac Mortgage Investment TrustProvidentRithmPlanet HomeOcwen, Finance of America and loanDepot. 

Third-quarter performance was driven by positive mortgage servicing rights (MSR) fair value marks, as expected in a high mortgage rate environment, and increased origination revenues. 

Rate-locked volumes remained flat in Q3 from Q2 on average for the companies but declined 4% from the same quarter a year ago – at current rate levels, refinance originations are uneconomical, analysts wrote.

However, average gain-on-sale margins increased slightly to 1.37% in Q3 compared to 1.35% in Q2, mainly due to retail and wholesale margin improvements. 

According to the report, the companies continue to trim expenses, but at a slower pace than in 2022 or early 2023. For example, salaries and compensations increased by 1% in the third quarter of 2023 compared to the previous quarter. In 2022, it went down 23% compared to 2021. 

In 2024, Moody’s analysts expect profitability to be modestly higher than in 2023.

“We assume a modest slowing of economic activity, mortgage rates declining modestly from current levels, and companies continuing to trim expenses,” Moody’s analysts wrote. 

Analysts added that if economic activity slows “materially more than expected: or if interest rates rise further, the effects could “dampen home sales volumes and mortgage purchase originations.” 

Ultimately, it would reduce the profitability of nonbank mortgage companies. Some mortgage firms are better positioned than others, however. 

“Companies with stronger franchises and ample levels of capital continue to sacrifice profitability to increase market share, continuing to pressure weaker competitors,” analysts wrote. 

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