UWM’s earnings and margins down, but volume rises

Even with the extremely low gain on sale margins UWM Holdings recorded in the fourth quarter of 2021, the company remained highly profitable, its executives claimed.

UWM reported lower earnings in the fourth quarter, $239.8 million, down from $329.9 million in the third quarter and $1.4 billion in the fourth quarter of 2020, which was prior to the company’s Jan. 22, 2021, merger with special purpose acquisition company Gores Holdings IV.

Included in the fourth quarter results was a $139 million fair value decline in the company’s mortgage servicing rights portfolio.

For the full year, UWM had net income of $1.6 billion, compared with $3.4 billion in 2020. The company recorded a $587.8 million decline in MSR fair value for 2021.

At the same time, Chairman and CEO Mat Ishbia said on the UWM earnings call that the company had its best fourth quarter ever — traditionally a slow period — for mortgage originations at $55.2 billion. This was down from the third quarter’s $63 billion, but up from $54.7 billion one year ago.

Purchase volume was $24.5 billion, compared with $12.1 billion in the fourth quarter of 2020.

However, the gain on sale margin was 80 basis points. While that was in line with what the analysts at Keefe, Bruyette & Woods were expecting, it was below what Ishbia guided to in the third quarter earnings call.

“These margin numbers are near the bottom and I see the first quarter of 2022 to be very similar to the fourth quarter, somewhere between 75 to 85 basis points of margin with $33 [billion] to $42 billion of production,” Ishbia said. “We’ll be very profitable at these numbers and will remain so even if it were lower.”

Later in the call, Ishbia said margins should not fall any further and that he expects them to rise in the next three quarters.

Those lower margins are being attributed to the “competitive environment” in the mortgage industry, said Tim Forrester, the chief financial officer. But the composition of UWM’s gain margin also needs to be considered.

As the fourth quarter started, in anticipation of higher conforming loan limits, UWM (along with several other lenders) started accepting loans at the expected 2022 levels. However, those loans needed to remain on its balance sheet until the start of the year, when they could finally be sold to Fannie Mae and Freddie Mac.

As a result, UWM sold in the secondary market some $5.8 billion more than it originated during the first week of January and around $9.5 billion more for the entire month.

Because the company incurred the hedging costs from having to hold on to the loans, the gain margin benefits are in its interest line. “It further pushed down the margins from an already competitive environment,” Forrester said. “Overall, the economics made sense for us to hold the loans, it just shows up in different line items.”

Full year originations totaled $226.5 billion, at a 114 bps margin, compared with $182.5 billion at a 249 bps margin for 2020.

Ishbia said UWM is contemplating when would be the best time to bring the servicing function in-house on its $319.8 billion portfolio. The company had $188.3 billion in MSRs on Dec. 31, 2020.

Besides weighing the financial benefits, “we also think there’s a great opportunity to build our own best in class servicing platform, which has many additional benefits and presents other business opportunities for UWM,” Ishbia said.

In addition to potential cost savings, UWM is also looking at providing better service to its consumers and the mortgage brokers that sell it loans, he said later in the call.

The revenue that UWM brings in from owning more servicing rights outweighs the higher incremental costs, and that benefit will further grow along with the portfolio, Forrester added.

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