Flagstar's 2Q mortgage earnings slip on margin compression

Flagstar Bancorp's second quarter mortgage banking earnings fell 26% compared with the prior three months and 45% year-over-year as gain on sales margins dipped and its servicing rights.

The Troy, Mich.-based bank, which is in the process of being acquired by New York Community Bancorp, reported combined net mortgage origination and servicing income during the quarter of $163 million, compared with $227 million in the first quarter and $295 million for the second quarter of 2020.

But the parent company, which also has community bank branches along with mortgage warehouse and securitization operations, recorded net income for the second quarter of $147 million. That is relatively flat with the first quarter's $149 million, but approximately 26% higher than the year-ago's $116 million.

"Of special note was our execution offour private label securitizations during the quarter, further demonstrating the versatility of our mortgage business and the optionality it provides," said Alessandro DiNello, president and CEO, in a press release.

Mortgage banking gain on sales margins for the most recent period were 135 basis points, down from 184 bps in the first quarter, a high of 231 bps in the third quarter last year and 219 bps in the second quarter of 2020. Competitive factors along with channel-mix based margin compression are responsible for the drop, Flagstar said.

It originated $12.8 billion in the second quarter, which is down from $13.8 billion on a quarter-to-quarter basis but up from $12.2 billion produced in the previous year. But the purchase business contributed $5.6 billion of the quarter's volume, compared with $4 billion in the first quarter and $4.4 billion during last year's second quarter.

Correspondent mortgage acquisition activity made up $7.4 billion of the quarter’s production, unchanged from the previous three months but up from $6.6 billion the prior year. But wholesale volume fell to $1.1 billion from the first quarter's $1.7 billion and the second quarter 2020's $1.9 billion.

The combined retail branch network and consumer direct operations produced $4.3 billion, down from $4.6 billion in the first quarter but higher than the $3.7 billion the previous year.

Flagstar took a $5 million net loss on its MSRs reflecting an $8 million write off of the fair value of government-guaranteed loans it repurchased during the quarter. The bank broke even on its MSR activity in the first quarter, but lost $8 million one year ago.

The bank serviced $255.7 billion as of June 30, of which $211.8 billion is subservicing. One year prior, it serviced $213.6 billion, with $174.5 billion of that being subservicing.

Warehouse loan commitments fell to $10.4 billion on June 30 ($5.9 billion of which is outstanding), down from $10.7 billion ($6.6 billion outstanding) on March 31. On June 30, 2020, Flagstar extended $7.9 billion of warehouse credit, with $5.2 billion outstanding, meaning there was a higher utilization rate.