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Wednesday, November 2, 2022
Today’s newsletter is from Janna Herron, Yahoo Finance’s personal finance editor. Follow Janna on Twitter @JannaHerron. Read this and other market news wherever you are with Yahoo Finance app.
It’s no secret that the mortgage market is getting hammered.
Just look at last week’s statistics on new and pending home sales and you immediately see the ramifications of 7% mortgage rates on real estate activity.
But it’s not just skittish buyers who are stifling mortgage lenders. It’s largely the non-existent refinance market – down about 85% from a year ago – as almost no homeowner wants to sacrifice their 3% mortgage rate they’ve secured for the past couple of years. years. Overall, mortgage activity is at its lowest point since before the turn of the millennium in 1997.
For mortgage lenders – especially non-bank ones who don’t have many sources of non-mortgage income – that’s a big deal. For example, Mr. Cooper (COOP) recorded a 26.6% drop in originations in the third quarter compared to the previous one. The next tax returns are Rocket Mortgage (RKT) on Thursday, United Wholesale Mortgage (UWMC) on Friday, and loanDepot (LDI) and Home Point Capital (HMPT) next week.
So how do these lenders keep ticking beyond removing workers? A few other line items can be a lifeline during this crisis.
While originations remain sluggish, the loans and refinances created over the last two years of prosperity still need to be managed. The Mortgage Servicing Rights (MSR) of these loans have become much more attractive as an income booster, and lenders are benefiting in two ways.
First, those in need of cash are offloading these MSR loan portfolios with historically low interest rates that are unlikely to be prepaid anytime soon.
The biggest sellers of these wallets so far this year are non-bank lenders: United Wholesale Mortgage, $107.4 billion; Home Point, $68.9 billion; Rocket Mortgage, $50.5 billion; and loanDepot, $25.3 billion, according to mortgage data analytics firm Recursion.
On the other hand, those who bought these wallets also get an incentive. This is because the value of these MSR wallets increases as the origination pool increases.
“They mark up the value and take in the revenue. It’s the natural hedge for a lending company,” Paul Muolo, editor of Inside Mortgage Finance, an industry trade publication, told Yahoo Finance. “That’s how the model is supposed to work. They can make a lot more money lending in good times than by providing services, but it can help them out. »
Take, for example, Mr. Cooper. The company, the fourth-largest buyer of MSR portfolios this year at $78.8 billion according to Recursion data, partly credited its quarterly net profit with a “positive MSR brand,” chief executive Jay Bray said. during the company’s earnings call, CFO Jaime Gow noting that “the value of MSR rose 5%…reflecting the recent rise in mortgage rates.”
Another bonus? The company was able to draw an additional $90 million from its MSR lines and continues “to use the MSR lines for working capital requirements and the opportunistic acquisition of MSR,” Gow said.
Some other non-bank lenders might notice. United Wholesale Mortgage and Rocket Mortgage, which have been big MSR sellers this year, recently amended or entered into credit facilities to include language on financing MSR portfolio acquisitions.
Speaking of easy credit, that’s the other tactic some lenders are using as mortgage rates strangle the housing and refi market. They are cutting or eliminating warehouse lines of credit with so-called Wall Street “repo” lenders that have been used to help fund new creations – which, as we have seen, are down the toilet.
In September, loanDepot reduced to $600 million a master repo agreement it had entered into in June 2016 with JPMorgan Chase. He also ended a line of funding with US Bank the same month. Similarly, Home Point terminated its master purchase agreement with Morgan Stanley in September, and another with CS First Boston in October.
“When the loans hit the wall like they do, they don’t need that borrowing power and they go back to Chase – or whoever it is – and say I don’t need that anymore. $1 billion warehouse line,” Muolo said. “If they close the lines, they don’t have to pay that user fee and can save money by doing that.”
How much money? Typically between 12.5 and 25 basis points, according to Muolo. It may not seem like much, but with mortgage activity at a 25-year low, every penny counts.
What to watch today
7:00 a.m. ET: MBA Mortgage Applicationsweek ended October 28 (-1.7% the previous week)
8:15 a.m. ET: Job change at ADPOctober (180,000 expected, 208,000 in previous month)
2 p.m. AND: FOMC Rate Decision (Lower bound)November 2 (3.75% expected, 3.00% before)
2 p.m. AND: FOMC Rate Decision (Upper bound)November 2 (4.00% expected, 3.25% before)
2 p.m. AND: Interest rate on reserve balancesNovember 2 (3.90% expected, 3.15% before)
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