Via Financial Times

A successful public offering by Quicken Loans, the biggest mortgage lender in the US, could pry open the market for other non-bank lenders, executives and analysts say. 

The Detroit-based company has filed paperwork for an IPO that could come as soon as July, it emerged last week, in what would be one of the most significant financial company listings of recent years.

The move comes on the heels of a liquidity crunch that caused alarm across the sector in March, and after rocketing unemployment that prompted millions of Americans to temporarily stop paying their mortgage. But the crisis has also driven down interest rates and handed the industry a bonanza of refinancing revenue and the widest margins in a decade.

“Non-banks might be thinking, we are having a phenomenal quarter [so] this might be a good time to tell my story to public markets,” said Sanjiv Das, chief executive of Caliber Home Loans, another private mortgage lender. “If the Quicken offering is successful, more investors will realise it makes sense to have more access to this asset class.”

He added: “A lot of the liquidity issues have gone away [now], but non-banks have learnt one thing . . . if you lose control of your liquidity, you are in trouble, no matter how well you run your business.”

Line chart of Spread of 30-year mortgage rates over 10-year treasuries showing Wide margins for mortgage lenders

Quicken originated $145bn in mortgages last year and together the non-bank lenders account for about 50 per cent of the market in the US. Other private non-bank lenders include Freedom, United Wholesale, Ocwen, and Amerihome.

While such companies sell on the mortgages they originate, they continue to service the loans, collecting payments and passing them to bondholders. Lenders had to scramble for funding to cover borrowers’ who were given permission to skip payments. According to the Mortgage Bankers Association, 8.5 per cent of American mortgages were in forbearance by the end of May.

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Jay Bray, chief executive of Mr Cooper, one of the few publicly traded non-bank lenders, said larger non-banks were able to secure the debt funding they needed.

Asked whether other companies would follow Quicken in raising equity capital, Mr Bray said: “Tapping the equity market is a different riddle. You have to have a great story to tell investors. I think there could be a couple more [offerings] but it is not going to be a huge thing.”

The industry has since been working through a backlog in demand. In the last half of April and the first half of May, the number of mortgage refinancings was more than 200 per cent higher than in the same period last year in the US, and it was still up 80 per cent this week, according to the Mortgage Bankers Association.

Mortgages approved for new home purchases have turned positive too, rising 12 per cent in the past three weeks as coronavirus lockdowns have eased.

Line chart of MBA refinance demand index, year-over-year per cent change showing Rising revenues for mortgage lenders

“The mortgage industry is a simple thing — it correlates to rates,” said Chris Whalen of Whalen Global Advisors. While mortgage servicing is a tough business, “it’s the relationship that matters. If the lender can [refinance] their borrowers, that’s a home run [for profits]”.

Mr Whalen predicted “a couple” more non-bank lenders might list. The disclosures associated with being a public company can have a knock-on effect of increasing investor interest and improving a lender’s access to debt markets, too, which are critical for financing their business.