UWM Shows Why Its Business Model Works in the Current Environment

 UWM Shows Why Its Business Model Works in the Current Environment

Things may be looking up for the mortgage business at long last. The Federal Reserve seems to be wrapping up its tightening cycle, which could pave the way for lower mortgage rates going forward. The mortgage origination business has struggled for the past 18 months, as rising interest rates choked off refinancing activity, and affordability problems negatively affected the home purchase market.

That said, one mortgage company is bucking the trend: UWM (NYSE: UWMC) the parent company for United Wholesale, the biggest mortgage broker in the U.S. What is this company doing differently?There are three basic business models for mortgage companies. The most common is retail, where the company employs loan officers or uses technology to find the borrower, and then assembles the loan. This is the model that Rocket uses.

 This has the highest margins, but the investment in technology or loan officer commissions can be sizable.The second model is correspondent, where the mortgage company buys completed loans from a smaller lender and flips them into the market. This is the model that Mr. Cooper uses. The advantage is that it can do a lot of business; however, the downside is that margins can be thin. We have seen a lot of correspondent lenders exit the origination business over the past couple of years.

Finally, there is the broker model, which is what UWM uses. In this model, the mortgage company has a relationship with mortgage brokers, who are free agents and can point the borrower to whatever company gives the best deal. The broker assembles the basic documents and sends the partially completed file to the mortgage company, who funds the loan. The biggest difference between the different models is that the broker is a free agent, and the mortgage company's "customer" is the broker. 

The mortgage business is dominated by purchase activity

As interest rates increased, the incentive for borrowers to refinance their home has largely disappeared. This means that the vast majority of the loans out there are purchase loans.While technology has been able to automate a lot of the mortgage process, home purchases are still largely a face-to-face business, where relationships with professionals like real estate agents or title and closing attorneys is crucial. Referrals are critical, and this is where companies that rely on technology to source loans struggle. 

UWM is growing while others are shrinking and exiting

In the second quarter of 2023, UWM originated $31.8 billion worth of loans, an increase of 6.3% year over year. This is astounding. In comparison, crosstown rival Rocket's volume decreased 35% compared to the same period last year. Purchase activity accounted for 88% of total volume. 

The broker model is better suited for the purchase environment than a technology-driven consumer-direct model like Rocket's. One of the historical knocks on the broker business has been the lack of transparency from the mortgage company. With UWM, the broker has visibility into the loan's status at all times, which makes for happier borrowers and real estate agents. 

Mortgage companies are extremely cyclical businesses

UWM reported adjusted earnings per share of $0.11 in the most recent quartrer, which was up 10% compared to a year ago. There is a highly seasonal aspect to mortgage banking, so looking at quarter-over-quarter changes doesn't tell the investor much.UWM is expected to earn $0.17 this year and $0.36 next year. This puts the company at a price-to-earnings ratio of 18.4 times 2024 earnings. Mortgage origination is highly cyclical, so it is normal to see high multiples during trough periods and super-low multiples during boom times. 

The adjusted earnings per share number did cover the quarterly dividend of $0.10, but it covered it barely. Based on expected numbers next year, the dividend will not be covered. Most mortgage companies don't pay dividends in the first place, so UWM's 5.9% dividend yield sticks out.It is hard to get excited about the mortgage space until we get an "all-clear" signal out of the Fed, but UWM looks to be the best of the bunch these days. 

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In today's rapidly changing business environment, adaptability is the key to success. United Wholesale Mortgage (UWM) has not only embraced this principle, but has demonstrated why its business model is thriving in the current environment. With an intense focus on innovation, client-centric solutions and staying ahead of industry trends, UWM has solidified its position as a leader in the mortgage industry.

Innovative mortgage solutions for modern needs

UWM's business model is built on the foundations of innovation. The company is constantly investing in cutting-edge technologies that allow them to streamline processes, improve customer experience and stay competitive. At a time when digital transformation is imperative, UWM's commitment to staying at the forefront of mortgage technology ensures they can meet the unique needs of today's borrowers.

Unrivaled customer-oriented approach

One of the key reasons for the success of UWM's business model is its unwavering commitment to its clients. In a world where personal experience matters more than ever, UWM understands that every borrower is unique. The company's customer-oriented approach ensures that borrowers receive a tailored solution, quick response and a smooth mortgage process.

Navigating regulatory challenges

The mortgage industry is no stranger to regulatory change and it is imperative that it remains compliant. UWM has demonstrated its ability to navigate complex regulatory environments and demonstrated its commitment to ethical business practices and sound credit standards. This commitment not only ensures UWM's longevity, but also builds trust with its partners and borrowers.

Adaptability in a dynamic market

The mortgage market can be volatile, but UWM's business model thrives on adaptability. The company's ability to pivot, adjust strategies and identify new trends has allowed them to stay on top. Whether it's changes in interest rates, fluctuations in the housing market or shifts in borrower preferences, UWM's adaptability is a cornerstone of its continued success.

WM market adaptability

In a business environment where resilience and agility are essential, UWM has proven that its business model not only works, but excels. With a focus on innovation, customer satisfaction, compliance and adaptability, UWM is a prime example of a company that understands the demands of the modern marketplace. As the mortgage industry continues to evolve, UWM's proactive approach ensures it remains a formidable force and a trusted partner to borrowers and industry professionals alike.