Mortgage Mayhem
May 18, 2021·5 comments·In Brief
Four mortgage companies just went public, all claiming they'd escaped the industry's boom-bust cycle through scale and technology. All four are simultaneously pursuing identical market share targets in a market that just contracted by $1 trillion in capacity. All four CEOs know margins will collapse. What happens when the same growth strategy that worked at the top of the cycle becomes a zero-sum war at the bottom?
• The mortgage market just shifted from capacity shortage to capacity glut overnight. Last year the industry was under-capacity with record volumes; this year it's carrying $1 trillion in excess capacity that needs to work its way through the system. Prices are already collapsing.
• Four newly public mortgage companies all raised capital at the peak, and all are doubling down on the same bet. Rocket targets 25% market share (from 8%), United Wholesale targets 50% in its channel (from 35%), HomePoint is also growing aggressively. They can all afford it because they capitalized when the market was booming.
• Market share is zero-sum, which means this works only if three of them fail. When demand shrinks and margins compress, the only way to win is to take business from competitors. The CEOs acknowledge this openly on earnings calls, though they don't acknowledge the mathematical impossibility.
• The structural problem isn't new; it's the reason the mortgage market has always cycled brutally. Originating a loan costs $7,000 to $9,000. When demand drops, companies cut prices rather than cut capacity. Margins go from all-time highs to all-time lows. This isn't a flaw in execution; it's baked into the economics.
• The question isn't whether the cycle will happen; it's which companies will still exist when it does. Markets produce inevitable outcomes through individual rational decisions that no single actor can control. Sometimes cycles break. Usually they just keep turning.
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Comments
Great post. It is quite interesting to see how NMLS focuses massively on compliance with ethics (TILA ECOA etc) but then the mortgage companies are actually offering products loaded with discount points and at the very end pyramiding fees from underwriting (and clients take them because they must close) in short it is still an horrendous environment and not getting any better. Scams are all over. Many refin were done to pay down higher cost debt (credit cards etc). Also note the relaxing of definition of qualified mortgages… because memory is short.
$7,000 - $9,000 to originate a loan? Must be very high fees. Reminds me of the scene in The Big Short where Mark Baum was talking to the mortgage brokers in Florida and goes to the strip club. You see why there is a lot of fraud when no one has any skin in the game.
I guess let them compete away. I didn’t buy any of their IPOs.
I really enjoy Marc’s notes and I hope he continues to be a contributor here.
Me, too!
Enjoyed the article as well having been a resi warehouse lender heading into 2007. We are seeing many of the same themes around unchecked growth in non-regulated commercial lenders as well. It accelerates the loosening of credit standards and creates a race to the bottom in pricing.
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