In the wake of the last housing crash, online lenders came to dominate the mortgage market. Those firms are now struggling to survive the latest downturn, with soaring interest rates hurting home sales and refinancing demand.
Better, the beleaguered mortgage provider that’s cut roughly two-thirds of its workforce, is poised to eliminate even more jobs. LendingTree Inc., Pennymac and Home Point Financial Corp. have also reduced their staffs. Such cost-cutting could be helpful in the short term, but may not be enough to allow the nonbank lenders to last long enough to see a mortgage-market recovery.
“Over the next several quarters, we expect to see significant separation between the well-capitalized players in the mortgage space -- those who have clearly defined long-term strategic plans -- from those who don’t,” Rocket Cos. Chief Executive Officer Jay Farner said on a conference call discussing his company’s third-quarter earnings, which plunged 93%. “In the end, only the strong will be left standing.”
Nonbank lenders focused on mortgage origination tend to be something of one-trick ponies. The firms thrived when borrowing costs were close to historic lows, spurring Americans to buy homes or refinance their loans, but they have few other business lines to lean on during a downturn, unlike traditional banks. Any shakeup that drives some online mortgage providers out of business would leave those remaining in a position to dictate who can borrow and at what price.
Borrowing costs for 30-year, fixed-rate mortgages are hovering around their highest level in two decades, with the average interest rate now above 7%. That’s pushed some homebuyers out of the market and forced others to cancel purchases. Mortgage costs have been boosted by the Federal Reserve’s efforts to tamp down inflation, including a 75-basis-point hike to its benchmark interest rate in early November.
Falling Sales
The housing market is “the most interest-rate sensitive segment of the economy,” and declining home sales “are not expected to improve” any time soon, Freddie Mac Chief Economist Sam Khater said last week. Total transactions for existing single-family homes, apartments and condos plummeted more than 21% across the US in the third quarter.
In a bid for survival, nonbanks are counting on unique offerings beyond home loans and the strength of their balance sheets to help them weather the worst of the housing rout so they’ll still be around to offer mortgages when the market ultimately recovers.
“We want to make sure that we will be there at the other end of the economic cycle no matter what,” Harit Talwar, chairman of Better and formerly an architect of Goldman Sachs Group Inc.’s consumer bank, said in an interview. “We want to be the last man standing.”
Talwar estimates New York-based Better has cut some 7,000 jobs in the last year or so. While it’s still trimming its workforce, the latest round is for just 28 positions, according to a filing with the state this month.
Banks were once the largest players in home-loan origination, but after the US housing market collapsed, triggering the global financial crisis of 2007 and 2008, risk-reducing reforms were enacted that led traditional lenders to pull back from the mortgage market. That retreat allowed nonbank lenders to pick up the slack.
Since then, companies such as Detroit-based Rocket and Foothill Ranch, California-based LoanDepot Inc. have come to dominate the space, with financial-technology firms backed by venture capital also breaking into the business.
“The nonbanks took over from the banks as they withdrew from what was a very risky business,” said Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School. “They’ve done extremely well -- very efficient -- particularly because they had new systems in place for scalable, rapid increases in capacity.”
The Covid-19 crisis and resulting government-stimulus efforts that left consumers awash in cash and sent interest rates to rock-bottom levels fueled a surge in homebuying and mortgage refinancing. Mortgage providers originated a record $4.3 trillion of home loans last year, according to data provider Black Knight Inc.
As interest rates rose, demand crumpled. Black Knight estimates origination volume will drop to $2.3 trillion this year, and Fannie Mae expects a further decline in 2023. The decrease in volume has forced lenders to make fast, deep cuts. Nonbanks aren’t the only ones feeling the pain. Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co have all cut staff in their mortgage businesses.