Home Point Capital (HMPT) Cuts Costs As It Contends With Challenging 2022 Year

A Quick Take On Home Point Capital

Home Point Capital (HMPT) went public in January 2021, raising approximately $94 million for selling shareholders in an IPO that priced at $13.00 per share. The company didn’t receive any proceeds from the IPO.

The firm provides residential mortgage origination and servicing for U.S. residential customers and investors.

2022 promises to be a year of cost-cutting, debt paydown with the hope of better performance in the wholesale channel than competitors.

Until we begin to have greater visibility into management’s handling of a difficult and fluid operating environment, I’m on Hold for HMPT.

Company

Ann Arbor, Michigan-based Home Point was founded in 2015 as a non-bank originator of residential mortgages and is now a top 10 originator in the U.S., according to Inside Mortgage Finance.

Management is headed by President and Chief Executive Officer, William Newman, who has been with the firm since 2015 and previously held senior roles at a number of mortgage industry companies, including ABN AMRO Mortgage Group and InterFirst Wholesale Mortgage Lending.

The company’s primary offerings include:

• Mortgage origination

• Mortgage loan servicing

The company employs a distributed sales model that ‘leverages third-party originators to provide trusted advice and in-market expertise without the cost of retail branches.’

Home Point’s Market & Competition

According to a 2020 market research report by ATTOM Data Solutions, in the first quarter of 2020, U.S. residential property mortgage originations reached 1.07 million refinancings for Q1 2020.

This result was 16% lower than Q4 2019 but up 87% from Q1 2019.

Interest rates dropped to all-time lows as a result of the Covid-19 pandemic and resulting lockdowns sharply reducing economic activity.

Homeowners took advantage of this lower interest rate environment and refinancings account for 55.7% of the 1.92 million home loans in Q1 2020.

However, the length and severity of the pandemic may ultimately push the mortgage market into a significant downturn, so the near-term future is one of uncertainty.

Major competitive or other industry participants include:

• AmeriHome (AHM)

• Rocket Companies (RKT)

• Guild Holdings (GHLD)

• Caliber Home Loans (HOMS)

• loanDepot (LDI)

• Fairway Independent Mortgage Corp.

• Guaranteed Rate

• Movement Mortgage

• CrossCountry Mortgage

Home Point’s Recent Financial Performance

• Operating income by quarter has also fallen dramatically in recent quarters, with a significant loss in Q2 2021:

(Source data for above GAAP financial charts)

In the past 12 months, HMPT’s stock price has fallen 71.4 percent vs. the U.S. S&P 500 Index’s rise of 9.1 percent, as the chart below indicates:

(Source)

Valuation Metrics For Home Point

Below is a table of relevant capitalization and valuation figures for the company:

Measure	Amount
Market Capitalization	$449,280,000
Enterprise Value	$6,290,000,000
Price/Sales	0.39
Enterprise Value/Sales	5.56
Enterprise Value/EBITDA	16.19
Revenue Growth Rate (TTM)	-21.75%
Earnings Per Share	$1.19

(Source)

As a reference, a relevant public comparable would be Guild Holdings (GHLD); shown below is a comparison of their primary valuation metrics:

Metric	Guild Holdings (GHLD)	Home Point Capital (HMPT)	Variance
Price/Sales	0.43	0.39	-9.3%
Enterprise Value/Sales	1.99	5.56	179.4%
Enterprise Value/EBITDA	6.58	16.19	146.0%
Revenue Growth Rate	18.1%	-21.8%	-220.1%

(Source)

Commentary On Home Point

In its last earnings call, covering Q4 2021’s results, management highlighted that it ended the quarter with over 8,000 broker partners along with 676 correspondent partners, which it hopes to leverage as a ‘springboard for market share growth in 2022.’

Also, the firm produced a 21% return on equity, which was significantly higher than its 15% minimum hurdle rate.

However, HMPT has experienced whole channel margin compression and a rising interest rate environment which has exerted downward pressure on loan origination volume.

Ominously, CEO Willie Newman said that 2022 will see ‘a challenging part of the mortgage cycle, with higher rates leading to a shrinking refinance market while industry capacity remains at an all-time high.’

To combat this, the firm seeks to go live with new technology solutions and a relationship with ServiceMac that promises to reduce servicing costs while lowering variable origination costs and increasing operational efficiency.

So, it appears the firm is hunkering down to reduce costs in what will likely be a difficult 2022 as the mortgage market shrinks while market participants compete ever more fiercely for volume in various channels.

Management hopes to go on ‘offense’ in the wholesale channel ‘because of the inherent cost advantages created by the alignment between brokers and wholesale lenders such as Home Point,’ reducing costs to consumers and driving volume through the channel.

CEO Newman noted that the last period of interest increases caused a large number of independent loan officers to join brokerages, aiding the firm in its market share growth efforts.

As to its financial results, revenue dropped substantially year-over-year while operating income also fell concomitantly.

However, management also reported reduced original segment direct expenses of 13%, lowered corporate expenses by 15% and servicing segment direct expense reductions of 9% during the quarter.

The company also has agreements to sell non-strategic assets and intends to pay down operating-related debt.

The primary risk to the firm’s outlook is the uncertain future of potentially higher and faster interest rate increases as a function of soaring energy prices, creating a ‘stagflation’ scenario.

Looking ahead, 2022 promises to be a year of cost-cutting, debt paydown with the hope of better performance in the wholesale channel than competitors.

Until we begin to have greater visibility into management’s handling of a difficult and fluid operating environment, I’m on Hold for HMPT.