Consolidation among large independent mortgage bankers is likely as several lack the financial wherewithal to deal with the changing environment, Moody's said.

"The long-coming increase in interest rates has partially reversed impairments of mortgage servicing rights, and further MSR write-ups should accompany prospective rate increases. At the same time, however, origination volume and income will decline," leading to amalgamation, a report from the ratings agency said.

Only three of the nine companies Moody's tracks — New Residential Investment Corp., Private National Mortgage Acceptance Co. (a subsidiary of PennyMac Financial Services Inc.) and Quicken Loans Inc. — had a pretax income-to-assets ratio above 1% over the past three years.

Not meeting that threshold means the majority of nonbank mortgage finance companies "are likely not covering their cost of capital," said Warren Kornfeld, a senior vice president at Moody's.

Already, Prospect Holding Co. and PHH Corp. exited the playing field, the report pointed out. HomeBridge Financial Services acquired the operating assets of Prospect Mortgage, while PHH announced a series of transactions including shedding its private-label and Realogy joint venture businesses along with selling its MSR portfolio, leaving it as a subservicer.

In February, Stearns Lending sold its correspondent production business to Flagstar Bancorp. Even though this channel was 28% of the company's 2016 originations, it was a "modestly credit positive" transaction because it got Stearns out of a "low-margin, non-core business," Moody's said.

There are capital issues at the nonbank lenders because they rely on short-term debt like 364-day repurchase and servicer advance facilities to fund originations and investments, and with rising interest rates, those are subject to refinance risk. As a group, they also have a high level of secured debt, above 60% of tangible assets.

But Nationstar Mortgage, Ocwen Financial Corp. and Walter Investment Management Corp. rely less on short-term financing than their peers, Moody's noted.

Ocwen's losses are largely driven by its legal and regulatory expenses. An agreement with the New York State Department of Financial Services could allow the company back into the MSR market.

But Ocwen's ability to purchase MSRs "will be limited by franchise uncertainty, capital constraints, modest opportunities and a highly competitive market," Moody's said.

Looking at the nonbank sector's future, "we expect profitability to improve as interest rates rise, overcapacity declines, compliance and regulatory costs moderate, and companies achieve further cost efficiencies," the report said.

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