“We’re
back
in
the
land
of
7%-plus
mortgage
rates,”
Will
Chang,


Pennymac’s
senior
managing
director
and
chief
investment
officer,
said
in
an
interview
with

HousingWire.
“For
better
or
worse,
consumers
are
starting
to
realize
that
the
days
of
2%
or
3%
mortgages
are
well
behind
us
and
not
going
to
be
seen
again
for
some
time.”

Chang
said
that
some
industry
professionals
had
thought
that
at
least
“a
little
bit”
of
refinancing
volume
would
come
back
this
year,
but
“that’s
gotten
pushed
out.”
Meanwhile,
in
the
purchase
market,
despite
turnover
based
on
life
events
—
such
as
people
having
kids
or
getting
a
divorce
—
volume
will
remain
small
for
the
foreseeable
future,
he
added.

Last
week,
the


U.S.
Bureau
of
Labor
Statistics
reported
that
consumer
prices
were
up
3.5%
in
March
compared
to
a
year
earlier.
March
was
the
second
month
of
accelerating
inflation
and
the
most
significant
jump
since
August
2023.

Investors
reacted
by
adjusting
their
expectations
for
the
number
of
rate
cuts
from
the


Federal
Reserve
this
year.
At
the
end
of
2023,
they
anticipated
six
rate
cuts
for
the
year.
A
few
weeks
ago,
three
cuts
became
the
expected
norm.
Now,
it’s
two
or
fewer
cuts,
and
some
experts
—
like
former
Treasury
Secretary

Lawrence
Summers
—
have
included
a
rate
hike
in
their
scenarios,
although
the
likelihood
of
that
remains
low.

Goldman
Sachs
analysts
pushed
back
their
forecast
of
the
first
rate
cut
from
June
to
July
as
the
Fed
needs
to
see
higher
inflation
data
from
January
to
March
“balanced
by
a
longer
series
of
softer
prints
in
subsequent
months.”
A
second
rate
cut
is
expected
for
November.

HousingWire
lead
analyst

Logan
Mohtashami
said
that
so
far,
“we
have
held
the
line
on
the
market
pricing
in
three
rate
cuts,”
but
last
week’s
Consumer
Price
Index
data
was
a
“clear
break
from
that.”
He
added
that
it
was
high
enough
for
him
to
remove

one
of
the
rate
cuts
he
expected
in
2024.
Another
layer
of
uncertainty
comes
from
a
potential
war
in
the

Middle
East.

Where
are
mortgage
rates
headed?

As
investors
adjust
their
expectations
for
the
Fed’s
moves,

10-year
Treasury
yields
jumped
roughly
40
basis
points
during
the
first
two
weeks
of
April,
going
from
4.20%
to
4.60%,
the
highest
level
since
November
2023.

In
March,
the


Mortgage
Bankers
Association
(MBA)
estimated
that
the
30-year
fixed
mortgage
rate
would
average
6.6%
in
second-quarter
2024.
But,
according
to


Freddie
Mac,
mortgage
rates,
which
tend
to
align
with
the
10-year
Treasury
notes,
went
up
to
6.88%
for
the
week
ending
on
April
11,
compared
to
6.82%
the
previous
week.
At

HousingWire’s
Mortgage
Rates
Center,
rates
for
conventional
loans
were
7.21%
as
of
April
15.

And
more
increases
are
yet
to
come.

According
to
Bose
George,
managing
director
at

Keefe,
Bruyette
&
Woods
(KBW)
who
covers
mortgage
companies,
the
mortgage-backed
securities
market
levels
“imply
that
the
Freddie
Mac
PMMS
should
be
something
like
7.15%
or
7.20%,
a
level
where
refinancings
are
going
to
be
low
and
a
recovery
in
purchase
is
going
to
be
even
more
challenging,” 

KBW’s
team
forecasts
$1.8
trillion
in
mortgage
origination
volume
for
2024,
which
George
considers
high.
He
added
that
the
forecast
should
be
reduced
if
higher
mortgage
rates
persist
for
longer.

At

BTIG,
managing
director
and
mortgage
analyst
Eric
Hagen
said
it
is
“needless
to
say
that
mortgage
rates
could
be
volatile.”
But
he
“still
feels
there’s
room
for
mortgage
rates
to
come
down
a
little
bit,
partially
because
secondary
spreads
in
the
mortgage
market
are
still
relatively
wide.”
Hagen
believes
that
rates
below
6.25%
would
be
supportive
of
the
market.

M&As
to
the
rescue

Industry
experts
say
that
higher-for-longer
rates
will
impact
lenders
that
are
already
hemorrhaging
—
primarily
those
that
rely
on
refinances
or
those
that
have
already
sold
at
least
a
portion
of
their
servicing
portfolio.
On
average,
independent
mortgage
banks
(IMBs)
lost

$2,109
per
loan
in
Q4
2023,
the
MBA
reported.

These
lenders
are
more
likely
to
reduce
capacity
even
further,
if
possible,
or
pursue
options
such
as
mergers
and
acquisitions,
which
they
may
have
been
previously
resistant
to
considering.

“I’ve
been
surprised
by
the
lack
of
companies
willing
to
raise
their
hand
and
acknowledge
that
they’re
in
a
tough
spot,”
said
Brett
Ludden,
managing
director
of
the
financial
services
team
at

Sterling
Point
Advisors.
“That
means
you’re
largely
going
to
see
companies
that
put
themselves
into
desperate
situations
instead
of
being
proactive
on
the

M&A
front.”

Ludden
added
that
many
lenders
have
been
“holding
off
on
getting
involved
in
M&As,
hoping
for
the
next
cycle
to
kick
off
and
production
to
rise.”
They
are
holding
on
to
servicing
revenues,
selling

mortgage
servicing
rights
(MSR)
or
injecting
cash
into
their
operations.
But
if
higher-for-longer
mortgage
rates
materialize,
they
will
have
to
“look
at
alternative
options
and
that
likely
means
more
M&As,”
Ludden
added. 

If
sellers
wait,
their
business
valuations
could
remain
relatively
stable
or
come
down.
Each
quarter
that
they
move
forward
is
closer
to
recovery.
But
higher
rates
can
impact
gain-on-sale
margins
and
production
forecasts.
Meanwhile,
Ludden
said
that
acquirers
may
be
more
concerned
about
cash
flow,
which
affects
upfront
cash
and
earn-out
negotiations. 

In
the
current
market,
legitimate
buyers
are
companies
with
substantial
amounts
of
cash
—
the
groups
Ludden
represents
have
at
least
$50
million
—
or
are
parent
entities
with
deep
pockets.
They
are
also
lenders
with
experience
in
either
previous
acquisitions
or
large
branch
acquisitions.
According
to
him,
20
companies
are
well
positioned
for
acquisitions
right
now.

“Certainly,
in
the
last
two
years,
distributed
retail,
in
particular,
has
been
the
primary
interest
for
all
the
buyers,”
Ludden
said.
“As
we
come
to
the
end
of
this
cycle,
you’ll
see
buyers
interested
in
potentially
adding
channels
to
their
capabilities.
But
in
the
short
term,
retail
is
the
place
that
has
the
ability
to
create
the
most
marginal
value.”

MSRs
are
a
difference
maker

Originators
with
relevant
servicing
books
and
a
focus
on
purchase
loans
are
better
positioned
in
this
scenario
since
they
can
count
on
revenues
coming
from
their
mortgage
servicing
rights.
These
assets
tend
to
appreciate
in
a
higher-rate
environment
and
promote
recapture
opportunities
when
rates
drop. 

“Servicing
is
a
very
good
asset
to
have
in
a
higher-for-longer
scenario,”
Chang
said,
referring
to
the
stability
provided
by
expected
cash
flows,
which
has
been
enough
for
some
lenders
to
keep
“the
lights
on.”

Some
analysts,
such
as
KBW’s
Bose,
expect
more
transactions
involving

MSRs
this
year
than
mergers
and
acquisitions
of
entire
operations,
which
are
more
complex
and
involve
more
resistance
for
lenders.

Analysts
are
less
concerned
about
big
lenders
with
scale
and
dominance
in
their
niches,
such
as


Rocket
Mortgage
in
retail,


United
Wholesale
Mortgage
in
wholesale
and


Pennymac
in
the
correspondent
channel.  

“For
the
nonbank
mortgage
finance
complex,
where
we
spend
most
of
our
time,
we
don’t
feel
like
higher
mortgage
rates
prevent
these
guys
from
growing,”
Hagen
said.

“We
can
still
see
decent
conditions
in
the
mortgage
market,”
he
added,
noting
some
constructive
signs
from
homebuilders
that
point
to
the
fact
that
affordability
is
tight.
Still,
this
isn’t
preventing
some
borrowers
from
getting
a
mortgage.