A Look into Rocket Mortgage’s Wholesale Competition, and Why They Might Have the Edge

Most people are acquainted, perhaps from their many commercials, with Rocket Mortgage. The fintech mortgage lender previously known as Quicken Loans is currently the largest retail mortgage lender in the United States. Rocket’s claim to fame has been its digitization of the mortgage filing process, such as allowing applicants to upload documents with their phone, personalizing information on available rates, and providing online chat features to reach out to professionals.   

Rocket Mortgage may be the golden child of digitizing how we get a mortgage, but it is far from the only player in the game. Competition ranges from national and local banks, to credit unions, to a variety of secondary underwriters. Of this mix, there is one company, the largest wholesale mortgage lender in the United States, and second overall only to Rocket, that appears to be particularly well equipped to take a stab over the coming years at dethroning Rocket as the top overall mortgage lender.  The company is United Wholesale Mortgage (NYSE: UWMC) and their CEO, Mat Ishbia, is on a mission to make his business the best. 

What Is A Wholesale Mortgage Lender? 

To those unacquainted with the intricacies of the residential mortgage industry, “wholesale mortgage lending” may seem like a daunting or involved practice. Simply put, wholesale lenders are those who partner with mortgage brokers—independent agencies across the country which are approached by clients looking for a mortgage—or similar 3rd parties. Under this business model, individuals looking to buy a home or refinance will visit a mortgage broker in their local area. This mortgage broker will then connect their clients with a range of potential wholesale mortgage lenders. Once the desired lender is selected, perhaps because they offer the lowest rate, have the fastest closing time, or are simply recommended by the broker, the wholesale lender underwrites the mortgage and lends the funds to the broker’s client. 

A key difference between this model and the retail mortgage lending model—that in which individual lenders work directly with borrowers—is that the actual lender does not work directly with the borrower. Instead, the 3rd party mortgage brokers serve as a sort of “middle man” between the two parties and seek to make the process as convenient and understandable as possible for the borrower. Today, the mortgage broker channel accounts for about 20% of the US residential mortgage industry. This is down from the 25-30% market share that broker controlled prior to the 2008 housing market crash, but the broker channel has significantly rebounded from its less than 10% market share experienced in 2011 during the heat of the great recession. Rocket Mortgage markets itself as a retail lender able to make their process the most convenient, but they actually work as both a retail and wholesale mortgage lender. United Wholesale Mortgage (UWM), however, is the largest wholesale lender, partnering with well over ten-thousand independent mortgage broker businesses across the country.   

Why Use A Mortgage Broker?

It may certainly seem old fashioned and unnecessary to work with a 3rd party broker to get your mortgage, but the broker channel has managed to grow market share and remain very relevant in the past decade. Brokers and analysts account this success to a number of factors:

 1.     A mortgage is a very complicated financial instrument, and it is genuinely helpful and comforting to many people to have a mortgage expert they can see, speak with, and receive personalized guidance from. Even if you are familiar with the mortgage process, working with a seasoned profession actively in the industry can save significant time and reduce the overall stress of the borrowing process. 

2.     Mortgage brokers provide borrowers with increased optionality in their mortgage decision through the nature of their partnerships. Much of the broker channel’s strength is derived from strong competition among wholesale lenders, as this provides brokers with multiple quality potential lenders to share and discuss with their clients.  

3.     Often, working with a mortgage broker is actually cheaper than many alternatives. Because of the independence of mortgage brokers, most wholesale lenders experiences significantly lower fixed costs and marketing expenses than retail lenders. These savings are passed onto the consumers. The nature of mortgage brokers working with multiple wholesale lenders also breeds very strong compression between these enders, further contributing to lower prices for the consumer. Even after considering all miscellanies fees (origination fees, underwriting fees, servicing fees, etc.), cost of a wholesale lender’s mortgage is usually lower than that of a retail lender.  

Of course, many of these benefits rely on the assumption that your broker has your best interests at heart and isn’t trying to coax you into paying excessive fees for their assistance. Fortunately, the nature of the relationship between brokers and wholesale lenders allows these lenders to monitor their partners regularly to ensure they are preserving the integrity of the broker channel, therefore contributing to both parties’ long-term success. 

 What Makes UWM Stand Out?

As the largest wholesale mortgage lender, UWM wields significant control over the broker channel. In March of 2021, the company issued what has been described as an “ultimatum” to its mortgage broker partners stating that UWM will not do business with them if they continue to also work as a broker partner with Rocket Mortgage. According to Mat Ishbia, CEO of United Wholesale Mortgage, less than 5% of the company’s broker partners announced they would stop doing business with UWM in favor of Rocket, a development Mr. Ishbia was very pleased with and called an indicator that “brokers are all in.” Mr. Ishbia has given guidance that he expects the mortgage broker channel’s market share of residential mortgages to rise from 20% to about 35% within 4-5 years, and he also expects UWM’s share of that market to rise from 33% today to about 50% over the same time frame. 

UWM has also invested heavily in itself and its partners to optimize its operations and reduce end costs for consumers. Examples of this include internal company dashboards used to monitor day-to-day broker market surveillances, as well as services for consumers to easily track the progression of their mortgage through the underwriting and origination process. The company has also created websites to raise awareness to the benefits of using a mortgage brokers (findamortgagebroker.com) and to encourage others to become mortgage brokers (beamortgagebroker.com), thereby strengthening the foundations of its business model. These investments have appeared to be very fruitful. According to 2021 investor presentation materials, UWM’s average close time on a mortgage is 17 days, while the overall mortgage industry averages 47 days. Additionally, UWM is able to consistently offer competitive rates, while simultaneously reporting higher margin gains by about 33 basis points when compared to Rocket’s mortgage broker operations.

Since going public via a SPAC in January of 2021, the largest merger of its kind at the time, UWM’s stock has received a less than optimal reception. Much of this can be attributed to rising interest rates, resulting in significantly less refinancing business, as well as a rising weariness of SPACs in general. These broader concerns do not appear to present any long-term threat to the company’s profitability or its ability to grow. Currently trading around $9.00 with a $0.10/share quarterly dividend (~4.40% annual return), the stock presents itself as an intriguing value play, as anticipated 2021 net income suggests the company is trading at a PE ratio between 10 and 11. If Mr. Ishbia and the UWM team are able to achieve their goal of becoming the #1 overall mortgage lender within 5 years, this stock could easily exceed $30.00/share within that time. 

Watch out, Rocket Mortgage, United Wholesale Mortgage is on a mission.  

Bibliography

Jasinski, Nicholas, and Shaina Mishkin. “The Biggest SPAC Deal Ever Was Just Announced. It's With a $16B Wholesale Mortgage Lender.” United Wholesale Mortgage to Go Public, Valued at $16 Billion, Barrons, 23 Sept. 2020, www.barrons.com/articles/united-wholesale-mortgage-to-go-public-valued-at-16-billion-51600887661

Mortgage Brokers' Share of Conventional Conforming Loans Up, www.corelogic.com/blog/2019/11/mortgage-brokers-share-of-conventional-conforming-loans-up.aspx 

“SEC Filings.” United Wholesale Mortgage - Financials - SEC Filings, investors.uwm.com/financials/sec-filings/default.aspx 

UWM Holding Corp. “EX-99.1 (Analyst Day Presentation).” EX-99.1, www.sec.gov/Archives/edgar/data/0001783398/000119312520296072/d72619dex991.htm

“UWM Holdings Corporation Announces UWM's Record Fourth Quarter and Full Year 2020 Results; $1.37 Billion 4Q20 Net Income and Declares First Regular Quarterly Dividend of $0.10 per Share.” Business Wire, 3 Feb. 2021, www.businesswire.com/news/home/20210203005942/en/UWM-Holdings-Corporation-Announces-UWM%E2%80%99s-Record-Fourth-Quarter-and-Full-Year-2020-Results-1.37-Billion-4Q20-Net-Income-and-Declares-First-Regular-Quarterly-Dividend-of-0.10-per-share

TylerTheTyler_. “United Wholesale Mortgage Says Its Crosstown War with Quicken Loans Is Paying Off.” CNBC, CNBC, 25 Mar. 2021, www.cnbc.com/2021/03/24/uwm-ceo-says-fight-with-quicken-loans-is-paying-off.html