What if a real estate agent could sell a large home to someone – and then come back every other year for 40 years – and offer to let them move up into a larger, nicer home at no cost and with lower payments? And “no cost” means – no moving costs, no transaction costs, no down payment, no nothing. Homeowners just sign some documents, and magically wake up in a bigger home.
And – even better, what if that agent was able to make a full commission with every move-up?
The answer: That agent would be very busy, very rich, and very full of himself.
THAT is how the mortgage industry works.
Mortgage banks were allowed to “sell free money” for much of the 40 years from 1982 – 2022, as rates continually dropped for much of that period: “Hi Bob, would you like to refinance from 7% into 6%? You’ll save $400 per month, and I will cover all of your closing costs…”
Bob will, of course, say yes. And – it is really easy to run a business that sells free money.
AND – that is largely why so many mortgage banks have gone belly up since 2022.
All too many mortgage bank managers never learned how to compete the way most businesses do – with better service, more innovation, better marketing, better cost-cutting, etc.
Instead they just wait for rates to fall, hoping to capitalize on the next “free money” refi boom.
The mortgage industry has not had a major refi boom since COVID – and it is hurting!
And worse, most mortgage banks (JVM included) thought this year would be a banger year, as rates were clearly headed down.
Mortgage banks were so certain that rates would fall that many bet the farm and massively increased overhead to ensure they could fully exploit all the volume.
Sidebar: JVM expanded too… by hiring two people… We did not take on $20 million of extra overhead – so we are doing just fine.
But then the Iran War hit. Rates shot up 5/8% – and mortgage banks are dropping like flies.
Mortgage Banks Getting Killed!
Better Mortgage lost $1 billion since 2023, and their CEO recently “retired.”
Loan Depot’s stock famously plummeted from $31 per share to $1 per share.
I know of another prominent mortgage bank (privately held, so they will remain nameless) that had over $500 million in cash after COVID, but that has since burned through almost all of it (I hate it when that happens).
And then there is United Wholesale Mortgage (UWM)… because WOW!
To be sure, UWM did cultivate a very clever model: They offered their fully integrated tech stack to mortgage brokers for free. This allowed brokers to operate out of their living rooms in their boxer shorts – without having to set up or pay for the expensive software suite that is necessary to effectively broker.
In exchange for this, though, UWM demanded strict loyalty – telling brokers they could not use other wholesale lenders. This rubbed many brokers the wrong way, and it has caused much strife and very distracting legal battles (UWM actually sued brokers for using other lenders).
But – what nearly sank UWM recently – forcing them to get a bailout – was running out of cash.
- Bet On Failed Merger: They made a huge bet on a merger that did not go through. This cost a fortune for reasons including an irrational “hedge” against the assets of a company that UWM did not yet own.
- UWM Paid Enormous Dividends – It Could Not Afford. It had to borrow money to pay them because it lacked sufficient profits. And worse, most went to the CEO and his family.
- UWM’s CEO Bought the Phoenix Suns – Because No Prominent CEO Should Go Without an NBA Team. This resulted in accusations of self-dealing, e.g. The Suns sold “naming rights” of their stadium to UWM for a whopping $115 million. And – it turns out that running and NBA Team can be a distraction. Who knew? (Sidebar: This is why I have no plans to buy an NBA Team). (Sidebar II: UWM’s CEO has done a horrible job managing the Suns, corroborating my points above).
There is more to the story, of course, but UWM’s CEO will likely lose his job, and he has lost effective control of his company.
Mortgage Industry Prayer
He, like most mortgage bank managers, is no doubt reciting the mortgage industry prayer every night: “Please God, make rates fall 1% in the morning…”
The prayer is not entirely irrational, though, as God did provide for 40 years. God just finally decided we had enough blessings by 2022, so he shifted some of his love to AI and chip fab firms…
