Ann Arbor, Michigan-based Home Point Capital did not experience the traditional ceremony to ring the Nasdaq Stock Market bell when the company went public in early 2021.
Open and closed ceremonies usually occur at the Nasdaq MarketSite Studio in Times Square, but that changed in the wake of the COVID-19 pandemic. Instead, Home Point had a virtual ceremony, with pictures of smiling employees and a message from CEO and founder Willie Newman transmitted onto an enormous screen in Times Square.
“I started at the company a month before its IPO with Nasdaq,” a former loan coordinator said. “It was a big deal. We all watched the live stream from Times Square. It just seemed so awesome working at a company that just came public.”
At that time, historically low rates spurred the mortgage market to $4 trillion in volume — and the perception among the rank-and-file was that Home Point Capital‘s wholesale lending business Homepoint was a great place to work.
“Homepoint was fantastic. It was basically the best company I’ve ever worked at,” a former underwriter, who joined the company in January 2021, said. “It was a booming mortgage market, everybody was making money and there were a lot of pros in this company.”
Leading a growing and profitable business, executives decided to capitalize on the mortgage boom that saw its larger rivals Rocket Companies and United Wholesale Mortgage tap the public markets in splashy IPOs. On Jan. 29, 2021, Home Point Capital carried the momentum to Wall Street, debuting with a share price of $13.
“We believe we have established a solid leadership position as a wholesale lender, as evidenced by the fact that we were able to double our market share in 2020 during a year when the market also doubled in size,” Newman said in March 2021 during the first call with analysts after the initial public offering.
“At the core of Home Point’s business is our origination platform, which has been designed to capitalize on the large and growing wholesale channel in a way that leverages scale and optimizes returns with a lower fixed cost,” Newman added.
The origination platform that Home Point was so proud of helped Homepoint become the third-largest wholesale mortgage lender in America in 2021 and 2022. But it also contributed to the company losing money — and, in turn, laying off thousands of employees in 2022.
Ultimately, Home Point Capital decided to sell the origination business to The Loan Store for a song on April 7, 2023, exiting the mortgage lending business entirely. On May 10, Home Point Capital – at that point a mortgage servicing rights shop – announced it was selling the company to Mr. Cooper Group for $324 million in cash, which will result in the company shutting down.
Homepoint is the largest mortgage originator to go bust this cycle, and only two years after it went public.
HousingWire interviewed former employees and analysts over the last month to understand the company’s downfall. Our reporting found that Home Point Capital was relatively under-capitalized from decisions that stemmed from a disappointing IPO; Homepoint struggled with chronic underwriting issues; never solved a myriad of technical problems with its semi-customized loan origination system, and couldn’t compete with the heft of its larger rivals, which squeezed the noose that ultimately led to the shutdown and sale.
A spokesperson for Home Point did not return a request for comments.
Problems early on
Analysts said Home Point struggled out of the gate, starting with its IPO valuation. Its private equity backers planned to raise $250 million by selling 12.5 million shares priced between $19 and $21. However, they only pocketed $94.25 million, less than 40% of their goal.
“In 2020 and 2021, the entire football team tried to hit the door at once and go public almost simultaneously,” said Brock Vandervliet, a mortgage expert who was an analyst at investment bank UBS. “There was a rush to capitalize on the valuations because the participants in the market knew that in 2021, we’re going to be best for a while in terms of gain on sale margins and earnings.”
Funds affiliated with its private equity backer, Stone Point Capital, benefited from the raise, but Home Point itself did not. Analysts argued it was an early misstep.
“Home Point was struggling from the moment they launched their IPO, which was well below the price range,” Vandervliet said. “There was just too much stock on the street; there were uncertainties. And yet, these deals were just being pushed out.”
On the one hand, Home Point’s shareholders did not raise the capital they intended with the IPO. On the other hand, as a public company, it was in the spotlight and subject to a higher degree of scrutiny, quite different from the smaller competitors that were private.
Warren Kornfeld, senior vice president of the financial institutions’ group at Moody’s, noticed that right before its IPO, Home Point made a capital distribution to existing shareholders, including private equity funds and management.
“Right after they went public, the capital levels were a little bit low compared to its peers,” Kornfeld said.
At the end of 2020, Home Point’s total shareholders’ equity comprised 12.5% of its assets, compared to over 20% for UWM and Rocket, according to filings with the U.S. Securities and Exchange Commission (SEC).
“But we were expecting at that time, in early 2021, to see profitability. That didn’t happen. Instead of that, Home Point started showing earnings weaknesses. Unfortunately, they went into the downturn with a weaker level of capital, on top of not having the efficiency that some of the stronger competitors have,” Kornfeld said.
Home Point delivered non-GAAP adjusted net losses in six out of eight quarterly earnings in 2021 and 2022. It also took a $28 million loss in the first quarter of 2023, its last quarter as a mortgage lender.
A challenging cost structure at Homepoint
Analysts soon noticed that Home Point was struggling due to, among other reasons, its high cost structure. The topic was frequently discussed among analysts and executives in earnings calls. On several occasions, executives set goals to reduce expenses.
On May 6, 2021, Mark Elbaum, Home Point’s then-CFO, told analysts the goal was to drive the direct cost to originate a wholesale loan down from the run rate of $1,700 to $1,000 by the fourth quarter of 2021. Three months later, the company set a target of $900 by the end of 2022 – at that time, it was at $1,500 per loan.
The issue became urgent when origination volumes were in free fall in 2022. Home Point announced in February 2022 that ServiceMac, a First American company, was chosen to handle its servicing operations. Home Point had over 300 employees in servicing and all of them were laid off and given the option to be hired by ServiceMac.
In addition, Home Point sold its delegated correspondent business to Planet Home Lending. These moves account for several thousand workers transitioning to new firms.
Those working at the company say they immediately felt the consequences of the cost-cutting initiatives.
A former processor, who moved from a loan coordinator to a junior underwriter job position in February 2021, quickly noticed the changes.
“As time went on, they started taking bonuses away. They would set the bar extremely high for the number of loans to get a bonus, so we would never hit it. Then they started telling us we couldn’t work overtime. After that, they started limiting the number of files we were working on,” the former processor said under the condition of anonymity. She said speaking publicly would harm her prospects of finding a job.
“They took away a lot of the stuff they were giving us, a lot of cash. We couldn’t do overtime anymore. Bonuses and compensation started to shrink,” the former underwriter said. “Then, of course, the layoffs started… every time a layoff comes around, it was an incredibly nerve-racking situation to work there.”
Home Point shrunk its workforce from about 4,000 workers in the summer of 2021 to about 1,000 by the fall of 2022. (The lender had only about 450 employees when the originations business was sold to TLS.)
Newman told HousingWire the executive team was resetting the company.
“In an environment like this, there’s not as much volume as we were doing before,” he said in an interview during the Association of Independent Mortgage Experts (AIME) Fuse conference in Las Vegas in 2022. “We’re not as much focused on volume and velocity as we are making sure that we improve processes, the interactions with broker partners, and ultimately to the consumers, in a way that, as we evolve from this cycle to the next cycle, we have an opportunity to grow.”
Amid the cost-cutting initiatives, Home Point’s gain-on-sale margin attributable to correspondent and wholesale channels prior to the impact of capital markets and other activity was 97 basis points in the first quarter of 2023, compared to 86 bps in the previous quarter and 61 bps in the same quarter in 2022. However, after the impact of capital markets and other activity, it was just 12 bps in Q1 2023.
To compare, a Home Point executive told Housingwire that the company’s cost structure was at 90 basis points. If margins were below that, the company was in the red.
“[90 basis points] It’s high. And again, if you look at it, it wasn’t ops, it wasn’t production, it was bloated corporate support. And despite our best efforts, it was impossible to change it.”
Declining quality of service
Layoffs resulted in Home Point being less effective as an originator, according to former employees. Former workers told HousingWire that Homepoint laid off hundreds of seasoned professionals as it tried to contain rising costs. When veterans were replaced, it was typically by staffers who had no experience in mortgage.
Ultimately, its service quality deteriorated, which resulted in loan underwriting problems with government-sponsored enterprises (GSEs). Fannie Mae declined to comment on the topic. Freddie Mac did not respond to a request to comment.
“It was like nobody could get anything done. No one was communicating. The morale completely shifted. Every time they would restructure, they would let go of their best people,” the former loan coordinator said. “Therefore, our quality went down, and we started having issues with Fannie Mae and Freddie Mac.”
In fact, HousingWire reported in early May that IMBs have been facing a still-surging wave of loan-repurchase requests from the GSEs. The huge volume of low-rate loans originated in 2020 and 2021 resulted in a higher rate of underwriting errors than in more normal times.
At Homepoint, executives created a specific role called “underwriter support specialist,” working between the loan coordinator and underwriter to review the loans and reduce mistakes. This included things like borrowers’ income and jobs not matching or making sense, former employees said.
One highly placed source told HousingWire that the firm had to buy back Fannie and Freddie loans and ended up building “audit functions” inside the company.
“Loans started to get tougher and tougher because the rates started to go up. The quality of loans we’re getting from files was definitely going down, and it was taking longer and longer to underwrite,” the former underwriter said. The time to underwrite a loan went from five to 10 days, she said.
The problems were noticed across the company’s network of about 9,260 brokers. Several mortgage brokers told HousingWire they stopped sending loans to the company and complained about the level of service, which was considered good in the past.
“I went from having, on average, 250 loans in my pipeline to 60 in three months. That affected me too because I got paid on how many loans I closed,” the former loan coordinator said. “I don’t want to blame it all on UWM because we struggled before UWM came in with their aggressive pricing. We were already having quality issues.”
The former loan coordinator is referring to UWM’s Game On initiative, which slashed prices across all loans by 50 to 100 basis points in June 2022. In response, Homepoint offered a 75 basis point pricing bonus for conforming conventional loans, with no additional cost to borrowers, in September 2022. But the offer was available in specified ZIP codes in 20 states where the lender identified a high percentage of loans originated to people below the area median income.
Homepoint’s chronic tech issues
Technology was also a challenge at the company. A Homepoint executive told HousingWire that the company had a tech team of 160 employees, but problems were frequent. To compare, when it sold its operations to The Loan Store, Homepoint had 450 employees, which means tech would have represented 35% of the total.
“The issue was not ops. It was not sales. It was 160 people in IT. It was all these layers that were created to manage a publicly traded company that we didn’t necessarily have the ability to maintain the scale we needed to justify those layers,” the executive said.
Karthik Kumar, executive vice president and COO at mortgage consulting firm LendArch, said that given the digitization scope and transformation appetite within the home lending industry today, around 20% of a company’s tech spend should be there to run the business.
“The other 80% should be on the transformation and innovation roadmap, whether you are a company with 400 or 4,000 employees. If everyone’s there trying to keep the lights on, then you have to change the bulbs soon,” Kumar said.
Multiple former workers said that Homepoint used a white label version of Encompass as its tech solution, but added customized layers for new functionalities. The software often had problems, the workers said. A spokesperson for ICE Mortgage Technology, Encompass’s owner, declined to comment on this story.
“Some days it would go down and we literally couldn’t even get in all day,” the former loan coordinator, who was laid off in February 2023, said.
The same source added: “There were times where I would get like one or two days’ clear to close and it was amazing. But that would very rarely happen. Our turn time was, on average, two to three weeks, which is absurdly long. Some of them would be in my pipeline for six-plus weeks. That would also be because it constantly went back and forth between the broker and the underwriter.”
Because the mortgage market is unique in that the mortgage originators don’t set pricing – it comes from the interest rate, the MBS spread, the guarantee fees – and they don’t set underwriting standards, winning or losing largely comes down to finding customers and being efficient.
“Efficiency obviously comes through scale and it comes from technology. But then there’s also one other element, which is a franchise,” Kornfeld said.
Homepoint did not have the same brand strength as Rocket in retail lending, UWM in the wholesale channel, or Pennymac in the correspondent space. However, it reached the position of the country’s 18th largest U.S. mortgage lender last year. The company was number three in the wholesale channel, with 6.5% market share in 2022.
In the end, analysts and former workers said, Home Point was unable to achieve the efficiencies needed to overcome a relatively weak capital position and the huge drop in business stemming from the Federal Reserve’s interest rate hikes.
The former processor, who was laid off in September 2022, said she has been facing the worst time in her career. “I’m probably at one of the hardest and longest times I’ve ever gone without a job,” she said.
James Kleimann contributed reporting to this story.