When the sky is falling in the mortgage industry, generally there is something else that is rising.
For many larger nonbank lenders, including UWM Holdings Corp., the parent of United Wholesale Mortgage (UWM), what is rising in their favor is the value of mortgage servicing rights (MSRs).
UWM, the nation’s largest wholesale mortgage lender, recorded net income of $215.4 million for its recently ended second quarter, up some 55% from last year’s second quarter earnings mark of $138.7 million, the lender’s earnings report filed with the Securities and Exchange Commission (SEC) shows.
That’s a healthy showing, considering over the same period UWM’s loan-origination volume dipped from $59.2 billion to $29.9 billion and total expenses increased slightly — from $344.5 million to $348 million.
Rising interest rates have crimped loan production for virtually all mortgage lenders as more and more borrowers are forced to forestall home purchases or have no incentive to refinance. That explains UWM’s declining loan production.
UWM, however, also has benefited from the sharp rise in the value of mortgage servicing rights (MSRs) this year — which gain value in a rising-rate environment.
“The volume of MSRs in the market continues to be robust in the first half of the year,” said Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors, which this year through July has traded a total of $180 billion in MSRs — based on the value of the loan portfolios involved.
“What we had the first half of the year … was a robust market for MSRs as a result of pricing valuation because of the velocity and steepness of the rise in [interest] rates,” Piercy added.
Rates this year for a conforming 30-year fixed mortgage are now hovering around 5%, some 2 percentage points higher compared to 2021 — when rates were far more stable and historically low, in the 3% range for much of the year for a 30-year fixed mortgage.
A closer look at UWM’s second-quarter 2022 earnings report shows that the lender’s bottom line benefited from a $26.2 million increase in the fair market value of its MSR portfolio. For the same quarter in 2021, in a very different interest-rate environment, UWM recorded a $219.4 million decline in the fair market value of its MSRs.
The unpaid principal balance of mortgage loans that UWM services for others as of June 30 stood at $308.1 billion, down slightly from $319.8 billion as of yearend 2021, SEC filings show. Even with that decline in overall size, the value of the portfolio still increased in value — by more than $26 million for the quarter as already noted and by more than $198 million over the first six months of 2022, SEC documents show.
The lender’s total MSR portfolio was valued at $3.7 billion as of June 30, up from $2.7 billion a year earlier, according to SEC filings. And that’s after selling off MSRs tied to $72.7 billion in loans over the first six months of 2022 — for total proceeds of $871.7 million, including $216.2 million clocked in the second quarter.
The sale of MSRs does not directly impact earnings as a revenue stream, given the MSRs are already accounted for as assets on the balance sheet. The conversion of MSRs into cash via sales deals, however, does help to bolster the lender’s cash flow and overall liquidity. That, in turn, gives a lender the resources to price loan aggressively, as UWM is doing, and also to ride out periods in which loan originations, and hence revenue, are slipping — as they are for many lenders now.
John Toohig, managing director of whole loan sales for Raymond James in Memphis, said there is “no question” that MSRs are now helping “to keep many lenders afloat right now.”
“The big shops like United Wholesale (UWM) and loanDepot will probably do all right,” he added. “It’s the little mortgage companies … those are the ones that will get pinched.”
The liquidity boost from MSR sales and value increases will come in handy, considering UWM is projecting, according to its second-quarter earnings filing with the SEC, that loan production in the third quarter will “be in the $23 billion to $28 billion range,” which is up to $6.9 billion below its second-quarter 2022 showing.
To that end, UWM, led by Mat Ishbia, also reports in its SEC filing that shortly after the end of the second quarter on June 30, it sold another large batch of MSRs — tied to loans valued in total at $28.5 billion — for total proceeds of $359 million. That windfall will be carried over into its third-quarter earnings report, offering the lender a cash blast to start the new quarter.
Also bolstering UWM’s liquidity are its cash position and warehouse lending lines. UWM reported in its SEC filings that it had $958.6 million in cash and cash equivalents as of the end of the second quarter, compared to $731.1 million at the end of 2021.
In addition, the lender had some 15 warehouse lines of credit providing up to $12.65 billion in credit to tap — with about $4.5 billion outstanding on those lines as of June 30, according to SEC filings. A footnote to UWM’s second-quarter earnings report to the SEC also reveals that UWM on August 8 entered into yet another revolving credit agreement with SFS Corp. — that provides a “$500 million unsecured revolving credit facility” that has an initial one-year maturity date. (SFS is a major shareholder in UWM Holdings Corp.)
Correction: An earlier version misstated UWM’s cash position as in the billions, when it is in the millions.
