Banks’ mortgage income will remain challenging in 2023 as the lending sector continues to face challenges, but the challenging environment also presents M&A and acquisition opportunities. talent for banks to increase before the next round, according to business experts.
Of the 15 largest public sector banks by total assets as of September 30, seven reported a quarter-on-quarter drop in mortgage income from one to four loans. households in the third quarter and 10 saw a year-over-year decline, according to S&P Global Market Intelligence data. The group saw a decline of 11.2% quarter on quarter and 47.6% year on year.
Some of the biggest drops in mortgage income came from Wells Fargo & Co. and JPMorgan Chase & Co. Wells Fargo reported mortgage income of $324 million in the third quarter, down from $1.3 billion in the first quarter of 2021, while JPMorgan reported $314 million in the third quarter, down from $704 million in the first quarter of the 2021.
With little refinancing and home sales due to high home and mortgage rates, the current market is extremely difficult, Jeff Davis, managing director of Mercer Capital, said. from an interview.
“Call this somewhere between a lot difficult and violent,” Davis said. “Ibeat exactly like that a cycle business. And when of the good, of the for sure good. And when of the bad, of the for sure bad.”
Other business lines, low risk is a silver lining for banks
Summary of mortgage originations it will be all around $2.245 trillion by the end of 2022, down from $4.436 trillion in 2021, according to the Mortgage Bankers Association, or MBA. mortgage finance.
The association expects that the environment will be more challenging in 2023, predicting only $ 1.899 trillion in total mortgages for the entire year.
Housing affordability and research issues have combined with rising prices to create a “perfect storm” that has discouraged many borrowers from buying homes, said Marina Walsh, the representative. president of the MBA of business studies, in an interview. But there are silver linings for banks that offer mortgages, industry experts said.
Luckily for banks, they have other sources of income, unlike independent mortgage companies that are more “one-trick” ponies, Davis said.
“(Banks) have other sources of funds, they have deposits, they have credit cards, other lines of business, other customer loans, so there is some flexibility. option to recoup some of those losses in other areas of the business,” Walsh said. “That’s not the case with independent mortgage companies.”
Another positive for banks is the current historic-low rate. TThe MBA mortgage survey, which has been conducted since 1979, found a new low of 3.45% in the third quarter, Walsh said.
The low level of defaults benefits banks by keeping the expensive work of managing loan modifications and reserves. However, if a widely expected recession comes, sanctions may not stay down, Walsh said.
“That possible character no jobs zero go yes go up a little little and we possible possible see increase inside crime,” Walsh said.
However, Walsh emphasized that the recession in 2023 will not come as a result of the recession or unemployment of the Great Depression because many homeowners have much in common with the lower mortgage rates if they don’t buy within the last year.
M&A mortgage opportunities
Given the volatility of the mortgage market, Davis does not expect many banks to be interested in acquiring mortgage-focused businesses, especially if mortgage rates remain stable.
But the current low rates for non-bank mortgages provide an M&A opportunity for banks willing to take on the risk, Performance Trust Capital Partners managing director Will Brackett said in an interview.
“QYes income zero really value yes bank,” Brackett said.The classification zero of the income river, of the classification zero debt, and thus, done of the business line too a lot value yes a a lot zero bank.”
New York Community Bancorp Inc. announced. its acquisition of Flagstar Bancorp Inc. heavy mortgages in April 2021 while the mortgage cycle was still heating up, and despite regulatory delays that pushed closings to December 2022 and in a very different mortgage market, the companies remained. of the strategic and financial aspects of the transaction.
The combined company is ready “to take full advantage of the next refinancing market, which is coming,” said the former President and CEO of Flagstar, Alessandro DiNello in October on the third quarter the income of the New York Community.
Another area of the mortgage business that may attract customers is servicing rights.
Servicing rights, which entitle mortgage companies to monthly payments based on the principal balance in exchange for mortgage collection, accounting and dealing with borrowers, have become increasingly attractive and scarce in the market. two when mortgage rates rise. and finding those companies more competitive as a result, said Bill Jones, senior vice president of Community Capital Advisors, in an interview.
Created by PNC Financial Services Group Inc. an agreement to purchase the mortgage rights of SecurityNational Mortgage Co. in October.
Opportunity to acquire talent
To adjust for the rate cycle, banks and mortgage brokers adjust the size of their mortgage business up and down to take advantage of economic times and avoid using rates when rates are low, Brackett said.
Layoffs are one way banks and mortgage companies are reeling under the current recession, and MBA predicts the industry will need to cut jobs significantly to get the right size if after the fall in the beginning, Walsh said.
“Our estimate is a 25% to 30% reduction in mortgage activity from top to bottom and that’s not nearly all the capacity we need,” Walsh said.
This period of relief could provide an opportunity for banks, Brackett said.
“When are you found some dispute, this be a good available for bank yes start yes building mortgage part or reorganization mortgage part for sort out zero of the next cycle zero high big,” Brackett said.