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Outlook Troubling For United Wholesale Mortgage

Mar. 29, 2021 8:51 AM ETUWM Holdings Corporation (UWMC)RKT
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  • United Wholesale Mortgage (NYSE:UWMC) has steadily shed market share the last 4 years. Over the same period, Rocket Mortgage (NYSE:RKT) has grown market share from approximately 10% to 32%.
  • In response, UWMC recently issued a shocking ultimatum to its broker client base: choose between either UWMC or RKT and Fairway Independent Mortgage.
  • Rather than leveraging its leadership position and strong cash holdings, UWMC is operating out of fear rather than investing and innovating to compete.
  • Bearish on UWMC: stock is down 38% this year and trading below the declining 40-weekmoving average.

It almost feels cliché now to say that the Internet is driving change and evolution across industries. Many consider it a given factored into expectations. If you consider the wholesale mortgage industry, however, the dominant player seems to have not yet recognized how technology enabled a role reversal which places the consumer in control. Rather than driving innovation to compete and maintain its leadership position, UWMC issued an ultimatum to brokers demanding they choose between doing business with UWMC or with RKT and Fairway Independent Mortgage.

This take-it-or-leave-it strategy is a last resort move by UWMC because the company will not – or cannot – compete in the fast-evolving marketplace. Speaking about UWMC’s ultimatum, Austin Niemiec, a vice president at RKT, told Housing Wire that brokers are calling his lending team upset about the UWMC mandate and raising questions about why they need to make a choice. “It’s because of fear… They [UWMC] don’t want to compete head-to-head,” Niemiec said.

If you examine monthly broker closing volume from 2017 to 2020, the numbers back this up. While the addressable market grew exponentially, UWMC’s share decreased by approximately 3% overall with more rapid YoY losses recently. On the other hand, RKT gained considerable share, holding 10% in 2017, 17% in 2018, 27% in 2019, and 32% in 2020.

A deeper look into the data indicates that a portion of RKT’s gain is fueled by industry growth – new business. The company is also taking share from UWMC and even more so from other firms in the industry. For instance, in a market that has grown approximately 5x from 2017 to 2020, Caliber has lost 14% share, and PennyMac has lost 7%. If trends continue and the sector consolidates, RKT could become the leader even without taking more share from UWMC.

A recent report released by Redfin showed that home buyers lose $23,250 in spending power with a mortgage rate of 3.25% versus 2.75%. As its purpose, brokers shop the marketplace to find the best opportunities and rates for consumers. By taking a portion of these options off the table, consumers who use the UWMC brokers could find higher rates that limit their spending power.

In a statement responding to anti-competitive tactics in the marketplace, Bob Broeksmit, CEO of the Mortgage Bankers Association, emphasized the independent trade association’s position. He stated, “Consumers are best served when they have choices created by a robust, competitive market that offers a multitude of loan prices, products and service levels.”

UWMC’s ultimatum to the broker channel is one sign the company cannot compete head-to-head with the competition. But a quick look at UWMC’s Q42020 balance sheet provides more insight. UWMC’s cash position was considerably strengthened year-over-year, meaning the resources are available to invest and compete in the arena against strengthening opposition. However, UWMC is opting to park more than $1 billion on the sidelines, rather than investing it to grow and compete as an industry leader.

It is worth keeping a watchful eye on UWMC’s Q22021 earnings that will reflect the initial market reaction to the ultimatum. The company’s share price is down year-to-date from $12.95 in January to $7.98 on Friday, a 38% drop.

Source: Seeking Alpha

Meanwhile, RKT’s shares are up 25% over the same period. It is no surprise. RKT keeps piling up wins, including new referral programs with Morgan Stanley (MS) and E-Trade (ETFC), as well as new technologies and other enhancements that strengthen its partnerships with brokers. RKT launched a new national broker directory which connects home buyers and homeowners with independent mortgage brokers. This is an impactful value-add for consumers that also stimulates demand for brokers.

Jared Whitley, a Seeking Alpha contributor focusing on the intersection of policy and Wall Street, added, “Mortgage brokers are going to go with the service that provides them with the best experience and the best options for their customers.” He is right. UWMC is trying to win on muscle rather than hustle. That is not a good bet in the lending industry.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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