Home Point Capital takes 3Q loss, nearly completes Ginnie Mae MSR exit

Home Point Capital recorded another loss in the third quarter, but executives said it's making progress in rightsizing its lending division and building liquidity through actions like selective servicing sales.

The company on Thursday reported a net loss of $93.4 million, more than double the first quarter's $44 million, and noted that it entered a commitment to sell "substantially all" of its remaining Ginnie Mae servicing as part of a planned exit, generating $110 million in cash. A year ago, HPC earned $71.2 million.

Analysts are concerned with the company's ability to contend with the price wars in the wholesale channel, which have led to razor-thin margins and closures of other lenders in the sector.

"Profitability is going to continue to be challenged with very severe operating conditions for nonbank residential mortgage companies, particularly for companies in the wholesale origination channel," Gene Berman, an analyst at Moody's Investors Service, said in an email.

The company's operating subsidiary, Homepoint, continued to pursue a strategy in the third quarter that's the opposite of that taken by industry giant United Wholesale Mortgage. UWM has been slashing prices to gain market share. Instead,  HPC continued to maintain a strategic focus on "margins over volume" during the fiscal period, Chief Financial Officer Mark Elbaum said during the company's earnings call.

Due to continued pressure from rising rates that's impacted the industry's originations overall, it still experienced some declines in volume but reported an intra-quarter improvement in margin.

The company reported $4.1 billion in funded mortgages in the third quarter, which the company ended with a gain on sale margin attributable to channels of 51 basis points. Elbaum said that was up from around 35 basis points in July.  

Originations and margins remained lower for the quarter as a whole relative to comparable periods. For the second quarter, these were $9.3 billion and 60 basis points. A year ago, originations totaled $20.8 billion with a gain on sale margin of 73 basis points.

Berman, and analysts on the call, questioned HPC's ability to strike the right balance in rightsizing origination staff and funding sources while maintaining adequate amounts of capital and liquidity.

With originations falling, the company has increasingly generated its revenue through its servicing division. Servicing segment revenue for the quarter was $64.2 million, nearly flat compared to $64.4 million the previous quarter and down from $97.2 million a year earlier. Origination segment revenue was $1.7 million, compared to $37.2 million in the second quarter and $183.8 million a year ago.

With a growing number of lenders selling servicing to raise cash as originations have declined, HPC faced some inquiries about its Ginnie Mae sale, the extent to which the company would need to engage in this type of activity going forward and the prices it might get when it did.

Although the prepayment profile of servicing rights has remained attractive to investors, analysts questioned whether prices have continued to cool a little due to lender sales.

"There is a lot of MSR supply stemming from nonbank originators selling assets to free up liquidity given their low volume and low/negative origination margins. The impact has been more attractively priced MSR for buyers," Nick Smith, founding partner and CEO of Rice Park Capital said in an email Thursday, when asked about current market conditions.

HPC executives said their MSR sales will be selective.

The company has been working on exiting Ginnie servicing for some time, and the notional amount remaining that it committed to sell was just $8 billion, management said during the company's earnings call. Although the company's servicing portfolio has been shrinking from levels about $100 billion last year, it was still well above $90 billion at the end of the third quarter, and executives said they wouldn't be under heavy pressure to engage in more sales.

"I think at this point, we feel really good about the liquidity position we have, so there's not a need to sell MSRs for us," said Willie Newman, the company's president and CEO.

Ginnie Mae's pending risk-based capital rule for nonbanks, which would apply to HPC's operating entity (Homepoint), have led some companies like Ocwen to consider reducing its holdings of servicing rights But it wasn't clear if that was a motivation for HPC.

When asked about the Ginnie rule that goes into effect at the end of 2024, executives said the company was compliant on a pro forma basis.

"At this point, I'm comfortable where we are. That's not to say I would take it for granted. We'll be managing it like we do everything else," Elbaum said.

In addition to entering commitments to sell off most of its remaining Ginnie servicing in the third quarter, Home Point also finalized its arrangement to have ServiceMac handle its subservicing. On Oct. 3, the company completed the sale of its stake in Longbridge Financial, Elbaum said.