Lenders pull IPOs even as mortgage market thrives

Two fast-growing US home lenders suspended their plans to list their shares last week, suggesting that the housing boom triggered by falling interest rates may rest on weak foundations.

Caliber Home Loans originated $57bn in home loans in the first nine months of 2020, an increase of 50 per cent, year on year. But last Wednesday, the day it was set to list, the company announced that it would “postpone” its public offering and “evaluate the timing for the proposed offering as market conditions develop”. AmeriHome, with $45bn in originations year to date and a growth rate to match Caliber’s, was also set to price its offering last week, but also delayed its listing. 

The IPOs would have given Caliber, which is owned by the private equity house Lone Star Funds, a market capitalisation of $1.9bn. AmeriHome, which is controlled by Apollo, was set to be valued at $1.3bn in its IPO.

The delays are surprising inasmuch as it is an excellent time to be a mortgage lender. The volume of mortgage refinancing applications, while down from the dizzying highs of the spring, are still about 60 per cent higher than they were a year ago, according to the Mortgage Bankers Association. Purchase mortgage applications are about 20 per higher.

Profitability is strong, too. The difference between the average rate consumers pay on their mortgages and the coupon on a government-backed mortgage bonds stands at 1.6 per cent, against pre-Covid levels of around 1 per cent. The spread is a rough proxy for lenders’ profit margins, because it tracks the difference between what lenders can buy mortgages for and the price at which they can sell them in the bond market.

In the third quarter, as a result, net income at Caliber and AmeriHome rose 200 per cent and 187 per cent, respectively. 

According to one person close to the situation, however, investors are concerned that the good times for mortgage lenders are at their peak, with only downside from here.

The fact that other IPOs continued apace last week — including debuts from Chinese wealth management platform Lufax and online insurer Root — underscored that the pulled flotations had more to do with investor disenchantment with the mortgage industry than broad stock market conditions.

Line chart of Year-over-year change, per cent showing Refinance mortgage applications

The disappointing performance of several recent offerings from other lenders and a slide in the shares of publicly listed lenders weighed on the Caliber and AmeriHome listings, according to people briefed on the matter. Rocket Companies’ Quicken Loans is the largest mortgage lender in the country. Rocket listed its stock at $18 a share in August, below its original target range. They remain near that level. Smaller Guild Mortgage also faced lacklustre investor interest for its IPO earlier in October, selling fewer shares than it had expected. Those shares slipped from an already cut listing price.

Publicly traded mortgage lenders PennyMac Financial and Mr Cooper have seen their shares underperform over the past few weeks after a strong summer. 

Rising interest rates are part of the reason sentiment on the mortgage lenders have shifted. Since August, the yield on the 10-year Treasury has moved from about 0.5 per cent to 0.86 per cent. If this trend continues it would crimp both mortgage demand and lender profitability.

“With the election coming up, there is concerns about a ‘blue wave’ [a Democratic sweep] that results in inflation because of big government spending, and then the 10-year moving up, causing mortgage rates to rise,” said Kevin Barker, a mortgage finance analyst at Piper Sandler.

Line chart of Difference between average mortgage rates* and coupons on mortgage-backed securities**  showing Mortgage spreads remain wide

Recent market volatility, triggered by surging Covid-19 cases and election uncertainty, also contributed to the suspensions. The S&P 500 fell almost 5 per cent last week, and the Vix volatility index rose to its highest level since June. This limited the two lenders’ chances of getting their offering away at a good price, said Christopher Whalen of Whalen Global Advisors. “Both Caliber and AmeriHome are well managed businesses with professional owners. They won’t pull the trigger if the pricing does not make sense,” he said.

“The timing of these [announcements] has everything to do with market volatility generally,” said Walt Schmidt, mortgage strategist at FHN Financial. At the same time, he said, “there is uncertainly about delinquencies in the coming months” as borrower forbearance programmes expire. Just under 6 per cent of mortgage loans remain in forbearance, according to the Mortgage Bankers Association.

Two other home lenders, United Wholesale Mortgage and the Loan Depot have also recently announced their intention to list — the former by merging with the special purpose acquisition company (Spac) Gores Holdings. Their prospects are now uncertain. 

“There was a small window of opportunity, and I don’t know if it will open again,” Mr Whalen said. 

Caliber and AmeriHome declined to comment.

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