Trends are likely to further favor the leading independent mortgage banks when origination activity increases, according to a report from Fitch Ratings this week. Interest rate headwinds and a subdued lending environment over the past two years led several lenders, including both banks and IMBs, to shed origination channels as they restructured, effectively driving increased volumes to the leaders. Meanwhile some "smaller, sub-scale players" also left the mortgage business altogether. 

"Continued consolidation will further benefit the largest originators, which have strengthened their franchises and will be able to take advantage of their competitive positions once origination volumes resume," the ratings agency's researchers wrote. 

With interest rates diminishing refinance activity, companies focused on the purchase market bolstered their positions last year, particularly in the wholesale and correspondent channels, Fitch said. As the top companies in those respective channels, United Wholesale Mortgage and Pennymac Financial came in as the overall number one and two originators by volume, even without retail operations.

Both companies saw their share of originations increase amid consolidation and downsizing. In early 2023, Wells Fargo announced it would leave correspondent lending. In wholesale, several companies have exited the channel since 2022, including Loandepot and Guaranteed Rate. Last year's industry slowdown also saw wholesaler Homepoint cease operations altogether, and in the past few months, Citizens Bank and Fairway Independent Mortgage both also left the channel.

UWM dominated the wholesale origination market, with a 48% share in 2023, rising from 37% a year earlier. The second largest originator, Rocket Mortgage, trailed at 12%. But between 2021 and 2023 wholesale originations overall fell 68%.

Within correspondent, Pennymac nabbed 22% of originations last year, up from 15% in 2022. But the segment saw a 62% decrease in volume from 2021 to 2023. 

Retail lending, which tends to see a higher share of refinances compared to the other two channels, saw the biggest dropoff in volumes during that period, with a 72% decrease. In 2023, Rocket finished as the country's number one retail lender.

Companies managing to withstand the challenges of the past three years to put themselves in a strong position going forward tend to possess the capability to scale with technology, gain profits from servicing segments and stand well capitalized with ready access to liquidity, Fitch said.

"While many originators suffered operating losses amid rapidly rising rates, scaled lenders were better equipped to navigate rate hikes and maintain operational flexibility, as cost-saving initiatives were implemented," its report said.

From a record high of $4.4 trillion in volume for 2021, originations fell in 2022 to $2.2 trillion and $1.6 trillion in 2023, according to data from the Mortgage Bankers Association. While the MBA sees signs of business returning this year, volumes are only expected to rise to approximately $2 trillion.

Despite improving prospects observed by some over the coming months, Fitch sees a "deteriorating sector outlook" for nonbanks in the near term due to current interest rates and a slowing economy. Unlike counterparts elsewhere in home finance, Fitch predicts interest rates to stay within a higher range throughout much of 2024 — between 6.5% and 7.5% — near current levels. 

But the firm also noted "​​right-sized cost structures will benefit profitability once incremental volume improvement materializes."