Loans

Non-bank mortgage companies favor unsecured debt



non-bank mortgage company More people are turning to unsecured debt as recent rises in interest rates create borrowing needs and they become more wary of the short-term secured financing they typically use.

Fitch Ratings said in a recent report that three major players returned to the unsecured debt market in the third quarter for the first time since 2021, citing the following examples: Mr. Cooper recently issued $1 billionpushing its stock price to a record high.

Others include Freedom Mortgage ($500 million in issuances this quarter and $1.3 billion in last year’s third quarter) and Pennymac ($1.3 billion in issuances). Expanded US$750 million unsecured note issuance in season four.

“Unsecured debt is more stable and will not be subject to margin calls if interest rates rise materially,” Pennymac Chief Financial Officer Dan Perotti said during an earnings call when asked about the motivation for using unsecured debt and whether banks would withdraw capital. Service Financing.

“We’re not seeing a contraction in banks’ MSR funding. In fact, it’s quite the opposite,” he said. “We want to continue to diversify our MSR funding, just for risk management purposes, but we’re not seeing a pullback there.” .”

Unsecured debt can cost more than secured branches, and it’s not a panacea, but as Perotti points out, it carries less refinancing risk. If it’s leveraged in a way that appeals to credit analysts, it could lead to higher interest rates. ratings, which in turn can reduce costs.

“I think over time, as we move more to unsecured, we can reduce costs,” Perotti said. “It has a more favorable rating and capital profile.”

Fitch’s report indicates that analysts view the use of unsecured debt to repay some secured financing positively, and they would like to see more of it.

Fitch said non-bank mortgage companies’ ratio of unsecured debt to total debt remains lower than that of some other higher-rated financial companies.

Given interest rate risks, Fitch encourages non-bank mortgage companies to improve the management of their warehouse credit lines, which are used to fund mortgage pipelines, in addition to MSR financing.

“Refinancing risk is always present because facilities, especially warehouses, must be modified or expanded annually,” the Fitch report noted. “In the third quarter of 2023, rated issuers only committed an average of 21.6% of their warehouse capacity, which is a significant risk for rated issuers.” limit.”

But you also need to be wary of the unique risks associated with MSR financing this year.

“MSR valuations decline as interest rates fall, which could weaken liquidity conditions,” Fitch analysts said.

However, this risk is likely to be limited because many outstanding loans have interest rates much lower than current rates, so they are unlikely to be affected by the refinancing incentives of MSR valuations.

“We expect rates to fall towards the end of 2024, but not to drive significant mortgage origination activity as refinancing opportunities for most existing mortgages will remain firmly out of funding,” the analysts said.





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