Home Point Capital Stock: Highly Speculative Here (NASDAQ:HMPT)

Shares of Home Point Capital Inc. (NASDAQ:HMPT) have been absolutely decimated since I had a look at the company in January 2021, when I concluded that this risky proposition was a full play on the residential mortgage boom, a play a bit too risky for my taste.

A Quick Recap

Home Point Capital went public in January 2021 in an attempt to take advantage of the huge boom in the U.S. residential mortgage market, trying to monetize its position as a low-cost originator.

Home Point is a residential mortgage originator and servicer which has a nationwide network of partnership relationships, key to drive its growth. Customers and relations can access the Home Ownership Platform, the customer service portal to streamline the process of originations.

The company has focused on the wholesale channel, using its relationships with independent mortgage brokers and end-borrowers. The company has seen huge growth in recent years, with funded volumes having growth from $11 billion in 2018, to $22 billion in 2019, to $46 billion in the first three quarters of the year 2020, as the company claimed to hold a 1.3% market share at the time.

On the back of the boom, the company went public at just $13 per share, far below the midpoint of the preliminary offering price range at $20 per share. Shares immediately fell further towards the $10 mark, translating into an equity valuation of $1.4 billion at the time. This was about twice the book value of $700 million, based on a balance sheet of more than $6 billion, filled with mortgages on the asset side of course.

The financial history showed a mixed picture. The company posted a $164 million in sales in 2018 on which an operating loss of $42 million was reported. Even as sales rose to $200 million in the year 2019, operating losses were essentially flat. The boom in origination volumes, and higher margins, made that 2020 sales ballooned to $922 million in the first three months of the year with operating profits exceeding the half a billion mark.

The resulting 3 times earnings multiple looked very low, but the history of the numbers clearly showed that these were abnormal numbers, leaving investors puzzled what the real run rate of the business could and should be.

Given the inferior quality of the business, based on the losses posted in 2018 and 2019, which were no bad years on their own, I was a bit careful as other peers were solidly profitable during those times.

All Downhill

As soon as the summer of 2021, shares of the company had fallen to the $5 mark already, holding up at $4 during this summer despite rising interest rates having a real impact on the business. Ever since, it has been all downhill, with shares down to $1 and change now.

Early this year the company posted its 2021 results, a year in which origination volumes were up 55% to $96 billion. With gain on sale margins down from 2.32% of sales to just 90 basis points, revenues fell from $1.38 billion in 2020 to just below the billion mark at $961 million. This resulted in earnings down three quarters from more than $600 million to just around $166 million, for earnings equal to $1.19 per share.

Trends toughened during 2022 as rates kept rising. First quarter origination volumes fell to $12.6 billion with gain on sale margin compressing to just 58 basis points, resulting in a mere $11 million in earnings on sales of $158 million. To offset some of the volume declines, the company resorted to acquiring Homepoint Correspondent in April, a business generating some $20 billion in origination volumes in 2021.

Trends worsened during the second quarter, with volumes down to $9.3 billion as sales margins fell further to a mere 42 basis points. With revenues down to $70 million, the company posted a $44 million net loss, with equity stable around $732 million. Hard to believe that performance would fall even further, but it did. Third quarter origination volumes of $4.1 billion were accompanied by margins of just 4 basis points, translating into sales of $8 million, triggering a massive $107 million operating loss. These earnings rapidly eat into the equity position of the firm, now down to $639 million.

The positive sign is that revenues are essentially non-existing, which sounds strange, yet it implies that they cannot fall further, either. At the same time, costs are likely coming down following some rightsizing, but for now there are few reasons to become upbeat. With 138 million shares now trading at $1 and change, for a market value close to $200 million, the reality is that the market is not buying the balance sheet, with the market value coming nearly half a billion lower than the reported book value.

What Now?

The reality is that a current burn rate could be maintained for a little while from an equity position, albeit that liquidity and financial stress risk will emerge before shareholder equity is zero of course.

The situation remains utterly complicated and harsh, yet underlying margins have been increasing to 70 basis points in October, as the earnings call revealed, with costs savings kicking in, as part of the third quarter expense base included some restructuring expenses.

The fundamental Home Point Capital story remains nearly uninvestable based on the projection of continued losses as the market sentiment remains tough, even as the performance in the coming quarter (from a financial point of view) will likely improve, for the simple reason that it cannot get much worse from a sales perspective and cost-cutting measures are being taken.

Amidst all this, I see no reason to get involved with Home Point Capital just yet, albeit that there is some time as perhaps some improvement in interest rates might reveal some upside and improvements to come. Therefore, the Home Point Capital situation remains highly speculative, as even modest improvements will likely be accompanied by continued losses.