Issues & Insights

When Companies Abandon First Principles, Consumers Lose

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Not every company makes it in the dog-eat-dog world of business. After all, only half of new businesses survive after five years, according to U.S. government data. But despite so many entrepreneurs failing, it is no secret that the recipe for success includes embracing competition and maintaining a laser-like focus on the customer. Leaders who guide their businesses beyond those pivotal first five years understand this well.

This makes it all the more disappointing that an industry-leading company has opted to ignore the consumers’ best interest to instead choose anti-competitive ultimatums as a strategy to attempt to expand market share. 

United Wholesale Mortgage (UWM), the largest wholesale mortgage lender in the country, recently gave independent brokers little over a week to make a choice: either sign an addendum with the company promising not to do business with Rocket Mortgage and Fairway Independent (two of UWM’s largest competitors), or no longer have the option to do business with UWM. The company aims to enforce its all-or-nothing insistence by forcing brokers to pay damages of $50,000 or more should they not comply. 

The ultimatum is not only unprecedented but it has been condemned by the Mortgage Bankers Association – the trade association for the mortgage industry – as “designed to thwart competition in the mortgage market and limit loan options available to borrowers.” It also remains to be seen whether or not it runs afoul of federal and state unfair and deceptive trade practice laws.

UWM’s demand is concerning for mortgage brokers and home buyers in several ways. Limiting choice reduces brokers’ ability to shop rates and offer value to clients, putting them at a disadvantage. Home buyers will also lose out when brokers are faced with fewer options, as the lack of competition means home buyers may be on the hook for paying higher mortgage rates or fees. 

The costs of higher mortgage rates come at a bad time for consumers given that home prices continue to skyrocket. In January, home prices increased 14% over the same month the year prior. A recent analysis from Redfin meanwhile, found that homebuyers lose $23,250 in spending power from a mortgage rate increase as small as one half of one percent. Just as a limited housing supply has contributed to rising prices, the reduction in mortgage choice will likely trigger higher costs to consumers as well. 

As if harming brokers and home buyers wasn’t enough, UWM’s ultimatum also sours business relationships within the industry. No one wishes to enter a business relationship with an organization prone to demanding unwavering allegiance. The insulting approach leaves discontentedness and little room for trust. 

It shouldn’t be surprising then that the very competitors UWM targeted have already seen the tactic redound to their benefit. It has been reported that UWM fell short of their goal of enlisting 80% or more of independent mortgage brokers. According to Rocket, daily registrations are up 40%, and 22 of the company’s 25 largest partners have rejected the ultimatum. 

In addition to providing consumers with the best experience possible, another pillar of a successful company is its commitment to fair business practices. Rocket Mortgage recently announced a new mortgage broker directory on their website to expand options for homebuyers and has committed $100 million in 2021 alone to help grow the broker channel.

By contrast, UWM seems to have abandoned some of these basic principles with its recent gambit. Companies that limit choices for their customers, like UWM, will likely see their reputation for being a trusted business partner diminish. 

Brokers – and their clients – would be well-served if UWM were to roll back this market-distorting ultimatum. Historically free markets have been the best way to drive positive growth in the economy and the mortgage sector in no exception. Abandoning these first principles of business is not the way to drive long term growth and when companies ignore those core tenets, everyone loses.

Chuck King is a Professor of Business, Law and Ethics and Dean Emeritus at the Colorado Christian University School of Business and Leadership and a fellow with the Centennial Institute

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