SoFi ($SOFI) – Mortgages & Galileo – August 10, 2024
Mortgages
SoFi has been working on establishing excellent service and consistent processes for its very small mortgage business. To enable direct servicing and origination of loans, it purchased Wyndham Capital, and has since integrated the assets. This week, mortgage rates fell to their lowest levels in nearly a year to a still elevated 6.5%, and I would expect mortgage volume this quarter to considerably outperform if that continues.
SoFi has positioned its model to take advantage of more mortgage demand and to create yet another operational tailwind stemming from near future rate cuts. Whether it’s more willingness to originate more unsecured credit with more rate certainty and capital market liquidity, student loan refinancing, better tech platform demand, velocity of money supporting faster financial services growth, or now mortgages, easy monetary policy will be great for this business.
One may rightfully wonder: How is that the case if this is a bank? While cuts will certainly be a net interest margin headwind, SoFi still has a lot more balance sheet optimization to do. It still has a lot of expensive warehouse debt to swap out with cheaper deposits. That will be a powerful offset to the traditional bank headwind from rate cuts, while all of the other mentioned segments enjoy bluer skies. And one more note: Personal loan variable to fixed refi demand does suffer with rate cuts. There’s intuitively less motivation to fix variable debt when rates are falling. Still, pent-up borrower demand stemming from SoFI’s extreme conservatism and better capital market liquidity will easily overcome that obstacle. That’s management’s view and my own. Cuts are coming. Powell has all but telegraphed a September rate cut, with betting markets now seeing 3-4 cuts in 2024. Obviously, if rate cuts are a response to severe recession, then SoFi and everyone else will suffer. The most likely outcomes, however, are looking like modest recession or soft landing. That scenario would likely bode very well for this company.
Galileo
Rumors swirled this week that Galileo lost another client in Varo. They haven’t been a Galileo client since 2022. Furthermore, as CEO Anthony Noto explained, Varo committed to regulators to move to a certain processor as part of their bank charter process. That commitment was made before SoFi purchased Galileo and secured its own banking charter. This is old news and will have no impact on 2024 tech platform guidance.
