Last May, during its first quarter 2022 earnings call, Home Point Capital President and CEO Willie Newman emphasized that the company was doubling down on its commitment to the wholesale mortgage channel.
Now, 11 months later, the deteriorating economics of the industry helped to drive the company’s sale of that business to The Loan Store.
The Tucson, Arizona-based company, which like Home Point is in wholesale and non-delegated correspondent, did $302 million in volume last year, but produced $1.4 billion and $1.25 billion in the boom years of 2021 and 2020 respectively. It entered the mortgage business in 2019.
The Loan Store’s current CEO Mark Lefanowicz, who will become executive chairman after the deal is completed, is a long-time mortgage industry veteran. He served as CEO of Ethos Lending — the home lending venture of Raj Date’s Fenway Summer, which became part of One American Mortgage in 2019 — and as president and CEO of E-Loan.
Homepoint, the operating name for Home Point Capital, originated $27.7 billion in 2022, down from $96.2 billion the prior 12 month period, according to its year-end Securities and Exchange Commission filing. But the parent company lost $36.8 million in the fourth quarter of 2022.
As an industry, independent mortgage bankers lost an average of $301 per loan originated during 2022, with production expenses reaching $10,624, the highest since the Mortgage Bankers Association began tracking this data in 2008.
Meanwhile, net servicing income (including amortization and valuation gains) was $586 per loan last year, up from $261 the previous year. That is key, because — at least for now — Home Point is keeping its mortgage servicing rights portfolio of $89.3 billion with approximately 317,000 customers as of Dec. 31, 2022.
Even though Home Point is publicly traded, 92% of its equity is held by Stone Point Capital, which is also a co-owner of CoreLogic and was an investor in Roostify.
If retaining ownership of Home Point is part of Stone Point’s long-term strategy, it is possible the company could be converted into a real estate investment trust corporate structure, Bose George, an analyst with Keefe, Bruyette & Woods, said in a research note on the transaction. Home Point moved its MSR function from in-house to First American’s ServiceMac subservicing operation, making that a more realistic possibility.
“We also think that the recent actions make a potential sale of the company or of just the MSR much easier,” George wrote. “In our coverage, we think Rithm, Mr. Cooper, Two Harbors or Annaly could be potential merger partners or acquirers of blocks of MSRs.”
The industry’s operating environment will create more merger and acquisition opportunities, George said.
“In some cases, we think that this creates an opportunity to acquire good businesses at attractive valuations while also removing some excess capacity from the system,” he wrote. “As the origination market has rapidly shifted to purchase and profitability has fallen sharply, we think more lenders could look to acquire mid-sized distributed retail business.”
But Homepoint had already exited retail, and a transaction of this sort just rearranges existing capacity, not necessarily reducing it.
Homepoint’s value to The Loan Store is those approximately 9,200 broker relationships, Eric Hagen, an analyst at BTIG noted. But a percentage of those may not make the move to the acquirer and send all or part of their business to another wholesaler, including possibly the dominant player in the channel, United Wholesale Mortgage.
However, the presence of Phil Shoemaker, Homepoint’s president of originations, who will join The Loan Store as its CEO, should ease the transition for that broker base, Brandon Stein, The Loan Store’s president, noted.
“As a smaller lender, with somewhat of a national footprint, we were looking to gain a little more traction throughout the country and with more loan officers and brokers, both on the wholesale and non-delegated correspondent side,” said Stein.
So that’s what makes this an attractive marriage, he said, with Homepoint’s sales and support staff joining the people The Loan Store already has. The Loan Store has about 60 employees currently and will add around 90 to 100 from Homepoint.
Prior to the deal, The Loan Store did business in 28 states and used a national account executive model. Homepoint, on the other hand is more regionalized with its sales force and that is the model that will be used when the transaction is completed.
“We feel that we’re ready to take it to the next step as far as becoming a larger lender in the wholesale space,” said Stein. “We thought this was an outstanding opportunity for The Loan Store to propel itself into that trajectory.”
It is a large undertaking to bring on that many clients, but having Homepoint’s management team and sales staff come on board will ease the process, he continued.
“We’re very confident that once we’re able to indoctrinate them into our system and get them used to our process flow and how we run a loan from A to Z, that they will love our process and love our people and enjoy working with The Loan Store similarly as they did with Homepoint,” Stein said.
The two have similar product menus, with The Loan Store offering conforming (it is a Fannie Mae/Freddie Mac-approved seller), jumbo, non-qualified mortgage and Veterans Affairs products. It is working on getting its Federal Housing Administration approval.
“If we’re able to create a seamless process and we allow them to focus on sales, we’re very confident that their partners will want to not only send us their business, but send us repeat business as well,” Stein declared.
Investors had a muted reaction to the sale and it was shown in Home Point’s stock price, Hagan pointed out. The deal was announced on April 7, when the market was closed for Good Friday. When Home Point went public, it was priced at $13 per share. As of 11 a.m. eastern time on April 10, Home Point was trading at $2.05 per share, 2 cents lower than its April 6 close.
At that time, UWM saw its stock price go up 12 cents at $5.29, while Rocket’s was flat at $9.23, according to Yahoo Finance.
The same economic problems that led to this deal have forced others out of wholesale, most recently Impac Mortgage Holdings, which downgraded to being a broker.
“It is a challenge across the industry for the ones that are under-scaled and struggling with liquidity, struggling with getting their leverage under control,” Hagen said. “It can be especially acute and I think that’s what happened here,” especially with the pricing wars going on among wholesalers, he added.
It’s been a tough start to the year for the mortgage industry, beginning with Wells Fargo’s decision to exit correspondent lending and reduce its servicing portfolio, Hagen said.
Fitch downgraded Home Point’s ratings to B-, saying the deal weakens the company’s “business model and franchise position. Fitch also believes the transaction introduces execution risk associated with further right sizing the expense base given the on-going revenue reduction following the asset sales.”
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