Justin Woodward has experienced the best and the worst of the mortgage industry in only 18 months.
A seasoned retail and commercial banking salesman in Fort Wayne, Indiana, the 39-year-old Woodward joined Interfirst Mortgage as a loan officer in October 2020 after a recommendation from an old college friend.
“I had not done first mortgage lending before, but I was familiar with the basics of real estate lending. So, it wasn’t a huge leap for me,” he told HousingWire.
The work was not complex, he said. Interfirst purchased refinance leads and sent them to Woodward to close.
“When I began with Interfirst, it was all refis. I can count on one hand the number of purchases that I did.”
It worked well for Woodward – and Interfirst – for about one year.
Then, the mortgage industry showed why it is called a cyclical business: in the second half of 2021, the Federal Reserve signaled an increase in interest rates and an easing of the purchase of mortgage-backed securities, choking the refi market.
“We know that the mortgage industry is about boom and bust,” said Woodward. “It is just the nature of the industry, but it’s still not pleasant.”
In fall of 2021, Chicago-based Interfirst laid off hundreds of employees. For Woodward, the pink slip arrived in October.
He was unemployed for only a few weeks. Woodward quickly landed a job as an LO at American Pacific Mortgage, a California-based lender that had just opened a branch in Fort Wayne. But Woodward struggled to originate purchase loans.
“I hadn’t developed a network for mortgage lending with Realtors,” Woodward said about his work at Interfirst in Indiana. “Without that being built, I was starting from scratch. And the rates started to go the wrong way. It just has not gone well.”
Triggered by the COVID-19 pandemic, a “gray swan” event that resulted in near-zero interest rates and the central bank buying mortgage-backed securities, mortgage originators – including Interfirst Mortgage – spent the last two years building up capacity to originate trillions of dollars in refinancings.
Tens of thousands of workers were hired, new technologies were piloted and operational processes implemented to capitalize on what was a historic moment for the industry. Origination volumes eclipsed $4.3 trillion in 2020 and then $4.4 trillion in 2021, the vast majority of business coming from refis.
With an abundance of refis, virtually no mortgage company in America lost money in 2020 or 2021. Taking advantage of the euphoria, half a dozen companies went public, raising billions of dollars and creating billionaires overnight.
But things change quickly in mortgage. By the fourth quarter of 2021, rates had climbed into the high 3% range, several top originators reported thinning margins and shed thousands of jobs. It was inevitable that the cycle would end and a challenging period would begin. But few thought it would end so quickly.
To close more purchase loans, forward-thinking lenders have invested gobs of money in technology, increased marketing budgets, and retooled their operations to reach new homebuyers in recent months. Spoiler alert: some companies seem to be ready for the transition, while others struggle, and others still will likely go under.
HousingWire interviewed over a dozen analysts, mortgage executives, loan officers, and consultants to answer the trillion-dollar question: who is positioned to win in the purchase market, and who is at risk of biting the dust?
The closer, the better
Competition will be intense over the next 12 to 24 months, driving gain-on-sale margins down even further, Moody’s analysts wrote in March. Profitability may resemble the market in 2018, when around one-third of nonbank lenders failed to turn a profit.
“Companies with above-average capitalization, strong market positions, and scale will be better able to navigate the challenging operating environment,” the Moody’s analysts wrote.
The consensus from mortgage executives and analysts alike is that lenders who did well with purchase mortgages in 2021 – and appear well-positioned to ride out the storm in 2022 – are those who can get closer to the borrower.
Following this logic, the correspondent channel has an advantage, as this group is formed by local banks and credit unions where people go in their communities to get a new loan.
“The whole industry is going to struggle with the transition from refi to a purchase market,” Bose George, mortgage finance analyst at Keefe, Bruyette & Woods (KBW), told HousingWire. “But some channels just have more purchases, such as the correspondent, and are in a better position to fight the headwinds.”
That is why, so far, California-based nonbank mortgage lender Pennymac has been the leader in purchase originations, with $106.3 billion volume in 2021, up 33.7% year over year. That was just over 45% of the company’s mix, according to Inside Mortgage Finance.
Originators whose loan officers have close relationships with a professional network, such as real estate agents and financial advisors, are also in a good position to win in a purchase market, industry observers told HousingWire.
It is not a coincidence that United Wholesale Mortgage (UWM), a pure-play wholesaler, was the second-biggest purchase lender in America last year, with $87.2 billion in originations, up 103.3% year-over-year, according to IMF data. Purchases were 38.5% of UWM’s mix in 2021, and company executives expect that number to grow in 2022 as rates climb.
“We think the wholesale market is very well positioned here because the brokers are the people that have a close relationship with Realtors,” Brian Violino, equity research associate at Wedbush Securities, said. “We are not at a point yet where people are fully ready to purchase a mortgage completely online.”
Traditional banks have proximity to borrowers due to a preponderance of local branches across the country. However, they are hampered by comparatively poor technology and the slow speed at which they can close a loan, analysts said.
Wells Fargo was the third-biggest purchase lender in 2021, according to IMF, originating $86 billion in volume, down 15.2% compared to 2020. J.P. Morgan Chase, with $75.2 billion in origination volume, and up 63.8% year-over-year, was No. 5. The purchase share in these banks’ mix was around 41% in 2021, according to IMF.
Nonbank lender NewRez/Caliber was No. 4 in the 2021 purchase volume ranking, with $77.6 billion in purchase volume in 2021, more than four times the total in 2020, according to IMF data. In August, the company announced the payment of $1.7 billion to acquire Caliber, a heavy-hitter across multiple origination channels, with $80 billion in origination volume in 2020.
The numbers suggest Guaranteed Rate, the No. 7 purchase lender last year, is well-placed to take advantage of a purchase environment. The retail lender originated $56.6 billion in purchase mortgages last year, with a 75.8% increase compared to 2020. Its overall mix of purchase mortgages was 49.5%, IMF data shows.
Earlier this year, Guaranteed Rate decided to discontinue its third-party wholesale channel Stearns Lending and laid off 348 workers, only one year after acquiring the company. The lender’s focus has been in tripling down on its network of top retail LOs.
And Shant Banosian is king of the hill. The Massachusetts-based top LO funded more than $2 billion last year, half of which was refi business. He expects to repeat the volume this year, but with only a 20% share of refis. In a purchase market, he emphasizes strong communication with clients and referral partners, such as Realtors and financial planners.
“As a loan originator, you have to do what you can to best support and service your clients and referral partners, being able to close super fast,” he told HousingWire. “Our goal is always to make our clients as appealing as possible to a seller to help increase their conversion of getting their offer accepted. So, to me, in the purchase market, it’s all about speed, availability and great communication.”
Others that leaned purchase in 2021, according to IMF, included depository U.S. Bank (53.3% of the mix), CrossCountry Mortgage (54.6%), Guild Mortgage (52.8%), multichannel lender Fairway Independent Mortgage (61.7%), and Movement Mortgage (67.3%).
Of this group, Violino highlights California-based Guild, which “has a branch-based strategy so that you have agents that are in the communities, forming relationships with homebuyers,” he said.
Violino added: “If a retail-focused company is able to tap into the purchase market, find a more effective way to do it without sacrificing margins, hypothetically, that combination would be better from an earnings perspective.”
During a conference call with analysts in early March, Guild’s CEO Mary Ann McGarry said the company has “local infrastructure and boots on the ground, which engenders strong relationships and superior client service which has expanded across the country.”
The company had $243 million in cash and $1.5 billion of unutilized loan funding capacity as of Dec. 31, 2021. It is looking for mergers and acquisitions, mainly businesses with a decent market share in their coverage areas.
A hard mission
Some companies need to pivot quickly from refis to purchase and other products to keep their heads above the water. That transition will be particularly painful for refi-heavy lenders, who are still trying to cash in on the product.
“The refi boom is not entirely behind us,” Joe Garrett, partner at Garrett, McAuley & Co., told HousingWire in early March. “It’s diminished hugely, but you have a lot of lenders now switching to cash-out refis, particularly call center lenders. But it looks like they will have some limited success.”
A Black Knight report showed that lenders originated $1.2 trillion in cash-out refis in 2021, up 20% compared to the prior year, the highest volume since 2005.
Direct-to-consumer lenders and digital-only lenders typically struggle in purchase-focused markets. When it comes to selling more complex loan products, buyers still feel more comfortable with loan officers at banks and broker shops.
A recent survey from ICE Mortgage Technology found that 31% borrowers were more likely to choose a bank and 25% a broker to close their loans. Meanwhile, only 13% mentioned an online entity.
“As an industry, we need to continue to deploy digital offerings – but not at the expense of relationships, which are still an important factor in choosing a lender,” Joe Tyrrell, president of ICE Mortgage Technology, said in a statement.
Better.com is perhaps the poster child of the coming conflict. Overall, just 19.9% of the company’s originations in 2021 were purchase loans, the third-lowest percentage after Rocket Mortgage and Freedom Mortgage among the 25 largest lenders in America. Better originated $10 billion in purchases in 2021, up 213% year-over-year, according to the IMF data.
But having made limited headway with purchase lending, Better laid off almost 4,000 employees over the last few months, 900 of them via an infamous Zoom meeting conducted by the CEO, Vishal Garg. In its most recent cost-cutting plan, the company is now asking staff if they would simply volunteer to quit (so long as they receive benefits).
There are several top 10 lenders in America that have feasted on the refi boom, but will have to prove to skeptics that they can pivot their operations to a purchase market.
New Jersey-based Freedom Mortgage, which is the leading Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) lender in the country, was No. 23 among lenders in purchase volume in 2021, originating $19 billion, a 21.9% increase compared to 2020. Purchases were only 16.7% of the lender’s total mix last year, and its sweet spot of government loans aren’t as competitive as agency product in a low-inventory environment.
California-based LoanDepot was the 10th largest purchase lender in America in 2021 per IMF, with $39.3 billion in originations, up 38.9% from the prior year. But it was refi heavy – just 28.7% of its originations were purchase loans last year. Its executives say the lender will capitalize on its lead generation potential and diversified channel strategy to attract more purchase business in 2022.
During the most recent earnings call, company founder Anthony Hsieh pointed out that loanDepot increased its market share in total originations last year to 3.4%.
“If you look at our model, we are fishing from a lot more ponds,” he said. “Last year we generated over 10 million top of the funnel leads, and we expect to have at least that level going forward this year in a market that’s decreasing 30-plus percent,” he said.
The challenging landscape inevitably reaches the top originator in the country, Rocket Mortgage. The company took advantage of the refi boom arguably better than anyone, but its executives know they’ll have to ramp up purchase business in a big way in 2022.
The company had only 16.2% of purchases in the mix last year, according to IMF data. In total, the lender originated a record $56.9 billion in purchases, up 42.7% year-over-year. Rocket announced plans to become the No. 1 retail purchase lender, excluding correspondent, in the nation by 2023.
To get there, Jay Farner, CEO of Rocket Companies, said its strategy includes brand awareness and lead generation; operational systems that get clients a verified approval, such as an overnight underwriting; and the “pro network,” which includes brokers, real estate agents, credit unions and other financial providers.
“We’ve taken our technology, and we’ve put it in the hands of all of these individuals that tend to be there when someone’s buying a home, and they can all send their clients through our Rocket platform, leveraging the technology and the client experience that we provide. That’s how we continue to grow down in this purchase market,” Farner told HousingWire.
Analysts say Rocket has some key advantages in the purchase market. The company, which does most of its business through consumer direct retail, is also the second-biggest player in wholesale. Per IMF data, it originated about $113.5 billion in the broker channel in 2021.
It also has scale and technology to deal with competition, with systems to deliver loans quickly. “Typically, industry averages are in the 40 days, and their averages are just below 20 days. The technology they filled out will help them either maintain or increase their market share,” said Kevin Heal, senior analyst and fixed income strategist at Argus Research.
In a more competitive environment, originators are also changing up their product mix, offering reverse mortgages, home equity loans, and home improvement loans. These products provide higher margins and a more stable origination volume than the traditional, vanilla 30-year-fixed rate mortgage.
Finance of America (FoA) has been particularly active in diversifying its products portfolio, mainly through reverse mortgages, investor loans and commercial loans.
“They’re going to be a bit steadier in their contribution to earnings. What’s going to be volatile is traditional mortgages,” Patti Cook, FoA’s CEO, told HousingWire.
Last year, the company originated $13.3 billion in purchase loans, comprising 45.5% of the mix. Its purchase volume increased about 35% over 2020. In 2021, the company’s best performing segment was commercial originations, increasing from $855 million to $1.7 billion, up 107%. Reverse originations also increased 57% year-over-year, to $4.26 billion.
Other lenders are exploring non-agency loans to give their broker partners a better shot at serving homebuyers. Wholesalers UWM and Homepoint, for example, are developing new products for non-qualified mortgage borrowers, including bank statement loans for self-employed borrowers, and investor cash flow loans.
Like most top originators, Homepoint did the bulk of its business in refis last year. It originated $29.8 billion in purchase loans, and its overall mix in 2021 was just 31% purchase mortgages, per IMF data. Interestingly, the Ann Arbor-based wholesaler managed to increase its purchase originations in Q4 to $7.7 billion from Q3’s $7.1 billion, which was rare among originators and might be a sign of good things to come.
Diversifying the portfolio to include non-QM loans is a smart strategy, but it will not “move the needle” much in the short term, observers said. The truth is that the transition from a refi to a purchase business can take years, mainly because it is challenging to build a network to reach new borrowers, for example, the relationship with Realtors.
“There are many ways to get business, and we don’t have any secrets. Making the switch from refinancing to purchase business doesn’t happen overnight. But you can cut your cost overnight,” said Garrett.
Less money coming in, but less money going out
Cutting costs has meant reducing the ranks of processors, underwriters, LOs and closers at some lending shops. At least a half-dozen mid- or large-sized lenders have cut staffers in the last six months, though nothing at the scale of a Better.com-style layoff.
In early March, HousingWire reported that Pennymac Financial Services would be laying off 236 employees at six different offices in five California cities. Also, retail lender Movement Mortgage, the 24th largest mortgage lender in the country in 2021, laid off between 165 and 170 employees in March, sources told HousingWire. Freedom Mortgage also trimmed its staff in the latter portion of 2021 and NewRez ousted 386 workers following the Caliber merger.
Inevitably, pay days are getting smaller for many in the industry as origination volume wanes and margins thin.
“Usually, professionals will have their base employment plan. And, then, they’ll have an addendum that describes how they’re going to be paid a variable compensation, which is normally driven, the most part of it, by volume,” said Lori Brewer, executive vice president and general manager at SimpleNexus.
The changes affect loan officers, processors and underwriters, but also top executives. Guild’s CEO Mary Ann McGarry, for example, went from a compensation package of $8.15 million in 2020 to $3.23 million in 2021, including salary, stock awards, non-equity incentives, and other compensations, according to a document filed to the Securities and Exchange Commission.
Her salary remained the same, at $500,000, but the variable compensation was reduced by the challenging landscape.
In some cases, however, cutting costs will not be enough. In the 2022 mortgage industry, there will likely be consolidation.
“Some of the smaller guys will have to be either laying off employees, or gonna be tougher to survive and they will get taken out. You might see some private equity guys come in and purchase them if it becomes cheap enough,” said Heal, the analyst at Argus Research.
The market had already claimed its first victim in February: Santander Bank announced that it was shutting down its mortgage lending business in the U.S. and laying off its divisional staff.
But, for the most part, the biggest mortgage lenders in America have cash from 2020 and 2021 and can gain market share. In addition, the switch from a refi to a purchase market is a relatively normal occurrence in the business, even if it’s jumping from one extreme to another.
“I’ve been in this business now for 26 years. The cycles are kind of all the same. What drives the underlying mortgage market is purchase. And what drives purchase businesses is physical distribution,” Phil Shoemaker, president of originations at Homepoint, told HousingWire.
Woodward knows first-hand how it is difficult to win in a purchase market. After his annual salary decreased by around $20,000 in the last 18 months, he has decided to change – again. He landed a branch sales manager position at Partners 1st Federal Credit Union, where he is tasked to originate not only mortgages, but car and personal loans as well.
“In all fairness, I’m the guy who’s leaving the mortgage company because I couldn’t get enough purchase business. But, as far as I can see and know of the industry at this point, it is about being connected to Realtors and doing a good job with the clients that you have. There’s not a new secret sauce.”
James Kleimann contributed reporting to this story.