Mortgage lenders race to streamline, scale amid rate shifts

Facing a volatile rate environment, mortgage lenders—especially banks—are doubling down on creating efficiency and scale. From AI-driven automation to home equity lending, they are making strategic moves to stay competitive, according to Boston Consulting Group.

"Companies are busy identifying the last remaining sources of efficiencies as part of a final push to right-size their cost structure and establish resilient, low-cost platforms," according to BCG's fourth quarter 2024 U.S. Mortgage Performance Report. "Our clients are now pivoting to strategies focused on revenue growth, margin expansion, and increased market share."

The report includes a wrap up of the results for 18 of the larger bank and non-bank publicly traded mortgage companies.

How the outlook for 2025 informs strategy

In February, BCG commented the industry still had too much capacity. Despite that, the 2025 investment strategies for lenders prioritize AI and automation to drive productivity, while also preparing for short-term rate declines that could spark waves of refinancing, similar to what happened in August and September last year.

Meanwhile,The mortgage industry could see more blockbuster deals like Rocket/Redfin in 2025. As lenders aim to scale their technology and expand homeownership ecosystems, M&A activity is likely to accelerate, BCG said.

Consumers are increasingly thinking about buying, financing and ownership in a more integrated manner and lenders are increasingly focused on partnerships and technologies that can provide that experience. 

"To create differentiated experiences for homeowners and diversify revenue, mortgage players should consider partnerships within the ecosystem, and ways to make the home buying experience feel seamless and integrated across partners," BCG said.

Home equity lending

With rising home values, lenders see home equity lending as a major opportunity. To capitalize, BCG recommends a multi-pronged approach.

First, lenders must upgrade their portfolio and pipeline risk models to account for the unique cash flow and credit features of home equity products.

When marketing these products, lenders should rethink their organizational structure and operating model to address needs during the mortgage lifecycle. That includes investing in creating borrower education and awareness.

Finally, they should seamlessly integrate home equity products within the organization's loan origination system, customer relationship management and/or point of sale technologies and invest in automation to drive efficiencies, BCG said.

What Q4 2024 performance tells us

During the fourth quarter, the 18-company-group had a 5% quarter-to-quarter increase in total volume and a 55% increase compared with the same period in 2023.

The $199 billion produced was the best quarter for these companies since the third quarter of 2022.

Mr. Cooper led the pack, with a 37% quarterly volume increase and a staggering 244% year-over-year surge—boosted in part by its Flagstar acquisition.

When it comes to gain on sale, five of the nine companies which supplied this data reported their margins were lower in the fourth quarter compared with three months earlier. The median decrease was 23 basis points. For the year-over-year comparison, five of the nine posted higher margins but the median decline was 75 basis points

Last week, the Mortgage Bankers Association reported that during the fourth quarter, nonbanks swung back to a per loan loss of $40 on production; its universe includes both public and private companies.

When it comes to servicing, BCG's universe grew their portfolios by 6% versus the third quarter and 11% compared with the fourth quarter of 2023.

The big gainers were Mr. Cooper (which acquired the Flagstar portfolio during the fourth quarter), Rithm and Rocket.

MSR values totaled $63 billion for the group, an increase of 9% from the third quarter's $58 billion and 12% from $56 billion one year earlier.

As lenders navigate a volatile mortgage market, they are betting on technology, efficiency, and home equity lending to drive growth in 2025.