Why The Mortgage Industry Is So Brutally Competitive. No Monopolies Here

There are almost 100,000 producing loan officers in America fighting over a pie that shrank from $4.5 trillion in 2021 to less than $2 trillion now.

But, a shrinking pie is not the only reason our industry is so crazy competitive.

Mortgage Industry: (1) Too Fragmented; (2) No Moats; (3) Mortgages Seen as Commodities

It is so competitive because it is so fragmented – so NOBODY has “pricing power” or the ability to push up rates because of their market share.

In addition, the mortgage industry has no “moats” to keep competitors at bay. Moats include very high capital costs to get started (railroads, airlines, movies, oil), high levels of intellectual property and patents (tech, pharmaceuticals), or complex network effects like social media companies employ (Facebook, TikTok, Instagram).

It is easier than ever to get into the mortgage industry now thanks to UWM (and similar firms), as a single loan officer can set up shop in her living room and access UWM’s tech stack for almost nothing.

Interestingly too, JPMorganChase’s CEO Jamie Dimon and others saw the threat of too much competition in 2008 so they aggressively supported regulations that were ostensibly to protect consumers but that were probably put in place to keep more competitors at bay (they worked for a few years…but the impact did not last).

SIDEBAR: Advocating for complex and difficult regulations is what a lot of large companies do, as they hope smaller firms will not be able to comply with them and thus stay out of the industry. Pharmaceuticals are a great example.

Lastly, all too many borrowers see mortgages as a pure commodity now – given that most loans are 30-year fixed-rate loans backed by Fannie and Freddie. This of course can be a mistake; we just got a loan yesterday in fact from a panicked agent, as it blew up at another lender.

The top 25 mortgage originators (led by UWM and Rocket) only accounted for 35% of the total mortgage volume.

In contrast, 80% of all airline flights are handled by only four carriers: American, United, Delta, and Southwest.

Apple alone has 55% of the U.S. smartphone market – along with a software network that keeps buyers locked into the platform.

And let’s not forget about the granddaddy of all current monopolies: Google! Over 90% of all searches are done on Google!

Facebook, Instagram, YouTube, and TikTok dominate the American social media landscape too – and, as a result, all of these tech firms just mint money because of their pricing power.

SIDEBAR: Should America’s monopolies be broken up?

Scott Galloway is an emphatic yes, as he sees the big guys stifling competition constantly by using their vast profits to gobble up competitors (e.g. Facebook buying Instagram and many other firms they simply just killed) and lobbying for regulations that keep competitors at bay.

Andy Kessler , however, is a big no. He thinks government should stay out unless they can prove the consumer is being harmed – when they usually can’t. He further thinks that monopoly power actually ends up making companies too fat and more vulnerable (see telephone companies, or the AI threat to Google and smartphones); and he does not want to give government additional power to muck things up and/or to pick winners and losers. Our government comically went after IBM in the 1980s for monopoly pricing power right when new tech, software, and PCs were crushing the life out of the company. His point: monopolies don’t last unless government regulations allow them to, like Fannie Mae (see below) or utility companies – which are often shockingly inefficient behemoths.

What Can the Mortgage Industry Do?

1. Carve out niches that are less price-sensitive. JVM’s niches include non-QM loans, bridge loans, fast closes, and bankruptcy bailout loans, among other things.
2. Become the low-cost producer – able to compete in any environment. At JVM, we do this by aggressively embracing overseas labor and any labor-saving tech app we can get our hands on.
3. Wait for the next boom ??. This is a strategy that all too many firms employ, but it is very expensive during downtimes, and it results in mass layoffs over and over. Better Mortgage is the poster child of this strategy.

Irony Alert: Fannie and Freddie

While the retail/origination side of the mortgage industry is extremely fragmented, the securitization/secondary side is dominated by two government-granted monopolies: Fannie and Freddie.

So, when mortgage companies that originate loans (engage borrowers directly) overall were getting killed after rates went up, Fannie and Freddie continued to not only mint money, but they were also further slamming the cash-starved mortgage companies by forcing them to buy back loans at enormous discounts.

Why did Fannie and Freddie inflict so much pain on an industry that was already in severe pain? Because they could. They have monopoly pricing power.

If there were 25 companies like Fannie and Freddie competing for business from originators, with much less excess regulation, rates would be much lower, and mortgages would be much easier to obtain.