United Wholesale Mortgage (UWM), the nation’s largest wholesale lender, posted another record for production in 2021, but lower margins and declines in fair value of mortgage servicing rights impacted its earnings.
The company reported on Tuesday $1.56 billion in profits in 2021, down 53.6% from the $3.38 billion registered in the previous year, which was the best in the history of the mortgage industry.
In the fourth quarter, the net earnings decline was even higher compared to the same period of 2020: a fall of 82.5%, from $1.37 billion to $239.8 million in Q4 2021. In comparison with the third quarter of 2021, profits fell 27%.
According to the Pontiac, Michigan-based lender’s earnings report, UWM originated $226.5 billion in mortgage loans 2021, a 24% increase compared to the previous year. Purchase mortgages rose from 23.5% to 38.4% of the total, the lender said.
Loan origination volume reached $55.2 billion in the fourth quarter, down 12.4% from $63 billion in the prior quarter but up 0.94% from the $54.6 billion originated in the fourth quarter of 2020. UWM said it originated $24.5 billion in purchase mortgages during the fourth quarter, a 103% increase year over year.
The company said earnings were impacted by a decline in fair value of mortgage servicing rights (MSRs) compromising $139 million in the fourth quarter and $587.8 million for the full year.
Another reason for the decline in earnings is that UWM’s margins have declined in a competitive market. According to the company’s earnings report, UWM’s gain-on-sale margin fell to 80 basis points in the fourth quarter, down from 94 bps in the third quarter and a huge decline from the 305 bps it notched in the fourth quarter of 2020.
“2021 was a fantastic year for UWM with incredible milestones: from becoming a public company to delivering another year of record production,” said Mat Ishbia, UWM’s CEO. He added: “We also delivered our best fourth quarter production of all time, coupled with growth in the broker channel.”
UWM estimates it achieved around 31% in market share on the wholesale channel in 2021. It has been the largest wholesale mortgage lender in the U.S. by closed loan volume for seven years in a row.
UWM is forecasting originations for the first quarter to range between $33 billion and $42 billion, and its gain-on-sale margin to range from 75 to 85 basis points. Because UWM’s cost to produce a loan is so cheap, the lender’s executives argue it is better positioned to weather pressure on margins than its rivals.
However, during a conference call with UWM’s executives on Tuesday, analysts raised concerns related to costs in a landscape defined by lower margins and less origination volume.
Tim Forrester, UWM’s chief financial officer, said the cost per loan will increase in the first quarter of 2022 as volume declines, “as anything when you have a smaller denominator,” but will remain around $1,500 per loan during 2022. “We do expect the first quarter to have a little bit of higher costs, but that will be made up in Q2 and Q3.”
UWM believes expenses will not become an issue despite lower volumes because of its technology, executives said during the call. They mentioned Bolt, a platform launched in the third quarter of 2021 that sped up the clear-to-close time on conventional loans by an average of approximately five days.
Regarding margins, Ishbia said retail lenders will see quite a bit of compression in 2022. Meanwhile, UWM is basically at the floor already.
“Do I think that margins are going to go up in the second, third, and fourth quarters? Yes, or flat, but they will not go down, is my perspective,” Ishbia said. “I don’t see it (margins) going lower than the 75 bps, 85 bps, basically.”
According to Ishbia, UWM sees the competitive pressures as an opportunity to move loan officers from the retail channel to the wholesale channel, increasing the company’s market share. “It’s a business development strategy,” he said on the call. “It’s working fantastically.”
Virtually all rival nonbanks posted declines in profits in 2021 when compared to the preceding year due to pressures on margins, though originations were still solid, and in some cases increased.
Last week, Rocket Companies, the parent of Rocket Mortgage, reported $6 billion in net income, down 35.4% from the prior year. Originations rose to $351 billion, up nearly 10% from 2020. Margins, however, declined to 2.80% in the fourth quarter, a sequential decline of 25 basis points and a 161 bps decline from a year prior. LoanDepot, another multichannel lender with a retail bend, also saw margins rebound in 2021, posting income of $623.1 million, compared to $2 billion the previous year.
As of 9:50 a.m. EST on Tuesday, UWM’s stock was trading at $4 a share, down 7.4% from the prior day.