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Update: Blend Labs, Guild Mortgage and United Wholesale Mortgage

This is a syndicated repost published with the permission of The Institutional Risk Analyst. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

November 12, 2021 | In this Premium Service installment of The Institutional Risk Analyst, we update readers on several new entrants into the world of public mortgage companies and related vendors. Suffice to say that the shrinkage in lending volumes is not being kind to any of the inhabitants of the mortgage ecosystem, including lenders such as United Wholesale Mortgage (UWMC) and Guild Holdings (GHLD), or the mortgage tech lead gen player Blend Labs (BLND). As we’ve said several times in our column for National Mortgage News, winter has arrived in mortgage land. Or to paraphrase our friend and fellow mortgage maven Rob Chrisman, ponder a 2022 lending market that’s 75% purchase mortgages and just 4.79 million units vs ~ 10 million new loans in 2020. Hmm?

Blend Labs Inc.

Earlier this year, we wrote critically about BLND (“Profile: Blend Labs, Inc (“BLND”), a startup that promised to change the way that loans are sourced and originated. “The S-1 filed with the SEC includes a great deal of hopeful fluff about “data-driven journeys from application to close.” The document has all of the right words. But what does BLND actually do to earn money? And is it really worth 10x book value in an IPO?” we asked back in June. No, is the answer, not even close. The chart below shows BLND at the close yesterday.

Source: Google

This week, BLND reported results and the bottom line was exploding operating expenses and a $76 million net loss. More to the point, just imagine how the results for BLND would look w/o the addition of Title365, which was acquired just prior to the IPO? As readers of The IRA will recall, the purchase of Title365 for 4x book value, a ridiculous and unreasonable valuation, was apparently meant to window dress the weak revenue of BLND’s lead generation business.

Source: BLND Q3 2021

Now 90 days later, we can see that the addition of the title insurer has not really changed the overall complexion of BLND, which remains a company in search of a business model. Generating leads and completing loan applications forms is the easy part of the lending process. Income verification as a business? Please. We are still waiting for folks at BLND to articulate a real value proposition for this expensive learning process. Meanwhile, the folks at industry leader Black Knight (BKI) are probably rolling on the floor. Don’t hold your breath waiting for BKI or Intercontinental Exchange (ICE), owner of Encompass, to take the shareholders of BLND out of their misery.

And remember that as volumes fall, title insurers are forced to pair back expenses to survive – one reason why the folks at Mr. Cooper (COOP) were smart to sell Title365 at the top of the cycle. But if you are largely ignorant about the mortgage industry, then you would not know that title insurance is not really insurance at all – just an expensive service that does not scale with volume. Of note, BLND raised full year 2021 revenue guidance midpoint by $13 million, but that still leaves the company bleeding cash as expenses grow faster than revenue.

United Wholesale Mortgage

Moving on, UWMB reported decent earnings in Q3 2021, although the lack of clarity on the earnings release date was a bit unnerving. UWMC managed to push volumes up to $63 billion, but on declining gain-on-sale (GOS) margins. Close your eyes and imagine how this chart will look in Q3 2022.

Source: UWMC Q3 2021

Of interest, UWMC has anticipated the key question going into Q4 2021 and 2022, namely the cost per loan. Loans in the wholesale channel are the least costly way of acquiring assets after the call center. Retail loans are the most expensive. UWMC is the largest wholesale lender in the US, which basically means that they buy “warm” leads from mortgage brokers. But as we end the year and go into 2022, the cost per loan is likely to rise if CEO Matt Ishiba’s comments about moving to purchase mortgages is to be taken at face value.

Source: UWMC Q3 2021

The net results for UWMC tell the tale in terms of the future. Adjusted EBITDA was $290 million in Q3 2021 vs $210 million in Q2 2021 and $1.4 billion in Q3 2021, an 80% drop in operating cash flow compared to last year.

Source: UWMC Q3 2021

As the wholesale channel disappears in what is likely going to be a rising interest rate environment, we worry that UWMC may be forced to retrench significantly. It’s one thing to talk about growing expensive retail lending capacity in an up market, but doing so in a declining volume market is just not possible short of divine intervention. UWMC is locked in a death battle with #2 wholesale player Rocket Companies (RKT), which we profiled earlier this week. RKT is more efficient, more aggressive and has far deeper pockets than does UWMC.

Guild Mortgage

Moving from the ridiculous to the sublime, we lastly focus on GHLD, one of the leading purchase mortgage lenders in the US alongside Caliber, now the NewRez unit of New Residential Investments (NRZ) and Freedom Mortgage.

GHLD net revenue totaled $413 million compared to $564 million in 3Q20, illustrating the stability of the purchase model. Adjusted EBITDA totaled $108 million compared to $267 million in 3Q20, a 60% decline and, again, reflecting changing market conditions in the secondary market for residential loans. EBITDA was $108 million in Q3 2021 vs $267 million in Q3 2020. Notice in the chart below, however, that GHLD is steadily building share in purchase loans.

Source: GHLD Q3 2021

The big difference between GHLD and UWMC is that the former is accustomed to managing the ebb and flow of purchase mortgage activity given the movement of interest rates. Yes, profits will become more challenging for all lenders as 2022 proceeds, especially if the FOMC is forced to accelerate a change in policy to combat inflation.

But moving into purchase mortgages from a strong base in wholesale and call center channels, both for RKT and UWMC, will be a difficult process. Retail lending is about loan officers who have relationships with realtors, a fact in the market that has yet to be changed due to the advent of smart phones and the internet. The recent announcement by RKT of a partnership with (CRM) to drive purchase mortgage volume is notable but as yet entirely untested. Notice the market leading GOS margin reported by GHLD.

Source: GHLD Q3 2021

As GHLD notes in its Q3 2021 presentation: “More stable origination volume, more consistent margins, and increased stability through interest rate and refinance cycles.” That just about says it all. As we move into year-end, look for the stronger players in purchase lending to become islands of stability, while lenders that have prospered during the extraordinary period of low interest rates and refinance volumes to retreat.

As we’ve noted many times in The IRA, when the FOMC pulls home sales from tomorrow into today using low interest rates, eventually tomorrow ends up being a little light. The total number of originated 1-4 family loans increased by 5.3 million or 67% between 2019 and 2020. Refinance loans grew 150% from 3.4 million to just over 5 million loans in 2020, according to the FFIEC. Home purchase lending increased just 6.7% from 4.5 million to about $4.8 million.

To put the case very directly, the US lending community did almost 10 million purchase and refinance loans in 2020. So, if we are going to do less than 5 million loans in 2020, what does that imply for issuers that have not been strong historically in the purchase market? What does it imply for vendors such as BKI and BLND?

As we’ve been taught over and over again, residential mortgage lending is a cyclical business that is entirely correlated to interest rates. When rates rise, the wholesale channel disappears and only the best managed purchase mortgage lenders with the strongest relationships and servicing books will survive.


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