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History Says UWM Offense Looks Like A Winner
It was October 2009, and I was driving through the canyons of the East Bay, in northern California, heading to the Ellie Mae headquarters in Dublin, California. The market had crashed a year earlier, Indymac, Lehman Brothers, Wamu and First Magnus had all shut the doors, unemployment was at 10%, and $498 billion in targeted federal bail-out funding (via The Troubled Asset Relief Program, or TARP) had passed to bail-out auto-manufacturers and America’s largest banks.
The markets were illiquid, state and federal regulators were shifting mortgage market demand toward depositories while negotiating an appropriate regulatory framework to oversee brokers and non-depository mortgage banks.
The future of the mortgage industry was deeply uncertain. The Implode-O-Meter became a daily site to get updates on companies that had failed. As banks shut their doors, the market threat was a shutdown of cashflow to all businesses, large and small.
I was thinking of all of that as I made that drive to Ellie Mae, an important meeting and they had emphasized the confidential nature of the discussion. It was the start of the Great Recession and there were many shadows and backroom discussions being had. Everyone needed a plan, but it was difficult to see the future amidst so much uncertainty.
Hatching A Plan
As I walked in, Jonathan Corr, the president of Ellie Mae, greeted me at the front door and proceeded to escort me to a private conference room where Sig Anderman, CEO and founder, and Joe Langner, chief sales officer, sat around a large conference table. It was strange. Despite the mortgage industry in eclipse, walking into the Ellie Mae headquarters, there was a fresh vibe in the air. The activity was busy, even disregarding the many empty cubicles. Jonathan reassured me those would be full again in the coming months; Ellie was poised for growth.
It is difficult to explain, but while outside of the doors, there was the American economic system in chaos, and yet, inside Ellie Mae’s walls, there was extreme confidence in the future. Why?
Sig, the company CEO, closed the door to the conference room, and proceeded to outline the plan. But first, he summarized the market outlook. In 2008-2009, many mortgage originators – and potential clients of the firm-- had gone out of business. Ellie had lost money in 2008: it had revenues of approximately $33M, but it’s bottom line still showed red ink of more than $1 million.
The Loan Origination System (LOS) wars were at their epic peak – Calyx, Mortgagebot, Byte, Avista, Open/Close, Mortgage Cadence, Harland E3, Blueberry, PCLender, Mortgage Builder, to name a few. It was a crowded field to say it mildly, but everyone was losing clients. Sig saw the market contraction as an opportunity, since these events were hurting his competitors, especially market leader Calyx. Calyx’s revenue contraction was severe, falling from about $40 million to a historic low of roughly $9 million; it existed anemically, he argued.
Still confused, I peered over to Jonathan seeking for some direction as the more Sig summarized the problem statement, the more confused I grew. I did not see the strategy. I saw an uncertain market, a crowded field of competitors and a long uphill climb to get marketshare from mortgage companies that may not weather the market storm.
Jonathan nodded to pay attention, like every good storyteller, Sig was getting to the main point. Sig laid out a strategy that was a radical departure from the way the LOS wars were fought. Sig wrote down the following on a white board:
- Transition Users from per-seat licensing to per-user per-month licensing
- Focus on prospective clients and their volume, and not number of users
- Project Promontory
The first two bullets were a vastly different perspective on the LOS market and how LOS vendors looked at mortgage companies. I was on the leadership team at Calyx from 2007-2009, and our business model at the time was based on a charge per seat. Additionally, the LOS world view was based on “number of accounts”, not accounts who did the most volume. Jonathan didn’t care about the number of mortgage company clients or accounts. He was focused on a smaller number of companies whose loan volume was high.
The first two bullets, while innovative in sales focus, weren’t entirely new – software as a service was almost a decade old. This was co-opted from Salesforce and applied to the mortgage space. But, still, from the LOS standard, it was a radical shift to target a list of companies focusing exclusively on loan volume. At this point, I understood the plan. But…
Ellie Mae’s Secret Program
What was the third bullet point, Project Promontory, about? Ellie Mae had decided to get into the lending business -- sort of. With so many mortgage companies going out of business, why not partner with a few larger Ellie Mae clients, and then help them acquire other companies more vulnerable to market conditions to effectively grow their sales organization?
About 80% of Ellie Mae’s broker users and 30% of mortgage banking clients went out of business in 2008. If an Ellie Mae client was going to go out of business, then it made sense to help that client transfer their sales talent to another larger, better capitalized Ellie Mae client. In this scenario, it was a win-win for Ellie Mae and for their larger clients.
Secondly, since there were so many Calyx and non Ellie Mae mortgage clients going out of business, the same market opportunity existed – engage with these weaker non Ellie Mae mortgage companies and help facilitate an acquisition with the larger existing clients of Ellie.
This strategy accomplished several objectives: it helped build loyalty with Ellie Mae’s larger customer base; it grew Ellie Mae’s marketshare by centering a strategy around specific mortgage companies using Encompass and it cut at the heart of Ellie Mae’s competitors and their marketshare. It was a brilliant idea.
The first two Ellie Mae clients we focused on growing were Primary Residential Mortgage (PRMI), based in Salt Lake City, Utah, and Freedom Mortgage, out of New Jersey. The risk that Sig took with this strategy could not be underestimated. The gamble was by partnering with two large Ellie Mae clients, Ellie ran the risk of alienating other Ellie Mae clients that weren’t part of the program, and it could have had the opposite effect by driving them to other LOS platforms. The program had to be secret. So we maintained its secrecy by facilitating it through my consulting company, Menlo Advisors, an M&A firm I founded in 2009.
We carved up the country targeting companies whose net worth or cash on hand was light, and by facilitating introductions and applying an acquisition model, we successfully accumulated companies and teams of loan officers across the United States to join well-capitalized Ellie Mae clients. We gave presentations to dozens of large lenders in major cities across the United States.
These efforts helped curb Ellie Mae’s attrition in loan volume by amassing production from both Encompass and non-Encompass users, these moves increased Ellie Mae’s marketshare and most importantly, increase production volume, which drove Ellie’s revenues now based on cost per closed loan.
In 2009 Ellie Mae was a $37 million company, with a net income of $1.7 million. In September 2020, Ellie Mae sold for $11 billion. I’d say the strategy worked.
UWM Sees Advantage
I see Ellie’s approach to the market in this move by Matt Ishbia and UWM, in which they’ve told the broker community that they can write with UWM, or they can write with Rocket Mortgage or Fairway, but if they choose either of those latter two, UWM is out of the game for them.
It is innovative, aggressive, and forward thinking. Amidst an uncertain economic market, on the heels of a $1.9 trillion dollar stimulus bill, UWM has decided to circle the wagons around a slightly smaller set of broker channel partners. It is an aggressive and high-risk strategy. On March 15th, UWM severed ties with brokers who failed to sign its updated agreement prohibiting (and penalizing) brokers in their network from selling loans to Fairway and Rocket. Reportedly, more than 90% of UWM’s brokers have signed the addendum.
UWM is the largest lender in the broker channel. This move targets and places tremendous pressure on the 30% of Rocket’s production income which comes from the same channel. Ishbia may also understand that in the rising rate environment, the broker channel contracts. In 2008, rates were mid 5% and brokers had a 35% marketshare. Regulations and compliance costs drove the broker channel to 6-7% marketshare between 2009-2013, with modest gains, culminating to an impressive 19% today.
As rates rise, the value proposition of a low-cost broker diminishes. With lower inventory, refinances lose steam and the competitive purchase market favors independent mortgage banks (IMBs). Ishbia knows this. His end game is to apply this market pressure to force his competitors out of wholesale, and to consolidate the marketshare before the overall broker channel contracts to a normalized 10-14%.
Ishbia of UWM, like Jonathan Corr of Ellie Mae, has a “you are with us or against us strategy”; It worked for Ellie Mae, it is quite possible it will work for UWM.