Source: The Motley Fool —
Mortgage companies are highly unpopular, but is sentiment too negative in the case of this stock?
The past year was extraordinarily difficult for companies in the mortgage space. The Fed aggressively hiked interest rates to help get inflation back under control, which translated into rapidly rising mortgage rates. To make matters worse, high home price appreciation in the aftermath of the pandemic created an affordability crisis for homebuyers, especially first-time buyers.
The stock for mortgage originators has been under selling pressure the entire year, but it appears mortgage rates might have peaked and may be beginning to fall. Here is what this rate reversal means for UWM Holdings (UWMC -5.32%).
Mortgage companies have different business models
UWM is the parent company of United Wholesale, which is the biggest mortgage broker in the United States. A mortgage broker is a bit different from a traditional mortgage lender, so it makes sense to take a second to understand the different business models.
The most common mortgage-origination business model is the retail mortgage originator. The mortgage banker assembles and funds the loan and either holds it or sells it to another mortgage banker. This is the model that Rocket Companies (RKT -1.88%) uses.
;
As an active Realtor for over three decades, I wonder what the hub-bub is all about regarding the mortage rate hike. My first home purchase in the 1970’s garnered an interest rate of 7%. Naturally, the housing price for our raised ranch style home was lower when compared to today’s market, but all things are relative to the times.
Fast forward to the 1980’s, specifically the period between 1985 and 1990,when the the interest rates sky rocketed to 19%. These rate hikes were destructive to both the real estate and construction industries. So much so that many brokerages had to close its doors.
Working in the lucrative housing market of Bergen County, NJ, at the time was no exception. Home owners were holding on and not selling due to the high interest rise, the inventory of available homes was low, and while there was huge acreage to be purchased, contractors could not secure the necessary loans to build. My small office had daily visits from local contractors desirous of buying land, but their hands and their plans were tied up by the extraordinarily high iinterest rates.
So real estate investors and buyers have been spoiled by the low, low rates of the past few years. Some should look at the history of loan rates and realize home purchasing is still more than possible, as is the American dream of home ownership. I see it happening every day.
Let’s look at the bright side in 2023! It’s very doubtful, in this less than desirable economy, that we will see a repeat of the high interest era noted, but it’s good to eview history, while reminding potential buyers and sellers that the present times are certainly better now. It’s up to the professionals in mortgaging, banking and real estate to remind them.