UWM touts aggressive pricing promotion as key to future

An aggressive pricing strategy at United Wholesale Mortgage will sharply drive down gain on sale margins in the current quarter and possibly longer, but management is thinking more about the long-term business this should bring.

Even without Game On, the latest pricing promotion's effect on future revenue, second quarter net earnings at parent UWM Holdings dropped 53% from the previous quarter, but were up more than 55% from one year prior.

While originations shrunk to $29.9 billion in the most recent period from $38.8 billion three months prior and $59.2 billion in previous year, gain on sale margins remained at 99 basis points for the second consecutive quarter and were 18 bps higher than the 81 bps recorded in last year's second quarter. UWM, parent of United Wholesale Mortgage, reported net income of $215.4 million in the second quarter, versus $453.3 million in the first quarter and $138.7 million in the second quarter of 2021.

Given that the first half performance was above UWM's full year guidance of between 75 and 90 bps, the extra margin provided cushion that allowed it to further drop pricing by between 50 and 100 basis points in the Game On promotion announced in June, Mat Ishbia, chairman and CEO, said on the second quarter earnings call.

As a result, UWM's margins will come in at between 30 and 60 bps in the third quarter.

"But the reality is [I'm] not really focused on the margins for this quarter," Ishbia said. "It's an investment for the long term, strategically building the broker channel, our market share will follow, it will grow as well."

Given the success that UWM has seen so far with the Game On promotion in terms of response from current brokers as well as retail loan officers considering a shift to wholesale, it is possible it will be extended past the third quarter.

Ishbia reiterated past comments that UWM controls the margins and others follow.

"It puts them on their heels a little bit, so they all lower the rates, which helps all brokers once again, all part of the strategy," Ishbia said. "But no one can get to the level that we're at right now because when honestly their costs are too high."

That swipe at the competition did not go unnoticed.

"We see the aggressive pricing as a somewhat deliberate move to undercut the wholesale growth prospects at Rocket, whose originations were more than 40% concentrated in broker last year," said BTIG Analyst Eric Hagen in a report. "We see it weighing more meaningfully on stocks like Home Point and Finance of America, which have leaned in heavier to wholesale as a share of overall production."

UWM and Rocket in particular have been in a pitched battle for mortgage-broker market share.

In addition to being a vehicle to this end, Game On is also a growth strategy where Ishbia said he has more comfort in the positive results versus the possibility of an acquisition. He added that he did not rule out buying another company on the call.

Game On is designed to help UWM boost loan officer engagement, which is key for its growth in the current environment. The company's purchase volume ended the quarter at $22.4 billion, a 17% increase compared with $19.1 billion in the first quarter, although a 7% decrease compared to $24.1 billion the prior year.

UWM's servicing portfolio increased to $308.1 billion at June 30, from $260.5 billion one year prior, even with the company's sale of $73 billion of rights in the past six months to help with liquidity. 

Ishbia noted that the company has various sources of liquidity including unencumbered credit lines supported by mortgage servicing rights. 

For the third quarter, UWM expects to produce between $23 billion and $28 billion in originations with gain on sale margin in the 30 to 60 basis-point range.

Ishbia started the call with a moment of silence for Tim Forrester, UWM's chief financial officer. Forrester took a leave of absence for health reasons on June 16, and passed away on July 10 following a battle with cancer.