Rising Rates Are Battering Mortgage Lenders

Mortgage lenders are scrambling to survive a sharp drop-off in the number of homeowners refinancing their loans, with demand drying up as interest rates rise.

While home prices continue to rise and Americans are still buying houses, the drop-off in refinancing activity is a giant blow because refinancings made up the bulk of U.S. mortgage originations throughout the pandemic.

Some lenders are considering selling themselves, convinced it is the only way to make it through, according to industry executives and advisers.

“Many lenders are losing money and have the prospect of losing money for the foreseeable future,” said

Steve Stein,

a former executive at Stearns Lending, a mortgage company based in Lewisville, Texas. “Partnering up could be a good strategic alternative.”

Last month, Mr. Stein and former Stearns Chief Executive

David Schneider

launched an advisory firm to guide what they believe will be a wave of lenders looking to stay afloat.

Some lenders are selling assets, such as their rights to collect mortgage payments. Others are trying to drum up business by offering lower rates or cutting their fees. In March, mortgage lenders made $2.36 in profit on every $100 of a loan, the smallest amount since 2019, according to the Urban Institute. In 2020, that figure was as high as $5.99.

“You saw lenders panic a bit with the decline” in originations, said

Richard Martin,

director of real-estate lending solutions at Curinos, a financial-services research firm.

The mortgage market’s slowdown is another consequence of the Federal Reserve’s attempts to curb red-hot inflation. The Fed has raised interest rates twice this year to try to cool the economy, and it ended its largest mortgage-bond buying program this spring. That has pushed up borrowing costs for mortgages, drying up the pandemic refinancing boom and even shoving some would-be home buyers out of the market.

With the average 30-year mortgage rate rising to 5%, homeownership may now be out of reach for millions more Americans. WSJ’s Dion Rabouin explains the impact for potential buyers, sellers and the housing market. Illustration: Adele Morgan

Originations at the 50 largest lenders fell 41% in the first quarter from a year earlier, according to industry-research firm Inside Mortgage Finance. Mortgage volume is expected to fall 37% in 2022, according to the Mortgage Bankers Association, driven by the drop in refinancings.

It could get worse: The housing market still looks hot by historical standards, and home prices are still rising. But the Fed’s moves have raised questions about whether the U.S. is headed toward a recession, which would likely slow home sales and make it difficult for some homeowners to keep up with their monthly payments. April’s seasonally adjusted annual rate of home sales was the lowest since June 2020.

“It’s like the music has stopped,” said

Jeff Taylor,

a managing partner at Mphasis Digital Risk, a consulting firm that works with mortgage lenders on technology and risk.

The average rate on a 30-year fixed-rate mortgage was 5.25% as of last week, according to mortgage-finance giant

Freddie Mac,

up from 3.11% near the beginning of the year, an increase that can add hundreds of dollars each month to a new buyer’s borrowing costs.

The pain is expected to be especially bad for nonbank mortgage lenders. Unlike banks, they don’t have numerous business lines to carry them through mortgage downturns. They also don’t take deposits, which means they are reliant on short-term loans. Seven of the 10 largest refinance lenders in 2021 were nonbanks, according to Inside Mortgage Finance.

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A few nonbanks are big names, such as Rocket, which is now the biggest mortgage lender in the U.S., but there are thousands of smaller lenders scattered throughout the country. They are often the preferred route to homeownership for moderate-income families or first-time home buyers. Nonbanks issued about 70% of U.S. mortgages last year, the highest share on record, according to Inside Mortgage Finance.

It is common for lenders to lay off workers when interest rates rise, like they did in 2018, and then hire again when rates fall. However, in the run-up to 2008, mortgage companies instead lowered lending standards to keep volume high, laying the seeds for the global financial crisis. This time around, lenders have kept their standards for mortgage loans relatively strict.

“It’s been decades since rates rose so quickly, so it’s kind of a shock,” said

Tom Millon,

CEO of Computershare Loan Services, a mortgage-service provider.

Some of the measures lenders are taking to stem the bleeding are short-term solutions. Cash from the sale of servicing rights—by which a company earns fees for performing the back-office job of collecting monthly payments—can help pad lenders’ bottom line. But selling those rights also means giving up a steady stream of income.

Amerifirst Home Mortgage, based in Kalamazoo, Mich., has sold close to $1 billion in servicing rights since the beginning of the year, CEO

Mark Jones

said, after selling none in 2021.

“We’re going to tweak here and there and cut expenses and just kind of mark our time until enough players exit the market or the market comes back up,” Mr. Jones said.

Shares of

loanDepot Inc.

are down 43% this year, and shares of Rocket,

UWM Holdings Corp.

and

Guild Holdings Co.

have lost between 29% and 38%, all worse than the S&P 500’s drop of 17%. At least eight big mortgage lenders have gone public during the pandemic, and all of their current share prices have fallen below their IPO price.

Rocket said it offered buyouts to several thousand employees this spring. The company has been working to get more of its business from purchase mortgages, which are typically less dependent on interest rates. Refinances accounted for an estimated 82% of Rocket’s originations in 2021, according to Inside Mortgage Finance.

Banks aren’t immune to the stress. Wells Fargo and

JPMorgan Chase

& Co. laid off mortgage employees this year, the banks said. Wells Fargo said in a statement that the layoffs were “the result of cyclical changes in the broader home lending environment.”

Write to Orla McCaffrey at orla.mccaffrey@wsj.com

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