Signs the mortgage industry may be moving from defensive to offensive

This the end of capacity reduction in industry is almost here, as both banks and non-banking mortgage lenders identify the final areas where they could make their operations more efficient, Q2 profit summary from Boston Consulting Group said.

Instead, the 10 banks and eight independent mortgage banks it monitors are focused on the next stage of growth.

“Our clients are now moving to strategies focused on revenue growth, margin expansion, and market share gains,” the BCG report says.

Origin volumes in the peer group increased by 33% compared to the first quarter and by 2% year-on-year. The largest annual gains were recorded by Rhythm AND Guildin both cases the increase was over 40%.

The largest declines were recorded in three banks: Wells Fargo, down 32% from a year ago; Truist, down 30%; and PNC, whose volume fell 29%.

For the group, origination volume in Q2 was $171 billion, including equity-backed credit lines. Compared with $129 billion in Q1 and $167 billion in Q2 2023.

However, eight of the nine peers that reported sales growth saw sales decline quarter-over-quarter. The peers were a median of 24 basis points lower than in the first quarter and 5 basis points lower than a year ago.

For example, Rithm shares are down 24 basis points quarter-on-quarter and 21 basis points year-on-year in Q2 2023.

On the other hand, United Wholesale Mortgage fell just 2 basis points compared with the first quarter and was 18 basis points higher than a year earlier, BCG reported.

The only company that recorded an increase compared to the first quarter was Loandepot rose by 22 basis points.

BCG expects these margins to continue to shrink in the future as the share of refinancing continues to grow.

Although Freddie Mac Primary Mortgage Market Survey up 2 basis points last week, since early May, the 30-year average interest rate fell 0.73 percentage points. But that’s not nearly enough to attract the most people to the shopping marketThis is the conclusion of a recent study by Mphasis Digital Risk.

Refinancing activity is on the rise, with Optimal Blue’s daily rate lock data from Aug. 15 showing a 26.1% share of these loans. While that was 1.39 percentage points lower than seven days earlier, it was 662 basis points higher on the same day in 2023.

Many of the firms included in the report told BCG that they are considering converting their mortgage loan portfolios to self-serviced ones to capture future refinancing volume because 18% to 22% of their unpaid principal balances are loans with mortgage interest rates above 6%.

“Firms are expanding their product portfolios to address potential borrower pain points (e.g., zero down payment, digital HELOCs, same-day mortgages),” BCG said. “Our clients are exploring the optimal portfolio of products that generate consistent revenue throughout the mortgage lifecycle while meeting specific needs of potential customers.”

BCG suggested that mortgage lenders should consider forming partnerships in the real estate ecosystem to provide customers with a seamless and integrated homebuying experience.

Meanwhile, the IMB Group continues to take market share from banks, with the number of loans granted up 9% and the number of loans serviced up 8%; the banking group saw a decline of 14% and 5%, respectively.

It is likely that the situation will change even more when Mr. Cooper takes over Flagstar’s portfolio of external services and orders from New York Community Bancorp.

BCG’s latest data is for the first quarter, when IMBs had a 58% share of MSR compared with 42% for banks. Just five years earlier, the split was 54% for banks and 46% for nonbanks, while in the first quarter of 2015 it was 70% to 30% in favor of banks.

In interviews with leading servicers, BCG identified five themes. First, servicers are having a hard time anticipating borrower needs. They are struggling to keep up with increased regulatory scrutiny of compliance.

Servicers said they lack access to the latest technology and data-driven workflows. They also expect credit quality to deteriorate and underestimate the impact of climate issues on their wallets. Finally, they have difficulty monetizing relationships through cross-selling.

This year JD Power Mortgage Service Satisfaction SurveyThe quarter, which saw 17 of the 18 companies tracked by BCG receive a score, was higher year-over-year as a group, but concerns about the growing number of borrowers in financial distress are weighing on future results.

“Lenders/loan servicers are looking at how best to leverage their MSR assets and existing customer relationships (by) building robust customer databases; increasing cross-selling opportunities; hedging against volatile credit volumes; (and) stabilizing cash flows from operating activities,” the BCG report reads.

The benefits include reducing customer churn by 10-15%, reducing the number of call centers to be serviced, and increased efficiency in reducing losses from a 30% to 40% reduction in credit review costs. If they can achieve that, their net promoter score will increase by 10% to 20%, BCG said.

In addition to the companies listed above, the BCG report also includes the following companies: JPMorgan Chase, US Bank, Bank of America, Citi, Citizens, Fifth Third, Pennymac Financial Services, Rocket AND Onity (formerly Ocwen).