Homepoint is in a tough spot.
Like its peers, the wholesale lender’s origination volume has plunged over the past year due to a dearth of refinancings and a sluggish purchase market. But there’s another threat that Homepoint executives must worry about – United Wholesale Mortgage (UWM), the top dog in wholesale, has embarked on a strategy of heavy price cutting, forcing Homepoint and others to limbo to compete for business. That has contributed to UWM’s competitors taking losses on loans when they can least afford it.
Homepoint’s financial statements tell the story. Origination volume declined 63.5% year over year to $9.3 billion in the second quarter, and the lender took a $44 million loss overall. Among 11 publicly traded nonbank mortgage lenders, the loss represented the third-worst financial performance in the second quarter, according to a HousingWire analysis.
Homepoint has been aggressive in its attempts to stop the bleeding. In the last year it has reorganized operations nationwide; sold non-core operations, including its correspondent business; transitioned its in-house servicing platform to ServiceMac; sold mortgage servicing rights when possible; and cut prices by 75 basis points to low-income borrowers. In total, Homepoint said the cost reductions made in the second quarter alone should result in $31 million in savings on an annualized basis.
But the reality is Homepoint – like some of its peers – is going to lose market share as it attempts to right the ship.
“Our bias right now is towards more margins and less volume – that said, obviously, the volume opportunity on a macro basis is relatively limited,” Willie Newman, Home Point Capital CEO and president, told analysts during a second quarter conference call. “We’re not afraid to get smaller as an organization.”
Beyond cost-cutting, the wholesale lender is looking to diversify its product mix to capture business it previously wouldn’t have even competed for. “We believe that in the purchase market, products are going to become more and more important,” said Phil Shoemaker, Homepoint’s president of originations.
Homepoint is hardly alone. During the second-quarter earnings season, executives from publicly traded mortgage lenders detailed their forays into jumbo loans, non-qualified mortgages, reverse mortgages, home equity products and even personal loans.
Analysts, mortgage executives and loan officers said that diversifying the portfolio is a smart strategy for mortgage originators. But due to the inherent challenges in distribution and adoption, they don’t expect these products will be enough to overcome larger market challenges and win in a purchase market – at least in the short term.
“For some smaller originators, it could kind of move the needle,” said Bose George, mortgage finance analyst at Keefe, Bruyette & Woods (KBW). “But I don’t think it can be meaningful for the big companies just because these other markets are smaller than the traditional mortgage market.”
Just a little less vanilla
The obvious starting place for nonbank lenders looking to capture volume is in jumbo lending, executives and analysts said. Home prices have remained stubbornly high, and there’s tens of billions of dollars in homes for sale beyond the conventional loan limits set by Fannie Mae and Freddie Mac.
Jumbo loan volume increased 3.1% in the second quarter from the first quarter to $135 billion, according to Inside Mortgage Finance estimates. Mortgage executives project that number to remain steady or even tick up in the third quarter.
“We’ve been focused on rounding out our jumbo offering, given what’s happened with home price appreciation, which is something that’s here to stay,” Shoemaker said. “Even though home price appreciation may feel like a bubble, it truly is an imbalance between supply and demand.”
Lenders are making a play with jumbo adjustable-rate mortgages (ARM), a product that has made a comeback after falling out of favor due to their role in the housing crash of 2008 and a decade-plus of fixed-rate mortgages under 5%.
In July, UWM rolled out an ARM product for jumbo loans with seven- or 10-year ARM and rate/term and cash-out refi for a maximum loan amount of as much as $3 million.
The company also launched temporary rate buydowns, which allows borrowers to receive lower mortgage rates at the beginning of their loan terms by using seller concessions as part of the payment. It comes at a time in which the housing market favors buyers and seller concessions become more frequent.
The new products complement UWM’s “Game On” initiative, a cut-rate pricing strategy devised to grow market share with purchase buyers.
“The investment we make today will have exponential benefits in 2023, 2024 and 2025 and beyond,” UWM CEO and Chairman Mat Ishbia said during an earnings call. “And we continue to capture more market share and not only position ourselves to win, but dominate the future. And we feel great about the decisions we made. As I said before, we control the margins.”
He added: “We’re watching it (Game On initiative) as it goes. And we’re going to continue to do it because it’s much cheaper than acquiring someone.”
On another front, wholesale lenders have flirted with adding a bevy of mortgage (non-QM) products this year.
The segment, which includes self-employed borrowers and those who work in the gig economy, was expected to take off with accelerating home prices and higher interest rates pushing borrowers outside the Fannie Mae and Freddie Mac credit boxes.
Homepoint told HousingWire in March that it was considering including bank statement and investor cash flow loans in its portfolio. UWM in March also launched a bank statement product for self-employed borrowers and loans for real estate investors.
But non-QM is a fairly dangerous space right now. With surging rates, lenders are struggling to sell in the secondary market legacy lower-rate loans originated months ago, as investors are seeking higher yields. This liquidity problem caused the implosion of non-QM lenders First Guaranty Mortgage Corp. and Sprout Mortgage. Others are backing off the product, such as Impac Mortgage Holdings.
Homepoint has decided to pause on entering the non-QM fray. “Based on our ongoing assessment of the non-QM market opportunity, coupled with the unpredictable liquidity for the product, we chose to focus our development resources on more relevant partnerships programs like Homepoint Cash Compete,” said a spokesperson for the company. “We’re thankful that we have not jumped into non-QM so quickly, and for the foreseeable future, we still don’t have any imminent plans to enter this space.”
Tapping that equity
Some lenders have taken a more aggressive approach to diversifying their offerings, going beyond traditional mortgages and betting on products such as reverse mortgages, home equity loans, and home equity lines of credit (HELOC).
Surging house prices have made home equity products an obvious choice, given the value of homes used as collateral for such loans is rising. According to Black Knight, at the end of the second quarter 2022, the average U.S. homeowner had $216,900 in tappable equity, up 5% quarter over quarter and 25% year over year.
In a traditional home equity loan, the lender disburses a lump sum upfront to the borrower, who then pays the loan back in fixed-rate installments. Meanwhile, a HELOC is a revolving line of credit that allows borrowing as needed, with a variable interest rate.
According to data provider Curinos, home equity originations reached $65 billion in volume last year, relatively flat compared to 2020. However, the product’s volume was pacing at a 49% annual growth rate between January 2022 and June 2022, compared to the same period in 2021. The data is based on 30 consortium lenders, including 20 of the top home equity originators in the U.S.
HELOC originations alone increased 41% year over year in the second quarter to 291,736, according to a recent analysis by TransUnion.
In the spring, nonbank top-10 lenders loanDepot and the real estate investment trust New Residential Investment Corp. (recently rebranded as Rithm Capital) announced plans to launch HELOC products, and Rocket Mortgage and Guaranteed Rate have also moved forward with home equity products. Meanwhile, UWM entered the space in August with standalone and piggyback options.
At Spring EQ, a home equity lender that’s increasingly going toe-to-toe with nonbank mortgage lenders in the space, demand for home equity loans continues to grow as home prices and borrowers struggle financially due to inflation, said Saket Nigam, senior vice president of capital markets. The lender’s loan rates range from 6% to 13%.
Home equity products, however, will not be a panacea to mortgage lenders’ short-term problems. “Home equity isn’t going to be the answer to the traditional mortgage volume drop, but it’s a way to at least replace some of the lost value for mortgage companies,” said Nigam.
In the case of loanDepot, president and chief executive officer Frank Martell told analysts the HELOC product will have a “modest contribution” toward the company’s goal to get back to breakeven in 2022, as “we’re launching it later in the year.” Most of the effort comes from reducing costs – the lender plans to cut 5,000 jobs.
At Finance of America, reverse mortgages have been a bright spot on an otherwise unsightly balance sheet. In total, FoA funded $4.23 billion in the traditional mortgage business in the second quarter of 2022, down 17% quarter over quarter and 39% year over year. However, reverse volume reached $1.58 billion in Q2 2022, a 7% increase compared to Q1 2022 and 56% compared to Q2 2021. The volume is a record for five consecutive quarters.
FoA has been particularly active in selling reverse, investor loans and commercial loans, products that can have higher margins in comparison to the traditional mortgage.
“If you look historically at mortgages, you know how cyclical it is. It’s boom and bust. Specialty products will be a bit steadier in their contribution to earnings. What’s going to be volatile is traditional mortgages,” Patti Cook, FoA’s former CEO, told HousingWire before stepping down as CEO in late June.
The company’s executives in August said they expect that the home improvement product, launched in May 2021, will break even financially later this summer, becoming a “very effective customer acquisition channel at essentially zero cost,” according to Graham Fleming, president and interim CEO.
Regarding FoA’s next bet, Cook said: “I would bet we could come out with a personal loan in 2022,” she said.
Moving beyond mortgage
Despite the relative risk, mortgage companies increasingly launching unsecured personal loans, which have traditionally been the domain of depository lenders, and more recently, startups like SoFi.
In July, Chicago-based Guaranteed Rate announced it had rolled out its first personal loan product. Customers can apply for a personal loan in 10 minutes and receive funds between $4,000 and $50,000 within hours. Standard fixed rate loans range from 5.74% APR and 19.99% APR.
“Personal loans are a really smart way for customers to reduce the cost of high-interest credit card debt or to help finance unexpected purchases,” said Anand Cavale, executive vice president and head of unsecured lending product at Guaranteed Rate, in a statement.
The introduction of a personal loan reflects the company’s strategy to develop end-to-end digital solutions to serve customers across various financial products beyond mortgages. But the product could also be a good source of mortgage leads down the road.
Guaranteed Rate’s diversified strategy appears to follow the Rocket Companies roadmap. The Detroit giant now offers closed-end home equity loans, solar panels installation, title insurance, real estate brokerage, auto loans and credit cards.
Its executives would prefer that mortgage – a cyclical, often volatile business – be just one spoke in a financial services wheel.
The second quarter makes that clear enough: Rocket originated $34.5 billion in mortgages, down from the $53.8 billion volume produced in the first quarter. The company reported a $60 million profit in the second quarter, down from $1 billion just the previous quarter. Much of the talk during the second quarter earnings call involved the rest of the Rocket product constellation.
Rocket plans to win new clients via Rocket Money (formerly known as TrueBill), the app it acquired in December for $1.275 billion, which surpassed 2 million paying premium members in the second quarter.
Despite its diversification, Rocket, for now, is largely a mortgage company. Mortgage represented more than 85% of its net revenue in the second quarter.
“2022 is playing out worse than expected and the second half of the year will be clearly tougher than the first for mortgage companies,” a team of mortgage analysts at Wedbush Securities wrote in a report. “We are looking past this year and towards what this company (Rocket) is going to do with its four million-plus active customers (Truebill and Servicing) over time.”
Time and training
Executives also noted that during the refi boom in 2020 and 2021, it was difficult for mortgage lenders to capture loan officers’ attention to sell additional products because they were making gobs of money with refi applications and straightforward purchase loans.
“We spend a lot of effort on training internal loan officers and our brokers to educate about products,” Cook said.
Whether loan officers will embrace the new products or lenders will have sufficiently worked out the operational kinks in time remains unclear, especially with fewer processors, underwriters, funders and closers in place. It takes time.
“You can’t just throw something out there and expect people to just through osmosis to pick it up,” said Shoemaker.
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