Lower volatility from mortgages supports Flagstar's 4Q results

Flagstar Bancorp reported slightly lower consecutive-quarter net income in its most recent earnings report, but that was a sign its decisions to shift to a banking business model and reduce its owned mortgage-servicing rights portfolio were effective.

"I am particularly pleased with the consistency of our earnings and our success in taking much of the volatility associated with the mortgage business out of the equation," Alessandro DiNello, president and CEO, said in the company's fourth-quarter earnings release.

"Both our banking and servicing businesses produced solid results for the quarter. Net interest income grew $6 million, or 4%, on an increase in earning assets of $1.7 billion, or 9%, compared to the third quarter of 2019. This strong growth in earning assets reflected higher loans held-for-sale and warehouse loans as we continued to be opportunistic in a mortgage market that remained persistently strong," DiNello said.

"We ended the quarter servicing or subservicing 1.1 million loans — a number that validates our investment in a high-quality servicing platform, and demonstrates the strong relationships we have fostered with our subservicing partners."

Flagstar's net income for the fourth quarter was $58 million or $1 per share, down from $63 million or $1.11 per share in the third quarter, but up from $54 million or $0.93 per share in the fourth quarter of 2018. "Overall, 2019 was a year where the results clearly demonstrated the earnings power of our company as our banking, mortgage and servicing businesses all delivered earnings growth that exceeded the prior year," DiNello said.

It was in the fourth quarter of 2018 that Flagstar closed on its purchase of 52 banking branches from Wells Fargo.

Mortgage revenue was $98 million, with its gain-on-sale margin increasing to 123 basis points, "resulting from optimizing production by focusing on profitable business versus volume," DiNello said.

Third-quarter mortgage revenue was $108 million, while in the fourth quarter of 2018 it was just $44 million. Mortgage revenue is the combination of the gain on loan sales and the net return on its mortgage servicing rights.

In the third quarter, the gain-on-sale margin was 120 bps, while in the fourth quarter of 2018 it was 60 bps.

The net gain on sale in the fourth quarter was $101 million, down from $110 million in the third quarter, but up from $34 million one year prior.

During the fourth quarter, Flagstar closed $9.3 billion, up from $9.26 billion in the third quarter and $6.3 billion in the fourth quarter last year.

Flagstar took a net loss of $3 million on its MSRs because of higher refinance activity, compared with a net loss of $2 million in the third quarter and a net gain of $10 million for the fourth quarter of 2018.

It ended the fourth quarter servicing $228.2 billion, of which $194.6 billion was subservicing MSRs; Flagstar previously adopted a policy of selling most of its originated MSRs, retaining the servicing function for the new owners. As of Dec. 31, 2018, Flagstar serviced $175.1 billion, of which $146 billion was subserviced.

Average warehouse loans increased $239 million or 10%, over the third quarter, benefiting from the increase in industry-wide mortgage loan production during the quarter. The latest Mortgage Bankers Association estimate placed fourth-quarter volume at $637 billion (51% refinance), compared with $605 billion in the third quarter.

It ended the period with $2.75 billion in average warehouse loans, up from $2.51 billion in the third quarter and $1.34 billion in the fourth quarter 2018.