It was the best of times it was the worst of times. Or so it feels for the mortgage industry as a whole. In one year, the industry has gone from record organizations to a slowdown at a record pace and unfortunately, a good amount of lenders are not going to make it. Bloomberg is reporting that market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs…(Bloomberg)
This is not 2008. Thanks to minimal lending excesses and the biggest banks pulling back from mortgages, there’s no systemic meltdown coming this time around.
Independent takeover. After 2008, the big banks pulled back from the mortgage game and nonbank lenders filled the vacuum. In 2004, only about a third of the top 20 lenders for refinancings were independent firms. Last year, two-thirds of the top 20 were non-bank lenders.
- Big banks are still pulling back as Wells Fargo just this week announced a pullback from the mortgage business.
Why this could be a problem. There are two main problems for nonbank lenders when volume starts to fall and rates start to rise…
- No plan b. Bloomberg notes that, unlike banks, “independent lenders often don’t have emergency programs they can tap for financing when times get tough, nor do they have stable deposit funding.”They depend on credit lines that tend to be short-term and depend on mortgage prices. This means they could be stuck with bad assets” which brings us to problem number two.
- Margin calls. Bloomberg points out that for a “lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet…These business conditions are spurring banks that provide lines of credit known as warehouses to make margin calls and cut credit.”
A lot of nonbank lenders will fight to keep their company afloat by finding capital and getting leaner. However, some won’t and we have already seen that. Sprout Mortgage shut down in July, LoanDepot shut down its warehouse division, and First Guaranty Mortgage Group filed for bankruptcy. The question going forward isn’t will anyone else go under, it’s who and when.