As investors become more positive about the economy, the mortgage banking sector becomes more negative. While 2020 was the industry’s best year since 2003, and 2021 should be nearly as good as well, interest rates are on the rise. This means that business will weaken in the second half of the year and into 2022.
Are brokers better?
United Wholesale believes brokers are better. A mortgage broker is different from a regular mortgage banker. A mortgage banker works with one company and selects the best option for the client based on the company’s proposals. A mortgage broker is not obligated to anyone. The broker will maintain relationships with all kinds of wholesale companies. So while the mortgage banker working for Wells Fargo can only sell Wells products, mortgage broker can sell loan to United Wholesale, credit, or a whole host of other places.
It is important to differentiate the United Wholesale business model from other models. United Wholesale works with credit brokers who find a client, do preliminary work on the mortgage, and then ship it to the wholesaler. His client is a broker, not a borrower. Originally a retail manufacturer such as Rocket finds a client, does all the work on the loan, and then finances him. The main difference is that Raketa finds a borrower, while United Wholesale does not.
Since mortgage brokers usually get their borrowers from realtors, they tend to run a more purchase-oriented business. This approach will help United Wholesale navigate the market in the future.
United Wholesale has a price advantage
United Wholesale provided just over $ 49 billion in the first quarter of 2021. Based on the average loan size of the company, this equates to something like 155,000 loans. The company’s total expenses were $ 317 million, so the average cost of a loan is about $ 2040.
To put this in perspective, the Mortgage Bankers’ Association just released first quarter performance statistics for independent (in other words, non-bank) mortgage companies. The average cost of obtaining a loan was almost four times that amount, which was $ 8,000 per loan. While this will be due in part to economies of scale, it is mainly due to United Wholesale’s investment in technology.
Interest rates have risen this year as investors see the economy recover. The holiday of easy refinancing started with COVID-19 is starting to fade. The mortgage business is very cyclical and we are part of a cycle in which capacity has caught up with demand. If rates continue to rise, refinancing activity will be further reduced and bankers will begin to cut margins to attract business.
The price war begins
United Wholesale’s forward-looking forecasts during its Q1 earnings conference call showed that price war go forward. The company predicted that the profit from the sale fields will fall from 2.19% in the first quarter to a range of 0.75-1.1%. At the same time, he assumed that the volume would increase. Most authors are more careful.
United Wholesale recently announced a price match guarantee for its quotes from a list of 15 major lenders. This would mean that the company is serious about winning the price war. note that Credit suisse recently downgraded stocks; however, it mentioned the company’s value advantage as positive.
The next few quarters may be difficult for the industry, but United Wholesale’s focus on sourcing and lower relative costs to build them make it likely to survive. The stock is trading at 15 times the expected earnings per share this year, which is expensive for the lender. The Street expects profits to grow 37% between 2021 and 2022, while cross-competitor Rocket’s profits are expected to fall 27% over the same period. Analysts strongly believe that United Wholesale’s business model will help weather the coming price war.
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