In a recent HousingWire article, mortgage M&A experts predicted that as many as 33% of the largest independent mortgage banks would not survive to the end of 2023. The experts expect large numbers of mergers, acquisitions, or outright failures. In the past, I would’ve put these prognostications in the “what should happen” column vs “what will happen” column due to the fact that most IMBs have similar expense problems and therefor they have all tended to limp along together in tough times with borrowers paying for their inefficiencies. But the modern wholesale channel has made this cycle very different from past downturns; IMBs are not just competing with similarly hamstrung competitors, they are competing with a business model that has fundamentally lowered the cost structure of the business and shifted the “rate/service equilibrium” of the industry which is making their pain in this cycle much more intense.
So how has the modern wholesale channel so fundamentally changed the cost structure of mortgage? What is so different and are these differences structural and permanent? Or is this just about UWM pricing aggressively to gain share? As we talk to people throughout the industry, we get these questions often, so I thought I’d share some examples of exactly how and where wholesale sheds redundant costs and saves our customers money – roughly $8000 per borrower based on HMDA data (and even more for minorities). Here’s how:
- Eliminates redundant underwriting – Correspondent lenders underwrite, then sell to aggregators who re-underwrite; wholesale does it once
- Eliminates unnecessary “secondary marketing” – Correspondent lenders need staff to sell loans to aggregators who also need staff to sell/securitize loans; wholesale does it once
- Eliminates unnecessary management – Correspondent lenders need expensive, multilayered management teams to manage all of the people involved; we don’t
- Attracts the very best underwriting talent – Underwriting is the most expensive area of mortgage-making. Efficiency and great service require great talent; our wholesale partners have the resources to attract, train, and retain great talent
- Scale in the capital markets – Size truly matters in the capital markets and aggregators transacting in $10s of billions a month receive much better prices and lower costs; our wholesale partners are the largest lenders in the country and pass the savings to our customers
- Eliminates redundant risk capital – Correspondent lenders must hold capital against their warehouse lines and against the risk of repurchase on loans sold to aggregators; aggregators must also hold capital for the same reasons and against the same loans; wholesale eliminates redundant capital which saves money
The experts in the article went on to say that some IMBs are trying to convert themselves into brokers; a very smart strategy, but one they will struggle to execute. And what about UWM? I often hear people say, “They can’t keep this up forever!” but I wouldn’t be so sure. While becoming the #1 lender in the country, their Q3 financials looked impressive with a net income of $325 million in Q3 (when the average IMB lost money) and their gain on sale margin was a very impressive 52 basis points for an organization that is leading the industry’s pricing. Their cash position of $799 million was down $160 million from Q2, but still higher than at the end of 2021. And they’ve proven they are not refi-dependent with a purchase share of 83% in Q3.
This time is different. In the past, I would’ve been very reluctant to say that, but the signals are obvious and the reasons are logical and quantifiable. We are witnessing a tectonic shift in how our industry operates and one that continues to improve the costs and experience of getting a mortgage in America. I hope that makes you as happy as it does me.