Lessons learned from lenders’ Q1 earnings amid epic volume decline

As banks and non-bank lenders recently released their results for the first quarter of 2022, two things became clear: origination volume fell across the board, but those who managed to muster a strong quarter benefited from portfolio management. As refinancing became less attractive, lenders also sold off much of the mortgage servicing rights (MSR), cut costs and diversified revenue streams to weather the mortgage storm.

Rocket companies ($1 billion), United Wholesale Mortgage ($453.2 million) and Attachment point ($11.9 million) are among the non-bank lenders that benefited from the sale of MSR, offsetting the lower volume of closed loans in the first quarter of 2022.

UWM, the nation’s largest wholesale lender, sold MSR on loans with a total outstanding principal balance of about $56.6 billion for processes of about $656.7 million, according to the premier’s filing. quarter of the company with the US Securities and Exchange Commission (SECOND).

With rising mortgage rates, the prepayment velocity of the MSR decreases, a by-product of reduced refinancing activity. This, in turn, amplifies the value of MSRs, as they pay out over a longer period.

UWM’s first-quarter earnings were led by a $172 million increase in the fair value of MSRs. UWM had $303.4 billion in outstanding MSR principal balances as of March 31, 2022, up from $221 billion exactly a year earlier.

Proceeds from the sale of MSR for Detroit-based Rocket Companies, the parent company of Rocket Mortgage, totaled $254 million in the first quarter of 2022, compared to $10.2 million in the same period of 2021.

Why 2022 could open up more opportunities for subservices

With production volumes flattening and non-QM origins increasing, the need for originators to focus resources and costs on the front-end of the business could lead to more under-service opportunities .

Presented by: Selene Finance

Rocket reported a 17% year-over-year increase of $546 billion in the outstanding principal balance as of March 31 for its service book. Rocket has 2.6 million customers in the service portfolio and generates $1.4 billion a year in recurring service fee revenue, according to the company.

Homepoint trimmed its service portfolio and closed MSR sales of single-family mortgages of approximately $434.5 million in the first three months of 2022. The company said it generated $83.2 million from the mortgage servicing during this period, up $64.8 million from the same quarter in 2021 and $74.4 million from the prior quarter.

Other companies delivering a profitable first quarter building on their service portfolios include California-based non-bank lender Pennymac ($173.6 million), non-bank mortgage lender and manager New residential investment company. ($690 million), Mr. Cooper ($658 million) and owen ($58 million).

Without an abundance of refis, lenders have also been tasked with increasing the volume of mortgage purchases. Mortgage managers, consultants and loan officers predicted that players who do well with buying mortgages – or in other words, get closer to the borrower – are better positioned at the bottom of the mortgage market. range.

Rocket posted $54 billion in closed loans from January to March, up from $75.8 billion in the prior quarter and $103.5 billion in 2021. The company’s purchase volume increased 43% from year-over-year, but it was only 16.7% of the lender’s total composition last year. .

“I’ve been very confident in our ability to grow buying organically,” Jay Farner, vice president and general manager of Rocket Companies, said on its earnings call. “That said, there are opportunities that could allow us to look into the buy market.”

Analysts say Rocket has advantages in the buy market, as it does most of its business through direct-to-consumer retail and is also the second-largest wholesale lender. Rocket generated around $113.5 billion in the brokerage channel last year, according to Inside mortgage financing.

UWM issued $38.8 billion in mortgages in the first quarter of 2022, down 29.7% from the prior quarter and down 20.8% year over year. Purchase loans increased 49% of total origination volume in the first quarter of 2022 to $1.9 billion, from 24.9% in the same period last year.

Refi-heavy loanDeposit had a difficult three months with a net loss of $91.3 million in the first quarter; it expects to be in the red for the rest of 2022.

Loan origination volume fell 26% to $21.6 billion from the prior quarter, bringing the company’s market share down to 3.1%. Lower rate lock-in volume and sell-on gain margin were responsible for the massive quarter-over-quarter decline, the company said.

“The increase in mortgage rates during the quarter occurred much faster and sharper than anyone had expected at the start of the quarter and resulted in a significant and rapid decline in profit margins,” said Anthony Hsieh, founder and executive chairman of loanDepot, to analysts.

Locked rate volume in the first three months of 2022 fell 13.7% to $30 billion from $34.8 billion in the previous quarter. The margin on sales declined to 1.96% in the first quarter from 2.23% in the previous quarter.

The company’s net loss of $68.4 million on the change in fair value of its management rights did not help its performance in the first quarter. The outstanding principal balance of the management portfolio fell to $153 billion in the first quarter of this year, from $162 billion in the last quarter of 2021.

Two of the largest banks in the country, JPMorgan Chase and Wells Fargo & Co.recorded double-digit declines in origination volume and net profit, partially offset by strong performances in their respective service portfolios.

Wells Fargo, the fourth-largest US mortgage lender by volume, native $37.9 billion in the first quarter of 2022, down 21% quarter-over-quarter and 27% year-over-year. The share of refinancings fell from 64% in the first quarter of 2021 to 56% in the same period of this year.

At JPMorgan, the nation’s fifth-largest mortgage lender, origination volume totaled $24.7 billion from January to March, down 41% from the previous quarter and 37% from the first quarter of 2021.

“The mortgage origination market experienced one of its largest quarterly declines in memory, and it will take time for the industry to reduce excess capacity,” said Charlie Scharf, CEO of Wells Fargo, during its earnings call.

While both banks saw a roughly 20% decline in revenue in the home loan business, higher service revenue offset lower origination revenue. Wells Fargo’s mortgage servicing fees rose 13% to $8.5 billion in the first quarter of 2022 from $7.5 billion. JP Morgan’s management fees rose to $7.2 billion in the first quarter of 2022 from $4.4 billion in the same period last year.

To manage business during the storm, staff reductions were inevitable for some lenders.

American Corporate Finance, which recorded a loss of $64 million in the first quarter, cut 598 jobs between March 2021 and March 2022. With refis expected to decline further in the second quarter, this will keep the workforce aligned with the volume of activity, although specific details have not been released.

Pennymac announced the layoff of 236 employees at six California offices in March. Most of the reduced positions were home loan specialists, including those with expertise in refinancing.

Layoffs were also imminent at loanDepot, which did not provide details of a timetable or the positions affected.

“We are aggressively managing our cost structure to return to profitability by the end of the year,” said Patrick Flanagan, chief financial officer of loanDepot. “We plan to achieve this goal by further reducing marketing expenses and personnel expenses through the addition of workforce reductions,” Flanagan added.

Dealing with the downturn in a cyclical industry has also meant that lenders have rolled out new products and services.

In the third quarter of this year, loanDepot is rolling out its new home equity line of credit (HELOC) product for which customers can apply and be approved in as little as seven days. The product is part of its mello business unit, which launched in 2017 and works side-by-side with loanDepot’s mortgage origination and servicing division.

In January, loanDepot announced that it was bringing maintenance of the Federal Housing Administration, Department of Veterans Affairs and united states department of agriculture-financed Ginnie Mae loans internally. The move builds on “continued investment in the company’s service platform, enabling the company to evolve for operational efficiency and improved customer service,” executives said at the time. from LoanDepot.

FoA diversifies its portfolio beyond traditional mortgage products with the best performance in reverse originations for the quarter. Funded product volume increased from $1.32 billion in Q4 2021 to $1.47 billion in Q1 2022, up 12%. Compared to the same period in 2021, when volume was $769 million, it was up 92%.

“Our reverse and commercial issuance businesses faced pressure in the first quarter as rates and spreads rose at the fastest pace in decades; however, the pipeline of reverse and commercial origins continues to be strong,” said Patti Cook, CEO of FoA. “Our reverse pipeline has never been stronger, boosted by the strong appreciation in home prices over the past two years.”

According to Black Knight. While purchase loans hit a record high of $1.7 trillion in 2021, the $2.7 trillion in refinance loans was below 2020 levels.

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