Inside United Wholesale Mortgage’s plan to topple Rocket

Mat Ishbia's firm has a plan to capture 50% of the wholesale market when the refis – and their competitors – fade

HW+ Mat Ishbia

Weeks before United Wholesale Mortgage (UWM) went public in a SPAC deal that valued the lender at $16.1 billion, its president and CEO Mat Ishbia said observers shouldn’t expect a different United Wholesale Mortgage or a different Mat. He proved it in his first earnings call.

On Thursday morning, Ishbia, in his characteristic fast-talking bravado, bragged about the wholesaler’s position as the biggest purchase lender in the market, cautioned that they’ve prioritized the long game over short-term profits, teased new technology offerings to come in 2021, outlined scenarios in which UWM dominates when interest rates rise, laughed about how other lenders take 54 days to close a loan when he does it in 18, and repeatedly told investors that his company’s strategy was far superior to that of its arch-rival, Rocket Mortgage.

The numbers for the fourth quarter were indeed impressive – $54.7 billion in originations, $1.33 billion in income, margins at a very healthy 305 basis points. In fact, UWM originated more than $182 billion in mortgages in 2020, generating about $3.37 billion in profits. Incredible numbers.

Ishbia told analysts that the company doesn’t see originations or margins normalizing in 2021, giving the firm another year of big profits and further investment in technology.

And yet, despite those eye-popping numbers and proclamations to reinvest in the company, UWM’s stock fell about 10%.

HousingWire took a closer look at how United Wholesale Mortgage plans to grow market share, who it intends to steal it from, the larger question of mortgage cyclicality, and why Ishbia thinks Rocket Mortgage’s strategy is ultimately flawed.

What to expect in 2021 for United Wholesale Mortgage

“2021 is going to be a great year,” Ishbia said on Thursday. “We’re really focused on mortgage brokers and helping make the process faster, easier, cheaper, and that’s helped us become the No. 2 overall mortgage lender. Hopefully soon, we’ll be the No. 1 mortgage lender, with strategies we’ll discuss during the call today.”

In the first quarter, the wholesale lender is projecting closed loan volume between $52 billion and $57 billion, and a total gain margin of between 200 and 235 basis points, which would be a significant increase over the 95 bps from the first quarter of 2020, but lower than that of the fourth quarter.

One of the reasons the lender expects strong profits for the first quarter and beyond is the additional firepower coming on the purchase front.

“When COVID hit, we pulled out of a lot of products, specifically FHA and jumbo, and basically said we’re not going to focus on these products – those delinquencies are higher, there’s uncertainty in the market,” Ishbia said. “And I’m OK doing less business because I’m going to make sure we steer the ship safely for the long term.”

“One of the consequences is we did less purchase business in those two buckets, which made our purchases look not as exciting as it had been. But we turned back on the FHA, our Conquest program in December. And we also will plan on turning on a jumbo product in March,” Ishbia said.

In all, United Wholesale Mortgage generated $42.9 billion in purchase loans during 2020, a decline from 2019. Reintroducing those products will generate about $16 billion in originations by the third quarter of 2021, the president and CEO of UWM said.

“We expect to have big, big purchase numbers going forward,” Ishbia said before taking a shot at rivals, notably refi-heavy Rocket Mortgage. “We are a purchase lender – we had 71% purchase in 2018. We’ve done this before, our biggest competitor and many of our top competitors have not done it before.”

A return to FHA and jumbo loans doesn’t mean UWM necessarily has a newfound penchant for risk.

The average FICO score for a UWM borrower in 2020 was 757, and UWM’s delinquency rate was below 2%, far lower than the industry’s rate of 4.7%, according to Ishbia. Forbearance rates on UWM loans were also below 2%, he said. “We have chosen less volume for quality. We are trying to win long term. We’ve been in business for 35 years, we’ll be here for another 35 years.”

Upsizing the mortgage broker channel

Perhaps no other mortgage lender in America has as much riding on the growth of the broker channel as UWM. It is foundational to Ishbia’s ambitious plan to topple Rocket Mortgage, which leads the race by several lengths and can make money across multiple segments.

It’s simple math: without thousands of new mortgage brokers and double-digit growth in the channel, UWM can’t possibly catch its rival, which originated about $323 billion(!) in mortgages last year, according to Inside Mortgage Finance.

As of the third quarter of 2020, the broker channel represented about 17.2% of the overall residential mortgage market, according to Inside Mortgage Finance. Ishbia says that channel can basically double in size by 2025, with UWM snagging 50% marketshare within the wholesale channel.

Where those brokers will come from looms large. Ishbia believes they’ll come from the biggest IMBs, small community banks, credit unions, large depository institutions, and even outside the mortgage industry.

“We think a big part of the broker channel growth is educating consumers, but also retail loan officers leaving the Guaranteed Rates, the Rocket Mortgages, the loanDepots, the Caliber retails, and joining mortgage brokers,” he said. “We see that trend happen every single day. But it will be a bigger push in the future…it just doesn’t happen when rates are so low and [retail LOs] are getting so many leads, [and their] pipeline is full.”

UWM’s method to growing market share within the wholesale channel is two-pronged: it will invest billions in technology, leveling the playing field with retail; and the value proposition for brokers is high.

“I think it will actually come from some of the top players that you might see in the wholesale top 10,” he said. “There is a wide gap in technology and delivery of speed of close, where we are winning right now. And a lot of other people have to significantly lower their margins just to get even close to the amount of volume that they want to compete with us. So as we continue to widen the gap, and the pricing is becomes more aligned, we believe that our growth will be substantial. And I’m expecting that growth to be in 2021 and 2022.”

Ishbia added that once a mortgage broker uses UWM, they stay because UWM doesn’t compete with them through other channels, has best-in-class technology and closes loans quickly. “Therefore, they look good to the Realtor, they look good to the consumer, and they’ll get more referrals and keep sending loans to UWM,” he said.

Overcoming mortgage cyclicality

The last year has been extraordinarily kind to the independent mortgage banks. Without the same regulatory challenges as their bank counterparts, IMBs were able to move (relatively) quickly when the pandemic began to capitalize on never-before-seen interest rates.

Including the correspondent channel, they originated over $4 trillion in mortgages in 2020, nearly 75% more than they had in the prior year. Several of the nonbanks, including UWM, have reported profits in the billions for the calendar year.

Not that the investors have been impressed.

Following a quarter in which it originated a then-record $72.3 billion in first-lien mortgages, Rocket Companies pulled the trigger and went public in early August. The company had planned to sell 150 million shares at a range of $20 to $22. But following a roadshow with investors, Rocket downsized the IPO. It ended up selling 100 million shares at $18 apiece, raising $1.8 billion for a $36 billion valuation.

The downsizing would become a theme. Guild Mortgage, backed by a private equity firm, followed in the fall. It downsized its IPO and then traded below its $17-$19 target price, ending its first day of trading at below $15 a share. Wholesale lender Homepoint, owned by affiliates of Stone Point Capital, debuted last month at a disappointing $13 a share in a downsized offering, well below the $19-$21 its backers had hoped to raise in the IPO.

UWM made its highly-anticipated public debut last month. Ishbia and top executives even traveled to the New York Stock Exchange to ring the bell and open trading. Shares of United Wholesale Mortgage Corp. (UWMC) closed at $11.35 on the first day of trading, up from the $10 of the initial company merger. Following the fourth quarter earnings, shares fell 10%.

Jack Micenko, an analyst at Susquehanna International Group, said the company’s gain-on-sale margin guide for the first quarter was likely the culprit.

“The company guided to a GOS margin in a range of 200-235 bps, down from 306 bps reported in 4Q20. Across the industry, GOS margins are elevated, but many assume (including us) that they are not sustainable,” Micenko said in a note.

“Given that UWMC’s guidance is 1/3 of the way through the first quarter, this suggests that the rationalization of GOS in the industry is finally upon us. We like the UMWC model – it’s more geared toward purchase volumes, and the broker channel should grow even if total originations decline. But the volatility in GOS is a key reason investors have historically valued mortgage originators in the 5-8x P/E range through cycle,” the note continued.

Ishbia insists he’s built a business for the long haul. He also offered a scenario in which UWM gains market share and maintains profitability while others struggle.

“We imagine, what does 2024 look like in a $1.5 trillion year, when the mortgage market is cut in half,” he said. “Well, here’s what happens – the broker channel grows to 33%. Not only do the brokers grow, but also purchase business [expands to] some 33% or $500 billion. Our share will be 50%.”

According to Ishbia’s math, UWM would be doing about $250 billion a year in originations. “We are less cyclical than our biggest competitor, who’s almost 93% refinance,” he said.

United Wholesale Mortgage’s anti-Rocket model

In the earnings call on Thursday, Ishbia didn’t shy away from critiquing his larger Michigan mortgage counterpart.

Rocket is a master of direct-to-consumer retail, which tends to be refi-heavy, Ishbia said. That model isn’t as effective when interest rates increase, he said.

Ishbia further questioned the viability of Rocket’s continuing strategy in wholesale – now a decade old – given that it competes with brokers in other channels and is predicated on leveraging the brand’s name recognition.

“We’re not competing with them, I think it’s a very bad decision to try to solicit those clients,” he said. “The competitors have done that and they’ve failed. And they will continue to fail.”

He said two of the nation’s top mortgage brokers have terminated their relationship with Rocket because of their “solicitation and their competitiveness to them.” About one-third of brokers will never send them a loan, he claimed on the call.

“Obviously Rocket has a great retail presence,” Ishbia said. “But brokers don’t want to have to compete with their partner.”

Ishbia later said that the Rocket Pro TPO business, which includes the broker model as well as a corporate partnership, actually comprises about 30% or more of that business line. He won’t be following a similar template. UWM is only interested in the broker, he said.

Still, Rocket’s interest in growing its broker-facing business – as evidenced by an expensive Super Bowl ad – is validation that his company’s focus on brokers is a winning strategy, Ishbia said in an interview.

Whether any of this means investors will take a more bullish view on United Wholesale Mortgage Corp’s faltering stock is unclear. But Ishbia, who now has a net worth somewhere in the $12 billion range, claims he’s not worried.

“The way I look at it is, the stock price usually will follow success, and so it doesn’t really matter the price, it matters the market cap –  we’re at $17 billion or $18 billion right now,” Ishbia said in an interview with HousingWire. “I don’t know the exact number, but we’re in that range. And same thing with Rocket. I think the difference between us and a lot of other people is how a mortgage company is valued. People know what it’s worth, plus or minus 20 or 30%. It’s not like an electric vehicle or these things that triple in price. We’re an established business with billions and billions of dollars and people know that and value us accordingly.”

James Kleimann is the Managing Editor of HousingWire. You can reach him at [email protected].

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