The fortunes of mortgage bankers can shift pretty rapidly, and we may be in one of those periods of volatility right now. Last year, the industry benefited from a wave of refinancings as the Fed lowered interest rates as much as it could. At one point last fall, it looked like three-quarters of all outstanding mortgages could be profitably refinanced. Now that rates have risen dramatically since the beginning of the year, is this investment thesis officially dead? Are mortgage bankers like UWM Holdings (UWMC -0.14%) a buy?

The 10-year bond yield is up big. So mortgage rates are too, right? 

Black Knight Financial put out an analysis last September (when the 30-year mortgage rate was 2.86%) that found 32.4 million borrowers could save 0.75% on their mortgage rate by refinancing. That is a tremendous amount of potential business. Since last fall, the yield on the 10-year Treasury note is up by more than 1 percentage point. What has happened to mortgage rates in general? 

30 Year Mortgage Rate Chart

30 Year Mortgage Rate data by YCharts

It turns out that mortgage rates are about 19 basis points higher than they were when Black Knight estimated that three-quarters of the mortgages in the U.S. could be profitably refinanced. At the end of the year, the Federal Reserve estimated that there was $11.7 trillion in residential one- to four-unit mortgage debt outstanding. Three-quarters of that would mean $8.8 trillion in potential refinance activity. The Mortgage Bankers Association forecast that refinance activity would be around $1 trillion in 2021, which seems low given the opportunity.

A table with mortgage paperwork and a small house model, as hands point at the paper.

Image source: Getty Images.

Mortgage brokers have a slightly different model

UWM -- better known in the industry as United Wholesale -- has a different business model than most of the other publicly traded mortgage bankers out there.

Generally speaking, the publicly traded mortgage bankers are either retail or aggregators. An example of a retail originator is Rocket. Rocket generates its own leads through its app, assembles the mortgage, funds the loan, and then sells it into the market. An aggregator would be someone like PennyMac Financial Services, which buys completed mortgages from smaller bankers and then sells them.

United Wholesale, meanwhile, operates a broker network where the brokers source the loan, assemble some of the paperwork, and then hand it off to United Wholesale, which puts together the loan and then sells it.

Wholesale lenders used to make up about half the mortgage market prior to the Great Recession, and that business seems to be coming back. Mortgage brokers do have the ability to service borrowers by choosing the best-suited wholesaler for each particular customer. That said, United Wholesale has some restrictions, and has told brokers they can either work with them or Rocket. But generally speaking, brokers can work with whichever they choose, and that is a big benefit to the borrower.

United Wholesale recently went public through a special purpose acquisition company (SPAC), and while it has released its full-year 2020 earnings, it has not filed its Form 10-K. The Form 10-K contains a detailed financial review of the company's operations. When I first wrote about United Wholesale, I said that I liked the company's business model and that its use of technology gave it a distinct advantage over many of its competitors. The only issue I had with recommending the stock was the lack of a 10-K. I still stand by that.

While the numbers may be on your side, investor sentiment is not

Here is one issue with mortgage bankers in general. Most investors think the 30-year fixed rate mortgage and the 10-year Treasury yield generally move in lockstep. So, they see a 1-percentage-point increase in the 10-year and assume mortgage rates are up the same amount and conclude the refinance party is over. Part of the art of long-term investing is being able to stand against the crowd when the numbers are on your side, but investors in mortgage bankers will have to fight a sea of negative sentiment as rates rise.