The expected reduction in mortgage activity will force more industry consolidation, but prospective homebuyers will enjoy the collateral damage in the form of reduced home prices, a Rocket Companies leader said.
Sky-high home values in the U.S. will decline up to 5% this year, according to a December analysis by Fitch Ratings. Meanwhile, industry projections suggest annual origination volume between $1.7 trillion and $1.9 trillion, less than half of the $4 trillion high reached in 2021. The declines, while painful, could prop up a robust purchase market for previously sidelined buyers.
"Our general view is that a little bit of price decline is okay for the mortgage space," said Brian Brown, chief financial officer at Rocket Companies, in a Fitch webinar Wednesday. We'll need to watch it closely and think about credit and all the things that I know you guys are thinking about. But a 5% decline can actually be beneficial to first-time homebuyers."
Soaring home prices and mortgage rates, which surpassed 7% over the past few months, prompted decades-low application activity, widespread layoffs, and a number of mergers and acquisitions. The market, however, has shown some recent signs of life, including an application surge to begin the year.
First-time millennial buyers could pounce on falling home prices, Brown suggested. Today's consumers are well-qualified compared to those whose loans created the Great Financial Crisis, and experts consistently cite affordability as their biggest issue.
Rocket is ready to capitalize on the first-time homebuyer pool it's gathered from its Rocket Money application, which includes millions of members who don't have mortgages with the lender. The personal finance software that keeps users in-house is a reason why Brown doesn't anticipate Rocket entering the busy M&A market.
"That could literally be a game changer for how a mortgage company does business on the purchase side," Brown said of the application. "So that diversification is a big deal."
The Detroit-based megalender hasn't been immune to market woes, offering voluntary buyouts to employees last spring and more recent cuts. Rocket Money, formerly known as TrueBill, has been the company's only acquisition since going public in 2020, and Brown said the company has looked at acquisition opportunities but has yet to make any investments.
Other large industry players have been active in the mortgage company marketplace, scooping up smaller lenders, if not swaths of outgoing employees of companies beset by the market's decline last year. Margin compression last year following a bountiful market was a main driver of last year's M&A activity, according to Stratmor Group.
Consolidation will persist but at a slower pace, given the industry's built-up capital of the past few years, Brown said. Rocket, which was still profitable in the third quarter last year, itself touts $8.8 billion of liquidity and roughly $20 billion of warehouse financing. To monitor the health of lenders still operating, industry watchers should observe firms' abilities to meet covenant requirements, renew warehouse lines of credits and their activity in the mortgage servicing rights market, Brown said.
The first MSR portfolio above $10 billion recently went up for bid, and even larger transactions are rumored to potentially enter the market in relation to Wells Fargo's mortgage pullbacks. The pool of MSR buyers however is limited among large companies, and any pullback from an institutional buyer could create more supply than demand impacting valuations.
"Watch the cash flows because if you're required to sell those assets, to fund working capital, that can be a position which can be challenging because there's timing issues there," he said.
