UWM beats originations but misses on analysts' earnings estimate in 2Q

In its second quarter earnings, UWM Holdings beat analyst estimates on originations and gain on sales margin, but GAAP and operating earnings per share were lower than analysts' expectations.

Operating EPS backs out a servicing mark-to-market valuation, which UWM management during its earnings call noted is largely outside of its control.

Because of the $115.3 million reduction in the fair value of its servicing rights, UWM reported lower net income versus the comparative periods. For the second quarter it posted net income of $76.3 million compared with $180.5 million three months earlier and $228.8 million one year ago.

BTIG had predicted 8 cents a share of GAAP EPS, with industry consensus at 7 cents. Keefe, Bruyette & Woods expected 6 cents per share in both GAAP and operating EPS, but UWM reported 3 cents and 4 cents respectively.

Volume-wise this was the best period for United Wholesale Mortgage since the first quarter of 2022, Mat Ishbia, chairman and CEO, said on the earnings call.

Production was $33.6 billion, compared with $27.6 billion in the first quarter and $31.8 billion for the second quarter of 2023.

Rival Rocket Cos. reported a second quarter closed loan volume of $24.6 billion.

While the gain on sale margin declined slightly from the first quarter, it was still at the upper end of previous guidance. UWM reported 106 basis points and its guidance for the period was for between 85-to-110. This compared with 108 basis points for the first quarter and 88 basis points for a year ago.

KBW had expected 98 basis points, Bose George said in a flash note, while BTIG's Eric Hagen's estimate was for 96 basis points, his post earnings report said.

"We still think there's room for margin expansion in response to larger and more sustained drops in interest rates, as lenders could potentially benefit from a window of bargaining power while capacity catches up to demand," Hagen said. "We especially see the company's scale factoring into the margin stability we expect at lower rates, especially versus some retail lenders whose capacity would likely take longer to reload/restaff, especially if a plummet in rates drives a rush of demand."

For the third quarter, UWM expects production between $31 billion and $38 billion, while Ishbia held to gain on sale guidance in the 85-to-110 basis point range.

However, in the days leading up to the earnings release, the mortgage market "has really made an inflection point where we can look at, could the refi boom be here right now?" Ishbia said.

If the 10-year Treasury yield, which closed on Aug. 1 at 3.79%, and mortgage rates stay where they were, UWM will beat that guidance from a production perspective, Ishbia said. But given that the third quarter is nearly midway done, he added he was more excited for the company's prospects in the fourth quarter.

Lower mortgage rates were the catalyst for Hagen's investment thesis for the company, where he raised his stock price target to $10.

(At noon on Aug. 6, UWM Holdings was trading at $8.55 per share, down 19 cents on the day, likely because of the earnings miss.)

"All else equal, we roughly estimate the company can do around $150 billion of annualized volume if mortgage rates were to fall below 6.5%, up from our current estimate of $120 billion this year with rates near 7%," Hagen said. "We think it could support that volume with very little additional operating expense, and fairly modest mark-to-market losses in its servicing portfolio."

Meanwhile UWM continued on its strategy of selling MSRs, and has received nearly $2.6 billion in proceeds through the end of the second quarter from bulk and excess sales, said Andrew Hubacker, chief financial officer.

"Proceeds from these sales have been used to de-lever our balance sheet, increase production and invest in our business while also maintaining a consistent dividend for our shareholders," Hubacker said. "These sales have been targeted at our higher coupon MSRs, and allowed us to significantly de-risk the portfolio."

Most of the MSRs sold had coupons over 5.5% and approximately one-third was Ginnie Mae collateral, he said.

Later in the call Ishbia said going into this year, UWM's strategy was to de-risk. However, servicing sales is not something he is focusing on at this moment.

"I'm not saying we won't sell any more MSRs, because people call us all the time to try to buy them," Ishbia said. "My focus is on origination, on scale and dominance in this industry right now."

Because of the sales, UWM ended the quarter with a $189.5 billion portfolio at a 4.31% weighted average interest rate. On March 31, it had a $229.7 billion portfolio with WAIR of 4.58%, while one prior UWM owned $294.9 billion at a 3.84% WAIR.

In May, UWM's consumer-facing website, Mortgage Matchup, became the official mortgage partner for both the National Basketball Association and Women's National Basketball Association, Ishbia noted on the call. Ishbia owns the Phoenix Suns and Phoenix Mercury franchises in those leagues.