United Wholesale Mortgage surpasses Rocket Mortgage in mortgage originations

The mortgage wars have a new leader.

Pontiac-based United Wholesale Mortgage Holdings Corp. on Friday booked $325.6 million in net income in the third quarter on $33.5 billion in closed loan volume, surpassing by 31% crosstown rival Rocket Mortgage LLC as the nation’s largest originator by volume in the quarter.

Investors rewarded the news, sending UWMC shares 20% higher to close the week at $3.71, though shares in the company remain down 38% year-to-date. Shares of Rocket Cos. Inc., founded by mortgage mogul Dan Gilbert, meanwhile, were falling 2.9% to $6.32 on Friday.

The milestone comes after UWM slashed interest rates on its loan products amid rising rates nationwide. It accomplishes a long-sought goal for CEO Mat Ishbia, a now-billionaire who joined his father’s 12-person company after graduating from Michigan State University where he played on its 2000 championship basketball team. He took over the top job in 2013 and has grown it into the publicly traded mortgage giant it is today with approximately 7,000 employees.

Ishbia committed last year to make UWM the country’s largest mortgage lender by 2024. And the company has waged public relations wars on Rocket Mortgage parent Rocket Cos. Inc. and attacked its business model.

The feat particularly is telling as UWM originates mortgages exclusively through the independent brokers who work directly with homebuyers and homeowners to find the best loan for them across multiple lenders. Brokers represent more than 20% of originations in the highly fractured industry, and UWM has dominated the channel as the top wholesale lender for the past seven years. Rocket, meanwhile, originates loans directly with customers as well as through brokers.

“What we have said would happen has happened,” Ishbia said on an earnings call. “Maybe just maybe there really is one elite mortgage company in America. Maybe there’s one CEO and his leadership team that really is in the weeds of the business and knows the business better than the rest. Who knows? That’s what we believe. I hope you’re starting to believe it, as well.”

Rocket, which also includes title insurer Amrock LLC, automotive retail marketplace Rocket Auto, and more, on Thursday recorded $96 million in net income, down 93% year-over-year, on $25.6 billion in loan origination volume for the third quarter with a 2.69% gain-on-sale margin.

The Detroit lender became the top mortgage lender in the fourth quarter of 2017 as it was a pioneer in closing loans online. Today, it works with more than 7 million paying customers a year through its various platforms, including Rocket Money, Rocket Homes and Rocket Loans, which it says helps develop long-term clients.

“Throughout our 37-year history, Rocket Mortgage has always been focused on helping Americans across our country regardless of home value or loan size,” the company said in a statement. “As the largest home lender in the country, we remain focused on helping more American families buy or refinance their homes than all other lenders. As opposed to focusing on large loan amounts, which is common practice for many lenders in more challenging rate markets, we will continue to take pride in growing the number of families we can assist.”

UWM was unable to specify how many people are recipients of the loans that it originates.

“Rocket’s going to cry like they cry about everything, and we beat them. Brokers are better,” Ishbia told The Detroit News. “We’re the largest mortgage company in America. It’s not negotiable. It’s not discussed. It’s not an opinion. It’s factual.”

UWM’s victory comes as its profits declined 1.3% year-over-year on $684 million in revenue, which fell by 0.9%. Increasing interest rates have turned a refinance boom, in which Rocket is particularly strong, to a purchase-dominated market where brokers represent a greater portion of originations. And low levels of available homes for sale has limited the industry, prompting consolidation and layoffs. Multiple rounds of buyouts at Rocket have shrunk its workforce to more than 20,000 people from more than 26,000.

It’s unclear for how long UWM can remain on top, though Ishbia said the company plans to dominate in 2023 and beyond and make record-breaking “2020 look like just an average or a good year.”

“When rates go down, it will be tougher for us to stay as No. 1, because the reality is, that’s the only thing that the guys in Detroit can do is refinance, refinance, refinance,” said Ishbia, referring to Rocket. “With that being said, the broker channel is growing, so we’re competing for only two out of 10 loans. Wait until that keeps growing and goes to three out of 10 or four out of 10 loans. That is the way that UWM will continue to stay on top.”

UWM’s own workforce has decreased from more than 8,000 people as recently as the first quarter of 2022 through attrition, according to the company, which has committed to no layoffs. Ishbia said the company loses 200 to 300 employees per month and is hiring about 100 to replace them instead of the 500 it had reported in recent years.

“We’re just not hiring as fast as we used to, because we don’t need to,” he said. “Our technology makes it so that we don’t need to have 10,000 people to be the No. 1 lender in the country.”

UWM anticipates decreased loan volume in the fourth quarter, forecasting it’ll be in the range of $19 billion and $26 billion with a gain margin between 0.4% and 0.7%. Buyers are starting to have more power in the market, and there’s a typical seasonal slump as temperatures cool down, Ishbia said.

That forecast could mean Rocket still is in the game. For the fourth quarter, it expects closed loan volume of between $17 billion and $22 billion and a gain on sale margin of between 2.3% and 2.6%.

“As the largest mortgage finance company, (Rocket) will survive the recession and gain wallet share from weaker competitors,” said Ken Leon, director of equity research at CFRA Research, in a note on Friday. “We like RKT’s expansion with a single platform for title insurance, appraisals, and closing services, but this remains small.”

UWM had set out to beat Rocket in the July-to-September quarter. It offered a “Game On” pricing program to slash interest rates, which brought to the company nearly 12,000 new brokers or those who hadn’t worked with UWM in the most recent quarter. Ishbia suggested the strategy will continue for now.

“People are just closing up shop,” said Kevin Heal, an analyst with Argus Research, about UWM’s competition in the wholesale channel. “They’re not able to compete on rate. UWM is a public company. They have capital and cheaper funding lines than a smaller originator. … He’s taken some short-term pain for long-term gains down the road.”

In the first six months of the year, UWM worked with more than 30,000 loan officers and had a 34% market share of the wholesale channel. Ishbia said UWM’s share in the third quarter could be as high as 50% — though, he noted, that’s not the ultimate goal. It’s to grow the broker channel, and more than 17,000 loan officers were added this year with about half coming from the direct-to-customer retail business, Ishbia said. He’s said by 2026, brokers could represent 33% of the market.

“I love when UWM market share goes down in the wholesale channel,” he said, “because I know when that’s happening that the other wholesalers are doing great things, one. And two, the broker channel is a lot bigger than it is today, which will be a win-win for everybody.”

UWM also had set its third-quarter outlook as the same as Rocket’s: between $23 billion and $28 billion. Its gain margin of 0.52%, which was at the higher end of its 0.3% to 0.6% forecast, is substantially lower than Rocket’s because of the competitive nature of the wholesale channel. It’s also down from the 0.94% it was a year ago.

The market is unlikely to turn around anytime soon. Rocket CEO Jay Farner predicted further consolidation in the industry as mortgage applications hit their lowest levels since the mid-1990s. The average 30-year mortgage rate in the U.S. was 7.23% on Friday, according to Bankrate, compared to 3.28% a year ago. Earlier this week, the Fed raised interest rates by 0.75 percentage points for the fourth time this year and signaled further increases are likely.

In the third quarter, the time it took UWM to close a loan on average was 17 days. The company has said it’s looking to decrease that to 12 with its technology. UWM’s expenses decreased 0.9% to $353.8 million year-over-year.

“We continue to be focused on staying disciplined with cost management in the current origination environment,” Ishbia said, “and are comfortable that more aggressive cost reduction actions are unnecessary and would be short-sighted.”

There’s continued strong demand for homes by millennials, he said, as they grow their families. And while home prices aren’t growing at double-digit rates as they had in recent years, Ishbia says growth will steady between 1% and 3%.

Refinances represented 17% of UWM’s mix at $5.8 billion, an 84% decrease from 2021. The rest of the $27.7 billion in volume came from purchases, which increased 4.6%.

As refinances fall off, retaining servicing rights of especially low-interest mortgages that are unlikely to refinance can offer a buffer for income during challenging times. 

Companies that also retain the servicing rights of low-interest mortgages can count on that for a stream of income. UWM’s mortgage servicing rights totaled $4.3 billion at the end of September, up 48% year-over-year. They represented a majority of the company’s earnings for the quarter.

“With a very low WAC (weighted average coupon), very low delinquencies and a high-asset quality, our MSR portfolio is stronger than ever,” said Andrew Hubacker, principal financial officer, “and continues to provide balance to our business models, recurring quarterly cash flow stream and a strategic source of additional liquidity.”

The company’s more than 60-day delinquency rate was at…