As the first quarter unfolded, macroeconomic risks created strong headwinds for mortgage companies. We hope you enjoyed last week’s edition where we talked about Mortgage Apps Jump 2.5%, Propelled By Purchase Activity. This week we’re bringing you:
Detroit-based Rocket Companies, the parent of Rocket Mortgage, generated a whopping $1 billion profit in the first quarter, up from $865 million the previous quarter.
Compared to its main competitors, the lender seems to be in a comfortable place. United Wholesale Mortgage (UWM) reported a much lower profit of $453.2 million from January to March, buoyed by adjustments in the fair value of mortgage servicing rights (MSRs). Meanwhile, LoanDepot had a $91.3 million loss in the same period.
But Rocket has its own challenges. Loan origination is dropping, as purchase volumes need to increase fast to replace refis lost due to surging mortgage rates. Analysts have started to question whether the company will deliver profits in the coming quarters. Meanwhile, top executives say they will protect margins.
“The rapid increase in interest rates this year has been the largest in over 40 years, with the 30-year fixed mortgage rate now north of 6% for the first time in more than a decade,” Jay Farner, vice chairman and CEO of Rocket Companies, said during a call with analysts. “Rocket has always navigated successfully through turbulent times by protecting margin and profitability.”
The Detroit-based company reached $54 billion in closed loans from January to March, down from $75.8 billion in the previous quarter and $103.5 billion in 2021.
The gain-on-sale margin grew 21 basis points to 3.01% in the first quarter. “Margins included one-time benefits due to the rapid move in bond markets, which increased gain on sale margin by 15 basis points,” said Julie Booth, CFO at Rocket Companies.
Black Knight says the steep ascent of mortgage rates, the 30-year conforming jumped 63 basis points in April, was matched by a sharp drop in rate lock activity. Overall volumes were down 20 percent from March, driven by a 50 percent decline in rate/term refinance activity. Cash-out refinancing fared little better. Homeowners appear unwilling to sacrifice their record-low rate existing first mortgages, seeking instead to access equity by way of home equity lines or second mortgages. Cash-out rate locks fell by 40 percent from March.
The combined decline in refinance locks pushed the refi share of the market down to just 20 percent. It was the lowest share in Black Knight’s records which originated in January 2018.
The company’s Optimal Blue Product and Pricing Engine (OBPPE) recorded an 11 percent decline in purchase mortgage rate locks but they remained largely unchanged from the prior April, indicating consistent and resilient homebuying demand. Government-backed lending increased during the month, and both FHA and VA lending captured market share from conforming products.
As the first quarter unfolded, macroeconomic risks created strong headwinds for mortgage companies. The greatest concern is quickly rising mortgage rates, resulting in overall margin compression and essentially a nonexistent market for refinances. Fannie Mae forecasted in early March that mortgage rates would approximate between 3.7% and 3.9% this year, but by April 7, the national average for a 30-year mortgage had already reached 4.72%.
The current volatility, combined with the likelihood of additional rate hikes on the horizon, has caused originators to focus on the purchase market as well as non-agency loan products like non-QM. Adaptability will be critical to navigating the rapidly changing market but it’s just as important to have a comprehensive understanding of your business’ KPIs.
Amid this challenging environment, mortgage companies must focus on their financial health, efficiency and effectiveness. One way to gain and maintain that knowledge is by utilizing key performance indicators, which allow a company to holistically assess critical components through relevant metrics. A few financial-related KPIs to consider include:
- KPI – Realized revenue vs. cash realized revenue: It’s critical to understand how much revenue your company is generating, as well as the ratio of cash to non-cash. For example, if a mortgage company sells a loan to an agency but retains the servicing rights, those rights are non-cash so you could end up short on liquidity. Especially in times like these, liquidity is pivotal to keeping your business going. So it’s important to know how much you make on a loan not only in terms of margins, but also the actual revenue realized versus the cash revenue because capital must be deployed to finance that spread. Startups sometimes refer to “cash burn” when conveying how cash is used, and it’s important for mortgage companies to understand cash usage as well.
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