Fitch flags rising leverage across nonbank lenders

Fitch Ratings says its 2025 review of nonbank mortgage lenders reflects how the biggest players have strengthened their franchises during three years of consolidation.

"The largely stable outlooks reflect Fitch's expectation that the operating environment will improve moderately and financial metrics will remain within rating sensitivities," the report said

It cited Inside Mortgage Finance data, which showed the top 10 originators in the first nine months of the year did 43% of the total volume, up from 41% in 2024 and 38.5% in 2023.

Third party origination channels, namely correspondent and wholesale, are dominated by a few companies, including No. 1 by total volume United Wholesale Mortgage, Rocket and Pennymac, the analysis said.

At the same time, retail production remains more fragmented.

Nonbank employment fell 37% this year from peak levels in 2021, Fitch said, pointing to reports from the Bureau of Labor Statistics.

"Banks have also pulled back, which Fitch expects to continue," the analysis said.

While Fitch affirmed the ratings on six of the companies, it did downgrade Planet Financial to "B" from "B+," a result of its higher corporate and gross leverage, which exceeded the rating agency's prior downgrade triggers, the report noted.

"Fitch expects leverage to remain elevated over the Outlook horizon, given anticipated growth in origination volumes and ongoing acquisitions of mortgage servicing rights, which are predominantly debt-funded," the report continued.

In a third quarter review, privately held Planet noted it had bulk and co-issuer MSR acquisitions of $2.1 billion, helping to bring its portfolio to $140.9 billion of owned and subserviced rights.

Servicing rights were 310% of Planet's equity in the third quarter, up from 247% one year prior, which is significantly higher than peers, Fitch said.

"The company employs a conservative hedging strategy which seeks to offset 100% of mark-downs, and the low average coupon partially reduces prepayment risk," the downgrade report noted. "As such, Fitch believes MSR valuation risks are manageable, but leverage and profitability remain sensitive to the effectiveness of hedges."

In the industry wrap report, Fitch pointed out non-funding debt to tangible equity averaged 2.1 times for the third quarter (excluding Finance of America, which it called an outlier), up from 1.7 times at the end of last year and 1.4 times for 2023. It expects industry metrics to largely stabilize next year on stronger, volume-driven earnings but remain elevated for Planet as well as UWM.

Other than Planet, the ratings for all other companies in the review were affirmed.

It did revise the outlooks on Provident Funding Associates to positive from stable and UWM to stable from positive.

The UWM outlook revision is due to increased gross and corporate leverage as compared to 2024, "as borrowings have increased to fund originations and operations and tangible equity has declined with dividends in excess of earnings," Fitch said.

But the ratings agency added it no longer expects corporate leverage to decline below its upgrade trigger of 1.0 times over the next 12-to-24 months.

Fitch said the outlook shift on Providen reflects the resilience of the company's "niche franchise through the challenging operating period for wholesale-focused originators, which has resulted in relatively consistent profitability and an improvement in its funding flexibility with an increase in unsecured debt."

Provident's rating could be due for an upgrade if it maintains pretax returns on average assets above 1% while maintaining its current scale and corporate leverage below 2 times over the next year or two, Fitch continued.

Fitch gave FOA a positive outlook, although it affirmed a long-term issuer default rating of "CCC" and senior secured rating of "CCC-".

In October 2022, FOA changed its business model, exiting forward mortgage lending to concentrate on reverse products. It would acquire then-No. 1 Home Equity Conversion Mortgage originator American Advisor Group later that year. Last month, it agreed to acquire Onity's reverse mortgage business.

This past August, FOA said it would purchase Blackstone's equity interest.

Fitch's positive outlook is a result of FOA's improved operating performance, which has helped to rebuild capital levels. It could upgrade the ratings by one notch if FOA builds a substantial liquidity cushion which exceeds upcoming repayment obligations and continues to de-lever its balance sheet with improved retained earnings.

But the rating agency added it remains concerned about FOA's "relatively weak liquidity profile."

While not mentioning Blackstone by name, the report did say the $80 million the company expects to pay to repurchase the shares will affect liquidity. This along with a recent $53 million borrowing repayment, reduces FOA's liquidity to 2% of total debt on a pro forma basis, Fitch said.

Besides the companies previously mentioned, the review also included Freedom Mortgage, whose senior unsecured debt ratings to "BB-" from "B+"

For the industry as a whole, profitability should improve as lower rates drive higher origination volumes next year, pointing to the Fannie Mae prediction of an 11% increase this year over last, then grow another 25% to $2.3 trillion in 2026.

At the same time, $2.7 trillion of outstanding mortgages have rates above 6% at the end of the second quarter, according to the Federal Housing Finance Agency. This creates "substantial refinancing opportunities as mortgage rates approach 6%," Fitch said.