The steady drumbeat of dour news in the mortgage industry punctuated by headlines announcing layoffs and closures among the ranks of independent mortgage banks continues to play out, with several lenders over the last two weeks adding to the torrent of pink slips.

Rising interest rates, sparked by Federal Reserve tightening policies, is the primary cause of the mortgage-finance industry’s pain right now. Last week, mortgage lender and servicer Mr. Cooper disclosed that it was laying off some 800 staff. 

Some 80% of the volume in our industry is done by about 40% of the LOs. And so, the bottom 20% of volume [handled by 60% of LOs] this is the part that has not yet shown up in [the layoff] data yet.

Garth Graham, senior partner at stratmor group

Similarly, news broke this week revealing that independent mortgage bank (IMB) New American Funding had culled its employee ranks by 240 — followed by news that non-QM lender Athas Capital Group was closing its doors and laying off more than 200 employees. In September alone, IMBs slashed some 8,200 jobs, a recent Inside Mortgage Finance analysis of U.S. Bureau of Labor Statistics data shows.

Those job losses, however, are the tip of an iceberg that is expected to sink even more careers in the IMB ranks before the ice melts. Garth Graham, senior partner and manager of merger and acquisition activities for the Stratmor Group, said many of the layoffs in the IMB industry so far have involved employees working in support positions, with loan officer jobs being the last to be jettisoned.

“All this cutting didn’t really start until about March, and so we’re six months or so into this cycle,” Graham said. He added that there were roughly 440,000 to 450,000 people employed by IMBs “at the peak in our industry [last year], and there were only about 300,000 before the rates started running down during the COVID [pandemic].”

“So, there’s some 150,000 excess people,” Graham said. “In that 150,000, there are an awful lot of origination people, and the LOs are just beginning to be impacted.”

Charting the loan officer exit

Graham projects that layoffs overall will ultimately hit 40% to 50% of the IMB industry’s total mortgage-origination staff and about one-third of industry employment overall. IMBs are nondepository lending institutions that, according to the Urban Institute’s Housing Finance Policy Center, account for nearly 77% of all agency-eligible mortgage originations nationwide.

“The MBA just put out their last forecast, and everybody latches on to the $4.4 trillion [mortgage origination] market [in 2021] now forecast to drop to a $2 trillion market [next year],” Graham said. “I latched on to the 13 million first mortgages we did last year that are forecast next year to be 5.5 million. 

“From a staffing perspective, that seems much more dire than the $2 trillion headline.”

Jeff Walton, CEO of mortgage-data analytics company InGenius, during a recent interview offered this perspective on just how dire conditions are for some in the industry: “Let me put it this way. Last night, my Uber driver was a loan officer.” 

Data provided by InGenius offers a deeper insight into the state of the industry for loan officers. According to InGenius, in 2021, the total loan-officer headcount nationwide was 353,119 — with 234,070 LOs having originated three or more loans. 

That’s up from 263,494 LOs in 2019, with 180,713 of that group having originated three or more loans for that year — representing an increase of nearly 30% between 2019 and 2021 (the refinancing boom) for the more active loan officers.

As of July 15 this year, however, some six months into the rising-rate cycle, InGenius’ data shows there were 276,837 licensed loan officers in the country. Of that total, 188,264 had originated three or more mortgage loans — representing a decline of 45,806 loan officers compared with 2021, or a nearly 20% drop over the period among the more active LOs.

That means today’s loan-officer workforce has already been pared down to levels approaching 2019 LO employment. Graham points out that most of that 20% drop in LO headcount as of July 15, compared with 2021, came after the first quarter of this year, however.

The largest 20% of lenders make up 80% of loan volume and employment. Therefore, unless there is substantial consolidation at the top, you should be able to gauge employment losses by monitoring layoffs across the largest 200 [IMB] companies, which is well under way.

Brett Ludden, managing director at sterling point advisors

Graham projects that by year’s end, that figure could go as high as a 40% to 45% overall reduction in LO headcount, compared with 2021.

“Some 80% of the volume in our industry is done by about 40% of the LOs,” Graham added. “And so, the bottom 20% of volume [handled by 60% of LOs] this is the part that has not yet shown up in [the layoff] data yet.

“There’s not a whole lot of volume at the bottom. The inverse of that, is that that top 40% of LOs doing 80% [of the volume] are worth a lot to good companies.”

Graham added that industrywide, IMB employment “is certainly getting back to the pre-COVID levels at 300,000 total jobs.”

“It’s painful for the 150,000 [or so people that are going to lose their jobs],” he said, “but it’s … not an existential meltdown like we had in 2008.”

Reading the employment tea leaves

Brett Ludden, managing director of mergers and acquisitions at Sterling Point Advisors, projects that the overall employment reduction among the nation’s 1,000 largest IMBs could go as high as 54% by mid-year 2023. Working from a larger total estimated employment base for the industry of 501,000 as of 2021 — a boom year — Ludden projects some 272,000 IMB jobs could be shed by mid-2023, resulting in a total industry headcount of 229,000. 

Ludden stresses that the projections are based on modeling estimates, adding that the best measure of employment losses in the IMB industry will be revealed by the lenders themselves. 

“The largest 20% of lenders make up 80% of loan volume and employment,” he added. “Therefore, unless there is substantial consolidation at the top, you should be able to gauge employment losses by monitoring layoffs across the largest 200 [IMB] companies, which is well under way.”

A recent report by Fitch Ratings states that the decline in mortgage originations in 2022 continues to exceed the rating agency’s expectations, leading to declining revenue for lenders from “lower origination volumes outpacing expense cuts.”

“Layoffs, channel exits and asset sales have accelerated, even with better capitalized players,” the Fitch report notes. “Citi, JPMorgan and Wells Fargo are reducing staff and operations, while Santander exited the U.S. mortgage market in February and partnered with Rocket [Mortgage] to issue mortgages for its customers. 

“Smaller players such as real-estate tech startup Reali and Sprout Mortgage have shuttered, while First Guaranty Mortgage Corp. filed for Chapter 11 bankruptcy. [In addition,] loanDepot exited the wholesale channel, with plans to sell its $1 billion pipeline and to refocus on consumer/retail channels.”

Optimistic and well-prepared companies are starting to see opportunities to pick up key staff and prepare for a refinance boom when rates eventually do fall.

Andrew Rhodes, Sr. Director and head of trading at mortgage capital trading

David Hrobon, a principal with the Stratmor Group, wrote in a recent commentary that by year’s end, the mortgage-advisory firm projects that some 50 IMB merger or acquisition transactions “will be announced or closed,” which is “50% more transactions than in 2018, the next highest year of lender consolidations in the past three decades.”

“Also, according to the Bureau of Labor Statistics, our industry employed 427,000 employees in March of this year,” Hrobon added. “Given the [dour] loan-volume forecast … the number of companies and employees in the industry will no doubt look very different this time next year.”

Ludden projects that up to 30% of the 1,000 largest IMBs will disappear by the end of 2023 via sales, mergers or failures in the wake of the double whammy of still-rising inflation and interest rates.

“You have a number of entities who are originators of mortgages and are witnessing a significant drop in mortgage volumes and horrendous [loan] pricing,” wrote John Toohig, head of whole-loan trading at Raymond James, in his weekly online newsletter, “Let’s Talk Loans,” published on LinkedIn. “Originations skyrocketed on ultra-low rates, people hired quickly, mortgage bankers made a ton of money, several IPOs, the market got crowded, and then the Fed took away the punch bowl [by unleashing higher interest rates].”

How bad will it get?

Tom Piercy, managing director at Incenter Mortgage Advisors, said, in general, the outlook for the housing industry is “bad for the foreseeable future.”  

“However,” he added, “it could be very good for companies who are well-positioned on their balance sheet, meaning lower debt ratios and strong cash or liquid assets, and they have cost-efficient retail originations.” Piercy said those lenders will see opportunities expand.

‘“The mortgage market is going to consolidate, but that is coming off recent record profits and boom years [in 2020 and 2021],” said Andrew Rhodes, Sr., director and head of trading at Mortgage Capital Trading. “Optimistic and well-prepared companies are starting to see opportunities to pick up key staff and prepare for a refinance boom when rates eventually do fall.” 

When will that turn in rates begin? Stratmor’s Graham said, based on the Mortgage Bankers Association’s most recent forecast, we can expect “a recession and a drop in interest rates in the second half of next year.”

“The first time [the Federal Reserve] lowers rates, that’s the beginning of the change,” InGenius’ Walton added. He said there will likely be a lag time between any housing-industry rebound and a Fed move to start rolling back interest rates. 

“But, if rates go down precipitously, like they went up, then you’ll see the rebound much faster,” Walton added. Until then, he said the productive loan officers, “the ones that are part of the 40% doing 80% of the business,” they will stay in the trenches adding more referral leads and borrowers to their rosters.

“I was a loan officer when I started in the business,” Walton added, “and through the downturns, I just added more Realtors and builders or whatever, and I always came out better on the other side because I had staying power.”

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