Nonbanks positioned for success as origination volumes rise in 2025, says Fitch
The outlook for US nonbank mortgage companies in 2025 is looking brighter, according to Fitch Ratings. Lower interest rates, increased mortgage origination volumes, and stronger gain-on-sale margins are expected to boost operating results across the industry.
Fitch said industry consolidation, which has reduced non-bank mortgage capacity by 35% since April 2021, will likely benefit larger, more competitive lenders.
Fitch estimated that $1.9 trillion in outstanding mortgages with rates above 6% will become eligible for refinancing as 30-year fixed mortgage rates approach 6% in 2025. This followed a surge in refinance activity in 2024, with volumes up 57% year-over-year in the third quarter, when rates briefly dipped to 6.1%.
About 74% of outstanding mortgages had rates below 5% at 2Q24, according to the Federal Housing Finance Agency. However, the remaining higher-rate loans represent a significant refinancing opportunity as rates decline.
While rates rose in the fourth quarter of 2024 due to higher Treasury yields, total originations are forecast to increase by 9% year-over-year in 2024, reaching $1.6 trillion. Fitch projected another 18% growth in 2025, pushing total originations to $1.9 trillion.
The nonbank mortgage industry has seen its capacity shrink by 35% since April 2021, according to the Bureau of Labor Statistics, as lenders downsized in response to rising rates and reduced refinancing demand. This consolidation has created a more streamlined market, with larger, well-capitalized lenders positioned to capture market share.
"Lenders with scalable technology platforms, servicing cash flow diversification, low corporate leverage, and access to liquidity are better equipped to withstand market cycles and take advantage of increased volumes," Fitch explained.
Companies with significant exposure to mortgage servicing rights (MSRs) may face higher amortization expenses and write-downs as prepayment activity accelerates. Fitch emphasized the importance of refinance recapture success for these issuers to maintain profitability.
Fitch recognized the efforts of several companies to address debt maturities. United Wholesale Mortgage (UWM), PennyMac Financial Services, Freedom Mortgage, and FOA have successfully refinanced or extended maturity profiles for a combined $1.9 billion in unsecured notes since the second quarter of 2023. These moves have improved liquidity and reduced reliance on short-term secured funding.
Debt management remains a key focus for the industry. Companies like Mr. Cooper, PennyMac, UWM, and Planet Financial have collectively issued $7.6 billion in unsecured notes since late 2022, primarily to pay down MSR lines and extend funding durations.
"Total leverage ratios will likely rise with increased warehouse utilization from higher origination volume," Fitch stated. However, these ratios are expected to remain below the peaks seen during the refinancing boom of 2020-2021.
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Fitch warned of potential challenges tied to rising unemployment and stretched housing affordability, which could lead to higher delinquencies. However, it noted that delinquencies remain below pre-pandemic levels, with accumulated home equity offering homeowners resolution options in the event of financial stress.
Despite some hurdles, Fitch expects non-bank lenders to capitalize on the opportunities presented by declining rates and higher origination volumes. The Federal Reserve is forecast to implement 125 basis points in rate cuts by the end of 2025, providing further support for market activity.
“Non-bank lenders are positioned to benefit from a more favorable market environment in 2025, leveraging their competitive advantages to navigate a shifting landscape,” Fitch said.
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