Things are heating up in housing and the mortgage industry, but probably not how you think. The spin machine is out there working double-time on narrative-weaving, with big guns blazing across various media outlets. Their target? The mortgage industry’s 2023 largest nonbank player, United Wholesale Mortgage ($UWMC), known as UW or U-Dub in the industry.
- Inside Mortgage Finance
The reports range from one published by a brand-new media group, Hunterbrook Media, theoretically powered by journalists affiliated with an investment arm who is making market bets, to a feature from a more established media outlet, ESPN. For avid readers, I believe this is a continuation of a bloody battle against the nonbanks that escalated in the Fall (remember Mr. Cooper, the VA moratorium and allegations of improperly handling loans?). The battle is complicated but is born from the fallout after the GFC when large banks stepped back from mortgage lending due to the onerous requirements of the supplementary leverage ratio (SLR) and Basel III. As the banks stepped back, the nonbanks stepped right up to the plate with little, real experience in the maze which is agency lending and servicing. You may recall in 2020, that the SLR was suspended to “ease strains in the Treasury market resulting from the coronavirus and increase banking organizations' ability to provide credit to households and businesses." The Fed knew if it wanted Jamie D. to play this would have to be so. That suspension expired in 2021. In many ways the recent performance by the top bank executives before Congress, maligning even stricter capital requirements after the 2023 banking crisis, was just a continuation of this moaning and complaining.
The banks recently took out ads, including one during a NFL game last fall, to wage war against these increased capital requirements:
Like nearly 20 million other Americans last Sunday, Aaron Klein was watching the Buffalo Bills go down against the Cincinnati Bengals. He was only half listening during a commercial break, checking his fantasy football scores, when an ominous voice broke from the usual pitches for beer or pickup trucks: “But now the Federal Reserve wants to impose unnecessary capital rules.”
The gist of the marketing campaign was that these new capital requirements would make it more expensive for our Forgotten American to obtain a mortgage. The fact is that the nonbanks have been increasing market share significantly since 2012 and do the majority of lending, until very recently.
In 2020 for instance, nonbanks accounted for 68.1%, or more than two-thirds of mortgage production. As mortgage origination has plummeted from its COVID highs, so has nonbank market share. Unlike the banks who can fall back on deposits, nonbanks have to use financing and large warehouse lines to fund origination, which got very tricky for many during COVID as they were also advancing funds to investors for loans that were on forbearance. Those large warehouse lines continue to be tricky now due to the increased cost of funds in a thin margin business as a result of higher rates. According to S&P, nonbanks accounted for 60.7% of mortgage origination in 2021 and 50.9% in 2022.
I could write a book on this topic, but suffice it to say, that I believe the banks and the powers-that-be want all of this to come back to the big banks, or G-SIBs (globally systemic important banks). The only way this will happen though is to tar and feather the nonbanks appropriately so that Jamie D. gets his pass and the politicians have an appropriate bad guy for the shenanigans in the housing market. In many ways, this is just the Obama playbook 2.0. It is likely there will be some performance of law and order, similar to the National Assocation of Realtors (NAR) suit and recently announced, resurrected DOJ investigation, for both the nonbanks and perhaps the institutional landlords (more to come on this topic very soon) as a way to provide protection for our politicians as they deal with distressed calls on affordable housing and evictions, while ultimately still leaving consumers out in the cold.
Although all of this may seem far outside the scope for someone making a decision to buy a home, someone currently in a home, someone thinking of selling a home, or investors managing properties, I assure you it is not. What happens here very much matters to not only your home price appreciation, but also to future purchases, the kind of financing you might be able to obtain and whether it will be to your benefit or detriment, as well as who you will have to deal with when you make your payments every month. Based on recent signals and back-pedaling by our Federal Reserve Chair, it certainly seems as if the banks will get their way.
Further evidence of this “pivot” could be found in the recently released stress test scenarios. Following the financial crisis, the banks are subject to stress tests where adverse conditions are provided by the regulators, and the banks have to model their results. These results determine capital requirements. I remember the very first days of these stress tests and what a cluster they absolutely were, one of the many reasons during that time that we never left the office. Ally Bank (formerly GMAC), my company, failed its first stress tests miserably. After a few bumpy years, everyone learned how to pass the test. Recently released stress test conditions include a new adverse “exploratory analysis,” but the Fed was careful to state it would not impact capital requirements:
The stress test for 2024 will also, for the first time, include an additional “exploratory analysis” of the banking system, which includes four separate hypothetical elements. Two of the hypothetical elements include funding stresses that cause a rapid repricing of a large proportion of deposits at large banks, while the other two elements include two sets of market shocks that will be applied only to the largest and most complex banks. These shocks hypothesize the failure of five large hedge funds, each under a different set of financial market conditions. Those conditions include expectations of reduced global economic activity with a negative outlook for long-term inflation and expectations of severe recessions in the United States and other countries. As per the FED announcement, the exploratory analysis will not affect bank capital requirements (my emphasis).
So while all evidence points to the banks getting their way, Yellen is ramping up oversight of the nonbanks very publicly.
What does that mean? The additional oversight will crush the nonbanks just as they are starving for liquidity. You only need to spend five minutes at one of these places before realizing that their technology and operating environments are unstable and vulnerable to innocent mistakes as well as fraud. My current theory is that there will be very few nonbank winners after this cycle, if any. The campaign has begun in earnest.
On Tuesday, April 2 at 9 :41 a.m. EST, ESPN published an expose on the bitter rivalry between Rocket Mortgage’s co-founder and majority owner, Dan Gilbert, who also owns the Cleveland Cavaliers, and Matt Ishbia, CEO of United Wholesale Mortgage and majority owner of the Phoenix Suns:
It’s hard for me to read this article without my own bias and understanding of the two firms, but the article’s focus on differences between the two around age (Gilbert older, seemingly wiser), net worth (Gilbert richer) and Ishbia’s tactics, leave Mr. Ishbia looking much worse for wear in my opinion:
The public vitriol has been a one-sided affair, with Ishbia lobbing numerous attacks against Rocket, including in a 2020 Super Bowl commercial. Gilbert, on the other hand, has avoided the fray. Rocket executives have taken the lead on publicly countering Ishbia's remarks, questioning UWM's business tactics and calling Ishbia a "playground bully." The feud continues.
On Tuesday, April 2nd at 4:05pm, a scathing report from a new media company called Hunterbrook was published claiming that United Wholesale
In social media posts, SEC filings, and a Super Bowl ad…tells prospective homebuyers its mortgages come from brokers who are “independent.” UWM has said these brokers have “your best interest in mind” and “shop dozens of lenders” to find “the best deal” for homebuyers.
But UWM deploys an arsenal of carrots and sticks to “cultivate ‘loyalist’ brokers,” as the company put it in a presentation to investors. Their methods for squeezing brokers range from offering those who send UWM loans better placement on their Super Bowl-advertised directory to suing brokers who shop around for better deals from certain competitors.
Who is this Hunterbrook, what is their vested interest and what does this mean for the mortgage market which had its worse year last year in recent memory - much worse than the nadir of the GFC in 2014 if you look at units of origination versus dollars?
*The FRB stopped reporting loan counts as the CFPB took charge, so for 2021, 2022 and 2023 counts are derived using the average mortgage loan size from Mortgage Bankers Association.
Last year’s mortgage market was abysmal, and, evidenced by their recent results, the nonbanks are hurting. The fight is about to get bloodier as the weak are separated from the herd, and Hunterbrook knows it.
Let’s dive into the folks behind this mysterious new group, including one who sat on the same floor as me at the Wall Street Journal, and their potentially vested interests. It seems Hunterbrook will not limit themselves to just mortgage, but plan to “publish investigations and business news from across the world.” Likely this will not be the last we hear of them. Additionally, we will discuss the recent jobs report and what I saw in Huntsville which made this University of Alabama alum a bit angry and sad. Lastly, I will provide detailed Redfin sales and home price numbers for each of my 80 cities.
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