4 key sets of metrics mortgage companies must watch in 2021

January 5, 2021 9:49 AM

Many factors will determine how the home mortgage market will fare under the continued pressures of the pandemic in 2021, including whether the low interest rates and supply-and-demand factors that have fueled the housing market will keep driving originations to the highs like those seen in 2020.

What follows are four key sets of statistics mortgage companies will be watching this year to get a sense of which way the wind is blowing.

Production costs and profits

In 2020, home loan production expenses were relatively stable while profit went up, but it was an unusual, record-setting year for volume, totaling around $3.47 trillion according to Fannie Mae’s December projection. By comparison, origination volume totaled $2.46 trillion in 2019.

Lenders should keep an eye out for profit margins growing a little thinner this year, in line with a slightly lower origination forecast. While overall mortgage profit margins rose between the second and third quarter of 2020, there were anecdotal signs of downward pressure on some companies in the industry. Large nonbank Rocket Cos., for example, recorded a decline in its gain-on-sale margin to 4.52% from 5.19% in the second quarter.

That could be a sign that bigger and more influential players are starting to lower prices to compete, which could put pressure on margins more broadly over time, particularly given that there are now more publicly traded players in the market desperate to continue to grow in order to appease their shareholders.

This won’t happen overnight as margins are still a lot wider than they were a year ago and origination volumes are still high. Rocket’s GOS margin, for example, was just 3.29% in the third quarter of last year. Still, that a lot can happen in a quarter. As recently as the fourth quarter of 2018, the mortgage industry had to operate on a negative profit margin.

Refinance share and marketing expenditures

The above snapshot from the Mortgage Bankers Association, which tracks the estimated share of refinances among all originations from quarter to quarter, is a good reminder that last year’s refinance share wasn’t typical. While refinancing currently dominates the market, the refi share has been as low as 11% at times as it was at one point in 1995, for example.

Fannie Mae predicts that in 2021, refis will drop to $1.8 trillion from $2.7 trillion in 2020.

If lenders begin to see their refinance share declining, they may alter their marketing budgets to emphasize outreach to first-time buyers, and their expenses will grow. While purchase lending is expected to remain robust in years to come due to supply-demand imbalances in the housing market, it requires more investment per loan than refinances do. That could be particularly burdensome for consumer-direct lenders, which tend to operate on thin margins and could see a big jump in their marketing lead costs.

Staffing costs and loan volume

In 2020, the amount of people employed by nonbanks reached highs never before seen in the Bureau of Labor Statistics’ data series, in line with record originations. That suggests current payrolls may not be sustainable if volume falls.

In October, the latest month for which estimates are available from the BLS, roughly 350,000 employees were on mortgage lender and third-party originator payrolls. In comparison, in one of the last best months for originations prior last year, June of 2018, lenders and brokers employed roughly 322,000 people.

Many lenders may need to downsize, and companies that don’t have a scalable workforce could be hit by the kind of high severance costs that can put a dent in earnings. Some companies may have invested in third-party originations to address this but that strategy has a downside as well given that TPO costs go up fast when the market turns.

Forbearance rates and foreclosure pipelines

Vaccinations are getting underway, but with coronavirus infections trending upward and much of the economy still reeling from the pandemic, mortgage companies will likely be forced to absorb a wave of distress, which could lead to higher servicing costs and possibly tighter underwriting.

While forecasts like TransUnion’s suggest in the long-term, mortgage delinquencies will only rise slightly as forbearance expires and not “markedly” exceed levels seen in recent years, servicing costs go up considerably when loans become distressed, so even a small increase could be a concern.

In addition, some markets are likely to be hit harder than others.

Using the amount of loans in forbearance as a metric — a proxy for short-term delinquency rates given CARES Act prohibitions — data suggest distress is likely to be concentrated in the Ginnie Mae universe, and in part of the private market, which each have forbearance rates that are on average near double those seen in the government-sponsored enterprise market.

Niches like securitized loans made outside the parameters of the Qualified Mortgage safe harbor, which have forbearance rates in the high teens, may be particularly hard hit.

It’s also worth noting that the number of seriously delinquent borrowers in November 2020 was unusually high year-over-year.

That means servicers, which have already suffered from lower servicing rights valuations and a shock to capacity in the past year, may also be dealing with backlogs when some of the borrowers currently on forbearance are added to their foreclosure pipeline. Add to that the potential compliance burdens that could be imposed on servicers, and it becomes apparent that even an incremental uptick in distress could have a substantial impact on the market this year.