California-based Guild Mortgage can be added to the growing list of lenders with waning profitability. But Guild’s executives believe the retail lender is well positioned to succeed in a lower-volume environment, whether it’s organically or through acquisitions.
The nonbank mortgage lender increased its total originations in 2021, despite a reduction in the fourth quarter. But margins under pressure due to higher rates reduced the company’s earnings.
Guild, a purchase-focused lender with a distributed retail model, reported on Thursday a $36.8 billion in origination volume in 2021, up 5% from 2020, with purchases representing 54.6% of the total. In the fourth quarter, volume checked in at $8.8 billion, down 15% year-over-year and 12% quarter-over-quarter, with a 62% purchase mix.
The gain-on-sale margin on originations declined from 5% in 2020 to 4.02% in 2021, but at the end of the fourth quarter, it had fallen to 3.47%, generally consistent with industry trends.
The company’s net income declined to $283.8 million in 2021 from $370.6 million in 2020, a 23% decrease. The profit plunge was especially pronounced in the fourth quarter, where it was down 46% year-over-year and 41% quarter-over-quarter, to $42.2 million.
Though profits have shrank, executives asked analysts to look at Guild in relation to its competitors.
“Compared to 2020, consistent with the industry trends, sales margins softened, but we maintained higher margins relative to those typically generated in the wholesale or correspondent channels, in part driven by our focused product,” Mary Ann McGarry, Guild’s CEO, said in a conference call.
She added: “Some of our peers have recently started shifting focus to purchases. We have been building the scale, relationship, and expertise in purchase over the last years.”
Part of the profit in 2021 came from the servicing portfolio. The company’s unpaid principal balance increased 18% last year to $70.9 billion, partially offsetting a decline in originations.
“Our underlying servicing portfolio consists primarily of MSRs originated through our retail channel. In 2021, we retained servicing rights for 84% of total loans sold,” Terry Schmidt, Guild’s president, told analysts. According to Schmidt, the company notched a 22% increase in total servicing fees in 2021.
Guild had $243 million in cash and $1.5 billion of unutilized loan funding capacity as of December 31, 2021. The liquidity, according to executives, may support mergers and acquisitions, mainly targeting businesses that have a decent market share in their areas, so Guild can keep its focus on building local infrastructure.
“While we remain focused on funding originations and reinvesting in the business, we maintain ample excess cash to capitalize on strategically and financially compelling M&A opportunities, as we have done in the past, most recently with the RMS acquisition,” Amber Kramer, Guild’s CFO, said during the conference call.
In May, Guild announced the acquisition of Maine-headquartered retail lender Residential Mortgage Services Holdings for $196.7 million. The target company, founded in 1991, had 70 offices across 14 New England and Mid-Atlantic states.
For the first two months of 2022, Guild delivered $3.9 billion in loan originations, at a gain on sale margin of 4.15%. Kramer said during the conference call that the company is seeing competitive pressures on margins but is looking at a locally disciplined pricing approach to remain competitive.
Guild shares closed on Thursday at $11.59, down 2.28% from the prior day. The stocks were up 2.94% in the aftermarket following the earnings report.