UWM Holdings Corp Q2 FY2022 Earnings Call

Good morning. My name is Tamika, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation's Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Blake Kolo, you may begin.

Good morning. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us and welcome to the second quarter 2022 UWM Holdings Corporation's earnings call. Before we start, I would like to remind everyone that this conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning. I will now turn the call over to Mat Ishbia, Chairman and CEO of UWM Holdings Corporation, and United Wholesale Mortgage.

Thanks Blake, and thank you everyone for joining the call today. I really appreciate it. Before we get started, I think it's most important that I first recognize the life of Tim Forrester, my CFO, who recently passed. He was a great man, loved these calls with all of you, and was a huge part of our growth and success at UWM, and he will be missed. I'd like to take a quick moment for silence in memory of Tim Forrester. As hard as this is to transition, let's get into the highlights of our second quarter with very strong results. First, we closed $29.9 billion of mortgage production for the quarter, $22.4 billion of this was purchased volume, 17% higher than our first quarter purchase volume. This is a dominant number. We continue to demonstrate that we are the number one purchase lender in America. We dominate on purchase and brokers view as well. We have been talking about this for years and all things we are great at tie into winning in the purchase business. The best purchase lenders are the most well-run lenders, and no one is better purchased than UWM. We continue to deliver world-class service levels. Our net promoter score is at plus 88 for the year, and our speed to close remains about three times faster than the rest of the industry. This level of service keeps our brokers always coming back to UWM and extremely loyal. In addition, I'm happy to announce that we delivered $215.4 million of net income for the quarter with a gain margin of 99 basis points, which was also our margin in Q1. As I said before, 75 to 90 basis points will likely be the average for the full year, and now we strategically have a cushion for the second half of the year which aligns into our announcement on Game On pricing, that I will talk a little bit more about later. In addition, we did fully diluted earnings of $0.09 per share. I'm happy to announce for the seventh consecutive quarter, we will be issuing our regular dividend, which is important to all of our shareholders, and I see no reason this won't continue for the foreseeable future. Andrew will provide more color on these numbers in a few minutes, but I wanted to discuss our strategy for the third quarter. We remain laser-focused on the growth of the broker channel. Because it's the fastest, easiest, and most affordable way for consumers to get a loan and the best place for a loan officer to work. This is not my opinion; these are facts. Most recent Honda data from the Home Mortgage Disclosure Act shows the average borrower will save $9,400 over the life of the loan by going through the broker channel compared to the retail channel. It's even better for minority borrowers who save about $10,400 using a broker. Consumers are learning these facts every day, and this is why the broker channel continues to thrive. We are excited to continue to get this data out to more and more people because it's going to make an impact on not only our business but consumers across America. Retail loan officers also know the broker channel is the best place for them to work, which is why UWM is committed to helping them make a successful transition from the retail channel to the wholesale channel. UWM has been waiting for the rising rate environment so we can prove what we've been saying all along. We continue to gain market share when others are retreating from business. We hosted about 5,000 of our clients here on our campus in May for UWM Live, while other people are laying off. We are being very aggressive in this environment, which is why our Game On announcement strategy in June is going to play off so well going forward. Game On is an aggressive pricing strategy used to attract brokers that are not using UWM to see why our process, our technology, our service, and our partnership are the best in the country. Once our brokers experience our technology and service, understands that we are a true partner, they become loyal. They know our goal is for them to do more business, and they will do more business partnering with UWM. Game On also is the last nudge that we believe retail loan officers need to convert to being a loan officer broker shop or start their own broker shop. They have always known it's hard for them to compete on price and rates with brokers and with the service and technology support brokers have today. But now with Game On, it's making them take an extra look at the broker channel. And it's working even better than planned. We are tracking amazing activity on beamortgagebroker.com website where people can begin the process of becoming a mortgage broker or loan officer in the broker channel. This proof point provides a very early look at how our changes are viewed or ignored; the fact that the website has had more traffic in the last few months since the Game On strategy than all of 2021 combined. So let me give you a little bit of that data. In 2021, about 226,000 people hit that website, inquiring about being a mortgage broker. Just in June and July alone since Game On, we've had over 329,000 people hit that website, and over 515,000 for the year. So just in the two months since Game On, we've had more people hit that website than all of 2021. In addition, new loan officers are moving from retail to wholesale. Now, this is a bit of a laggard on data because it takes three to six months, maybe even seven months in certain states and areas for them to actually become a broker from leaving retail. All of 2021, the data shows 6,353 loan officers who left retail joined broker. In the first seven months of this year, including July, 5,782 have already converted over. So we're on pace to do significantly more, and that is inclusive of the best month we've ever tracked, which is over 1,000 loan officers moved over from retail to wholesale in the month of July. We're very excited about that data. And once again, that lag. So it's really not even like the Game On date is going to push even further going forward with all the people hitting our website along with people moving their license over. Very excited about this opportunity. We are confident the strategy will work because we've done this before. The last time was in the first quarter of 2019, and we saw a significant number of loan officers turn to UWM. This is happening again. And this time our service and technology are even better than it was back then. I'll have more data on the 2019 success and the 2022 success at our next earnings call. And I'm excited to share because the early numbers are fantastic. With one of my last points, I think it's really important to mention that all the success, the brokers that only make 20% of the overall mortgage market. That's the last thing to move. Beamortgagebroker.com at the top of the funnel, the loan officers converting at the middle of the funnel, and actually loans closing is the end of the funnel. Now, this means UWM, the second largest mortgage REIT in America, and hopefully soon to be the largest, has been competing for only two out of every 10 loans, when most of our competitors are competing for all 10. As we mentioned before, we believe the broker channel will grow to 33% over the next five years. However, with strategic initiatives like Game On, we think that number could reach 40% or higher. Meaning, UWM would compete for four out of 10 loans rather than just the two out of 10 loans we're competing for right now. We've been waiting for the ideal market to execute on the strategy and the time is now, and we're excited about this opportunity in the market combined with our different strategies, a catalyst we need to accomplish the next level of growth. I'm excited for you guys all to see it. We will look back on the Game On strategy in a couple of years and three to five years now and say, that was a multibillion dollar decision investment in our business, and the success will be shared with all our shareholders going forward. I will now turn things over to our Principal Financial Officer, Andrew Hubacker, to go over some of the financial numbers.

Thanks Mat. We generated meaningful profitability in the second quarter of 2022 with origination volume and gain margin within or in excess of our previously provided quarterly guidance. As Mat mentioned, $22.4 billion, or approximately 75% of our total Q2 loan production volume of $29.9 billion was from purchase transactions. This represents a 17% sequential quarterly increase in purchase volume showing continued strength from our core competency and competitive differentiator. Our servicing portfolio remains very strong, contributing positively to our second-quarter operational performance and providing significant cash flow benefits. Despite sales of servicing on loans with a total UPB of approximately $73 billion in the past six months, our servicing portfolio remains above $300 billion as of June 30. We believe that we have accumulated one of the best servicing portfolios in the industry with a very low WAC and better asset quality than the industry overall, which provides balance to our business model and a strategic source of liquidity. The fair value of our MSR portfolio was just over $3.7 billion as of June 30. On the expense side, our staffing levels continued to decline through natural attrition, and incentive-based compensation expense decreased consistent with the decline in loan production, while servicing costs increased with the increase in the servicing portfolio compared to the prior year. We finished the quarter with just under $1 billion in cash. Our leverage metrics were more typical levels for our current size and scale as compared to December 31 when we were aggregating loans due in part to the early rollout of the increased conforming loan size limits. We believe that the actions we have taken by monetizing a portion of our MSR portfolio and lines of credit we have put in place and expect to put in place by the end of Q3 will continue to provide more than sufficient capital resources to support the liquidity needs of our business inclusive of our regular dividend. As noted in our earnings release, and as Mat just mentioned, the board authorized a regular dividend to be paid to our shareholders for Q3. We continue to be comfortable with the amount and timing of the dividends and believe it is appropriate to continue to reward our stockholders.

Thanks, Andrew. Before I turn over to some questions, I want to summarize a few key points. We're committed to the broker channel. The broker channel has tremendous momentum right now. There's no question this channel continues to grow and is the best place for consumers to get a loan and the best place for loan officers to work. The early numbers are in on Game On growing the channel, and we're excited about the results. Our services are best in class, pretty much any industry. We are currently running an NPS or a Net Promoter Score of plus 88. Game On pricing brings them in the door, and our lead client will keep them coming back for a very successful long-term investment in our business. Our $22 billion of purchase business is irrefutable. Brokers in UWM dominate the purchase market and will continue to do so with the support of tools and technology we provide. Lastly, everyone considers this a tough mortgage market. However, I continue to say, UWM is able to deliver strong earnings, capture more market share in this type of environment. With that said, we are now deciding to take advantage of our pricing power by making investments into our future growth. The investment we make today will have exponential benefits in 2023, 2024 and 2025 and beyond. We continue to capture more market share, and not only position ourselves to win but dominate the future. We feel great about the decision we've made. As I said before, we control the margins; we decided to lower margins strategically to grow the broker channel and help us continue to grow our market share. With that said, we expect our production to be between $23 billion and $28 billion for the third quarter. While we still believe that $75 to $90 is a good expectation for full year 2022 gain on margin, we expect our third quarter gain margin to be between the 30 and 60 range. We have chosen to be more aggressive in growing our share and the broker channel going forward. I could not be more excited about the second half of this year because I know the decisions we're making today have a materially meaningful positive impact on the long-term success and growth of the business. Now I'm going to pause and turn it over for some questions. Thank you for listening.

Your first question comes from Bose George with KBW.

Hey, everyone. Good morning. Actually, your guidance for the margin for the second quarter is quite broad with 30/60. What takes you to the high end versus the low end of that range?

Hey, thanks for the question. Yes. There's a lot of things depending on the market right now. But the reality is, I'm not really focused on the margins for this quarter as the focus. It's an investment for the long term. Strategically building the broker channel; building our market share will follow, it will grow as well. But it's really an investment going forward. So whether it be 30, or 40, or 50, or 60, it's going to be in that range, like I said. Once again, the big thing is even with this big Game On announcement and Game On strategy, the 75 to 90 basis points for the year, as I've said before, we'll still hit in that range, as I told you, that would be the low of the market. We had a little extra cushion. We could be more aggressive here and really help catapult the growth of the broker channel, which is the long-term strategy of 2023, 2024 and 2025, and the investment that we made.

Okay, great. Thanks. Then, actually in terms of the timeline for the Game On program, is there sort of a finite timeline? Or how does that work?

We're watching as it goes. The early reads have been so much better than even—we thought it'd be great. We knew we had a lot of strategy around it. But the data we're accumulating about each client, the information we're doing with the broker channel, seeing their retail loan officers and how they're acting towards brokers, seeing that convert, it's been so magnificent, that we're watching it a little longer. But the way I think about it, Bose is just, there are a lot of different ways to grow a business. Long term, we're thinking about this as a big investment to be a multi-billion dollar investment. I can look at acquiring a company for $500, $700 million or maybe get a little market share pickup, maybe turn some loan officers from retail to wholesale; probably won't get much data out of it, or I spend a couple of hundred million dollars in the gain on sale. You guys can notice it there. But our market share grows, we move over 1,000 to 10,000 loan officers. We get tons of data; there's no culture change dealing with acquiring a company, so many benefits. So this long term is a no-brainer for us. How long does it last? I'm looking at it going forward this quarter. I'll give more guidance at the fourth quarter on that earnings call in November.

Okay, great. Thanks a lot.

Your next question is from the line of Kevin Barker with Piper Sandler.

Good morning. Thanks for taking my questions. Mat, I mean, you mentioned that this is a multibillion dollar opportunity by making the investment now. And I mean, it's tough to see that right now. And obviously, it's going to take time to see how that plays out. But could you help us quantify how much investment you're willing to make now? And then how big the multibillion dollar opportunity could possibly be? Whether it's market share growth in the broker channel, or just general market share growth within the brokers overall? And where those margins could potentially go to over time?

Yes. That was a great question. I'll do a good job of quantifying some of this in November for you on the earnings call there, so you can see it. But we've done this before. So January 2019, we did a similar approach. I've done this. We've seen how this plays out from the data, the analysis, the growth of our market share and the growth of the wholesale channel. The problem was the wholesale channel's growth didn't work as well back then because it turned into a refi boom. The market turned into 2019, 2020 COVID, 2021 major refinance boom, so the loan officers shift didn't happen at the pace that we're seeing already. How do I quantify multibillion dollars? Well, just as it sounds like; it's going to be—we're going to spend hundreds of millions of dollars, and we're going to see billions of dollars in return. How do I see that? Like, we saw what we made in 2020, making over $3 billion in profit. Do I see a year like that again in 2024, 2025? Absolutely. I think this puts us in position for that next opportunity. The other thing is, the big part that I think people need to realize is we're as strong as we are, we're dominant on the purchase side. I compete for two out of 10 loans right now. What do I have to do as a business leader to compete for four out of 10 loans? Let's just say my market share doesn't grow because we do a poor job, which we're not going to do a poor job. But let's say it stays at a 30% market share or whatever you saw in the first quarter, wherever it was. If we stay at that same market share but we compete at four out of 10, we just doubled our business, right? I understand the market coming down, but the market does go back up too. And so, understand that we're positioning ourselves for long-term growth and long-term strategy, and this is the perfect time to do it. We're going to continue to do it because it's much cheaper than acquiring someone, and unlike acquiring someone, I have much more comfort and guarantee in the results that I'm about to have.

So, you're essentially consolidating the industry via pricing initiatives. How do you weigh that versus M&A, given your stock is trading at a healthy—higher valuation relative to peers, I guess on price to book earnings are debatable, but how do you weigh acquisition versus organic growth? Just given you have a pretty strong currency?

Yes. No, it's a great question. I appreciate your thought. We're definitely looking at acquisitions; we look at that also. I'm not saying we wouldn't do that if the right opportunity was there. However, this was a way to make it happen sooner, have much more certainty in the results, and organically control the results ourselves with the data and the information. Quite frankly, it's a lot cheaper, right? I understand your point about I could pick up someone with more float. I could pick up someone with a lower multiple, but quite honestly, I still think that this is a better strategy right now. However, I'm open-minded and I look at things. There's a lot of upside in what we're doing right now. Once again, I've tried to give a little bit of an early read. I didn't do this until June 22, but the early read on beamortgagebroker.com, and the loan officer conversions in our market share within creating stickiness with our clients, it's been phenomenal, and we're excited about it.

Thank you. Thank you, Mat.

Your next question is from the line of Doug Harter with Credit Suisse.

Thanks. Mat, I know you've made your views around headcount and expenses clear to us. But just wondering kind of at what point you can kind of get data on sale margins back above expense levels, or kind of get volumes up enough to leverage the expense base?

Yes. I think I'm leveraging it great right now. I feel good about everything. On the expense side, we're obviously profitable. Our business is in a great position. I know, Doug, you probably get a chance to see what we're talking about here in our office and see how we do things here, and appreciate you recognizing that. We feel great about where we're at from the expense side. We're profitable; we're running a very efficient business, strategically made a great decision here, which I think we're already seeing better results than I expected. You'll see those continue to shine for not only months to come but years to come. We feel really good about it. There's always people—we're not hiring 500 people a month like I was doing a year ago, but our people are an investment. They're not as much of an expense as other people look at it or investment in our future. They're part of our team, and we're doing great things together. We're winning. We've been waiting for this time in the industry where rates went up, they went up fast; everyone else's kind of caught doing the refi game, the little merry-go-round with doing every refinance all day doesn't work for a long-term strategy. You're seeing it right now. We'll continue to take market share. We'll continue to grow our channel, and we'll be positioned not only for a great year this year but in 2023, 2024, and 2025. I think you'll see the return in a very positive way.

Great. Thank you.

Your next question is from the line of Eric Hagen with BTIG.

Hey, thanks. Good morning. Sort of broader question about how you manage through a volatile rate and spread environment. Like, how do you take that volatility and effectively communicate changes in mortgage rates to your network of brokers? And how does the volatility you think sort of flow down or affect the way the broker is able to communicate with the borrower level, especially for purchase money loans? Thanks.

Thanks for the question. Yes. I mean, obviously, it's been a very volatile market. I've got a first-class capital markets team. We feel good about being able to handle all of this volatility, where some of our competitors maybe struggle a little bit more with it. For the brokers, obviously, it's hard to handle volatility, but volatility plays in the broker's strength a little bit. Here's why. When you call someone a, quote, 5.5%, you call someone else; they quote, 5%, you're like, what's going on? Right? It's such a difference in rate. So what it makes you shop a little more. When you shop a little more, guess what? You're going to find that brokers are always going to be cheaper. It actually plays in the brokers' favor a little bit where not everyone has the same rates because the market's been so volatile; timing has changed. Brokers are going to win. Now, in the purchase market, there's a macro environment you could argue that slows down purchases throughout the country. However, we're still the elite purchase lender. We did over $22 billion this quarter, and we're still focused on purchase business. Brokers understanding the volatility and us communicating with it. We have 670 days that are calling and communicating we have different videos and live shows that go out to brokers to educate them. So they can educate consumers about stuff. That's part of the partnership. Being a partner with UWM, you have access to leverage our information, our training, and our knowledge to communicate in a positive way in their markets throughout America. It's helping brokers win. We feel really great about it right now, and we'll continue to use that edge to help our brokers continue to win.

That was really helpful. Thanks. I think you guys mentioned some new funding lines that you're exploring if I heard you correctly. Can you offer some color on what those funding lines are? It sounds like that will be the funding source to support the growth that you're aiming for by trimming your margins. Can you also share how it potentially changes your appetite to sell MSRs going forward?

Yes. We have access to liquidity. It's obviously important. We talked about our actual liquidity in a lot of our earnings, and Andrew and his team have done a great job putting together, and even Tim, before Tim unfortunately passed, put together ways that we have access to more liquidity, whether it's partnerships with SFS, whether it's MSR capital lines, lines. Because one thing people don't recognize and I don't get any credit for here is that our MSR lines are not encumbered at all. All my other companies that we're competing with are leveraged up on their MSR. We have not one penny leveraged on our MSR. We're accessing a line on that. Once again, even without all that stuff, our cash flow is significant, and it's really not a factor. But cash is king, and we're going to continue to make sure we have access to liquidity; we have plenty of liquidity on our balance sheet. At the same time, we use our liquidity and proven ways to provide returns for our partners.

Your next question is from the line of James Faucette with Morgan Stanley.

Yes. Thanks a lot. Just a couple of quick follow-up questions from me. What's your sense of remaining excess capacity in the overall mortgage market? I guess your strategy is pretty clear, how you want to take advantage of the current situation. But as you think about how this plays out and the duration of how long you want to be aggressive on gain-on-sale margins, etc. How should we be thinking about those things?

Yes. It's a good point there. The market's definitely interesting. We're seeing a lot of our competitors laying people off, struggling, losing money, but beyond that, just losing volume and market share at substantial amounts. Part of that is because their business model is tied to refi. Part of that is because their retail branching models. Part of it is because their retail market and what they're doing and their margins have to be so big to compete, and that their cost to originate is too high to actually be profitable. That's one of the big benefits that we have right now on the technology side, and we talk about it a lot is that our operations and cost to originate is lower than most. So we can be more aggressive in the Game On strategy like we're talking about. Put pressure on other players. Give the brokers a massive competitive advantage. Recruit retail loan officers all while making a nominal investment in our big scheme of things, while continuing to pay a dividend because we have so much cash and profitability going forward. We feel really good. It's like kind of threading a needle. The overall market is definitely seeing some contraction. Not discrediting of all the companies that don't do mortgage for a living as this is not their only thing. Of course, it's a contracting market; if you don't have a differentiation and a strategy to win long term and short term to be clear. That is happening in some of those. We were consolidating, laying people off, and we just feel like we're really in a great position. I couldn't have predicted this position a year ago because I didn't think rates would go up this fast. This has really put us in the kind of what do they call it, the catbird seat. I don't really know what that means, but it sounds cool. We're in the catbird seat where we feel good, and these other places, although they're reducing staff, it's going to happen again. I’ve been here 19 years. This is not my first time through these rotations and these cycles. In 2023, 2024, 2025, sometimes rates are going to drop, and those places that are not going to be able to handle the new volume. They're not investing in technology, they're laying off people. How are they going to sustain? That’s when we're going to make $3 billion, $4 billion plus in one of those years coming up. This is the cycles. We feel really good about where we're at and the position we're in going forward.

Makes sense. And then from—you mentioned the technology investment you've been making. How are you feeling about where you're at on the investment requirements? Is there areas where you need to increase investment? Or is it more likely to sustain investment? Or do you ever reach a point where you can start to bring that down a bit?

Yes. That's a great question. We feel really good about our technology investment. Our BOLT technology has been picking up, and I think I announced it—it's almost been a year, I think so. It's not quite a year, but it's been fantastic. It makes it so our clients have a better, easier experience. It makes it so my underwriters can do more volume per underwriter, and that will lower our costs as well. Our investments are continuing technology. I think any time in business you stop investing in technology, you will lose. Because it's not like there's going to be less technology in five years or 10 years than there is today. We’re constantly investing in technology, coming up with new things, helping our brokers grow new business, whether we come out with Boost. I've got new things coming in next month, and we’re always thinking of what's the next thing to continue to dominate. Although most people look at our company and say, those guys are really successful. The number one wholesale lender; the number one purchase lender; number two overall lender, they're really successful. There's so much upside in where we're going and so much opportunity that we're just getting started. So I'm not slowing down on the technology investment. We're not slowing down on the new initiatives. We're going to continue to grow and dominate and continue to win our market share and help brokers continue to win.

Thanks.

Your next question is from the line of Steve DeLaney with JMP Securities.

Good morning, Mat, and God bless Tim. Sorry to lose him. Can you hear me?

Yes, thank you. Tim was a wonderful man. I know he liked talking with you. He will be missed by all of us.

For sure. Just a question; how the world did you beat your own guidance on gain on sale in the second quarter, 99% versus your 75% to 90%? What was the key factor in achieving that result?

Yes. Once again, I control the margin. We set them every single day. When there’s an opportunity like Game On where we can lower margins, strategically we do that. There’s opportunity when you can pick up. Sometimes that's product mix and different things. The market—and I'm not saying this in an arrogant way—has to react to us. We are the biggest player in the game in wholesale. Even in retail, although we're smaller than one other player out there. In the overall market, everyone has to react to UWM. I’m sure you've heard other places say the margins have normalized, and they feel good until we decide to not let them be normalized at UWM. We control that. We feel good about it. We were able to—I always tell you, and you've heard me talk about, Steve, 75% to 90% is kind of the low end of a year in wholesale. I could even make an argument that I would take out the Game On quarter or the Game On half of the year because it's just a long-term investment, but even with that we'll still be in that 75% to 90% range for the year, and we're able to have 99% in the first quarter and second quarter, as you've probably seen.

Yes. And so, Game On is primarily a third quarter, but you made it clear that you might extend a little bit just depending on the success. If we look out to 2023, do you think 75% to 90% is where we should be modeling when we look out sort of post Game On?

Yes. I would actually say 75% to 90% is what I would always tell you in the wholesale channel at least. Now, obviously as technology world's lever, that's on the low end, 75%. I don't see it going below 75%. If you're modeling that, that would assume a very competitive year again. I'll put the one caveat if I continue the Game On further, and that could adjust it slightly, but 75% to 90% feels like a good number to be on the low end side. Our lowest in history, I think was in the low 80s, and that was—I don't know what year it was, but that was 2018-ish. But those type of years—if the market softens, or is a tougher market, yes. If it's a little bit more sunshine out there, there could be more upside in that. Very profitable, 75%-90%, as we've demonstrated already.

That's great color, and congrats on a really good quarter in a tough market. Thanks.

Thank you.

Your next question is from the line of Kevin Barker of Piper Sandler.

Thank you. I just wanted to follow up on the guide for the third quarter on originations. It would imply a slight decline at the top end. You seem very excited about the progress you made on Game On. Are you— I mean, the guidance seems pretty low, given how excited you are with the progress that you've made so far. Do you feel like you had the capability to exceed the $23 billion to $28 billion that you laid out there just given how well Game On has been going?

Yes. What I'm saying about the success of Game On is that I'm primarily focused on loan officer conversion. Gaining market share is positive, and it's gratifying for all of us. However, the true strategy revolves around the long-term growth of the channel. That's why I mentioned beamortgagebroker.com; the high traffic and the engagement of loan officers are promising. We're seeing loan officers shift to wholesale, engaging with brokers and receiving calls from the retail sector. It's been impressive, as we've significantly separated retail from wholesale. As I noted earlier, in 2021, it was $94 cheaper for consumers to interact with a mortgage broker than through retail. Game On is enhancing that advantage further. In 2020, the cost difference was $8,000, and in 2021 it reached $9,400. This trend is increasing because brokers offer a more effective overall model. Our efforts have enabled them to compete with low costs while providing exceptional products and pricing to consumers. To address your question, considering all these factors, I believe we're well-positioned. Am I confident in the $23 billion to $28 billion range? Yes. Do I think we can exceed it? Absolutely. Could there be a shortfall? Yes. I aim to provide guidance that we believe we can achieve. We have surpassed our guidance at times; last quarter, we were right in the center. The market needs to recognize the existing inventory shortages, and many are adjusting their guidance downward. We hope to approach the performance we had in the second quarter. Still, I’m confident in the $23 to $28 billion range I provided. Is there potential upside? Yes. Can there be a downside? Yes. My main focus isn’t solely on third-quarter volume, even though it’s significant; the crucial aspect is the loan officer conversions. This process has some lag time, and it takes several months to see results. Over the next few months, I’m excited about this conversion along with UWM's growth in market share and the retention of those clients, which will reveal the success of Game On. I look forward to sharing more data in the November and February calls because I believe the results will be well received, especially by my shareholders.

Okay, great. And then, with the price initiatives, are you also seeing further expense synergies or at least a decline in operating expenses over the next couple of quarters and maybe going into 2023 to generate more operating leverage as this plays out?

Are you seeing expenses also come down as you implement operating efficiencies within the overall business? Yes, we do see that. I mean, the efficiency is a BOLT. That’s a big one, I will talk about, and we’re rolling out some more stuff soon. How do we create efficiencies by technology? Investments in technology will help us win. We can do things such as make it so that our people can do more. At the same time, you have technology to help us with our own quality. So we have less buyback risks. We have fewer service related issues. All of these things tie into it with technology. Yes, I am seeing costs and expenses go down, and you’ll see that as well in the numbers in the third quarter. It’s not focused on letting people go. It’s focused on how do we make people more efficient and handle the volume and make sure the service and loan quality, all those things are at the highest levels.

Okay. Is there any way you can quantify how much the operating expenses can decline in the third or fourth quarter?

There's a lot; I can't quantify it right now for numbers. You'll see it in the third quarter. What I'll say is we focus on making sure that we're not bloated. Everyone else has to do things by laying people off. That's not how we have to do things. We have to focus on how do I do that by making us more efficient. With the volume numbers that we were just talking about, in my staff to appropriately handle volume, we have to be overstaffed by design, which is why I'm not laying people off. I'm prepared for 2023, 2024, and 2025 when no one else will be. At the same time, we have the upside to grow, right? Because we're not sitting here saying we're going to keep retracting, retreating like a lot of our competitors. We're saying I'm going to add thousands of loan officers to the wholesale channel. I might have to grow in the fourth quarter. I might have to do more volume in the third or fourth quarter than I did in the second quarter, which is mind-boggling in this market. But I have to be prepared for that because the loan officers are coming over in droves from the retail channel, we’ve got to be ready for that. One last thing— not only loan officers coming over, but loan officers in the broker channel right now, John Smith in the broker channel, he is winning loans against the retail loan officer, a guaranteed rate, or movement loans. Those are good times; I’m not saying anything negatively. He’s winning those loans. The loan officers in my channel are actually getting a bigger percentage of the market share right now. Not even counting the loan officers—not counting UWM’s market share. So it’s just winning all around. I’ve got to be prepared for that, and I am prepared for it.

Okay. Thank you for taking my questions.

Your next question is from the line of Jay McCanless with Wedbush.

Hey, good morning. Thanks for taking my questions. Mat, I think you made a great point that it may be cheaper to cut margins right now and grow the business that way than it is to do an acquisition. But at the same time, your warehouse borrowings are going up. You've got an aggressive Fed that wants to keep hiking rates. At some point, it seems like you're going to have to slow it down a little bit. Can you maybe talk about what you're thinking from that perspective? And when is enough, enough, I guess?

I'm not following what you're asking. You're saying slow it down a little bit and slow down the ability to?

Yes. I mean, your cost of funding is going up, the size of your warehouse borrowings are going up. I understand that you're generating more mortgages, but your costs—maybe your personnel costs aren't moving up, but your funding cost is moving up pretty quickly. I understand the strategy. I understand where you're trying to go with this. But is it going to get too expensive at some point? Is it too punitive to keep this amount of borrowing up in order to drive this kind of market share?

Yes. A couple of things. No, it's not too punitive. Our borrowing costs and warehouse costs are not going up; they're actually going down. You remember that they match the note rate. The interest rates at 5.5%. There's still an entry. If you look at my financials, the interest income versus interest credit or interest costs. So we're actually—our gain there. So I think maybe you're missing me. Maybe I'm misinterpreting what you're asking, or you're misunderstanding what's going on. We feel really good about that. It's not punitive because once again, I'm not playing the third quarter game. I'm not playing the fourth quarter game; I'm playing the 2023, 2024, 2025 games. We feel really good about it. Of course, the first half of the year was very profitable. We're paying a dividend. I mean, for my shareholders, they’ve got to be ecstatic. We're paying, I think, I don't know what the stock is anymore, but let's call it a 10% dividend, which is fantastic. Our company is profitable; we’re gaining market share; we have strategy to win in 2023; 2024; 2025. Anyone who really understands our business sees there’s a multibillion-dollar profitable year in 2023, 2024, and 2025. What do we make? $3 billion or $2 billion or $4 billion, whatever the number is. Based on the multiples my stock prices, everyone feels really good. There’s great growth potential across the board. So no, I'm not worried about it at all. I think that maybe I misunderstood what you're saying because our warehouse costs and those things are going down as a spread; but at the same time compared to the note rate, we're making money because it’s all relative to the note rate on the loan.

Okay, great. Thanks for taking my question.

Thank you.

Your next question is from the line of Kyle Joseph with Jefferies.

Hey, good morning. Thanks for taking my questions. Just going back to your long-term targets of roughly a third for the broker channel. How much do you see an initiative like Game On accelerating that? Obviously, it's subject to market conditions. And then the second part of that question, you also talked about potentially even going to 40%. What's the balance of broker conversion versus increased productivity in that 40%?

Yes, that's a great question. We have aimed for a 33% target for a while now. The goal is to reach 33% by 2025 or 2026, which I've been discussing since my roadshow when we went public. That remains our focus, and I believe Game On will help accelerate this goal. The market is also growing. As I mentioned during my roadshow, rising rates can pose challenges for loan officers. The only factor that might hinder our growth in the broker channel is if rates drop, which could slow our progress in building success in this area. A significant aspect to consider is our low conversion rate; however, our current brokers are performing well. We have strong partnerships, and my passion lies in helping our brokers succeed and expand. We dedicate our efforts to providing training and support to loan officers, helping them improve and effectively collaborate with real estate agents to grow their businesses. The broker channel has immense potential, akin to a tall, athletic teenager poised to become an NBA star. That's the level of opportunity we have in this channel, and I’m committed to fostering that growth. We're also addressing loan officer conversions to retail, and I remain eager to expand in the broker channel. UWM is fully backing this initiative. While it's challenging to pinpoint the exact components that will contribute to our 33% or 40% targets, I believe much will stem from loan officer conversions, which are crucial to our progress. Each day, we focus on empowering our brokers to thrive and achieve excellence, enhancing customer interactions and improving our reputation. If we do our job well, it reflects positively on the brokers, leading to more referrals and growth. I maintain confidence in our 33% target for 2025 or 2026. To elevate loan officer conversion to possibly 40%, consider that we're currently competing for two out of ten loans. As the second-largest mortgage company, envision what happens when we aim for three or four out of ten loans. We could become a dominant force in both the wholesale channel and the broader mortgage market, alongside the brokers.

Very helpful. Thanks for answering my question.

Your next question is from the line of Mark DeVries.

Yes. Hi. How sticky in your experience have share gains been from pricing initiatives like Game On as opposed to maybe just learning on some of the services that you provide to help your brokers stand up and grow their businesses?

Great question. That's what we have to focus on is what the stickiness factor is and how that continues going forward. That will tie to the market share growth and figuring out how our net promoter score is, how our technology is, how will we make it so that the brokers realize that UWM is the best partner for them for the long term. That's a big part of this strategy. We've done it before. If you look back in 2018, look at my market share. I don't know the exact number, but I'll call it 15%-ish. Then watch my—look at my 2019 number, which I think is more like 30%. I'm not suggesting we're doubling market share. This time, we’re so big; it’s hard to move the needle at this size. However, it will go up. Yes, it stayed sticky. We think about it. We have a great grocery store where people are coming into our grocery store because we have a special and an opportunity. They see, wow, this is the best store. I love the service; I love everything about it. I’m going to keep coming here. That's what we have to do with UWM with our technology, with my account executives, with my operations team, with my partnership, with our training, and with our initiatives and help brokers grow, and help them win. That’s the way we think and hearing all of those results and feedback from our brokers, it’s very important.

Okay. That's helpful. And then what is the competitive response been to Game On? Are you seeing competitors try to match on price and limit those share gains, or are they struggling to do that because their cost to produce is too high?

Yes. They’re all trying to, but you hit it right; the cost to produce is just too high. At some point that; I’m talking and they’re like reacting to me, right? I’m making this decision, and they have to react to us. They're also reacting to what UWM has done. It’s not like I called everyone and said, guess what on June 22, we're going to do this; be prepared. We did this on June 22; our cost to originate because of our technology is lower than everybody else in the wholesale and retail channel to be clear. Kind of puts them on their heels a little bit. They all lowered the rates, which helps all brokers, once again right, all part of the strategy, but none of them can get to the level that we’re at right now. Quite honestly, their cost to originate is just too high. Their technology hasn’t been developed at the same pace as ours, and quite honestly, they just don't have the cash reserves, the strategy, and they're reacting rather than being proactive. I have 100% support from the board; my brokers; everyone loves what we're doing. We feel good, and I don't know that our competitors can have that on a reactive basis compared to my proactive way.

Your next question is from the line of Courtney Bahlman with Barclays.

Hey, everyone. Thanks so much for the question. Really quick two from me. First, total non-funding debt to equity leverage looks pretty light, which is great, especially in this environment. But, with your bonds trading where they are, how are you guys thinking about the possibility for any sort of opportunistic repurchases, and how they fit into capital allocation priorities as a whole?

Yes, thanks for the question. Yes, our non-funding debts were in a great ratio, a great position. In general, what I would say is Andrew is doing a great job going through how do we use cash the right way; it's definitely something we look at. We obviously have authority on the buybacks. We have to worry about the float, as we've talked about before. We go through all of these; everything, how do we focus on it? We're opportunistic on everything. Opportunistic on acquisitions; opportunistic on debt buyback; opportunistic on Game On. We're sitting here trying to win long term, and we look at all aspects of the business. We’re excited about where we stand. We have cash; we have opportunity; we have the business structure, the purchase volume; all of the things are in our favor. The short answer is opportunistically, but the long answer is I can go through this; roll on thing; all different things we're thinking about from a cash perspective. All the things we're thinking about how to prepare ourselves to win long term. Right now, we’re opportunistic, but there’s nothing on the agenda as of today.

All right. That’s super helpful. Thank you. Just one more, if you don’t mind. I know you guys don’t specifically hedge MSR risk. But unless the buoyancy and rates—are there any changes to how you're thinking about that moving forward into 2023?

Yes, absolutely. It’s like you said about risk committee with me. We analyze this, develop it, and talk about it all the time. When is the time do we hedge? What percentage do we hedge? How do we analyze it? What's our whack versus the market? We go through the details; it's a long boring conversation, but we spend a lot of time on it. We look at it. We make an analysis of what's best for the business. Right now we feel comfortable with where we're at. But it's discussed and talked with not only with my Principal Financial Officer Andrew, but the capital markets leaders, and a lot of different people in that region from risks, and Chief Risk Officer, and so all different things. We look at all aspects of it all the time.

Our final question comes from the line of Michael Kaye with Wells Fargo.

Hey, good morning. One of the pushbacks I get when I talk about the growth of the broker channel is that a lot of these retail loan officer detections are really not the higher-quality loan officers, either from the bank or even the non-bank retail shops. Meaning, it's really these lower-tier retail loan officers from much smaller retail mortgage shops who are converting. Any sort of comments on that?

Yes. That’s what I would say if I was in their seat too, right? I can show you multiple people that were in top 100 Scotsman Guide that evolve. If you want to call it defected, I call it proactively one, and went to the broker channel over the last year. It happens all the time. Of course, some of the top guys have moved a little when you pay $20 million, or $5 million retention bonuses to keep them and then raise your margins to try and make up for it. The game is over, is my perspective, my goal. It’s over. I’m just waiting for everyone else to see it; they are all converting over. I won’t say all, but they are. We see the number, the high-quality loan officer, a low-quality, like their loan officer they are producing. Once again, the end game is what percentage of the loans are going through the broker channel, right? Right now, it’s two out of 10, will become two and a half out of 10, will become three out of 10 loans; how that progression happens. You’ll see it in the numbers, right? I'm just trying to give everyone a high-level view, but I'm in the reads of it every day.

Okay. That's great. Any update on Boost? Does that fully roll out yet? What's the take-up rate with clients thus far?

Yes. Boost is going well; it’s still early, right? We just rolled out where brokers are trying it. There’s all there’s three parts of Boost. All aspects are being tried. Just like where I explained things with my brokers, it takes time for all these things to evolve. People get comfortable buying leads; a lot of loan officers in the broker channel are used to buying leads. How do they buy leads? Do they have to call the borrower multiple times? There are big companies that are set up to call the time. We’ve done some things that transfer leads to them. We feel really good about them having the opportunity in Boost to get competitive if they want to buy leads; they want connections or real estate agents. It’s going really well so far; it’s still early, but we feel good about that. I’ll be able to continue to do more updates. Just like BOLT, I'll give you constant updates on how BOLT is going. That’s almost a year; it’s a year anniversary. Same thing with appraisal direct. Some of these things I rolled out last year, the source, one year later—it’s like, wow, how do we ever survive without it? I’m hoping that Boost will be in that same category over the next one to three plus years. Great. Well, thank you. I appreciate it. Is there any more questions?

There are no further questions.

Great. Thank you all for taking the time to listen to our call. We appreciate the support. Blake is available. Andrew is available. I’m available. We're all available to talk. If you need any questions for follow-up, Blake Kolo or Andrew, myself, we’re all available to talk to you. Thanks a lot. We appreciate the support and have a fantastic day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.