UWM Holdings Corp

NYSE:UWMC

Earnings Call Analysis

Comprehensive Review of UWM's Strategy and Performance

As an investor examining the recent earnings call for United Wholesale Mortgage (UWM), you'd appreciate the candid discussion on the company’s strategies and its performance metrics for the quarter. The Mortgage Servicing Rights (MSR) portfolio remains sizeable, hovering around the $300 billion mark, suggesting stability in that aspect of the business. Margins on wholesale were at the higher end this quarter, reflecting robust market positioning even in challenging market conditions. Management expects mortgage business cycles to affect the upcoming quarters, typically seeing slower activity in Q4 and Q1, with an anticipation of hitting the mid-range guidance. UWM continues to adapt to industry changes and regulatory shifts without significant impact, as seen from the level response to Fannie and Freddie's rate of loan repurchase requests. On the product front, UWM has expanded its offerings, including a notable shift to accommodate brokers with loans for borrowers with credit scores as low as 580, focusing on broker satisfaction and a dominant client experience. Noteworthy is the adjusted strategy in servicing portfolio sales and the acknowledgment that current loans typically have a weighted average coupon (WAC) over 5%, setting the stage for refinancing potential if rates soften.

Consistent Margin Policy Underpins Resilience

The company successfully maintained its wholesale margins, adhering to a consistent range of 75 to 100 basis points, even in challenging markets. This quarter, performance was on the higher end of that margin, reflecting strong operational control. The ability to set margins daily signifies proactive management, essential for investor confidence in the company's financial health.

Stable Servicing Portfolio Amid Dynamic Environment

The servicing portfolio has remained relatively stable, hovering around the $300 billion mark, indicating management's success in balancing growth with risk exposure. Despite the possibility of fluctuations, there seems to be a steady expectation that things will continue as observed in the past, contributing to predictability in cash flows from servicing fees.

Seasonal Variation in Revenue Streams

As observed historically, the company experiences variances in mortgage activities aligned with seasonal trends, with the first and fourth quarters generally exhibiting slower activity. However, as the largest purchaser in the country, the company is well-positioned to navigate through these fluctuations.

Vigorous Mortgage Servicing Rights (MSR) Market

There is a vibrant market for MSR buying and selling, with the company receiving multiple bids whenever it brings out a product. Such active interest underlines the quality of the company's MSR assets and presents opportunities for strategic portfolio optimizations.

Addressing Rising Direct Loan Production Costs

Direct loan production costs increased by 50% in the current quarter. The rise is primarily attributed to initiatives such as the affordable programs, particularly the 1% down program, targeting affordability improvements in alignment with Fannie Mae, Freddie Mac, and FHFA guidelines.

Expanding Products and Lowering Credit Barriers

Beyond the affordability agenda, the company has embarked on an expansion of non-QM (Non-Qualified Mortgage) products and lowered the minimum credit score requirement from 620 to 580. This move caters to brokers' desires to increase their business with UWM and indirectly reinforces client experience, a tactic that also aligns with increasingly inclusive lending standards.

Preparation for Interest Rate Variability

While the company has thrived even in adverse mortgage markets over recent years, there is an emphasis on preparedness for the eventuality of lower rates. This proactive stance is likely to ensure continued success and profitability in diverse economic scenarios.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the UWM Holdings Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Blake Kolo, you may begin your conference.

[Blake Kolo, executive]

Good morning. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us, and welcome to the Third Quarter 2023 UWM Holdings Corporation's Earnings Call.

Before we start, I would like to remind everyone that this conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning.

I will now turn the call over to Mat Ishbia, Chairman and CEO of UWM Holdings Corporation and United Wholesale Mortgage.

[Mathew Ishbia, executive]

Thanks, Blake. Appreciate it, and thank you to everyone for joining the call. We had another great quarter, and I'm incredibly proud of our results and excited for the opportunity ahead. I know that every loan we do today means that much more opportunity for us when rates go back down in the next 6, 12, 18 months. And we're doing a lot of loans right now. So things are going great.

You're now seeing the reality of what I've been saying for years. When rates rise, both UWM and brokers shine, while others struggle. Despite about a 25-year high in mortgage rates and lower housing inventory, we continue to thrive in all aspects of the business, including having one of our best purchase quarters of all time.

It's no secret why UWM and the broker community continue to do so well in the purchase market. Purchase transactions require an expert. They require more attention to detail. They require a higher level of service for real estate agents, consumers and brokerage, everybody. And they require an efficient process where speed matters for getting contract deadlines.

Together, UWM and independent mortgage brokers match these needs perfectly. We have world-class NPS scores, which was actually a plus 86 for this quarter. We have fantastic turn times that are the fastest in the industry.

We provide brokers with tools and technology to ensure all transaction details are handled at a speed and efficiency and amazing client service. We love purchase because it's hard for others to compete at our level. And the business is less cyclical, providing UWM with stable and consistent volume and earnings as you continue to see.

And when refis turn, we will be ready because we are investing heavily right now to ensure our brokers will win bigger than ever in the next refi cycle. The combination of our purchase business and scale and quality of our servicing book is so strong that our business can thrive in virtually all markets. We embrace these cycles each time they happen. And we come out stronger, and no other lender can say that.

I've always said we'd rather be the best lender than the biggest, but we've, in fact, been both, all of last year and this year for the total numbers but really the last 5 consecutive quarters and of course, for the last 9-plus years or 9 years or so in wholesale.

Turning to our results for the quarter. We delivered $29.7 billion in overall production, well within our guidance. Of that, almost $26 billion was purchase volume. As I talked earlier, we dominate in the purchase market. We were doing more purchase volume in the past few quarters than any other lender did volume, period.

Our gain margin was 97 basis points at the higher end of our range. And we generated $301 million of net income, which is inclusive of $92.9 million markup of our MSR portfolio. But as you know, I always like to point out regardless of the direction of MSR mark, we are operationally profitable, which almost no mortgage company in the country can say.

This is the true barometer of our success. And actually, in fact, I think we made more money this quarter than many of our competitors that are refi-focused have made all year or even 5 or 6 quarters' worth. That's how strong our business is right now.

I hope it is now clear more than ever that we are winning. I also hope people realize that we have seen multiple mortgage companies look great in low-rate environments who went out of business in the last 2 years or are struggling significantly. And that will continue to happen.

We hear how other companies are doing great once rates drop. But remember, UWM is excellent regardless of interest rate. And that is why we are the obvious choice in the best-in-class mortgage originator in America, and we thank all of our investors that have noticed that and continue to see that.

The opportunity ahead will be massive. It might take 6 months, 12 months or 18 months to get there, but I believe it's on the earlier end of that scale when the market turns. UWM will be the most prepared mortgage company. Whether it's a big refi boom, a mini refi boom, we will make the most opportunity.

I'm going to now turn it over to our CFO, Andrew, for a few more details.

[Andrew Hubacker, executive]

Thanks, Mat. Against the market backdrop of continued increases in interest rates, particularly towards the end of the quarter, we delivered strong financial results in Q3 and favorable sequential and year-over-year comparisons. This strong operational performance is a result of a consistently high volume of purchase originations, gain margin on the high end of our guidance range and our continued emphasis on prudent cost management.

Year-to-date, we've generated net income of $391.2 million, and our core operational income before considering changes in the fair value of MSRs increased sequentially and as compared to 2022 in Q3 and year-to-date. We are focused on growth as we continue to make investments in the wholesale channel and in preparing for the next interest rate cycle by hiring additional team members and rolling out new product and technology solutions.

Nevertheless, our core operational expenses, excluding servicing, interest and other nonoperational expenses, are down approximately 4% year-to-date. Our balance sheet, including our capital, available liquidity and leverage, remains strong and very consistent with the past 2 quarters.

To date, we have generated just under $1.7 billion in net proceeds from sales of MSRs. We have continued to opportunistically sell MSRs as market conditions warrant to fund our operational capital liquidity needs.

Despite these sales, we have maintained a sizable and high-quality servicing portfolio as originations of MSRs have largely kept pace with sales and payoffs. Our MSR portfolio consisted of loans with a total UPB of just over $280 billion as of the end of the quarter, which continues to deliver significant recurring quarterly cash flows.

Liquidity and access to liquidity, including cash, [indiscernible] warehouse and accessible borrowing capacity under our secured and unsecured lines of credit approximated $2.9 billion as of the end of the quarter, which is largely consistent the past 2 quarters and a significant increase from the end of last year. We continue to believe that our current financial strength positions us well for any market cycle.

Okay. I will now turn things back over to our Chairman and CEO, Mat Ishbia, for closing remarks.

[Mathew Ishbia, executive]

Thanks, Andrew. Appreciate it. I'll be brief so we can get to the Q&A. I may sound like a broken record here, but I know the marketing challenge for most businesses in the mortgage industry. But come to [indiscernible] sometimes. I love to see you guys out here and see how things work at our headquarters.

Our culture is vibrant. We are hiring. We are growing. We're investing in technology. In the 37 years we've been in business, we've never laid off a team member. And in fact, in the third quarter, we hired over 1,000 team members. We're going to hire more again in the fourth quarter.

We are growing the broker channel. By year-end, we'll host over 25,000 loan [indiscernible] on our campus for training and development. Brokers are not slowing down. And I think the market numbers are starting to show that.

UWM is very strong and will continue to be. We are dominating both purchase in the overall market by growing share with huge origination numbers, world-class service and technology that exceeds our clients' needs.

And we remain committed as ever to our shareholders. And this will be our 12th consecutive quarter that we announced a $0.10 quarterly dividend. We are consistent in rewarding our shareholders and those who continue to believe in us, and we appreciate them.

We plan to close the year out strong. And for the fourth quarter, we expect production to be between $19 billion and $26 billion and our margins range of 75 to 100 basis points.

I'm going to turn it over to the operator now for a Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Kyle Joseph from Jefferies.

[Kyle Joseph, analyst]

I just want to get your thoughts. Obviously, margins were very strong in the quarter. It's, obviously, a good thing despite what rates did but volumes -- or sorry, guidance looks like you expect kind of normalized trends in the fourth quarter. Any sort of onetime items to call out there? Or anything you'd highlight there?

[Mathew Ishbia, executive]

Yes. No, thanks for the question. It was a great quarter. No, there's nothing -- there's no onetime items, nothing specific besides as we talk about, your brokers are competitive. We set the margins on a daily basis. And obviously, it seems like it's going well. And I continue to guide in the same range, 75 to 100 is -- that's what the margins on wholesale will be in the toughest markets. And we, obviously, have the higher end of that margin for this quarter.

[Kyle Joseph, analyst]

Got it. And then on the MSR portfolio, I know you guys are opportunistically selling there. But as you think about the size of that portfolio, is this 2 80 number kind of the ballpark we should expect to be in going forward?

[Mathew Ishbia, executive]

Opportunistic. We make the decision on a monthly basis. We also [indiscernible] discuss what's best for the business. But yes, we feel good about it. I think we've been basically in that, I call it, $300 billion range for years now. And so between 2 50 and 3 50 seems like a right number. Does it go down to 2 30 at some point? Does it go up to 3 70 at some point? Probably it will at one point. But now, we feel pretty steady that it's going to be more of the same as what you've seen.

[Kyle Joseph, analyst]

Got it. And then one last one for me, Mat. Just on the NAR ruling and all the noise we've seen in the realtor space the last few weeks, just kind of want to pick your brain and see how you're thinking about any sort of implications for the industry and opportunities or risk for UWMC specifically?

[Mathew Ishbia, executive]

Well, obviously, there's a lot of talk about it, but also there's a lot of work to be done before anything actually ever changes if something ever does change. So we stay close to it. We're in the weeds of the business. We understand all of the implications.

And what I always would tell you is with any change, and I'm not suggesting this change will happen or should happen, by the way. But with any change in the industry, the people that are most in tune win.

UWM has won in other changes in the past, whether it's [indiscernible] changes, whether it's guideline changes like we usually win in those things. When there's a little bit of fluctuation, a little bit of uncertainty, that's when the best lenders in the country win. UWM has done that for years. And so I'm not suggesting this change will happen or any change will happen.

But if something does happen, I'm really confident that our ability to take advantage of it in a positive way, help our brokers win, help realtors win and help consumers win at the same time.

[Operator]

Your next question comes from the line of Bose George from KBW.

[Bose George, analyst]

Actually I wanted to ask about the jumbo growth. I mean, it looks like that continues to go pretty well. And do you think that will continue to grow as a percentage of the total volume? And are banks sort of being a little less competitive there?

[Mathew Ishbia, executive]

Yes. Thanks for the question. No, I don't really see it being a big change from what you see. I mean, it goes up and goes down. I don't think -- are banks competitive on jumbo more than other loans? Yes. So as they back out of the market or a little bit or they struggle a little bit or focus on other things, will there may be opportunity? Yes, but that's not a driver of our success or volume.

It's really a -- it's a rounding [indiscernible] at best. So jumbos are good opportunity. Brokers win. Brokers are the best option for consumers on all loans. And that will continue to grow and continue to succeed, whether it's jumbo, whether it's $81,000 loans, whatever it may be, broker trying to do those loans and take great care of consumers.

[Bose George, analyst]

Okay. Great. And then actually just going back to the gain on sale margin and the guidance. Just on the seasonality in 4Q, could we see the margins sort of at the midpoint or sort of not at the high end of the range? Or just any thoughts there?

[Mathew Ishbia, executive]

Yes. I mean, I gave a range for a reason because I usually expect that it's going to be somewhere in the middle of the range, plus or minus, is how I always think about it. You are correct, though, in pointing out cyclicality. A lot of people don't understand if you're doing all rebuys, there's no cyclicality in the fourth quarter and first quarter.

But in real business, mortgage business purchases, fourth and first quarter are slower quarters. And you saw it even -- as you look at our first quarter earlier this year. And so we expect it to be a little slower in the fourth and first quarter. That's why I guided to [indiscernible].

I expect us to meet guidance in all aspects of things, I always say, which I've done, I think, for 12 consecutive quarters. And we'll continue to do so. So -- but yes, you are astute to point out that fourth quarter and first quarter are slow mortgage months or quarters. And then second and third quarter, especially when you're doing a lot of purchase, and we're obviously the largest purchaser in the country.

[Operator]

Your next question comes from the line of Eric Hagen from BTIG.

[Eric Hagen, analyst]

Maybe one more on the margins. Just want to get a sense for the competitiveness in the market just really at these rate levels and maybe whether you've been surprised by the stability in margins at these rate levels and even like why the broker channel might have more stable margins if rates stay kind of in this ballpark right now?

[Mathew Ishbia, executive]

Yes. So like I've said for years, I set the margins daily. So it's -- we make the decision what the margins are going to be. We control those, and we always will control the margins in a positive way.

So we -- so it's not market-driven. It's not -- it's UWM-driven, and we're very involved with the details of it. And we try to set great pricing out for the brokers and help the brokers be competitive. But -- so the market doesn't dictate that as much.

I know people -- you guys don't like to understand that or believe that, but that's just the reality is that every day, I look at the pricing. I set it with our capital markets team. Personally, I do it. And we know where our margins are going to be.

And so that's why I'm very confident saying 75 to 100, and that's what it will be again this quarter. And when the market changes, to your point, I think what you're asking, when the market changes and evolves, that range will change. Instead of 75 to 100, I might say, hey, 80 to 105 or 85 to 110 or eventually, I'll say, 100 to 125. And then that changes as the margins -- as the market changes. But when that's in this range, it's completely tied to what UWM does, and others will follow.

[Eric Hagen, analyst]

Right. I appreciate that. So how are you guys thinking about conditions in the MSR market right now? A lot of expectations for banks to be sellers of MSR and how you see the capacity of large bulk buyers in the market and their capacity to buy more and how that develops and really what you think those buyers might be sensitive to going forward?

[Mathew Ishbia, executive]

Yes. So we've seen a very active market. And what we found actually -- have to do a little research, and Blake Kolo and his team do a great job of this is realizing what our business is and who we are has made it so our bids are maybe a little bit higher than others in the market. So we've seen a really great market.

We get multiple bids any time we bring something out. We get people usually bidding up on it, and it's really tough because we like to partner with people and be consistent with them. But a lot of people are looking for that product. And I think as this new year starts, people are looking for the product again. There's less originations out there, and there's less opportunity out there, less people that have the low rate and there's less people that are [indiscernible] the current product.

And so I think there's actually a really big market out there for MSR [indiscernible] and for MSR selling as well, obviously. It's a supply and demand issue. I think we have a lot of the supply, and there's a lot of demand out there.

[Operator]

Your next question comes from the line of James Faucette from Morgan Stanley.

[Unknown Analyst]

This is actually Jeff on for James. Just noticed that the direct loan production costs were up 50% this quarter even though your originations were down a little bit. Just wondering if there's anything to highlight there as a driver of those costs this quarter.

[Mathew Ishbia, executive]

Yes. So actually, 1% down. Is that correct, Andrew, you want to?

[Andrew Hubacker, executive]

Yes. Part of that is the initiative for our affordable programs, a 1% down program. That's why most of the increase is there.

[Mathew Ishbia, executive]

So it's not tied to what you're asking because expense is something we're doing to help affordability, which FHFA, Fannie and Freddie are very supportive of. And so it's in that bucket, but that's not what it is. Our expenses are not up 50% on a loan-by-loan basis or a product on a variable cost basis.

[Unknown Analyst]

Understood. Okay. And then just -- there's been a few headlines recently about rate of loan repurchase request for the industry increasing from Fannie, Freddie. Just wondering if you guys are seeing anything there, what kind of impact you're expecting for the industry going forward. And I know your Ginnie repurchase eligible loans were up, but not necessarily related to that issue, something different. So just maybe just talk about that.

[Mathew Ishbia, executive]

Yes. I think this is a hot topic in the industry and to give credit to FHFA Director Sandra Thompson does a great job, and she knows what's going on in the market. And she realized it after it's been brought to our attention.

And I think Fannie and Freddie are making changes to be more aligned with what the industry expects and what FHFA expects. And so it's not been a real issue. It's been more of just same old thing.

And I think actually, with some of the changes we're making, I think it will be even reduced even beyond what we've seen in the last 24 months. So I think it will be a positive change some of the stuff that Fannie Mae and Freddie Mac are doing because I think somebody got a little bit out of normal course. Because of some of the interpretations tied to COVID, you want to get to the real details. But I think overall, it's not a big deal, and it won't be a big deal going forward.

[Operator]

[Operator Instructions] Your next question comes from the line of Kevin Barker from Piper Sandler.

[Kevin Barker, analyst]

Great. And just a follow-up on some of the affordability comments that you made. I noticed you moved down in credit score to the 5 80 from 6 20. Is that move partly due to trying to expand the credit box and push to make more affordable loans? Can you just maybe give some more color on that move?

[Mathew Ishbia, executive]

Yes, that's not really tied to what the move was tied to. The real issue is on loans that brokers are doing is they want them to come to UWM. The biggest request I get is they want to send 100% of business to us. They want to use UWM.

And so when they -- that's why we roll out some [ non-QM ] back. That's why we look at different things in Fannie and Freddie. We roll out products because our brokers want to use UWM because they know if they use UWM, they'll get referrals from the real estate agents and the consumers because we make the process faster and easier.

And so that's where a lot of our product expansions have been over the last 2 to 3 years is just helping brokers with loans that they're already doing and not really tied to -- of course, we do a lot of stuff on affordability, which that 1% down program is a program that we're putting a lot of money towards to help FHFA, Fannie and Freddie hit their affordability goals with VLP and LIP programs.

But at the same time, we're focused on making sure we take care of our brokers. And we'll continue to increase wallet share and dominate the client experience for the brokers because that matters because we know that a lot of these loans that brokers are doing, they're going to be refinancing the clients here in the next year or 2 years. And we want to make sure they have an amazing experience.

If they use other lenders, quite honestly, the experience isn't the same. Thus, they don't get the loan back. That's why people want to use UWM.

[Kevin Barker, analyst]

Okay. Great. And then just going back to the servicing and some of the MSR sales, how much of a servicing portfolio do you sell in the third quarter? Sorry if I missed it in your commentary.

And then I noticed that the weighted average coupon drifted higher as well, went to 4.2% from 3.84%, which would seem that it might be lower-coupon MSRs that you're selling [indiscernible] what the average coupon was on the servicing that you are selling and how much it was?

[Mathew Ishbia, executive]

Yes. The average weight on our rates, weighted average coupon is a little higher. I think that's mostly because we do a lot of loans right now. So we're doing $29 billion of business at 7.5%. That's going to obviously drive your average WAC up. So it's got nothing to do with it.

We do some services sales, we sold some higher WAC and some lower WAC. It's all tied to we originate a lot of loans. So you won't see other lenders' numbers move as much because they don't do [indiscernible] business, the mortgage business that we're in. So that's kind of what we're seeing.

[Kevin Barker, analyst]

So what percent of your portfolio now has -- is greater than a 5% WAC or coupon? And then which may present an opportunity to refinance and we do see a little bit of softening of rates in the future?

[Mathew Ishbia, executive]

The loans that we're doing now usually have a WAC over 5%. I don't -- look, I just -- sort of random arbitrary number, 5%. I don't know why you picked that number, but it's got nothing to do with what we're looking at.

So the loans we do now are higher than 5%. They're actually probably all like 6.5%, 7%, 7.5%, even 8% rates. And loans that we did before are usually lower because that's what happened with rates. I think you [ follow ] the market. So there's really no data there that would make sense to go through.

[Kevin Barker, analyst]

I'm sorry, maybe I [indiscernible] question. It was more about how big -- the servicing portfolio, how much of it is the higher WAC or higher average coupon? That was just more about...

[Mathew Ishbia, executive]

Once again, the loans we originate are higher. The loans that we had from years ago were lower. We got a lot of loans. I don't have like the exact breakdown of them. This is not relevant in any aspect of the business. So -- but thank you for the question.

[Operator]

Your next question comes from the line of [ Mikhail Goberman ] from JMP Securities.

[Unknown Analyst]

Just kind of a hypothetical scenario question from my end here. And definitely, hopefully, the scenario won't come to [indiscernible]. If we do get some sort of a consumer recession in the, let's say, middle part of next year, how do you guys see that affecting the industry competitively? And more specifically for United Wholesale, how do you guys see that affecting the company operationally, financially in terms of volumes, margins and the MSR book?

[Mathew Ishbia, executive]

Yes. So obviously, in almost throughout history, and you can track this and check the data, recessions usually are led out of recessions with lower interest rates with the mortgage market has been really successful. So if there was a recession, I actually would argue that it's actually going to be really good for our business because [indiscernible] lower rates. And then lower rates mean a lot of refi activity, even more purchases, more people will sell their houses, more opportunity.

And so there's really no negative to that if that happens. I think what you've seen in the last 2 years is the worst it can be for mortgage lenders. And a lot of mortgage lenders have gone out of business. A lot of them lose money all the time. A lot of them have laid off a bunch of people.

And we are the strongest mortgage company in the country. And we've made a lot of money, obviously, but we also are hiring. We're prepared for the next opportunity.

And so when that opportunity comes, whether it's because of a recession or because the Fed lowers rates or because of inflation or because of some war or whatever may happen, when rates do drop, other lenders will do really well. But we've all seen now a glimpse into the future of what lenders are the best in these markets.

And so whether a recession or whatever happens, we'll be prepared for the lower rate. And in the meantime, we'll continue to win and to be successful as you've seen quarter after quarter going forward. So we appreciate it. Thank you for the question.

[Operator]

That will wrap up the Q&A portion. I would like to turn the call back over to Mat Ishbia for some closing remarks.

[Mathew Ishbia, executive]

No, thank you for the time today. We appreciate you all being on the call, and look forward to another great quarter in the fourth quarter. And we'll talk to you guys soon. Have a great day. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.