By Brent Nyitray, CFA – Dec 25, 2022 at 7:55AM
Mortgage companies are highly unpopular, but is sentiment too negative in the case of this stock?
The past year was extraordinarily difficult for companies in the mortgage space. The Fed aggressively hiked interest rates to help get inflation back under control, which translated into rapidly rising mortgage rates. To make matters worse, high home price appreciation in the aftermath of the pandemic created an affordability crisis for homebuyers, especially first-time buyers.
The stock for mortgage originators has been under selling pressure the entire year, but it appears mortgage rates might have peaked and may be beginning to fall. Here is what this rate reversal means for UWM Holdings (UWMC -5.32%).
Mortgage companies have different business models
UWM is the parent company of United Wholesale, which is the biggest mortgage broker in the United States. A mortgage broker is a bit different from a traditional mortgage lender, so it makes sense to take a second to understand the different business models.
The most common mortgage-origination business model is the retail mortgage originator. The mortgage banker assembles and funds the loan and either holds it or sells it to another mortgage banker. This is the model that Rocket Companies (RKT -1.88%) uses.
The second model is the correspondent model, where the bank buys completed mortgages from retail lenders. This is the model that PennyMac Financial Services (PFSI 1.45%) uses.
“Brokers are better”
UWM goes down a third path, using something called the wholesale model where the company works with mortgage brokers that source loans for the company as independent agents. United Wholesale believes “brokers are better” and that this model is best for the borrower. The broker isn’t obligated to work for a single lender, so it can find the right product from the right wholesaler for the client. These brokers tend to have a network of real estate agents, which is how they get their leads.
UWM has an army of brokers who are close to the home purchase market, which should be the dominant source of mortgage business in the near future. Companies like Rocket feasted on easy refinancing business during the pandemic when interest rates were extremely low. But now that rates have risen, there is little incentive for borrowers to refinance, as nobody is going to trade a 3.5% mortgage rate for a 6.5% rate. This means the mortgage business will be dominated by lenders who are in the best place to capture home-purchase loans.
Mortgage rates are peaking
The rapid rise in mortgage rates seems to have hit its peak, and it appears rates are beginning to fall. This will go a long way toward addressing the affordability issue.