Rocket and United Wholesale Mortgage Divide on Market Slowdown

Metro Detroit mortgage leaders say they are cutting costs and offering incentives to weather a declining mortgage market due to rising interest rates, low inventory and recession fears.

United Wholesale Mortgage Holdings Corp. said on Tuesday its second-quarter net profit rose 55% year-on-year to $215.4 million on loan volume of $29.9 billion, a decline of 50%. This came after Crosstown rival Rocket Companies Inc. last week reported plummeting profits a year ago.

Fierce rivals agree the market is smaller and tougher. Lenders nationwide have cut jobs and other expenses, and some have even abandoned the mortgage business to focus on more profitable segments.

The Federal Reserve raised its benchmark interest rate in a bid to curb inflation, which is at its highest level in 40 years. Mortgage originations are expected to decline 40% this year compared to 2021, according to the Mortgage Bankers Association. latest forecast.

Mortgage pundits and originators themselves expect hurdles to persist throughout the year, although giants like Rocket and UWM stand to benefit from industry consolidation and take various steps to weather the storm. storm.

“They’ll likely maintain fairly high market share and margins just because the other mortgage companies have gone bankrupt,” said Kevin Heal, analyst for Argus Research. “Others are closing up shop or consolidating or streamlining their operations.”

After Santander Bank exited the mortgage market, for example, Rocket Mortgage signed an agreement in July to provide it with mortgages.

The Detroit Golf Club, in preparation for the Rocket Mortgage Classic, June 25, 2020. (David Guralnick/The Detroit News)

Nearly 30 mortgage lenders, including Rocket Mortgage, have announced some kind of downsizing in 2022, according to National Mortgage News. UWM has not, although the company says employment has fallen to over 7,000 from over 8,000 through natural attrition.

Loan applications fell and consumer confidence fell, but the United States added more jobs than expected in July, easing some recession fears.

Rocket Companies posted a net profit of $60 million in the second quarter on closed loan volume of $34.5 billion. The Detroit-based lender forecasts third-quarter loan volume of $23 billion to $28 billion, up from $88 billion in 2021. UWM’s guidance for the current quarter is the same, which would be in down from $63 billion last year, as the nation’s largest wholesale lender seeks to take Rocket’s crown as the largest mortgage originator.

Companies diverge on their path forward. Rocket is emphasizing how it seeks to save on expenses to preserve margins, and executives said they will continue to invest in other products and services on Rocket’s platform to drive growth. in areas unrelated to mortgages. CEO Jay Farner said during the company’s earnings call last week that the company has 2,000 employees dedicated to accelerating the platform’s growth.

Jay Farner

“In this time of flux, we have taken proactive steps to optimize our core mortgage operations by improving lead capture and allocation, launching new products, signing new partnerships and aligning our resources internally,” Farner said.

One of the products, for example, is Rate Drop Advantage. It covers a portion of closing costs if interest rates drop and the client refinances within three years of buying a home.

“We will continue to work on spend, but our primary focus is to grow that revenue through increased conversion rates and lower our customer acquisition cost,” he said. “Our senior leadership team, we put in many, many hours a week, going over line by line where all of our resources are, the work that’s being done.

Wall Street, however, continues to view Rocket primarily as a mortgage business, and the prior quarter’s results underscore how closely the company’s performance is tied to the housing market.

“I think we’ve seen management capitulate to a much weaker housing market, which is expected to weaken in the second half of this year and into 2023,” said Ken Leon, research director at CFRA. The investment research firm last week reaffirmed its “sell” rating on Rocket shares, citing an “unfavorable macroeconomic outlook.”

Leon said that while Rocket has strong fundamental business, it cannot escape the impacts of a cyclical downturn and “will be operating in a very challenging market over the next 18 months.”

“A weaker housing market is going to translate into expected significant declines in mortgage issuance and (refinancing),” he said. “Rocket’s core business is mortgages. While we appreciate their investment in a single platform…for services and adjacent products, the bottom line is this: a weak housing market negatively impacts Rocket performance.”

UWM, meanwhile, is sacrificing its profit margin in the third quarter to offer better rates to customers and increase volume.

Rocket slashed costs from $300 million to $1.3 billion in the prior quarter, driven primarily by marketing, production and suppliers. It expects to save up to an additional $150 million in the third quarter from production and marketing cuts and buyouts it offered earlier this year.

Marketing discounts are a reversal of what Farner indicated that Rocket would do in early 2021. At the time, he said marketing cuts could create a “death spiral” and put loan officer jobs at risk.

“Their expenses are way too high,” Argus ‘Heal said. “They have the golf tournament and the Super Bowl sponsors. Is it going to be cut? If they cut marketing, how much? They want to stay ahead.”

But other avenues also present challenges. Executives pointed to supplier cuts during an earnings call last week, but Heal says it’s a “wildcard”.

“It seems like they’re counting on getting better prices from suppliers, but I imagine those suppliers must be under the same inflationary pressures,” he said. “I’m sure they can extract something, but maybe it’s not that high because sellers have expenses too.”

Meanwhile, UWM’s spending rose 1% in the second quarter to $348 million. It has no loan officers as it issues mortgages exclusively through independent brokers, who work directly with homeowners and buyers. The business-to-business model allows it to focus less on marketing and maintain a small workforce.

However, he relies on a brokerage channel to send him loans. Last quarter, UWM introduced a “Compete & Beat” pricing program to beat the rates offered by major wholesale lenders, and in late June it launched “Game On” pricing, lowering rates on all its loans from 0.5% to 1%. The national average on a 30-year fixed rate on Tuesday was 5.53%, according to

The tactic aims to increase volume, although it sacrifices UWM’s earning margin. The company expects third quarter margins to be 0.3% to 0.6% compared to 0.94% for the quarter in 2021. Rocket expects a gain on sale margin of between 2.5% and 2.8% in the third trimester.

Mat Ishbia, President and CEO of United Wholesale Mortgage

However, UAW CEO Mat Ishbia says the 0.99% margin in the first half of 2022 provides a buffer for the second half and expects the margin to still be 0.75% at 0. .9% for 2022, compared to 1.14% in 2021. He highlighted how the move will support long-term performance, projecting $3 billion or $4 billion in annual earnings in the years to come.

“Game On is an aggressive pricing strategy used to entice brokers who don’t use UWM to see why our process, technology, service and partnership are the best in the country,” Ishbia said on a call to results.

Ishbia suggested that this decision was superior to seeking an acquisition from a competitor. It’s probably less expensive, offers the company large amounts of data, and avoids the hassle of merging cultures.

He added that the strategy is also intended to incentivize loan officers from retail mortgage lenders to branch out and become mortgage brokers who can work with UWM. Ishbia cited data indicating nearly 5,800 people have converted so far this year.

“I’m not playing the third quarter game,” Ishbia said. “I don’t play the fourth quarter game. I play the 23, 24, 25 games, and we feel really good about that.”

Twitter: @BreanaCNoble

Twitter: @JGrzelewski

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