Large nonbanks are on better financial footing ahead of 2025

The
bulk
of
more
sizable,
rated
nonbank
mortgage
companies
will
start
the
new
year
on
better
footing
than
12
months
earlier,
but
they
face
interest-rate
risks
and
a
mixed
funding
outlook.

Layoffs
that
occurred
as
record-low
rates
from
the
pandemic
rebounded
to
normal
levels
have
improved
financials
by
reducing
staffing
by
35%
from
its
heights
in
2021,
according
to


Fitch
Ratings’
review
of
the
sector,
which
analyzes
Bureau
of
Labor
Statistics
data.

That
has
put
companies
in
a
better
financial
position,
and
origination
units
could
build
on
that
if
a
gradual
reduction
rates
telegraphed
by
the
Fed
materializes
in
2025.

“The
mortgage
companies
we
cover
are
already
profitable
in
a
lower
origination
environment,
and
if
originations
increase
in
2025,
that
will
only
improve,”
said
Eric
Orenstein,
senior
director
at
Fitch
Ratings,
in
an
interview.

Fitch
has
recently
upgraded
ratings
for
two
publicly
traded
nonbanks,
Rocket
Mortgage
and


Pennymac’s
financial
services
company,
in
part
due
to
the
broader
improvement
in
the
nonbank
outlook.

Rocket’s
moved
one
notch
and
crossed
the
line
that
divides
high
speculative
grade
from
low-end
investment-quality
in
going
from
BB
plus
to
BBB
minus
ahead
of
third-quarter
earnings
due
Nov.
12.
The
Pennymac
company
ascended
to
a
higher
speculative-grade
rating
of
BB
from
BB
minus.
Fitch
also
revised
its
rating
outlook
for
the
publicly
traded


United
Wholesale
Mortgage
upward
to
positive
from
stable.

Challenges
Fitch
foresees
for
these
and
other
rated
nonbanks
include
the
immediate-term
possibility
of
more
negative
servicing-rights
marks
in
the
industry
and
the
need
to
maintain
adequate,
flexible
funding
while
managing
leverage
ratios.

While
most
Fitch
rated
companies
have
extended
unsecured
debt
maturities
beyond
next
year,
$1.5
billion
in
outstanding
obligations
mature
in
2025,
according
to
the
report.

Unsecured
debt
tends
to
contribute
to
higher
ratings
because
it’s
generally
more
flexible
given
it
extends
out
further
than
alternatives
and
doesn’t
restrict
balance-sheet
assets.
Debt
in
this
category
had
fallen
to
31.4%
of
the
total
as
of
mid-year
from
34.3%
at
year-end
2023. 

In
terms
of
funding,
warehouse
lines
costs
will
be
lower
if
short-term
rates
keep
falling,
but
utilization
rates
and
gross
leverage
will
be
higher
based
on
Fannie
Mae’s
forecast
for
a
28%
surge
in
originations,
which
compares
to
an
estimated
14%
uptick
in
2024.

Excluding


Finance
of
America,
a
reverse
mortgage
specialist
that’s
considered
an
outlier,
Fitch
found
warehouse
utilization
increased
rated
nonbanks’
leverage
to
2.8x
on
average
in
the
first
half
of
this
year,
compared
to
2.3x
at
the
end
of
2023
and
a
high
of
3.8x
in
2020.

There
also
will
be
other
challenges
if
the
scenario
for
financing
costs
pans
out
differently
than
Fitch
envisions
it,
with


the
recent
bond-yield
volatility
spike
pointing
to
higher
rates
next
year
if
incoming
President
Trump
increases
the
U.S.
deficit
and
monetary
policy
reacts
as
anticipated.

“The
debt
and
the
deficit
are
becoming
increasingly
issues
that
are
impacting
Treasury
markets
and
mortgage
rates,”
Bill
Killmer,
senior
vice
president
of
the
legislative
and
political
affairs
at
the
Mortgage
Bankers
Association,
noted
in
an
interview.

Even
then
larger
nonbanks
would
be
in
a
relatively
improved
position
when
it
comes
to
navigating
the
mortgage
market
next
year,
but
the
outlook
for
smaller
players
differs.

Prospects
for
more
moderate-sized
nonbanks
differ
by
loan
channel,
according
to
the
report
which
indicates
that
correspondent
has
become
a
scale
business
while
opportunities
are
more
broadly
distributed
for
companies
of
varying
size
in
retail.

In
terms
of
policy
risks
for
smaller
nonbanks
beyond
interest
rates,
there
is
some
concern
about
the
potential
for
the


government-sponsored
enterprises
to
exit
conservatorship
in
a
way
that
puts
those
types
of
companies
at
a
disadvantage. 

The
first
Trump
administration
took
steps
to
privatize
the
GSEs
and
that
effort
is
expected
to
resume.
The
path
that
takes
has
potential
to
affect
small,
independent
mortgage
bankers,
said
Scott
Olson,
executive
director
of
the
Community
Home
Lenders
of
America.

“There
were
a
lot
of


fights
over
in
Congress
over
how
to
do
GSE
reform,
and
CHLA
and
our
predecessor
organization
testified
in
Congress
and
fought
for
a
lot
of
things
to
protect
smaller
IMBs
as
far
as
having
a
broad
base
in
terms
of
GSE
mortgage
origination.
So
we’ll
be
tackling
that
issue
and
pushing
for
a
model
that
preserves
protection
for
smaller
members
and
for
consumers,”
he
said
in
an
interview.

Mark
Calabria,
the
former
director
of
the
GSEs’
regulator
during
Trump’s
first
term,
did


voice
interest
in
preserving
the
parity
of
guarantee
fees
that
shape
the
influential
mortgage
investors’
lender
pricing.

It
is
unclear
whether
Calabria
would
reprise
his
role
in
Trump’s
second
term,
although
he
has
said
in
the
past
he
would
serve
again
where
needed.
He
had
not
responded
to
a
post-election
inquiry
at
the
time
of
this
writing.