Freedom Mortgage founder addresses ’extraordinary’ credit profiles, profitability and products 

Stan Middleman said that mortgage market participants should get used to the concept of 'higher for longer' rates

Mortgage lenders should get used to the concept of ”higher for longer” interest rates and work to bring profitability to their businesses, according to Stan Middleman, founder, president and CEO at Freedom Mortgage

”Your interest rates are going to be higher for longer,” he said. ”This year will look a lot like last year. Next year is going to look a lot like this year. [Interest rates] may be 20%, or it may be 30% or more. Guess what? That’s not enough to change your life, your business, your margins. So, start making money on every loan. 

“Sometimes, it means that you have to shrink your business and get it under control,” he added. ”Sometimes, you are going to say, ‘I can’t get my P&L to work; maybe I shouldn’t be doing this.’ Sometimes, it is, ‘I need to buy other people to get economies of scale.‘”  

Middleman spoke Wednesday morning during a session at The Gathering, HousingWire‘s annual conference held in Scottsdale, Arizona, when the 30-year fixed mortgage rate for conforming loans reached 7.52%, according to HousingWire’s Mortgage Rate Center

Amid a challenging environment, Freedom has kept its cost structure low and has acquired loans to increase its servicing portfolio. 

Middleman believes that the current vintage mortgages, which lenders have originated over the past four or five years, ”might be the best credit that ever existed.” while adding that ”we’re getting towards the tail.”

To prove his point, Middleman said that he is seeing average loan-to-value ratios of 50%, average debt-to-income ratios in the lower 40% range, and credit scores in the low 700s, which is an ”extraordinary” credit profile, he said. 

The problem is that acquiring excellent loans is expensive, but if ”you want to live in a nice house, you can’t really complain about the taxes,” Middleman added. 

Inside Mortgage Finance (IMF) estimates Freedom’s owned mortgage servicing was $458 billion at the end of 2023, up 1.3% compared to the previous year. In September 2023, to support its operations, Freedom Mortgage raised $1.3 billion in debt in about 24 hours, more than the $1 billion expected in June when the company announced the offering.  

”We can raise public debt; we have a lot of money, and we can afford to invest in the assets. Without being concerned, we would probably have $550 billion [in servicing] currently on the books, and we’re going to be approaching 3 million customers,” Middleman said.

”So, when we think about our business and what we are interested in, we want to have customers; we want to have predictable cash flows. We want people with good credit that won’t default.”

According to Middleman, Freedom’s strategy allows the company to have a 30 basis-point cost to produce a loan. IMF estimates that the company originated $16 billion in mortgages in 2023, down 41% year over year. 

In a shrinking market, a dangerous step is that “everybody thinks it’s the time to go big,” Middleman said.

“You can’t create economies of scale if you lose money on every loan. Our business is one of those businesses where you can’t lose money on every transaction and make it up on volume,” Middleman said. 

When thinking about profitability, another incorrect strateg, is to offer a wide range of products, he added.

“A smaller menu really adds to profitability rather than the larger number,” Middleman said. ”And one of the things that somebody that’s running a good business might do is scale back into products.” 

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