An Inside Look at Berkshire Hathaway's Mortgage Businesses

 Berkshire Hathaway, the conglomerate led by renowned investor Warren Buffett, has its hands in many different business sectors, from insurance to railroads to utilities. One area that may fly under the radar is Berkshire's presence in the mortgage industry. Through several subsidiaries, Berkshire Hathaway mortgage lending and servicing businesses generate billions in revenue each year.

In this article, we'll take a closer look at Berkshire's mortgage operations and how they fit into the company's broad investment strategy.

Berkshire's Mortgage Lending Businesses

One of Berkshire's main mortgage subsidiaries is HomeServices of America, which is the second largest residential real estate brokerage firm in the United States. HomeServices has over 45,000 real estate agents and operates under different brand names like Edina Realty and Long & Foster.

An important part of HomeServices' business model is mortgage lending. It operates Prosperity Home Mortgage, which provides mortgage products through its real estate agents and brokerages. In 2020, Prosperity originated over $24 billion in home loans.

Another Berkshire Hathaway mortgage subsidiary is Berkshire Bank, which provides commercial and consumer lending in addition to mortgage products. The bank operates primarily in New England and New York. In 2020, Berkshire Bank originated around $1.4 billion in residential mortgages.

Mortgage Servicing at Berkshire

In addition to mortgage origination, Berkshire Hathaway has a major presence in the mortgage servicing industry through PHH Mortgage. Servicing includes collecting mortgage payments, managing escrow accounts, and handling issues like loan modifications.

PHH Mortgage is now one of the ten largest non-bank mortgage servicers in the country, servicing over 1.7 million mortgage loans. Berkshire acquired PHH in 2016 and the business continues to grow—PHH serviced $219 billion in mortgages in 2020, up from $183 billion in 2019.

The scale and experience of PHH Mortgage provides Berkshire with stable servicing fee income even during challenging markets. The business also gives Berkshire more exposure to the U.S. housing market.

Why Mortgages Appeal to Berkshire

Warren Buffett has often praised the humble mortgage as an attractive long-term investment. Mortgages perform consistently across different economic environments. Borrowers make monthly payments that provide steady cash flow for decades. There is also minimal technology risk with mortgages compared to other financial products.

The mortgage businesses fit well with Berkshire Hathaway's broad strategy of acquiring straightforward, profitable companies in industries with sustainable long-term demand. The combination of origination and servicing provides diverse revenue streams across the mortgage value chain. Berkshire's huge size also provides advantages in capital funding and regulatory compliance that gives it durable competitive advantages.

Despite Berkshire's general avoidance of the technology sector, it has made measured investments to bolster its mortgage operations. For instance, it purchased Origence, a mortgage technology provider that helps lenders like PHH Mortgage assess credit risk and process loans more efficiently.

Berkshire also isn't afraid to make big strategic bets in the mortgage sector. In 2020, it acquired insurance giant AIG's United Guaranty mortgage insurance unit for $5.56 billion. This addition expanded Berkshire's mortgage exposure by insuring lenders against the risk of borrower default.

Key Takeaways

Through operating companies like PHH Mortgage, HomeServices, and Berkshire Bank, Berkshire Hathaway has established itself as a major player in the U.S. mortgage industry:

• Berkshire originates tens of billions in mortgages each year for consumers and businesses.
• Its servicing portfolio collects payments and provides servicing for over $200 billion in mortgages.
• Acquisitions like United Guaranty demonstrate Berkshire's willingness to make big strategic bets.
• The mortgage sector aligns well with Berkshire's investing approach of finding sustainable, profitable businesses.

Though not as iconic as GEICO or BNSF Railway, Berkshire's collection of mortgage businesses contributes steady cash flow and will likely continue as a core part of its investment portfolio for years to come. The mortgage operations reflect Buffett's appetite for discovering value in unglamorous sectors of the economy that others may overlook.