By Orla McCaffrey

Mortgage lenders hoping to take advantage of a surprisingly prosperous year are facing a big challenge: rising market turbulence.

The August market debut of Quicken Loans parent Rocket Cos. kicked off a flurry of planned public listings for mortgage companies, marking a major reversal for a group that just two years ago was under significant pressure. At least six of the 30 largest U.S. mortgage lenders have gone public this year or are seeking to, according to industry-research group Inside Mortgage Finance.

Housing demand and the broader financial markets have been remarkably resilient during a recession that has put millions of Americans out of work. Mortgage rates have hit their lowest level on record during the coronavirus downturn, spurring a refinancing boom and delivering hefty profits for home lenders.

For much of 2020, healthy demand for mortgages and a surge in public listings -- the IPO market is on pace to record its best year since the tech boom of 1999 and 2000 -- created ideal conditions for nonbank mortgage lenders to raise capital through public listings. But a volatile autumn in the markets underscores the risks still looming over the mortgage sector.

The initial offerings of two major lenders, Caliber Home Loans Inc. and AmeriHome Inc., planned for last Thursday, were delayed as major U.S. stock indexes suffered through their sharpest retreat since the early days of the pandemic. Nonbank firms typically lack the deposit bases that give banks a steady source of funding, potentially leaving them vulnerable to economic crisis.

"If you're a smaller private company and you've got a chance to raise capital, you take it," said Guy Cecala, chief executive of Inside Mortgage Finance.

In a year of major stock-market swings, mortgage companies have been helped by the low-rate environment. In July, the average rate on a 30-year fixed mortgage fell below 3% for the first time in almost 50 years of record-keeping. The Federal Reserve has signaled it expects to keep interest rates near zero through 2023.

The low rates have juiced refinancings in a market that already was flourishing the year before the pandemic. Mortgage lenders are expected to originate a record $3.2 trillion worth of mortgages this year, according to the Mortgage Bankers Association, a 41% increase from 2019.

But mortgages, and in particular refinancings, are highly cyclical. The MBA expects refinancings to make up 55% of mortgage originations this year, and they have been a big part of business for nonbanks, particularly Quicken.

What's more, many would-be buyers are being locked out of homeownership, which could alter the mortgage market for years to come. There already was a short supply of homes for sale before the pandemic, and now many of them are being snapped up by wealthier people buying second homes in more rural areas or houses with more space. Home prices, as a result, are still rising, and recently hit a median of $311,800.

Rocket raised about $1.8 billion in its August IPO. It soared from its initial offering price of $18 to more than $31 in the first month of trading, but closed Friday at $18.23.

Guild Holdings Co. raised about $98 million in its late October listing. It closed at $14.75 Friday, compared with its offering price of $15.

United Wholesale Mortgage and Finance of America Equity Capital LLC have announced plans to go public through mergers with special-purpose acquisition companies.

Caliber, which delayed its planned public offering, said it would evaluate the right time for the listing "as market conditions develop." AmeriHome, whose listing also was delayed, declined to comment. The S&P 500 fell 5.6% last week, slammed by new coronavirus infections in the U.S. and fresh lockdowns in Europe.

The spate of nonbank public offerings highlights a broader shift in the mortgage market. Since the financial crisis, banks have taken a large step back from mortgage lending. Nonbanks have stepped in, issuing a record 59% of U.S. mortgages in 2019, according to Inside Mortgage Finance.

Nonbanks also made a large share of mortgages in the run-up to the 2008 crisis, though the mortgages they make today tend to be much more conservative.

The nonbanks don't have the deposits or diverse business lines that give banks a steady source of funding. Instead, they rely largely on lines of credit to fund the mortgages they make. If the housing market sours, banks could cut their funding -- which doomed some nonbanks in the last crisis.

Nonbank lenders are "always, frankly, looking for money," Mr. Cecala said.

The coronavirus recession has been a challenge. Nonbanks service many of their mortgages, which in good times means they collect payments from borrowers and hand them to the investors that own the loans.

When the pandemic hit, lawmakers instructed mortgage servicers to allow struggling homeowners to pause their monthly payments on government-backed mortgages for up to a year. But that also meant that servicers were caught in the middle: Servicers still typically have to front payments to investors even when borrowers aren't paying. The government, though, has taken steps to protect mortgage companies from being on the hook for a year's worth of payments.

Some of the recent offerings have included ambitious growth targets. Rocket said it wants to control 25% of the mortgage market within a decade, up from less than 10% today.

Some banks are skeptical of the nonbanks' ambitions.

"We're certainly not rolling over here and giving up market share," said Bruce Van Saun, CEO of Citizens Financial Group Inc., a regional bank. "Whether they can deliver market-share gains and consistent revenue for the longer term is still an open question."

Write to Orla McCaffrey at orla.mccaffrey@wsj.com

(END) Dow Jones Newswires

11-02-20 0544ET