Loan Options
That pullback may reduce borrowing options for consumers, particularly those on the “lower end of the economic spectrum,” said Jacob Channel, LendingTree’s senior economist.
“They might struggle a little bit more as lenders tighten,” he said.
Instead of depending on diverse business lines to survive times of upheaval, nonbanks tend to rely on variable cost structures that can be ramped up or down to meet demand. That means expenses associated with originating mortgages -- for marketing and employees, mostly -- can be increased or decreased depending on the market cycle. But fewer people and less advertising can make it tougher to quickly increase originations when things improve.
“The problem is not so much making that work in the downward direction,” said Bloomberg Intelligence analyst Ben Elliott. “How do you ramp back up in the next cycle?”
Pennymac’s job cuts were based on acting “as a prudent and responsible business,” the lender said in an emailed statement. “Pennymac conducted a thoughtful review of its operational workforce needs following the continued and measurable industrywide reduction in US mortgage applications, originations and refinancing.”
Better, for its part, said in an emailed statement that it’s “focused on making prudent decisions that account for current market dynamics.”
Profitability Struggle
For now, lenders are struggling to find ways to be profitable. LoanDepot, for example, reported net losses of $137.5 million in the third quarter as loan volume and revenue slumped. The company touted a reduction in expenses, the result of “right-sizing staffing levels” and cutting marketing costs.
LoanDepot may end up losing market share because of the problems it’s having returning to profitability, Elliott said. If the lender has to make deep cuts to its origination capacity to make ends meet, it will start from a lower base when rebuilding into the next market cycle, when demand for refinancing returns, he said.
“Those who can hold onto more staff and more volume when it’s less profitable can ramp up more quickly when refis come back,” Elliott said.
Farner, the CEO of Rocket, said his company is taking a different approach from other lenders, opting to diversify to retain customers during down markets. The company offers a personal-finance platform, auto lending and other services on top of its mortgage-focused lines of business.
“That drives a client back to your experiences daily, weekly or monthly,” Farner said in an interview.
Despite the weakness, consolidation isn’t likely among nonbank lenders because struggling mortgage originators aren’t offering a unique service, said Kyle Joseph, a research analyst with Jefferies Financial Group Inc. While a new technology or high-performing loan officers may make a particular company a bit more attractive, takeovers aren’t likely in large numbers, he said.
“I would expect ongoing exits,” Joseph said. “Those without size or scale are vulnerable right now."
This article was provided by Bloomberg News.