Builders are confident in the market, home inventory data is good and buyer demand for mortgages is increasing, but don’t be fooled. The brutal low origination and industry consolidation that occurred in 2022 for lenders is not expected to turn around, at least not significantly, in 2023. Fitch Rating.
“The outlook for mortgage originators and servicers is deteriorating,” Champa Bhattacharya, director of Fitch Ratings’ Financial Institutions Group, said at a non-bank financial outlook webinar on Wednesday.
Fitch Ratings expects 2023 to be tough, at least in the short term, but the industry is right-sizing from the $4 trillion in production that hit the year of the pandemic boom.
Moreover, credit rating agencies expect mortgage rates to rise further in 2023, driving home prices down by up to 5%.
“We expect profitability to remain challenging in the near term as industry capacity slowly adapts to reduced originations,” said Bhattacharya.
While the housing market looks much stronger than it did during the 2007 financial crisis, high-quality lending and strict underwriting through the Dodd-Frank Wall Street Reform and Consumer Protection Act are being implemented to prevent lenders from predatory lending practices. There are guidelines. Consumers face an affordability problem, Bryan Brown, rocket companyThe Chief Financial Officer said at the webinar:
“A slight drop from where we are now could be a very good way to offset affordability concerns that come with higher mortgage rates,” Brown said.
Home prices fell for the seventh straight month in October, according to the latest data S&P CoreLogic Case-Shiller National Home Price Index, recording a profit of 9.2% annually. Mortgage rates are now at their lowest since September 2022, about 1 percentage point below last fall’s peak mortgage rates. Mortgage Bankers Association.
“The slight offset or drop in home prices that we’re starting to see[…]could help first-time consumers,” Brown said.
Mr. Brown expects more industry consolidation in the production of mortgages, as “loan officers open less than one loan a month on average.”
While denying the possibility of buying a mortgage lender, Brown said Rocket Companies is prioritizing sizing and cutting costs.
“If we get to our fourth quarter guidance on Rocket Companies expenses, and compare that to the fourth quarter last year, it’s about $2.5 billion, almost 40% of the potential expense base,” he said. Mr Brown said.
The Michigan company made cost cutting a priority after reporting an adjusted net loss of $166 million in the third quarter following a slowdown in production.
Rocket expects to reduce expenses by an additional $50 million and $100 million in the fourth quarter of 2022 from the $1.188 billion recorded in the third quarter, Rocket said in its latest November report. stated in the income statement.
The mortgage servicing market (MSR) is an area of interest for industry watchers, including Brown. Because the lender sells his MSR portfolio to fund working capital.
“For people who need to sell their MSR assets to fund their working capital, this can be a challenge because MSRs are liquid in some ways, but they are also the least liquid. , it’s not like selling a loan to a GSE[government-sponsored company]you need a buyer and a seller,” Brown said.
Lenders have sold large amounts of MSRs to make up for lackluster revenue streams in a rising interest rate environment. Rising interest rates have a negative impact on origination volumes, but significantly increase the value of MSR assets.
Mortgage analysts say the excessive sale of MSRs is a red flag.
“So we didn’t need a lot of pullback from institutional investors and suddenly there was more supply than demand,” said Brown.
Fitch Ratings also expects a weaker outlook for the US mortgage insurance market in 2023.
The outlook for the sector reflects expectations of an economic slowdown in 2023, with unemployment likely to rise slightly and a price correction in the housing market. This will be offset by stable insurance holdings, driven by a percentage increase in the number of customers retained by insurers, the credit rating agency said in a separate report.
“Inflation uncertainty and slowing home prices portend worsening conditions for the US mortgage insurance sector,” said Christopher Grimes, Director of Fitch Ratings.
According to the report, several macroeconomic factors, including unemployment and changes in home prices, will significantly affect the performance of the US mortgage insurance sector.
“Favourable macroeconomic conditions, such as falling unemployment and rising house prices, are positive for the industry. Because it can increase your ability to repay.” Report the status.
Slower job growth and higher unemployment in 2023 will reduce the ability of mortgage borrowers to keep their loans up to date, leading to higher levels of mortgage insurance claims, according to the report.
