UWM’s margin confidence & the coming wave of retail LOs

Mortgage lender also reveals that it plans to accept crypto in the third quarter

UWM Chairman and CEO Mat Ishbia

United Wholesale Mortgage plans to be the first mortgage lender in America to accept cryptocurrency payments from borrowers. The alternative currency acceptance could come as early as the third quarter, UWM Chairman and CEO Mat Ishbia said on the lender’s quarterly earnings call on Monday.

“We’ve evaluated the feasibility and we’re looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments,” Ishbia said. “That’s something that we’ve been working on, and we’re excited that in Q3 we can actually execute on that before anyone in the country.”

The crypto bombshell was just one of the many bold proclamations Ishbia made on the call. He also provided details on “pricing adjustments” from Fannie Mae and Freddie Mac that have dinged some nonbank lenders of late, when top-performing retail LOs will make the switch to the broker channel, and why its competitors will suffer greatly once rates climb.

When the tide is out

UWM originated $59 billion worth of mortgages in the second quarter, beating the company’s May forecast of $51 billion to $55 billion by about 20%. And roughly 40% of the mortgages originated in the second quarter were purchase mortgages — $24 billion worth. That’s a sticky business that will prove a difference-maker in future quarters, Ishbia said.

“While Q2 was a glimpse into the future with rising rates, we’ve seen rates drop a little bit in Q3, which means a lot of the heavy refi shops, our competitors, will be able to post decent numbers and better gain on sale margins in the third quarter,” he said. “The reality is, Q2 was a glimpse into the future. And what this will look like in 2022, 2023, 2024 – UWM is the elite mortgage company.”

Although the lender’s gain-on-sale margin dropped to 81 basis points in the second quarter from 219 bps the prior quarter, Ishbia saw that as a good thing. It supports his larger thesis that the firm’s tech efficiencies would prove a difference-maker.

UWM’s cost to originate a loan in the second quarter fell to $1,490 from $1,660 the prior quarter, Ishbia said. That translates into about 43 basis points. Other lenders simply can’t match the efficiencies, he argued. Homepoint, for example, lost money in Q2 operating at a 58 bps margin. Others have “bloated infrastructures” and fixed costs they can’t shed, he told analysts.

“Rates went up 19 basis points and everybody went crazy. Margins compressed, everyone did less business, everyone struggled. Wait ’til they go up 100 basis points. That’s when we’re going to do $120, $150 billion, maybe $200 billion depending on exactly where rates are. And everyone should be well below us,” he said.

As he often does, Ishbia took the opportunity to take a swing at Rocket Mortgage, which originated $84 billion last quarter and earned $1 billion in net income. Rocket doesn’t disclose the purchase vs. refi mix, and their “partner network” isn’t as strong as they’d lead you to believe, Ishbia said on the call. Ishbia claimed Rocket’s “broker margins are actually well below ours,” at about 50 bps, but its overall TPO margins are propped up by affiliate partnerships with corporations such as State Farm and Morgan Stanley.

Ishbia also said he’s rapidly gaining ground on Rocket. “In the first quarter we were $54 billion out of the number one spot, and now we’re $24 billion out of the number one spot. So a $30 billion closing of the gap in one quarter wasn’t so bad. Imagine if rates went up to three and a half or four, you’ll see a whole different game very soon.”

They’ll become brokers sooner or later

One analyst on the UWM call asked Ishbia about Bureau of Labor Statistics job report that showed employment among mortgage brokers had slowed in recent months. UWM’s growth trajectory is predicated on increasing the number of brokers and their productivity; stagnation limits UWM’s ability to grow. But Ishbia dismissed the report, saying the company’s internal record-keeping and his personal interactions show something different altogether.

“Seventy loan officers started their own broker shops last month, almost 200 loan officers we helped find a broker shop, leaving retail,” he said. “I’ve talked to, you know, I’ll say, three of the top 20 loan officers in America that are at retail shops and they all have the intention of starting their own mortgage broker shop in the next six to nine months, calling me personally and reaching out and visiting our campus.”

He said the recent decline in mortgage rates means retail LOs have relatively full pipelines.

When rates go up and those pipelines thin, they’ll make their move. It will be a “great migration,” Ishbia said. The retail lenders with “dinosaur models” – Caliber Retail, Guaranteed Rate, loanDepot, Fairway Independent – will lose LOs because they’ll be forced to offer higher rates to consumers, according to Ishbia.

“Brokers being one-in-three mortgages, or 33%, by 2025, that’s going to happen, we are making that happen,” he said. “We are working with them, and those loan officers transitioning is a big part of that.”

The mysterious GSE “pricing actions”

Ishbia was uncharacteristically vague when asked a question about the recent “pricing actions” that Fannie and Freddie have taken toward some nonbank lenders of late. (Other earnings calls from nonbanks suggested it was related to the 7% cap on investment homes and secondary homes, but that could not be definitively confirmed.)

In an earnings call last week, Homepoint CEO Willie Newman reported last week that a competitive environment and unspecific actions taken by the GSEs hurt the bottom line.

“Our already compressed origination revenue was further impacted by certain capital market movements, most notably pricing and product actions undertaken by the government-sponsored enterprises, or GSEs,” he said. “These actions were undertaken without notice and disproportionately impacted nonbank third-party lenders, such as Home Point.”

Newman later added that Homepoint has “taken several proactive steps to mitigate this type of risk going forward by diversifying our execution. Most notably, we accelerated our transition to MBS deliveries versus cash sales.”

Ishbia wasn’t much clearer in what exactly transpired with the GSEs and what would happen in future quarters.

“I can’t control what Fannie and Freddie do and how that impacts our business,” he said.

Ishbia told the analyst that he didn’t know if the GSEs’ “pricing actions” would happen again in the third and fourth quarter. “And so, some of the legacy rules and some of the things other lenders have talked about, that the GSEs might have imposed recently. I think those are short term and I think one day we’ll be talking about a quarter where they got reversed and all of the sudden we picked up some money in a positive way.”

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