A big year for mortgage originators culminated in the Super Bowl, which featured ads for recently public Rocket Cos. and FindAMortgageBroker.com, part of UWM Holdings . But investors are already starting to think about next season.
Fourth-quarter loan volumes reported by originators so far have been huge, and there are signs that the start of 2021 may not have the typical seasonal softness. However, some key measures of how much originators can make when they originate and then sell mortgages are falling.
Median gain-on-sale margins have dropped for banks and lenders in the fourth quarter from the third, according to Piper Sandler. And that pressure is likely continuing: A proxy for these margins, using the spread between primary and secondary mortgage market rates, had fallen to about 1.4 percentage points from an average of 1.6 points in the fourth quarter as of last week, according to Autonomous Research.
This is historically typical in past mortgage cycles, in part driven by competition among lenders leading to tighter pricing. In such cases, mortgage rates eventually start to rise—perhaps along with a strong economy—and refinancing volumes dip, reducing the speed at which mortgages pre-pay. Markets now seem to be anticipating this: Shares of recently listed origination giants Rocket and UWM are both down so far this month. LoanDepot , a big retail originator, made its public listing last week at a reduced size from what it proposed—though its shares jumped sharply in its first two days of trading.
But there may be a bit more upside yet in originating. For one, there are still a ton of mortgages with rates that make them strong candidates to be refinanced. As of December, there were roughly 19 million mortgages outstanding with high-FICO borrowers, or about $7 trillion worth, for which the average borrower could save about $300 a month if they refinanced, according to figures tallied by analysts at Jefferies Financial Group.
