Fitch Ratings: Non-Bank Mortgage Lenders to Withstand Liquidity, Funding Pressures

U.S. non-bank mortgage companies are positioned to withstand liquidity and funding pressures amid the fallout from recent bank failures, growing recessionary risks and tightening lending standards, reported Fitch Ratings, New York.

In a non-rating commentary, Non-Bank Mortgage Lenders to Withstand Liquidity, Funding Pressures, Fitch noted consolidated leverage ratios remain below downgrade sensitivities for the rated universe. “While lower originations due to rising rates are an earnings headwind, they will also serve to reduce warehouse borrowings,” the report said.

Fitch noted it has a deteriorating sector outlook for non-bank mortgage companies for 2023, driven by earnings pressure, industry overcapacity, potential pressure on homeowner credit performance and periodic regulatory scrutiny of the business model.

“Mortgage-servicing businesses have served as a partial offset, with rising rates and historically low prepayment speeds below 10% increasing mortgage-servicing rights valuations,” the report said. “This has supported liquidity for mortgage companies that benefit from stable cash flows for an extended duration from servicing portfolios, particularly as companies can seek to sell MSRs or borrow against them using secured facilities. However, this could be tested if operating losses continue for an extended period, with diminishing MSR valuation upside as rates move higher.”

The report said non-bank mortgage companies’ ratings are constrained by their reliance on secured bank funding, with committed and uncommitted warehouse facilities and MSR lines comprising 60% of balance sheets or higher on average for Fitch’s rated peer group.

“To date, the bank failures have not been disruptive for non-bank mortgage companies,” Fitch said. “Rated mortgage companies with lending relationships from these banks were able to roll or replace their facilities with continued access to custodial deposits. However, weakening economic conditions, deposit outflows, higher funding costs, and the expectation for higher capital requirements has resulted in banks tightening underwriting standards and potentially reduced credit availability.”

The report said banks have cut back on warehouse lending as they manage their risk-weighted assets more judiciously due to actual or expected tighter capital requirements. “This may shrink credit availability, but should not challenge mortgage market liquidity in the near term, as originations are down and warehouse usage is low,” Fitch said. “Signature Bank and Credit Suisse were both significant players providing secured lending and custodial deposit services to the industry, with Comerica Bank also announcing it would exit warehouse lending.” Fitch said weakness emerging in the MSR market would represent a ratings concern because this remains a key driver of liquidity/contingent liquidity for originators and services. “Banks are usually willing to provide facilities given the high-quality collateral, but may tighten lending conditions and be less willing to continue to provide covenant waivers given operating losses in the sector. Other concerns would include weaker mortgage credit, though the market remains overwhelmingly conforming with higher underwriting standards, which supports liquidity,” the commentary said.