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Rocket, United Wholesale Mortgage diverge on weathering market downturn

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Mortgage leaders in Metro Detroit say rising interest rates, low inventories and recession fears are providing incentives to cut costs and address a shrinking mortgage market.

United Wholesale Mortgage Holdings Corp. announced Tuesday that second-quarter net income was up 55% year-over-year to $215.4 million, while loan originations were down 50% to $29.9 billion. This followed cross-town rival Rocket Companies Inc. last week. reported profits that have plunged since a year ago.

Fierce rivals admit that the market is smaller and more challenging. Lenders across the country are cutting jobs and other spending, and some banks are even ditching the mortgage sector to focus on more profitable segments.

The Federal Reserve is raising its benchmark interest rate to keep inflation at a 40-year high. According to the Mortgage Bankers Association, mortgage originations are expected to fall 40% this year compared to 2021. latest forecast.

Experts and mortgage originators themselves expect the roadblocks to continue throughout the year, but giants such as Rocket and UWM are well positioned to benefit from industry consolidation and are taking steps to weather the storm. increase.

Argus Research analyst Kevin Heal said, “Just because other mortgage companies are declining, they will probably maintain fairly high market share and profit margins.” “Other companies are closing stores or consolidating or streamlining operations.”

For example, Rocket Mortgage signed a deal to originate mortgages in July after Banco Santander exited the mortgage market.

About 30 mortgage lenders, including Rocket Mortgage, have announced some kind of job cuts for 2022. National Mortgage NewsNot so for UWM, but the company says employment has fallen from more than 8,000 to more than 7,000 due to attrition.

Loan applications fell and consumer confidence plummeted, but the US added more jobs than expected in July, alleviating some recession fears.

Rocket Companies booked $34.5 billion in loans in the second quarter and earned a net income of $60 million. The Detroit-based lender is forecasting loan volume in the third quarter at $28 billion from his $23 billion, down from $88 billion in 2021. The largest wholesale lender is looking to make Rocket Crown the largest overall mortgage originator.

Companies branch out on the way forward. Rocket has emphasized ways to conserve spending to maintain profitability, with executives continuing to expand on other products and services on Rocket’s platform to drive growth in areas not related to mortgages. CEO Jay Farner said on the company’s earnings call last week that the company has 2,000 employees dedicated to accelerating the growth of the platform.

“In these fluid times, we are optimizing our core mortgage business by improving lead acquisition and assignment, launching new products, signing new partnerships and aligning resources internally,” said Farner. We have taken proactive steps to do so,” he said.

For example, one of our products is Rate Drop Advantage. Covers a portion of closing costs if interest rates fall and customers refinance within three years of home purchase.

“We will continue to work on expenses, but our main focus will be on boosting that revenue by increasing conversion rates and reducing customer acquisition costs,” he said. I spend hours a week looking at the work being done, row by row, where all the resources are located. “

But Wall Street continues to view Rocket primarily as a mortgage business, and last quarter’s results underscore how closely the company’s results are tied to the housing market.

“Management is likely to give in to the massive decline in the housing market, which will likely fall later this year and into 2023,” said Ken Leong, research director at CFRA. An investment research firm last week reaffirmed Rocket’s sell rating, citing an “unfavorable macro outlook.”

Although Rocket has a strong fundamental business, it is not immune to the effects of a cyclical recession and “will operate in a very tough market over the next 18 months,” Leon said. increase.

“A weaker housing market will lead to a significant decline in mortgage originations and (refinancing),” he said. “Rocket’s primary business is mortgages. We love investing in a single platform, but when it comes to adjacent services and products, ultimately we believe that a weak housing market will have a negative impact on Rocket’s performance.” is.”

UWM, meanwhile, is sacrificing third-quarter profit margins to offer better rates to customers and increase volume.

Rocket reduced its marketing, manufacturing and vendor costs by $300 million last quarter to $1.3 billion. We expect to save an additional $150 million in the third quarter from production and marketing cuts and the acquisitions we delivered earlier this year.

reduction in marketing Farner suggested Rocket will do it in early 2021At the time, he said marketing cuts could create a “death spiral” and jeopardize the jobs of loan officers.

“They’re spending too much,” Argus’ heel said. “They have a golf tournament and sponsorships in the Super Bowl. Will that be cut? What if they cut back on marketing? They want to stay on top.”

However, other means also present challenges. Executives highlighted cuts from vendors on last week’s earnings call, which Heal says are “wild cards.”

“They seem to rely on getting better prices from their vendors, but I think those vendors have to go through the same inflationary pressures,” he said. I’m sure it can be extracted, but it may not be very expensive as the vendors also have costs.”

Meanwhile, UWM expenses increased 1% in the second quarter to $348 million. There are no loan officers, as we only originate mortgages through independent brokers who work directly with homeowners and buyers. A business-to-business model allows you to focus less on marketing and maintain fewer staff.

However, it relies on broker channels to send loans. launched “game on” pricing, lowering the interest rate on all loans from 0.5% to 1. %. The national average for 30-year fixed rates on Tuesday was 5.53%, according to the company. Bankrate.com.

This tactic tries to increase the volume, but at the expense of UWM’s gain margin. The company forecasts a profit margin of 0.3% to 0.6% in the third quarter of 2021, compared with a profit margin of 0.94%.

However, UWM CEO Mat Ishbia said the 0.99% profit margin in the first half of 2022 will serve as a buffer for the second half, with a profit margin of 0.75% to 0.9% in 2022, compared to 1.14% in 2021. I expect. The move will support long-term performance, with annual profits projected to be $3 billion or $4 billion in the next few years.

“Game On is an aggressive pricing strategy used to attract non-UWM brokers to see why our processes, technology, services and partnerships are the best in the country.” Ishbia said on the earnings call.

Ishbia suggested the move would be better than seeking to acquire a competitor.

He added that the strategy aims to provide incentives for retail mortgage lender loan officers to split up and become mortgage brokers who can work with UWM. Ishbia cited data that shows he has converted nearly 5,800 people so far this year.

“I’m out of the game in the third quarter,” Ishbia said. “I’m not playing a game in the 4th quarter. I’m playing a game in ’23, ’24, ’25 and we feel really good about it.

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Twitter: @BreanaCNoble

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Twitter: @JGrzelewski

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