In May, the Federal Reserve hiked the federal funds rate a quarter of a point to a range of 5.0% to 5.25%. This marks the 10th increase in a little over a year and rates have now reached their highest point since August 2007.
This undoubtedly presents razor-thin margins for individuals and families who are trying to find ways to buy a home. Options available to home buyers are essential, and yet, entities in the mortgage industry have reprehensibly dug their heels in to block choice in the market. Specifically, United Wholesale Mortgage (UWM) has kept up with what has been called “bizarre” and “anti-competitive” behavior by prohibiting contracting with any broker or bank that also worked with either of UWM’s main competitors.
While this ongoing saga is daunting for the consumer market and retail investors, it is also apparent that obfuscation in the mortgage industry can sadly come in many forms. While the inflated rates paid by the end-user have made regular headlines, the intricacies of consolidation among heavy weights in the industry also need to be heavily scrutinized.
Take for example the recent lawsuit by shareholders of Gores Holding IV surrounding a $16 billion merger with UWM. In this suit, top leadership of Gores are accused of putting their own financial interests ahead of shareholders when they pursued the UWM deal.
Here’s where it gets interesting, the deal hinged upon inflated financial projections provided by UWM, ultimately leading dealmakers to potentially mislead public investors like us about how the takeover plan would dilute the cash value of their stock.
The disingenuous nature of the deal with Gores is underscored by a variety of factors. First, the special purpose acquisition company (SPAC) used to complete the deal was under obligation to do so in a tight timeframe. If they were unable to finalize the merger in time, then the founders’ shares would become worthless, and the investment would be liquidated to pay back its investors. The lawsuit thus describes the "perverse incentive" to get the deal done irrespective of the best interests of all public stockholders.
Second, UWM’s selective projections uniquely focused on a market landscape when interest rates were historically low. As such, UWM’s negligence is demonstrated by ignoring a predictable rise in interest rates and ensuing decline of consumer activity.
Overall, the parameters around UWM’s business dealings are worth scrutinizing at every turn. In fact, UWM has leveraged a valuation of $16 billion in order throw its weight around the industry with anti-competitive behavior and high-profile acquisitions. Yet at the same time, this leveraged value has tremendously eroded as UWM has recently sold off more than $55 billion worth of loans.
The sale of these mortgage servicing rights (MSRs) isn’t uncommon in the industry, but UWM’s interest in quickly boosting its current fiscal position does prompt scrutiny. Specifically, these mortgage servicing rights (following the $55 billion sale) will no longer be held for their full terms of agreement. In other words, UWM is seeking an immediate lump sum infusion NOW and is sacrificing what would be a more substantial and steady income stream over a longer period.
Furthermore, in UWM’s first quarter report for 2023, the fair value of the company’s MSRs witnessed a dramatic write-down of $337.3 million, in large part due to falling interest rates. This contributed to UWM’s net loss of $138.6 million for the quarter. UWM’s future projections are especially at risk considering that loan servicing income accounted for 33.4% of its total net revenue compared to just 6% in 2020. UWM’s stock price is now below $5 per share, marking a 47 percent decline in the past five years.
For UWM principal Mat Ishbia, resources and assets have also been diverted away from the mortgage business and into professional sports. In December 2022, Ishbia wiped out more of his personal wealth and UWM’s financial backstop by buying the Pheonix Suns and Phoenix Mercury for a whopping $4 billion.
The home-buying industry is uniquely consequential for millions of Americans, and because of that trust and authenticity in operations is paramount, and indirectly consequential for many retail investors. Continued trends show that UWM is lacking in that regard, and millions of consumers should be wary.