The mortgage banking business is a story of feast and famine. The past two years have been a feast after the Federal Reserve cut rates to zero in order to stimulate the economy, which triggered a boom in refinance activity. The party ended in late 2021, and since then the mortgage industry has seen volumes get cut in half, which has triggered a wave of layoffs and companies exiting portions of the business.
Despite a challenging environment, UWM Corp. (UWMC 0.17%), the parent of United Wholesale, is aggressively working to take market share and is optimistic about what the future looks like for its brand of mortgage banking.
United Wholesale has an unusual business model
Mortgage banks generally follow one of three basic business models. The most common model is retail, where a mortgage bank markets its services to customers, assembles a mortgage, and then either sells it or keeps it. The revenue from a loan (and the costs) are the highest. Rocket (RKT 0.10%) is the best example of a retail shop.
The second model is the correspondent lender. In this arrangement, the lender buys completed loans from smaller lenders and either keeps or sells them. The best example of a correspondent shop is PennyMac Financial Services (PFSI 0.37%). The margins in correspondent lending are quite narrow.
Finally, there is the wholesale model, which is what UWM follows. In this case, a mortgage broker, who is not an employee of United Wholesale, finds the borrower, and then passes off the loan to UWM, which then assembles and sells it.
United Wholesale believes that its model best serves the borrower. On its second-quarter earnings conference call, the company said that the typical borrower who uses a mortgage broker will save $9,400 over the life of the loan, compared to a borrower who uses the standard retail shop. Minority borrowers supposedly fare even better, saving $10,400 over the life of the loan. The company believes that the brokerage business is the "fastest, easiest and most affordable way for consumers to get a loan and the best place for a loan officer to work."
Growth will be driven by an increase in the share of mortgage brokers
The company's overall growth strategy is to increase the share of business that goes to the broker channel. On the call, Chief Executive Officer Mat Ishbia said that he believes the broker channel will grow from roughly 20% to 25% market share to 33% in five years. To drive this shift, the company is implementing a strategy called "Game On" which is designed to both cut price and to bring non-brokers into the broker realm.
Most loan officers only work for one company, while a broker is a free agent. United Wholesale's strategy is to pull good loan officers into the brokerage business, and wow them with service and pricing. Ishbia believes this "investment" will have "exponential benefits in 2023, 2024, and 2025 and beyond."
This means that earnings may suffer in the immediate future as United Wholesale cuts prices and builds share. Despite this move, the company also said on the conference call that it is comfortable with the amount and timing of its dividend, which currently stands at $0.10 per share. This gives the company a dividend yield of almost 10%. It is hard to love mortgage banking stocks right now. However, it looks like inflation may be moderating, and that means the Fed won't have to be as aggressive as feared. While it may be a while before we see another feast, the famine could start easing up.