UWM Holdings returned to profitability in the first quarter, helped by doing the most purchase volume for this particular three-month period leading to gain-on-sale margins moving above 100 basis points.
The Detroit-area lender earned $108.5 million for the period, compared with losses in the fourth quarter of $461 million and $138.6 million during the first quarter of 2023.
Total volume of $27.6 billion included $22.1 billion of purchase loans, which UWM chairman and CEO Mat Ishbia attributed to a strong spring purchase market. This compared with $24.4 billion in the fourth quarter, of which $20.7 billion came from purchases. One year ago, United Wholesale Mortgage produced $22.3 billion, including $19.2 billion of purchase loans.
“I won’t say like extremely strong, isn’t like the best of all time, but it’s a strong market,” Ishbia said on the earnings call. “Definitely stronger than it was last year and that’s why we’re seeing volume increases” year-over-year in the first quarter of 24%.
UWM is guiding to second quarter volume in the $25 billion to $35 billion range. A year ago, the company’s second quarter volume was $31.8 billion.
“If we can exceed last year’s number that would be a really big number,” Ishbia said. “And we exceeded last year’s number in the first quarter but last year’s second quarter we had a great quarter.”
Gain-on-sale margins of 108 basis points beat the company’s own prior projections of between 80 and 105 basis points. For the fourth quarter and the first quarter last year, the margin was 92 basis points.
Its total volume was at the upper end of first quarter predictions UWM management made in its last earnings report.
But operating earnings per share of 2 cents missed consensus estimates, but was in line with Keefe, Bruyette & Woods’ projections, Bose George wrote in a flash note. The volume figure also beat George’s $23.7 billion estimate.
For the current period, KBW expects $32.7 billion while the Street estimate is actually higher than UWM’s at $35.1 billion.
“Revenues beat us (+$0.01) driven by higher loan production income (+$0.04) from higher volumes and a higher GOS margin, while net servicing missed by -$0.03 on higher than forecast MSR value decline from realization of cashflows,” George continued.
He said the GOS also beat his expectations of 95 basis points, “but the magnitude of the sequential increase is not overly surprising given the similar results we have seen from other large originators in 1Q.”
UWM’s guidance suggested production income in the second quarter to between $238 million and $385 million, but George said the midpoint of $311 million is below his estimate of $334 million.
The latest results are inclusive of a $15.6 million decline in the fair value of its mortgage servicing rights. In the previous period, UWM had a $634.4 million MSR hit, while for the first quarter of 2023, it was $337.3 million.
Part of the fourth quarter hit was related to UWM’s strategy of selling its servicing rights. On this call, Andrew Hubacker, chief financial officer said the company continued that strategy in the first quarter,
“Our first quarter sales were accomplished at what we believe to be favorable prices and have allowed us to significantly derisk our MSR portfolio and de-lever our balance sheet while also supporting our ability to originate substantial new loan volume,” Hubacker said.
Later in the call, Ishbia said the sale prices were in line with what the carrying value of the MSRs were on its balance sheet. Other servicers might be carrying the MSRs at values that are unobtainable.
For the second quarter, UWM again raised its GOS guidance to between 85 basis points and 110 basis points.
While claiming he is not a believer that rates will be higher for longer, if they do stay elevated for an extended period, Ishbia said he is comfortable with providing that GOS number, adding if rates do decline, those margins will rise.
KBW’s current estimate calls for the GOS to decrease slightly from the first quarter, to 105 basis points.
BTIG analyst Eric Hagen has a slightly different take on UWM’s, and the mortgage industry in general, margin growth potential.
“We still think there’s room for margin expansion in response to larger and more sustained drops in interest rates, as lenders could potentially benefit from a window of bargaining power while capacity catches up to demand, although we think odds are low that mortgage rates can rally meaningfully in the very near-term while MBS spreads in the secondary market are somewhat biased to remain near historical wides,” said Hagen in his report on the UWM earnings.
