PrimeLending says volume may be higher in 2024

Hilltop Holdings' residential mortgage originations business is still operating at a loss, as both total volume and gain-on-sale margins in the fourth quarter were lower on a year-over-year basis as well from the prior three months.

Primelending reported a pretax loss of $15.9 million for the fourth quarter, compared with a loss of $8.2 million for the third quarter but improved over the loss of $25.6 million for the same period in 2022.

For all of 2023, it lost $62.8 million pretax, versus a loss of $36.5 million the year before.

What was going on in the mortgage market hampered Hilltop's company-wide results, Jeremy Ford, president and CEO, said during the earnings call.

Hilltop earned $28.7 million in the fourth quarter, down from $37 million then the previous quarter but better than the $25.6 million earned one year prior.

"We are committed to steering our mortgage business [on] a trajectory towards profitability, recognizing the mortgage cycle has endured for longer than anticipated," Ford said.

For 2024, the company expects the gain on sale margins to remain pressured, with a full year average of between 175 basis points and 195 basis points. Mortgage origination volume should come in between $8 billion and $10 billion.

"Looking forward, we believe the measures already taken to reduce our cost base, combined with improved pricing, utilization of technology to reduce headcount dependency and our success in hiring skilled loan originators from peers with less stability, place Primelending in a strong position for the eventual recovery of the housing and mortgage markets," Ford said.

During the fourth quarter, Primelending originated $1.8 billion. Since typically the fourth quarter — along with the first quarter — is slow for mortgage activity, it is not a surprise that volume was down from the $2.2 billion in the third quarter. But it was also lower than the $2 billion produced in the fourth quarter of 2022. 

For all of 2023, it originated $8.24 billion, down from $12.66 billion the prior year.

The gain-on-sale margin of 189 basis points was 9 basis points lower than the third quarter's 189 basis points and 3 basis points lower compared with the fourth quarter of 2022's 192 basis points. But a possible explanation for the falloff exists.

"What we've seen…is that customers have a propensity at this point to want to buy down the rate," said Hilltop Executive Vice President and Chief Financial Officer William Furr. "So we're seeing more customers paying higher origination fees and other fees versus [what] necessarily is rolling through our gain on sale."

Expressed in basis points, origination fees are higher on a year-over-year basis in the fourth quarter, 181 basis points in 2023 versus 172 basis points. But measured in dollars, fees were lower in that same time frame, $69.2 million compared with $71.1 million.

Industry-wide, while fourth quarter loan profitability data is not yet available, on several occasions, Marina Walsh, the Mortgage Bankers Association's vice president of industry analysis, said she did not expect a turn towards origination profitability until the second quarter of this year.

In Hilltop's corporate structure, PrimeLending is a subsidiary of Plainscapital Bank. During the call, Furr revealed that in order to mitigate the risk of falling interest rates, the company is retaining more hybrid adjustable rate mortgages on its balance sheet.

"While loan retention could be volatile on a monthly basis, we expect to retain on average, $10 million per month throughout 2024," Furr said.