Non-bank mortgage lenders could face further pressure on margins and more industry consolidation according to Fitch Ratings.
This is due to rising interest rates meaning higher funding costs compared to the lower cost for the stable depository funding of the banks.
For the five public non-bank mortgage companies, profitability for the 4.5-year period ending June 30, 2018 was weak as expenses outstripped net revenues by approximately 21%.
Profitability is also likely to be dampened by lower origination levels for the non-banks, with Fitch citing Mortgage Bankers Association forecasts for $1.6 trillion annually in 2018-2020, down 6% from 2017 levels. For refinance loans, non-bank originations are forecast to more than halve to 24% by 2020 (from 49% in 2017).
Consolidation set to intensify
Fitch is also calling for more consolidation among non-bank mortgage lenders as they seek to drive profits with economies of scale to offset higher interest rates, technology costs, and regulatory burdens.
“That said, non-bank lenders with multiple origination channels and established mortgage servicing platforms that generate higher fee income and more sustainable earnings should be better positioned for the shifting trends of the interest rate and economic cycles,” Fitch’s report states.
These lenders are less exposed to the cyclical swings of mortgage lending.
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