Debt moves give major mortgage firms a key advantage

Uncertainty around federal policy and tariffs has rocked the capital markets this year, and that has added to challenges for the mortgage industry, but there's a silver lining for larger nonbank players.

Companies like United Wholesale Mortgage, Pennymac, Rocket, Mr. Cooper, Loandepot, Provident, Freedom and Planet Financial are in a good position to weather the market's volatility and gain market share through accelerated consolidation, according to Fitch Ratings.

That's because mortgage rate volatility has intensified challenging conditions for originations that have put less efficient smaller players at a disadvantage in the last few years.

"While they're not recording the record profits that they did in 2020 and 2021, they are still — for the most part — profitable, and able to achieve enough volume where they can continue to invest in the business, improve their product offerings, and make acquisitions," said Eric Orenstein, senior director at Fitch and sector lead for nonbank mortgage companies.

Those acquisitions range from deals like the Rocket-Mr. Cooper combination to MSR purchases aimed at growing the servicing book, he added.

Reductions in near-term debt maturities

The majority of large mortgage companies have recently demonstrated an ability to contend with one of the risks Fitch had previously called out: near-term maturities for some of their unsecured debt.

Fitch's analysis of the aforementioned companies' unsecured maturities initially found only United Wholesale Mortgage, Pennymac and Loandepot had unsecured debt due in 2025. All three have since taken measures to address the risk, Orenstein said. Most of the unsecured debt nonbank mortgage companies currently have will mature after 2028, according to Fitch's report.

Pennymac is issuing $650 million in new unsecured notes with an expected high-end speculative grade rating of BB to repay a portion of the older debt of this type, which it noted in a recent earnings call, is due in October.

UWM raised funds through a new debt issuance in December aimed at ensuring funds would be available to redeem $800 million in notes when they come due later this year. The older notes have rates lower than what's currently available so it was advantageous to leave them outstanding, Orenstein said.

Fitch doesn't rate Loandepot, but Orenstein said he was aware based on reports the publicly traded company issues that it had exchanged the bulk of its near-term unsecured debt for secured notes earlier and only $20 million from the original amount is left.

Nonbank mortgage companies have leaned into unsecured debt in the past year or so, with some executives noting that it has the advantage of not being subject to margin calls if there's an abrupt interest rate shift the way some secured financing can be.

Fitch has generally views unsecured debt use a credit positive for that reason, but had warned that companies with large volumes of notes immediately maturing still could be forced into replacing their borrowing at a time market conditions aren't optimal.

Differentiation in the level of risk

The ability of nonbank mortgage companies to take steps to address risk around near-term unsecured debt maturities and the recent restoration of calm in the broader markets have allayed many concerns, but some players still may struggle with it more than others.

"Some of the lower rated or unrated issuers might not have as much liquidity on hand so if they can't access the markets, they're going to face a real problem," Orenstein said.

Finance of America, a reverse mortgage lender, no longer has any near-term unsecured debt, but it did previously and found itself forced to exchange some it had coming due near-term to avoid a likely event of default because it faced challenges issuing new notes, he said.

Fitch initially downgraded the company to RD or restricted default prior to that debt exchange. The rating agency later upgraded the company to a low-end speculative grade rating of CCC to reflect the post-exchange capital structure, Orenstein said.