Mat Ishbia isn’t sweating a projected drop in gain-on-sale margins, all the way down to 75 to 110 basis points. Quite the contrary. In his estimation, a higher rate environment and hyper-competitive pricing will provide United Wholesale Mortgage an opening salvo to win a war of attrition and build an even bigger army of loyal mortgage brokers. Anybody can make a killing in a market like 2020. But those days are over.
On UWM’s first-quarter earnings call, Ishbia offered up a vision for the future. Those gain-on-sale margins that had reached their zenith in the third quarter of 2020? They have gradually been falling back to earth. And they’re going to keep falling, Ishbia said. For UWM, that means 75 to 110 bps may be the norm for a few quarters. It depends on the 10-year.
“Will margins compress? Absolutely, they will compress,” the UWM CEO told analysts and investors on the earnings call. “They usually go from all-time highs to all-time lows. That’s what happens in the mortgage biz, and then they’ll settle in, [to] normal numbers. We didn’t expect them to go down to this point in this part of 2021, but we’re excited about it because we’re going to still produce a lot of income, where our competitors might not. And at the same time, we’re going to take market share and show you that we are the elite mortgage company.”
UWM is hardly the only top lender espousing the sunny side of reduced profits — rivals Rocket Mortgage and loanDepot have also said in recent days that they’ll be able to expand their territories in upcoming quarters. Basically, their largesse, a growing number of partnerships, and the strength of their respective technology platforms will allow them to grow their slice of the pie, even in a time of waning refis, rising rates and limited home inventory. Rocket even boldly proclaimed that it would be the largest purchase retail lender in America within 24 months.
So, what exactly differentiates UWM from the crowd? Why would they succeed when plenty of other lenders with grand ambitions and gobs of cash wouldn’t? If you take Ishbia’s word for it, a combination of the company’s strict adherence to the wholesale channel, its history of strong purchase business, and an ability to produce loans at a lower cost than its competitors gives them an edge.
“As our competitors all guide to do less volume in Q2, we’re guiding to do more volume because we’re going to take market share and grow,” he said, forecasting between $51 and $55 billion in the second quarter. “We win in a purchase environment. We win in these environments. Our cost to originate, our technology gives us a differentiator.”
How low can you go?
If you’ve talked to a mortgage broker lately, they will tell you that pricing in the channel has rarely, if ever, been so competitive. Virtually every mortgage lender with a toe in wholesale has been dropping pricing to win their business, in large part because the two biggest players have pulled the string on pricing. Where UWM and Rocket Pro TPO might have been outside the top 10 in terms of rate prior to mid-March, they’re up there now. The ultimatum Ishbia issued — in which the UWM chief said Rocket and Fairway Independent Mortgage Corporation were harming the broker channel and brokers couldn’t do business with UWM if they also sent them loans — has contributed heavily to the pricing war, brokers said.
“No doubt, they’re going really low,” said one West Coast broker-owner who sends close to half of his business to UWM. “Just look at Loansifter. They started this thing with Quicken [Rocket] and so I’d expect them to keep prices really low for at least a few more months. UWM just wants to grow volume, I don’t think they care about the profits right now. They know the medium and smaller firms can only keep it up for so long.”
The reality is that a few select companies, especially Rocket and UWM, have the cash and the capital in place to manage around anything the mortgage market throws at them, said Henry Coffey, a mortgage and housing analyst at Wedbush Securities.
“They also within their respective channels have something special. In the case of United, its cost to originate loans is in the 50 basis point range — that’s an all-in cost, fully loaded, everything but servicing expense. Rocket is probably in the 60s on that basis. And the number three, Homepoint, is probably 75 basis points on that basis. So, you know, you have got the cash, you have to have the capital, but you also have to have the operating structure that allows you to, at least on a GAAP basis, be profitable.”
Ishbia told analysts on Monday that margin compression — not acquisition of other mortgage lenders, a common trend these days — is how UWM is going to gain market share, picking up purchase-focused brokers with low rates.
“We are the leader, without question,” he said. “People will follow us up or down the price ladder, if you think of it that way…In order for our competitors to get business, they have to be substantially better priced than UWM. Our technology, our service, our partnership is elite, and our clients know that. And so the way our competitors can get business is by being significantly better priced.”
Ishbia has already claimed victory over Rocket (which disputes any such characterization, naturally), stating that he lost only 600 brokers, which will hobble the second-biggest player in the wholesale market. Roughly 43% of new registrations in April were purchase originations, an indicator that UWM will produce record purchase volumes in Q2 or Q3, he said.
Preparing for a pricing fight
Several brokers told HousingWire that it would be foolish to assume Rocket would cede any gains they’ve made in wholesale, a channel they’ve pledged to invest several hundred million dollars in, a channel that gives them access to a pipeline of purchase business.
“Rocket will be right there with them,” said an East Coast broker who does a small amount of business with Rocket and none with UWM. “Absolutely no way they spent all this time and money trying to get brokers on their side just to check out when things get hot. Rocket’s stepped up their game since this whole nonsense started.”
Even with $1.6 billion in cash and the courage to go lean on margins, UWM faces an uphill battle. Rocket produced about $103.6 billion in originations last quarter — more than twice as much as UWM. The wholesale market is still just under 20% of the overall market, and margins in the channel are much lower than retail.
Ishbia sees that as a sign of retail bloat, as if the channel is an out-of-shape fighter who is going to tire later in the fight.
“Those large retail organizations, they need those higher margins or they can’t compete because they have massive infrastructures with bloated executive comp, along with massive amounts of money in marketing and TV commercials,” Ishbia said. “They spend a lot of money on things that make it so they can’t be profitable at 100 basis points.”
When the tough gets going later this year, Ishbia says the top LOs are going to leave retail and join the broker channel, where his company’s competitive pricing, 16-day turnarounds and tech tools will make for a natural partner.
“The opportunity is huge. You will see that happen this year where some of the biggest loan officers in America leave their retail companies and go to brokers, make more money, give better deals to consumers, and it will make this shift. This shift will happen… And we think it’s going to happen later in this year or early next year. But it’s starting to happen a little sooner because as rates go up, those loan officers that are charging borrowers higher rates, they say, ‘I’m charging my cousin a higher rate. I’m not making that much money, and I don’t have to make loans in pipeline. Like, why don’t I just go do this myself? And I know that the brokers are out there winning and competing right now.'”