Opinion: Is United Wholesale Mortgage's ultimatum legal?

The views expressed below are the opinion of Derek F. Dahlgren and do not necessarily reflect the views of MPA or its editorial team.

The mortgage industry has seen a dramatic flurry of activity this past year. It has expanded in many ways while other areas of the economy have lagged. However, not all types of mortgage companies have seen the same growth.

For wholesale lenders like United Wholesale Mortgage (“UWM”) the boom in refinancing and sales has been particularly good to wholesale lenders. They have been rapidly gaining market share and surpassing traditional retail lenders, such as banks like JPMorgan Chase.

Set against this uptick in the market and shift towards wholesale lending, a recent video posted on Facebook makes one wonder whether one major lender isn’t playing fair with its competitors. On March 04, 2021, UWM CEO Mat Ishbia issued an unusual ultimatum to wholesale brokers: choose either UWM or two of its major competitors, Rocket Companies, Inc. (“Rocket”) and Fairway Independent Mortgage Corporation (“Fairway”).  

For context on how the wholesale lending market may be affected, Rocket originated approximately $320 billion in overall mortgages during 2020 with roughly a third of that involving wholesale lending. Revenue from wholesale further represented 61% and 76% of Rocket’s total revenue in 2019 and 2020, respectively. Ishbia even recognized this stating “If you look at Quicken and Rocket’s growth since 2016, it’s been almost exclusively in the partner network, is what they call it, but that’s the broker channel, wholesale business. They have been flat on the retail, but very big in wholesale.” 

UWM, the leading wholesale lender, originated roughly $182 billion last year, all with independent brokers. It claims that “As the largest wholesale lender in the country, the numbers two, three, four, five, and six companies combined don’t even equal our market share of 33%.”  UWM further claims “this year we’re at 33% right now. We’ll finish at 35% this year to 40% and beyond over the next couple of years, and here’s how. 59,000 loan officers are licensed and set up to send UWM a loan today.”  Looking at 2019 data, UWM trailed only Rocket in total loan volume for all mortgage loans, surpassing Wells Fargo and JPMorgan Chase, the third and fourth largest overall lenders by loan volume respectively. Fairway was the fifth top lender by loan volume.

In sum, we have the second largest lender by volume attempting to prevent its broker customers from dealing with two of its largest competitors. This begs the question, is UWM’s ultimatum going to harm competition?  To some degree, the video post may answer that question. In it, Ishbia says “options are key” for brokers. Notably, Austin Niemiec, vice president of Rocket Pro TPO, responded by stating that “a broker’s competitive advantage is choice.”

The distinction between options and choices can be a fine one, but it seems appropriate here. Options are things, whereas choices are decisions. Ishbia is saying to brokers that UWM will have plenty of different products for you, but you can’t freely choose with whom to work. Surprisingly, in the very same video, he also says that “we’re not going to try to be the best price, we are going to try to be very consistent.” This comes shortly after SEC filings in January in which UWM stated “So when you have faster, easier, cheaper, Mat what do we have? We have happier clients.”  But UWM is also enforcing its ultimatum with some significant penalties. The addendum that brokers are being forced to sign has a penalty provision where they have to pay anywhere from $5,000 to $50,000 dollars. It remains to be seen how happy these clients will remain.

This also comes shortly after UWM offered praise for Rocket, but also hinted at increasing competition. Despite that, it repeatedly referred to brokers and consumers possibly benefitting from having Rocket as an option (no longer true apparently):

Every lender is different. If you go to a broker, you have access to a lender like UWM, our rates, our fees, our services, but we might not be a great fit, because we might not do as low of a credit score, so you can go to Rocket or Quicken. Or maybe that’s not a great fit, so the broker can take them to Flagstar or whoever it may be. There are options. Borrowers going to a broker have options, have a more likely chance of getting approved, because there are three or four lenders looking at it potentially, rather than just one, and they’re competing for the business. Which is why the rates are always lower in wholesale. And so, it’s a big deal and we think whatever is best for the consumer is where you want to put your focus and effort, and that’s why we went all in on the wholesale channel.

So is it anticompetitive?  This is where it gets more complicated. In antitrust law, details matter. Antitrust laws, such as Section 1 of the Sherman Act, are generally meant to prohibit undue restraints on trade. In this case, we have a vertical restraint on trade (e.g., between a wholesale lender and brokers) rather than a horizontal restraint (e.g., agreement between two competitors). It is also a multi-sided platform because, for each loan, there is a transaction between the lender and broker, as well as between the broker and consumer. Additionally, there are aftermarket effects to consider, such as sales of the originated loans on the secondary market and the provision of Payment Protection Insurance, among others. In this situation, all of this is assessed under the “result of reason.”

The rule of reason requires a court to perform a fact-specific analysis of market power and market structure to determine the effect on competition. This is to distinguish between anticompetitive agreements that help consumers, and those that would harm them, the latter being unlawful. In doing so, the court may weigh the anticompetitive effects of the agreement against any procompetitive effects. That is why details matter.

In this situation, there is anticompetitive behavior restricting a broker’s choice as to with whom it will work, coming from a wholesale lender with up to 40% market share. The brokers will certainly have fewer options in terms of lenders as well. Indeed, Rocket has stated that it will invest $100 million into its broker channel and launched a new national mortgage directory in January with 43,000 different loan offers with which it works. UWM’s ultimatum will result in those innovations no longer being options for certain brokers that choose to work with UWM instead.  

Overall, the precise market effects are beyond the scope of this analysis. For example, UWM makes much of the other 75 or so lenders it is allowing its brokers to work with, but whether their combined market share is significant enough such that healthy competition remains is unknown. However, the fact that UWM is targeting two of its biggest rivals, that those two rivals happen to be gaining market share, and that the rivals are investing substantial resources into the broker channel, suggests, at a minimum, that this developing situation deserves greater scrutiny and monitoring.