Home Point Capital surprised the market on April 7 when it announced that the acquirer of its struggling mortgage origination business was a small wholesale shop few had even heard of. The Loan Store, based in Arizona and accustomed to originating about $20 million a month, was picking up the pieces of the third-largest wholesale lender in the country?
Really.
“We wanted to find a platform where the capital, the ownership structure, was long term, meaning we were looking for a group of individuals that owned a mortgage entity to operate in perpetuity, and there was no strategy to build it up to a certain level and then sell it,” Phil Shoemaker, former Homepoint’s president of origination who is now the CEO of The Loan Store, said in an interview.
Aligning expectations is just one of the lessons Shoemaker learned at Homepoint, a private equity-backed lender that went public in early 2021 and faced constant pressure from its investors.
Add this to the list: control costs while growing and use an off-the-shelf tech system when you are small.
“The focus for me is: I want to grow in a very sustainable, methodical way,” Shoemaker said.
TLS will focus on the wholesale channel but not compete with United Wholesale Mortgage (UWM), Shoemaker said. The core business will be conventional government lending, though TLS will create value-added products and services. Despite inheriting more than 9,000 brokers from Homepoint, TLS will only do business with the “right brokers,” Shoemaker said.
“That capacity allows us to take about $400 million a month, which is a very small number relative to what we were generating at Homepoint. The people we’ve hired allow us to take it from $20 million to $400 million a month. We’re about halfway there, and we’re in month two and a half [since the transaction]. Once we get there, we’re going to focus on optimizing things.”
Shoemaker answered a range of questions in an interview with HousingWire in mid-June.
This interview has been condensed and edited for clarity.
Flávia Nunes: Why did Homepoint choose to sell its origination business to TLS?
Phil Shoemaker: There were a few things important to me as well as to Willie [Newman, Home Point Capital CEO and president] and the team at Homepoint that put this deal together. We wanted to make sure that we set the origination team up for success. The best way to do that, based on everything I’ve learned the last 28 years, is to accomplish a couple of things.
We wanted to find a platform where the capital, the ownership structure, was long term, meaning we were looking for a group of individuals that owned a mortgage entity to operate in perpetuity, and there was no strategy to build it up to a certain level and then sell it. To that extent, the owners of TLS, two of them are close friends of mine, are looking to build a successful mortgage bank that is sustainable and profitable with time. That means doing things methodically, sustainable across the market cycles, and maybe not growing as fast.
Nunes: Will TLS only operate in the wholesale channel?
Shoemaker: I do think the model is mattering more and more. Despite the competitive dynamic of wholesale, I still think wholesale is the right model to access the purchase market, the primary market. And the reason why I think that’s the case is because I think it’s the best for the borrower. Anytime you’re aligned with the consumer, overtime you’ll win.
Now, the competitive dynamic in wholesale is fairly unique, and I don’t think that’s gonna change because the main incumbent is good at what they do. We’re all gonna need to keep stepping up and doing it better. The whole nature of wholesale is optionality; brokers want choices. We’re not looking to do business with every broker out there; we’re looking to do business with the people that are aligned with us culturally.
Nunes: How has the transition of employees from Homepoint to TLS been so far? How has their compensation changed?
Shoemaker: We’re still going through that process, we’ve gotten most people over. When the last person joins TLS, it’s gonna be just around 100 or so people. In total, by the time we’re done, there’s probably gonna be upwards of 140. It was our goal to make sure that everyone transitioned without seeing an impact at least to their base compensation.
The market overall is seeing salaries, and probably more variable compensation, start to normalize because there was a bit of a run-up in 2020. We’re seeing salaries start to come back to a more normal level across the board. Within that, I think you’ll have two types of strategies: companies trying to bring new people in, train them and pay them at a lower level, and then you have people – and this is more the strategy where we’re – going more towards the highly experienced people. We want to pay them fair compensation, and we want to give them an upside based on the performance of the company.
Nunes: The cost structure was a problem at Homepoint. How will you control expenses at TLS?
Shoemaker: The important piece is making sure every dollar we spend needs to go towards making a good loan. The experience I had at Homepoint was great. Of course, we all wish we could have worked out differently. That’s a given. But I really don’t regret it. It was a great experience. The people I met. The private equity investors – very good people. But you learn things, right? To some extent, the bigger you get, and the faster you do that, you start to get infected with a lot of costs that maybe are not necessarily directly attributable to making the loan. The focus for me is I want to grow in a very sustainable, methodical way.
The biggest lesson is skill matters in a big way. So, when you get larger, your fixed costs get diluted over a larger slice of production. That said, you still have to be efficient. The problem is the bigger you get, the harder it is to change things. Literally, it’s like turning the Titanic. You can’t build it and then come back and try to make it more efficient. It’s something you have to do on the way up. Maybe some people can, but that’s not what I intend to do. To be clear, I’m not trying to compete against UWM. That’s not my goal. And anyone out there that thinks they can; they’re crazy. Again, it’s a big market. I know it’s a challenging market. Wholesale will continue to expand. I’m just going to focus on what I can do well and the things I can control.
Nunes: Another problem at Homepoint was the technology. Tell us about TLS’s tech stack.
Shoemaker: I do believe that is part of the secret sauce. My first time actually dealing with a vendor was when I came to Homepoint. And here’s where I’ve got with that: I actually don’t believe there’s any strategic advantage in having and building your tech in-house. The more you try to customize and build things on your own, the more cost you create. If you’re doing a ton of volume, then sure it makes sense. But that’s not most of the world.
When you customize an out-of-the-box system, you actually end up with a scenario where you’re not only maintaining the cost structure of running your own proprietary system, but you’re also having to pay the vendor. We’re going to go all in on an off-the-shelf system. We’re currently using Ellie Mae, they’ve agreed to align with us on our roadmap, what we need. The expectation is we’re going to build a platform that is competitive, that doesn’t have any gaps, that performs well, and they’re going to bear that cost. My hope would be they then take that and they give that to other lenders and wholesalers and they’re able to take advantage of that, because we need more wholesale lenders, not less.
Nunes: TLS is a small lender. How big can the company be in the short term?
Shoemaker: Before Homepoint, TSL was doing maybe $20 million or $30 million a month — a very small company. That attracted me because I didn’t want to come into something where there was a whole lot of volume, and then you had to change things. It’s a lot easier to change things when you’re small. It also was all pure wholesale, so it wasn’t business channels that needed to be changed or shut down. The other benefit is the way it’s been set up is very scalable.
TLS was formed in 2019. Since then, it hasn’t scaled much. They grew about $350 million per month in 2020, when the refi boom was there. But they never really got big, so their emphasis is really just getting things right. As a result of that, their quality track record has been outstanding. At the time that we joined, they originated like 7,600 loans, and there were only seven loans out of that 7,600 that were bought back. It was a platform ready to take on some scale but didn’t have the people, experience or structure to do that. We are taking the best of salespeople, we’ve transitioned over to TLS. That capacity allows us to take about $400 million a month, which is a very small number relative to what we’re generating at Homepoint. The people we’ve hired allow us to take it from $20 million to $400 million a month. We’re about halfway there, and we’re in month two-and-a-half [since the transaction]. Once we get there, we’re going to focus on optimizing things.
Nunes: What will be TLS strategy in terms of products?
Shoemaker: We’re about to do a big marketing push on something called ‘buy before you sell.’ This is a partnership with a company called HomeLight, where we’re able to create liquidity for borrowers in their current homes and make it easier for them to get out of their homes and into a new one. It’s addressing the inventory issues. We’re going to focus on things like that. Our core business needs to be conventional government wholesale lending. But what we’re going to do is, rather than focusing on scale, we’re going to focus on creating value-added products and services around that, which will further diversify the business, make it more sustainable, and then will grow as the market conditions allow us to grow or it makes sense to grow.
Nunes: How will TSL compete in terms of price?
Shoemaker: TLS was doing about $20 million a month; we’ll be somewhere in the $130 million range this month, and next month we should be upwards of $200 million. We’re growing the business very quickly. And the reasons why we’re able to do that are: 1) We have control, and our cost structure is allowing us to price at a level that is in line with the market. 2) We do spend money on people, and so the service is ultimately where we’re going to win; 3) Our goal is to not do business with every broker–to be clear, we want to do business with the right brokers.
Nunes: Who is the right broker for TLS?
Shoemaker: It’s probably more of a cultural piece. We had 9,500 brokers or so at Homepoint and we have access to those brokers now at TSL, that’s basically what was acquired. But if we were to go to do business with all of them now, we would blow ourselves up. We can’t support them. We’re strategically deciding based on the products we offer; based on, for example, it being a purchase market. We’re focusing our energy on brokers that we think are best suited for this market as sequencing it in a way where we can ensure the service levels that we want to support. Rather than going for scale and getting vague, we’re going to focus on service, and we’re gonna define ourselves around being really best in class when it comes to purchase. Based on the size of TLS, I would not be surprised if we’re supporting LOs somewhere in the range of 1,500 or so.
Nunes: Home Point Capital bought a share at TLS, but now it has been sold to Mr. Cooper. What will happen to this investment?
Shoemaker: Home Point, as part of the transaction with TLS, they did get 9.99% of the TLS that was the consideration that was given for the assets that were purchased. But the majority of TLS is owned, is in control, and the company’s isolated, with a group of individuals aligned to build this business for long-term sustainability.
