It’s not that mortgages are bad, it’s that the volume of mortgages collapsed. And the shares of the biggest mortgage lenders crashed after the IPO or SPAC merger.
By Wolf Richter by WOLF STREET.
The most recent entry in the long litany of mortgage lender firings is Citibank, which laid off some people in its mortgage unit. Well, Fargo, JPMorgan Chase, and many other banks, along with non-bank mortgage lenders, have been laying off staff since the end of last year.
The largest mortgage lenders are not banks. They’re not banks: Rocket Companies (owner of Quicken Loans), United Wholesale Mortgage (owner of United Shore Financial), and LoanDepot have cut their staff by thousands. LoanDepot also exited its wholesale business. Artificial intelligence-powered mortgage lender startup Better.com became famous when its CEO mass-fired people via Zoom, which was followed by more layoffs. Some mortgage lenders have filed for bankruptcy. Others have closed.
Shares of the top three mortgage lenders have tanked: Rocket Companies by 82%, United Wholesale Mortgage by 75% and LoanDepot by 95%. All three went public through an initial public offering or through a merger with a SPAC during the housing mania over the past two years amid immense hype and uproar. All three have been included in my imploded stock.
But mortgage lenders aren’t getting into trouble because homeowners suddenly don’t pay their mortgages or whatever.
They’re getting into trouble because their income has collapsed because mortgage origination has collapsed, particularly refinance mortgages, where origination has collapsed to 22-year lows because few homeowners are going to refinance an old 3% mortgage with a new 6% mortgage, unless they have to do it for cash, and that can be done more cheaply with a HELOC.
Mortgage applications to refinance an existing mortgage fell 1% in the latest week, having collapsed 83% from a year earlier, to the lowest level in 22 years, according to the weekly index of refinance mortgage applications from the Mortgage Bankers Association, published today:
Mortgage applications to buy a home fell 3% in the latest week as recently returned 6% mortgage rates further dampened home buying activity. The MBA’s mortgage purchase ratio is now down 23% from a year ago and is nearing lows during the April 2020 closings:
But it’s not the mortgages that are going bad…
Outstanding mortgages have held up well. Delinquencies and foreclosures have started to rise, but from record lows during the forbearance era, when delinquent mortgages moved to forbearance programs where homeowners didn’t have to make payments and their mortgage was no longer considered delinquent
The rise in home prices since the spring of 2020 has allowed homeowners to get out of forbearance in a number of ways, including selling the house, paying off the mortgage, and walking away with extra money. But leniency programs are being phased out.
So mortgage delinquencies have started their journey back to normal: Mortgage balances that were 30 days or more delinquent rose to 1.9% of total mortgage balances in the second quarter, but remain well below good-time lows (red line).
Foreclosures have also started to rise, but are still well below any of the pre-pandemic lows:
For mortgage lenders: A collapse in mortgage origination revenue.
The three largest mortgage lenders are not banks; They hold the mortgages they originate for only short periods of time, until they have enough mortgages together to sell to Fannie Mae, Freddy Mac, VA, Ginnie Mae, etc., who then securitize the mortgages and sell them to investors like MBS. These mortgage lenders, by not keeping mortgages on their balance sheet for very long, remove credit risk from their mortgage buyers (and, ultimately, from the taxpayers who guarantee many of these mortgages).
But during the period that mortgage lenders hold the mortgages, they are exposed to the risk that mortgage rates will skyrocket, causing the value of the mortgage that has a lower interest rate to decline. This isn’t normally a big deal, but it was this spring when mortgage rates soared by record amounts in weeks, causing some losses among mortgage lenders.
These losses came just as revenues collapsed. Non-bank mortgage lenders derive their income from net interest income (a small portion of total income), mortgage origination and sale proceeds, origination income, service fees, etc.
in the rocket companieswhich overtook Wells Fargo years ago as the largest mortgage lender, revenue plunged 48% in the second quarter to $1.39 billion.
The company went public through an initial public offering during the housing mania in August 2020 at $18 per share. his actions [RKT] have collapsed 82% from their March 2021 high, and 59% from their IPO price, at $7.54 (data via YGraphics):
United Wholesale Mortgage underwrites and provides closing documentation for mortgages originated by brokers, small banks, and credit unions. Its loan origination volume plunged 51% in the second quarter compared to a year earlier.
It went public through merger with a SPAC. The merger closed in January 2021. SPAC shares peaked after the announcement but before the merger closed, with an intraday high on December 28, 2020 of $14.38. Since that December 2020 high, the stock has plunged 75%. The chart only goes back to the merger completion date, the first day the stock traded under its new ticker. [UWMC]. Since the closing high that day, the stock has plunged 68% to $3.61 (data via YCharts):
At Loan Depot, revenue in the second quarter collapsed 60% from a year earlier to $308 million, generating a staggering net loss of $223 million, compared to a net profit of $26 million in the second quarter of 2021.
The company went public through an initial public offering in February 2021 at $14 a share. For the first two days, the stock made a spectacular intraday “burst” of hype and hoopla at $39.85, and then crashed 95% from that high, and 88% from the IPO price, to $1.66 ( data via YCharts):
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