Nonbank mortgage lenders may need to brace for more cuts

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Intensifying margin pressure could spur another wave of cost-cutting at nonbank mortgage lenders, unless other strategies, like consolidation or a mortgage servicing book that could increase in value, offset it.

For publicly traded nonbank mortgage companies, the average ratio of total expenses to total revenue from 2014 through the second quarter of this year, with one-time items excluded, is 121%, according to a Fitch Ratings report.

"An expense ratio over 100% implies operating expenses that are higher than net revenues and weaker profitability," Johann Juan, a director in Fitch's financial institutions ratings group, said in an interview.

The average is based largely on expense ratios of four publicly traded nonbanks planning or undergoing mergers that could change the metric, but it still is indicative of cost pressures like higher rates and lower originations that almost all nonbank mortgage firms, public or private, are subject to, Juan said.

Margin pressures are greater for nonbanks due in part to their use of warehouse lines and repo facilities as funding sources, he noted.

"Nonbanks obtain funding through the capital markets, which is more expensive than the deposits bank use," said Juan.

Despite such pressures, one public nonbank mortgage company, PennyMac, has been able to maintain a lower expense ratio of a little over 62%.

Lenders with multiple loan channels and mortgage servicing rights expected to gain in value like PennyMac, as well as ones that merge, are expected to be able to better mitigate the growing pressure on their lending margins than others that don't, Fitch noted in its report.

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Nonbank MSR Mortgage rates Fitch