Proptech founder and former equities exec highlights past examples in a bleak picture for the industry
Despite announcing record loan volumes in their Q1 earnings reports, many of the country’s largest mortgage lenders shared a common fact about this industry in 2021 – margins are shrinking. Lenders like Homepoint, citing increased competition in the wholesale space, announced that they made less money than Q4 of 2020 while closing greater loan volumes. Rocket and United Wholesale Mortgage both reported falls in their gain-on-sale margins. While in both cases, the margins remained high enough to maintain profitability, it speaks to a post-refi boom period that has been predicted by many mortgage analysts: dropping volumes, tighter margins and intense competition for the volume that is out there.
To understand why these margins are shrinking at some of America’s largest lenders, and what that means for loan officers and independent brokers, MPA spoke with Jarred Kessler (pictured) founder & CEO of proptech firm EasyKnock and former global head of equities at Cantor Fitzgerald. He offered some insight as to why these margins are shrinking faster than expected now, whether the industry has any historical parallels to draw on, and what pressure these shrinking margins will put on originator volume and commissions.
“Two factors come to mind,” Kessler said. “The first is that you’ve seen upward pressure in the 10-year treasury yield and some mortgage companies are willing to offset that and absorb those expenditures in their margins to capture more volume. The second reason is advertising. Mortgage CEOs see that this isn’t going to last forever and now is the time to spend money on marketing.”
“As for how this affects originators on the frontline, it’s intuitive to me that if you see margin compression and a slowdown in volume, you’re going to probably see compression in headcount. Mortgage companies traditionally hire when things are good and contract when things slow down and that’s probably what you’ll see now as people look to cut costs.”
In this winnowing market, Kessler believes that companies with heavy investments in technology, like Rocket Mortgage, will come out on top because they have greater control of their human costs. Companies that rely more on staff to achieve scale will start falling behind.
As for smaller independent brokerages, Kessler believes they are at a disadvantage due to their own lack of scalability. However, they are usually able to compete on customer service, relationships and local market knowledge. In a market that’s more driven by purchase business a broker who has developed unique ways to market themselves ought to be able to ride this wave well.
As mortgage pros look for guidance in this period of belt-tightening, Kessler believes they should look to both the stagflation era of the 70s and 80s and, more recently, to the expected rate rises and mortgage slowdowns of 2015 to ’17, when margin compression and a poorer outlook saw the overall industry headcount shrink.
Speaking from his equities background, Kessler explained that investors are already seeing this margin pressure and adjusting their positions accordingly. That’s why we’ve seen the UWMC stock remain around $6 despite the company reporting its best ever Q1. Investors, Kessler explained, buy on mystery and sell on history. Investors look at this margin pressure and think that the days ahead for these lenders will be darker. Kessler thinks that loan officers and brokers should be planning with a similar outlook.
“Invest in technology and be selective of the personnel you have,” Kessler said. “Pick the best people that can navigate through good and bad times and double down on your customer service, because that’s always an advantage.”