The past year was one of the best ever for mortgage bankers. According to the Mortgage Bankers Association, total volume for 2020 will come in at $3.2 trillion, which would be the best year since 2003. Perhaps fittingly, we saw a slew of mortgage bankers go public in 2020, as many hoped to raise capital to build their business. Most have similar business models, but the biggest broker went public by merging with a special purpose acquisition company (SPAC). United Wholesale Mortgage recently completed its merger and is now trading as UWM Holdings (NYSE:UWMC). Brokers have a different focus and business model, and it pays to understand the various models in the mortgage business. 

Picture of a couple getting a mortgage

Image source: Getty Images.

United Wholesale's business model

Most publicly traded mortgage companies look similar to Rocket or PennyMac Financial Services. Rocket is primarily a consumer-direct mortgage originator. In other words, consumers deal directly with Rocket's application, submit their financial data, and then Rocket approves and funds the loan. It then retains the servicing business, and uses that to keep the customer and build the relationship. PennyMac Financial is an aggregator. Consumers deal directly with their independent mortgage bank, which works the loan and funds it. The independent mortgage bank then sells the completed loan to PennyMac, which then sells or securitizes the loan and hangs on to the servicing.

United Wholesale's business model differs from Rocket and PennyMac in that United follows the broker model. Independent brokers will often partner with real estate agents and find the right loan for a consumer. Brokers are not tied to any one lender, so they have the ability to send their customer to whichever lender has the best rate and lowest fees.

This is generally a good deal for the consumer. Prior to the real estate bust of 2008, brokers used to have a much larger market share. United Wholesale sees the broker share increasing in the future. 

Building relationships with brokers

Under the broker business model, United Wholesale is not buying customers; it is buying relationships with independent brokers and real estate agents. Brokers will find the customer, determine the best loan product, and then refer the loan to someone like United Wholesale, which will then put the loan together.

Unlike PennyMac, United Wholesale does all the work with assembling and funding the loan. The company's technology gives the broker the visibility to see how the loan is progressing, which is an advantage. By providing the best service (and visibility into the loan's status), United Wholesale hopes to provide the best customer service for the broker and the consumer, with the goal of building great broker relationships. 

Servicing is less of a focus

One of the biggest differences between United Wholesale and the other big publicly traded mortgage companies revolves around servicing. Mortgage servicers handle the mechanics of administering the loan after it has been funded. They collect the monthly payment, ensure the principal and interest are sent to the holder of the loan, make the required escrow payments, and work with borrowers if they are struggling to make payments. The servicer usually earns 25 basis points (or one quarter of a percent) as compensation. Mortgage servicing then provides a stable cash flow that can offset the natural ebbs and flows of the mortgage market. 

Rocket and PennyMac Financial are big holders of mortgage servicing. United Wholesale does intend to hold some servicing, but it will make up a much smaller percentage of its portfolio. Since the company is in the business of building broker relationships, it does not solicit prior borrowers with loan refinance pitches, and prefers to focus more on mortgage purchases.

This means that in the short term, it doesn't have to worry about heavy pre-payment activity (which can hurt the value of servicing). But it won't see as much benefit when rates start rising. Mortgage servicing is one of the few financial assets that increase in value as rates rise, and mortgage originators often hold it in order to offset declining refinance activity. 

The only mortgage company expected to see an earnings increase next year

United Wholesale is trading at 9.3 times expected 2020 earnings per share and 8.1 times expected 2021 EPS. Its rival Rocket is trading at 5.2 times expected 2020 earnings and 10.6 times expected 2021 earnings. Analysts see United Wholesale increasing EPS next year by 15%. On the other hand, they see Rocket's earnings getting cut in half and PennyMac's earnings falling by roughly a third. This is a bet that rates are going to rise next year, which will depress refinancing activity. Since United Wholesale is focusing more on the home-purchase business (rather than refinancing), it will be more insulated when rates rise. 

So is United Wholesale a buy? I want to see the full-year financials before I decide. The latest pro forma statement only covers the first nine months of 2020 (with earnings per share of $0.90) and full-year 2019 (with EPS of $0.17). As a general rule, I am bullish on the mortgage business, as I think rates are going nowhere for a while since the Federal Reserve is managing the market via purchases of mortgage-backed securities. As a result, I think there is upside to earnings for the entire sector, not just United Wholesale.

The Fed realizes that one of the easiest non-legislative ways to put money into people's pockets is to let them refinance their mortgages at low rates. According to Black Knight Financial Services, 32 million borrowers can save 0.75% on their rate by refinancing; it will take years to work through that much volume.

United Wholesale will certainly capture its fair share of that volume, and its relationships with brokers will help it jump on home-purchase activity, especially new construction. Its focus on purchase activity should help it weather any rate hikes better than its peers.