Mortgage lenders will be more profitable in 2025, but there are headwinds, Fitch says
The election of Donald Trump as the 47th president of the United States has brought mortgage rates closer to the 7% threshold, but Fitch Ratings expects them to settle lower in the coming months. Looking ahead to 2025, analysts from the credit ratings agency expect declining rates to increase mortgage origination volumes, driving profitability for nonbank lenders.
In light of this outlook, Fitch recently reviewed ratings for several U.S. nonbank mortgage companies. It upgraded Rocket Mortgage (from BB+ to BBB-) and Pennymac Financial Services (from BB- to BB) and improved the outlook for United Wholesale Mortgage (from stable to positive). Other companies—Provident (B), Mr. Cooper (BB), Freedom (BB-), and UWM (BB-)—had their ratings affirmed.
Fitch’s optimism is bolstered by industry forecasts, with Fannie Mae estimating a 28% rise in mortgage originations in 2025, reaching $2.1 trillion, and the Mortgage Bankers Association projecting a 28.5% increase to $2.3 trillion. With market consolidation over the past two years, top nonbank lenders are well-positioned to benefit from higher volumes and margins.
To illustrate, the market share of the top-10 mortgage originators increased to 40% in the first nine months of 2024, up from 38.5% in 2023. Smaller, sub-scale players exited the market and banks have pulled back, which Fitch analysts expects to continue to happen in 2025.
Commenting on the Federal Reserve’s recent 25-basis-point rate cut, Eric Orenstein, senior director for nonbank financial institutions at Fitch, noted that “volatility in treasuries has been a greater catalyst for mortgage rate movements than the Fed’s cuts.” But the Fed’s easing cycle is expected to support mortgage originations in 2025 as more homeowners qualify for refinancing.
Potential headwinds
While higher origination volumes are expected, Fitch forecasts that increased warehouse utilization will keep gross leverage ratios elevated for nonbank lenders. The leverage ratio (gross debt to tangible equity) was 2.8 times in Q2 2024, up from 2.3 times at the end of 2023.
According to Fitch, ”retained earnings and fewer mortgage servicing rights (MSR) acquisitions will be offset by greater operating cash needs.” While most companies have addressed the 2025 maturity wall, $1.5 billion in debt is still outstanding, according to the analysts.
Additionally, while declining rates may cause some MSR mark-downs for firms without sufficient hedging, analysts expect improvement as a 30-year average rate near 6% reopens a segment of the refinancing market.
On a positive note, asset quality remains robust, with delinquencies of 60 days or more averaging 1.6% in Q2 2024, down from 1.7% at the end of 2023 and 2.4% at the end of 2021.