For decades now, one of the key mortgage industry trends in the US has been the outsized effect it has on overall market sentiment. The majority of the country’s debt is held in mortgages, according to research. It makes up 71% of the $16.5 trillion in total household debt in the US; as a result, decisions made by mortgage business leaders tend to closely reflect the overall economic mood of the nation.
Recently, in October of 2023, large mortgage companies have started to raise money through debt offerings, and analysts suggest that others may follow suit. This is indeed good news for the industry since strategic debt can help improve liquidity and inject much-needed cash flow into scaling mortgage operations.
Coming Out of a Not-So-Bullish Period
Since the financial crisis of 2008, investors have been extremely cautious when it comes to purchasing mortgage debt. On the one hand, it represents an extremely profitable asset category with highly secure collateral linked to it. On the other hand, regulatory imbalances and unprecedented market upheavals like the COVID-19 pandemic can severely impact debt management strategies.
In the last two years, rising interest rates amid growing inflation have been among the key mortgage industry trends. Combine this with a steadily decreasing new home inventory, and you have a bearish market for mortgage debt. The new generation of property owners, such as Gen Z, are also choosing to rent longer, driving down average demand.
That is why, for several quarters, mortgage providers were hypervigilant about their debt management strategies, rarely eager to expose themselves to more debt. In January of 2023, Wells Fargo stepped back from the housing market led by the company’s 2019-appointed CEO, Charlie Scharf. Prior to his joining, Wells Fargo had made deep inroads into the home loan industry and mortgage servicing rights (MSRs).
However, from mid-2023, the tide seems to be turning. Even as geopolitical conditions and supply chain complexities continue to squeeze the global economy, mortgage industry trends are starting to look up. This is evident in the mortgage business’s debt management strategies, particularly in the case of non-banking lenders.
Rethinking Debt Strategies for a More Resilient Market
Even as banks like Wells Fargo take a step back from mortgage, other players are now more optimistic and eager to finance business growth as the year comes to an end. Warren Kornfeld, SVP of the financial institutions group at Moody’s Investors Service, explains that profitability is finally starting to improve after a period of soaring rates.
As a result, investors’ fears are also abating, and mortgage companies are rethinking their debt management strategies. In Q4 of 2023, Freedom Mortgage and PennyMac Mortgage Investment Trust are raising hundreds of millions of dollars in debt; both are seeing an exceptional amount of traction from the market.
Freedom Mortgages’ $1.3 billion dollar debt financing round was oversubscribed in less than 24 hours. Pennymac has announced a public offering, from which the proceeds will go towards funding its operations as well as new investments. Financial services firm BTIG finds that 10 mortgage lenders have approximately $4 billion in unsecured debt, with several years left for maturity.
All of this points towards heightened market optimism and a renewed trust in mortgage debt as a valuable asset class. The country’s leading data aggregator, Fitch, also reports that “U.S. non-bank mortgage companies are positioned to withstand liquidity and funding pressures over the near-to-medium term.”
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Mortgage Industry Trends Drive Market Optimism
The housing market serves as a barometer for economic stability and growth. Therefore, understanding the intricate relationship between mortgage companies and market optimism is crucial. This relationship plays out in the following ways:
- Leveraging interest rates: Timely financing allows mortgage businesses to tide through periods of fluctuating interest rates and even leverage new opportunities when they arise. Funding from debt lets lenders maintain operational scale for when demand resurges and origination volume picks back up.
- Strengthening risk management: The right debt management strategies allow mortgage providers to reduce their exposure to risks such as an increasing number of delinquencies or foreclosures. Low risk for the mortgage industry translates into more stable market conditions.
- Gaining access to capital markets: Debt strategies also allow mortgage players to gain access to capital markets where they must compete to obtain financing. Competitive market conditions usher in new innovations, smarter operations, stronger ethical principles, and more transparency.
- Adapting to regulatory changes: Regulatory trends such as modernized borrower communications or stronger customer protection laws can create operational challenges for mortgage businesses. An injection of funding through debt makes it easier to adapt to these changes by using the right platforms and/or partnering with the right provider.
- Investing in technology and innovation: The country’s mortgage industry is many decades old, and several companies continue to operate via outmoded models. A good debt management strategy can facilitate technology investments and end-to-end process modernization, from automating workflows to centralizing data.
Navigating Market Volatility with Nexval
As the world reels from the after-effects of the pandemic and the ongoing geopolitical conflicts, mortgage companies’ debt management strategies are a definite green flag. Demand for mortgage debt and cash influx into the housing market signals a period of innovation and economic growth. At Nexval, we partner with the country’s top mortgage providers to help streamline their modernization journey.
Speak with our experts to know more.