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Mortgage

The strategy behind UWM’s multibillion dollar investment

The lender is burning cash to wreak havoc on its competitors, but can it maintain market share when prices go back up?

In 2021, United Wholesale Mortgage (UWM) CEO Mat Ishbia set a three-year goal to make UWM the No. 1 lender in the country. Ishbia, who started running his father’s mortgage firm in 2013 and has since grown it into the country’s No. 2 lender, isn’t satisfied with second place, behind Rocket Mortgage.

Mat-Ishbia-Headshot-2

“I don’t have on my board my goal is to be the No. 2 overall lender, it’s to be No. 1 and we’re going to do that,” Ishbia told HousingWire in 2021. 

After two golden years in the mortgage market during the pandemic period, refis have dried up and the industry has since pivoted toward a purchase market. Ishbia is confident his firm can benefit from this trend by cutting prices for brokers and bringing more retail loan officers to its wholesale channel, whose market share currently stands at around 20%.

Following the firm’s pledge to beat the top 20 lenders’ pricing by one basis point in May, UWM took another aggressive step towards pricing in June. Dubbed the ‘Game On’ pricing initiative, UWM slashed prices across all loans by 50 to 100 basis points, wreaking havoc on competitors with already compressed margins. 

“I’m not really focused on the margins for this quarter,” Ishbia told investors in UWM’s second-quarter earnings call. “It’s an investment for the long term, strategically building the broker channel.” With gain on sale margins expected to be at around 30 to 60 bps in the third quarter, there’s no question UWM is losing money, analysts said. 

I don’t have on my board my goal is to be the No. 2 overall lender, it’s to be No. 1 and we’re going to do that

— CEO Mat Ishbia

“There is no magic bucket of money,” said Brian Hale, founder and CEO at Mortgage Advisory Partners. “He’s trying to drive more volume to speed those costs across and to say to his brokers that we’re in the fight with you.” 

For a company that has more than $900 million in cash and $3.2 billion in equity as of the second quarter, plus technology that can close loans faster than most competitors, aggressive pricing is a “multibillion dollar decision investment,” as Ishbia put it. That aggressive strategy means other lenders focused on the wholesale channel or reducing servicing portfolios are finding themselves in a bind. Smaller players that have limited access to liquidity may be forced to downsize or get consolidated. 

“He (Ishbia) wants to win at all costs,” said Kevin Heal, senior analyst at Argus Research. “They (UWM) have enough capital to withstand, whereas others that didn’t raise capital or didn’t go public might not necessarily have cash on hand or capital to sustain in this new match.”

Multibillion dollar investment

It’s been about two months since UWM rolled out its new pricing strategy and Ishbia says he is already seeing the impact on the market. 

“With Game On, it’s making them (retail loan officers) take an extra look at the broker channel,” Ishbia told analysts in its second-quarter earnings. “We believe the broker channel will grow to 33% over the next five years. However, with strategic initiatives like Game On, we think that number could reach 40% or higher.”

In the second quarter, the lender’s $215.4 million net income was buoyed by a more than $26 million increase in the fair value of mortgage servicing rights (MSRs) and UWM’s cash and cash equivalents rose 6% to $958.7 million from the previous quarter. 

The lender’s total MSR portfolio was valued at $3.7 billion as of June 30, up from $2.7 billion a year earlier, according to SEC filings. That’s after selling off MSRs tied to $72.7 billion in loans over the first six months of 2022 — for total proceeds of $871.7 million, including $216.2 million posted in the second quarter. 

Kevin Barker, managing director at Piper Sandler, says UWM has access to liquidity via borrowing and selling MSRs, and the lender is not too levered with net debt to equity being 1.7 times.

“You could run that up to 3 or 4 before it starts to become a real concern. His tangible net worth ratio (a proxy of how much equity you have relative to your total assets) is just under 30%. Anything below 15% you start to question it,” said Barker.

During the refi heyday, UWM beefed up its employee count to 9,000 in the second quarter of 2021 but has consistently cut down their headcount, losing a total of 2,000 employees over 12 months, according to the firm’s 10-Q report. Expenses in the second quarter dropped 5% to $348 million led by a cut in salaries and commission. 

But there is no question Ishbia is losing money on the gambit, Barker added. “With the gain-on-sale margin of 99 bps, when you cut 50 bps off of that, you’re in negative territory pretty quick.”

UWM’s total production expenses were $247 million or 86 bps on the $29.9 billion in originations for the second quarter, a report published from Wedbush Securities estimated.

“With a gain on sale margin of 99 bps this quarter, they are making a GAAP profit, but if you think about the cash flow, they are burning cash,” said Jay McCanless, senior vice president at Wedbush.

UWM’s loan production income of $296.5 million includes $412.7 million of non-cash MSR capitalization. When mortgage servicing rights are sold, UWM’s current loan production income in cash terms would be -$117 million ($296.5 million-$412.7 million), according to Wedbush’s report. 

“They made money on a GAAP basis this quarter. We think they’re going to lose money on a GAAP basis next quarter because of how low they’re taking the gain on sale margin,” said McCanless. 

Ishbia didn’t set a timeline for how long UWM will run with the Game On pricing initiative and the big question among analysts is how much of the market share gain is going to end up being permanent when the lender ends its price cuts.

“He’s using price to increase market share. What we don’t know is whether market share could stay when prices go back up,” said Barker. 

Not all about pricing

Broker Hussam Saada of Precision Mortgage closed about 60% of mortgages with UWM after the firm rolled out its new pricing initiative. On a monthly basis, he closed about $3 million in volume with his previous top lenders including Flagstar and Homepoint. With UWM cutting rates and its technology enabling fast closings, Saada’s business with the Michigan lender grew about three-fold since ‘Game On.’

He now sees other wholesale lenders quickly catching up to compete in the game. For one, Homepoint is offering a 75 bps pricing bonus for conforming conventional loans at no additional costs to borrowers, although it’s limited to a specified number of ZIP codes in 20 states.

“At the beginning, UWM was more than 0.25% to 0.375% better in rates than my top lenders, but other wholesale lenders are getting aggressive to compete with UWM,” Saada said. “When one company gets aggressive with pricing, everyone else has to catch up.”

On Aug. 25, UWM was paying brokers 101.025 bps per loan excluding loan officer compensation, at a 5.25% mortgage rate for a single family, $400,000 purchase price with a 20% downpayment and a 720 credit score, according to pricing data on Loansifter. Provident Funding Associates Wholesale had the best price for brokers that day, offering 101.25 bps, meaning the lender was paying 22.5 more bps per loan to brokers than UWM. 

Rocket Pro TPO trailed UWM by offering 100.718 bps per closed loan. Homepoint ranked fourth at 100.465bps and Flagstar followed, paying brokers 100.095 bps per closed loan that day. (Some brokers might have better pricing based on volume provided to each wholesaler.)

But for brokers, price isn’t the only determining factor when comparing rates for the borrower. On top of competitive rates, getting approved for a mortgage has to be an easy and quick closing process for the customer, said Kevin Leibowitz, CEO of brokerage Grayton Mortgage.

“There are two things I need to mitigate: process and price,” said Leibowitz. “I need to use somebody that has a process I like. If I’m going to offer a loan in a competitive environment and they are doing a good job with the process, I might as well offer a lender with the lowest rate that doesn’t require the borrower to pay for points and pays my commission.”

For instance, UWM’s underwriting system Bolt, which the lender says enables brokers to underwrite a loan in 15 minutes, was one of the top reasons brokers gave for choosing the lender. Using artificial intelligence, Bolt allows brokers to do a pre-underwrite, which an underwriter looks at within four hours or so, according to Saada. 

“I can get you (borrower) a conditional loan approved in 20 minutes. If it wants the loans ‘clear to close,’ borrowers would need to have to wait for their closer to get the package out. With UWM, you as the loan officer, you as the attorney or title company, can do your own closing package in 10 minutes. It’s smoother for the client,” Saada said.  

“What’s the end game?”

UWM is actively courting more brokers and retail LOs to the wholesale channel. In this highly competitive environment, how are other lenders countering that strategy?

Home Point Capital, the parent company of wholesale lender Homepoint, is one of the most affected by the price war triggered by its rival UWM. The pure play wholesale lender reported a $44 million loss in the second quarter from an $11.9 million profit in the previous quarter. To improve liquidity, it chose to reduce its servicing portfolio, completing a sale of single-family mortgage loans worth $257.3 million in the first quarter. 

As of June 30, the servicing portfolio totaled $90.5 billion in unpaid principal balance, down 11% quarter over quarter. While the company was cash-flow positive, reporting $135.8 million in cash and cash equivalents in the second quarter, the company cut its dividend to preserve liquidity. It also bought back $50 million of senior debt in the open market to reduce leverage in the second quarter, a report from Wedbush said. 

Home Point Capital’s CEO Willie Newman in a second-quarter earnings call acknowledged the firm may get smaller with the “volume opportunity” on a macro basis “relatively limited,” but said Homepoint won’t engage in a price war. 

Instead, the lender plans on expanding its product mix, in line with other firms’ pivot to diversify product offerings, including Rocket’s solar loans and home equity loans.

“Whether it’s our enhanced portfolio of adjustable-rate mortgage (ARM) and jumbo products, or more innovative solutions like Homepoint Cash Compete and Homepoint New Build, we’re giving consumers, real estate agents and home builders more reasons to work with our broker partners,” said Phil Shoemaker, president of originations at Homepoint.

Homepoint Cash Compete helps buyers close an all-cash bid and the Homepoint New Build program connects builders with construction financing.

And though it may not want to engage in an all-out price war, Homepoint is strategic about pricing for certain segments, as its recent 75 basis point pricing bonus demonstrates.

Amid UWM’s aggressive pricing, nonbank heavyweight loanDepot exited the wholesale channel after reporting a $224 million loss in the second quarter. With cash and cash equivalents rising 72% to $955 million in the second quarter from the previous one, it plans on rolling out its home equity line of credit (HELOC) product later this year while maintaining joint ventures with homebuilders and depositories.

Rithm Capital, formerly known as New Residential Investment, which acquired Caliber in August 2021, posted a $3 million loss partially due to a decline in residential mortgage originations. While its origination volume dropped 29% to $19.1 billion in the second quarter and cash holding declined 9.6% to $1.5 billion from the previous quarter, the firm said it’s focused on “consistent pricing.”

“We monitor our competition, we evaluate their movements but we’re focused on discipline and consistent pricing,” said Jeff Gravelle, chief production officer at Caliber. “We have a wide range of products we offer in non agency, specifically our ‘Smart Series’ which is our non-QM program. This gives NewRez, Caliber plenty to add to our broker customers.”

The firm plans to roll out new products and features in non-QM in the coming weeks and focus on affordable housing lending, said Gravelle. 

As Wedbush analysts said in a report in June, it will likely take a quarter or two before excess capacity from public mortgage companies is flushed out of the system. Looking at lenders’ financials, the silver lining for some of these firms is that they have access to liquidity via cash or selling MSRs. 

The mortgage landscape isn’t expected to get any better in the third quarter as mortgage rates remain elevated and lenders lay off employees to reduce expenses. Smaller lenders that don’t have access to liquidity are caught in a difficult spot.

“You probably will see some small lenders driven out from the market or some consolidation or get bought by a private equity company,” said Heal. 

The analyst said that while UWM has enough cash and capital to fund their own loans, smaller lenders relying on warehouse loans are getting squeezed. “As rates rise, those warehouse financing costs go up.”

However, smaller-sized wholesale lenders who carved out a niche by targeting a different audience than UWM are better positioned to weather the storm.

“A smart wholesaler won’t try to out UWM,” said Paul Blaylock, CEO at retail lender LoanFlight Lending. “What they’ll try to do is find a corner of a market where UWM doesn’t compete, can’t compete or won’t compete.”

Pennsylvania lender Spring EQ Wholesale Lending, a wholesale lender that offers home equity loans and 30-year fixed-rate mortgages for second lien loans, is an example of a lender that found its niche four years ago. Because the lender doesn’t offer first lien mortgages, it is immune to UWM’s aggressive pricing, the firm said. 

Spring EQ sees competition coming as rates stay high and available home equity is at historic levels. Without disclosing its origination volume, the lender said it added 54 operations team members over the past 90 days to “accommodate growth.”

“We are not competing with UWM,” said Paul Saurbier, senior vice president at Spring EQ. “If someone wants a $1.2 million mortgage, a mortgage broker can do an $800,000 agency loan with UWM and then they can do a simultaneous second one with us to make up the difference,” he said.

For consumers, the rate for a jumbo loan is higher than a conventional loan and guidelines tend to be more stringent, so breaking the loan gives borrowers a better blend of rates. 

“Customers get better terms on the first mortgage not going jumbo and we can help facilitate that. It’s a simultaneous closing for a second lien mortgage for the client where they sign the UWM loan and sign a loan with us, called a piggyback loan.”

Other lenders including Provident Funding, Cardinal Financial Wholesale and AmeriSave Mortgage Corporation were not available for interviews on their strategies to navigate, pricing and their prospects for the third quarter. 

Time will tell how well UWM will maintain its market share once the lender raises prices again. Another major question that remains unanswered is how UWM’s ambition to increase its market share will affect consumers in the long term. 

“He (Ishbia) wants a monopoly,” said Blaylock. “So the question is, is that good or bad for the consumers in the long term? If a wholesaler has monopoly in the short term, during that battle it’s probably good. Long term, nine times out of 10, it’s bad.”

“Once he (Ishbia) has price control, he probably has a fiduciary duty to shareholders to take advantage of that. Brokers have to decide whether that is healthy in the long term. What’s the end game? Who pays for this?”  

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