Portfolio Update & Mortgage Survivors
- May 8, 2024
- 6 min read
Updated: 2 days ago
May 8, 2024 | Premium Service | A year ago, we told our readers that things are changing in the world of nonbank finance. Yet there are still a number of firms in mortgage and specialty finance that are unprofitable and do not seem to be in any particular hurry to fix this situation. Below we provide updates on our portfolio as well as our view of mortgage finance on the back end of Q1 2024 earnings season.
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One name we hear about a lot from readers in the mortgage verse is Blend Labs (BLND), the techno mortgage lender that promises to change the world. After a capital raise and persistent speculation about rate cuts, BLND delivered triple-digit equity returns over the past 12 months, Bloomberg reports, for the lucky few that held the stock. But like many of the aspirational nouvelle finance/tech stories that came out of the COVID pandemic, the LT performance of BLND is not impressive. BLND is down almost 20% in the past month but has destroyed almost 90% of its value over the past five years.
Source: Google Finance
Like many aspirational assets, BLND is eating cash, but not as much cash as it was a year ago. The BLND mantra was to change the world in banking and mortgage lending via process improvements, but now with lending volumes at 25% of peak 2020-2021 levels, this opportunity is less attractive. As we discuss below, the LT wave in mortgage lending is actually servicing existing assets and aggressively defending the mortgage servicing right (MSR) asset via efficient CRM and loan recapture efforts. The chart below comes from BLND's most recent earnings announcement.
After several bracing conversations at the BTIG Mortgage conference in NYC this week, we decided to make some changes to the portfolio. We have reluctantly exited Guild Holdings (GHLD) because we cannot see how retaining the retail network and, indeed, acquiring more retail capacity does anything but delay the inevitable. Even BLND has taken the proverbial ax to operating expenses. We think that GHLD, well run as they are, needs to take notice of the business model changes already evident in mortgage lending. LOs are becoming self-employed brokers while hourly call center employees grow in number.
Why are these changes significant? First and foremost, the great conundrum over loan officer compensation is being solved by the Fed's high interest rate policies. Retail branches have largely disappeared at Freedom Mortgage, Caliber, Flagstar, etc. due to cost. Hyper-efficient lenders/aggregators such as Mr. Cooper (COOP), Freedom, Rocket Mortgage (RKT), United Wholesale (UWMC), Planet Home, PennyMac Financial (PFSI) and Rithm Capital (RITM) have embraced change.
The survivors in mortgage finance have optimized their operations around purchasing loans from brokers and/or correspondents, and the direct-to-consumer (DTC) channel. Commission driven loan officers are disappearing in favor of employees working in call centers for hourly wages plus a bonus. This is the only way to make a purchase market with acquisition costs north of $12k per loan work. The chart below from the latest MBA survey tells the story.
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