Despite the announcement of record lending volumes in their earnings reports for the first quarter, many of the country’s largest mortgage lenders shared a common fact about the industry in 2021 – margins are shrinking. Citing increasing wholesale competition, lenders like Homepoint said they are making less money than they were in the fourth quarter of 2020 while closing larger loan volumes. Rocket and United Wholesale Mortgage both reported declines in their profit margins. While in both cases margins remained high enough to maintain profitability, this suggests a post-refi boom phase predicted by many mortgage analysts: falling volumes, tighter margins and intense competition for the volume that is available.
To understand why these margins are shrinking at some of America’s largest lenders and what that means for loan officers and independent brokers, MPA spoke to Jarred Kessler (pictured), founder and CEO of proptech company EasyKnock and former global chief stockist at Cantor Fitzgerald. He gave an insight into why these margins are now shrinking faster than expected, whether the industry has historical parallels and what pressure these shrinking margins will put on the volume and commissions of the originators.
“Two factors come to mind,” said Kessler. “The first is that you’ve seen upward pressure in 10-year government bond yields and some mortgage companies are willing to make up for this and absorb that expense into their margins to get more volume. The second reason is advertising. Mortgage CEOs see this won’t take forever and now is the time to spend your money on marketing. “
“As for the impact on frontline creators, it’s intuitive to me that if you compress the margins and slow down the volume, you are likely to see a compression of staff. Mortgage lenders traditionally hinge when things are good and contract when things slow down, and that’s probably what you’re going to see now as people try to cut costs. “
In this emerging market, Kessler believes that companies with high technology investments like Rocket Mortgage will stay ahead because they can better control their human costs. Companies that rely more on employees to achieve economies of scale will fall behind.
Kessler believes that smaller independent brokers are at a disadvantage due to their own lack of scalability. However, they are typically able to compete on customer service, relationships, and local market knowledge. In a more buy-driven market, a broker who has developed unique ways to market themselves should be able to handle this wave well.
As mortgage professionals look for guidance at this stage of tightening the belt, Kessler believes they are looking to the stagflation era of the 1970s and 1980s and, more recently, the expected rate hikes and mortgage slowdowns from 2015-17 as a margin Due to the compression and the poorer outlook, the total number of employees in the industry shrank.
Based on his equity background, Kessler said that investors are already seeing this margin pressure and are adjusting their positions accordingly. Because of this, we’ve seen UWMC stock stay at $ 6, despite everything The company reports its best first quarter to date. Investors, Kessler explained, buy on puzzles and sell on history. Investors are looking at this margin pressure and expect the coming days to get darker for these lenders. Kessler believes that loan officers and brokers should plan with similar prospects.
“Invest in technology and choose the people you have,” said Kessler. “Pick the best people who can navigate good times and bad and double your customer service because that’s always an asset.”