UWM reports financial loss in Q4 but expects margins to rise in Q1

The financials are all red for the top U.S. mortgage lenders for the fourth quarter of 2022. United Wholesale Mortgage (UWM) on Wednesday morning reported a small financial loss in Q4, one day after Rocket Companies disclosed its most significant quarterly loss in company history. 

UWM, the top U.S. wholesale lender, maintained flat gain-on-sale margins in the fourth quarter of 2022, despite competitive pricing initiatives. But falling volumes and declines in fair value of mortgage servicing rights (MSRs) strongly impacted the company’s earnings. 

The Pontiac, Michigan-based lender announced a non-GAAP adjusted net loss of $53.3 in the fourth quarter, compared to an adjusted net income of $254.3 million in the previous quarter. The company’s GAAP net loss in Q4 was $62.5 million.

Non-GAAP adjusted net income came in at $719.4 million in 2022, compared to $1.2 billion in 2021. On Tuesday night, competitor Rocket Companies reported a $197 million non-GAAP adjusted net loss in the fourth quarter and a $137 million loss overall in 2022. 

Mat Ishbia, UWM’s chairman and CEO who recently bought the Phoenix Suns and Phoenix Mercury, said in a statement the company became the overall mortgage origination leader in 2022 while issuing loans exclusively through the wholesale channel. 

“In 2023, we will continue to invest in technology to serve the broker channel and products that put brokers in a position to win,” Ishbia said. “As we have done in other purchase-centric markets, we’ll grow market share and emerge stronger to better capitalize on the next boom.”

According to Ishbia, the acquisition of the two professional basketball teams will have no impact on UWM. “Actually, there’s probably a positive impact on UWM and my leadership here, not only the notoriety of me, but the broker channel in general, and educating consumers,” he said.

UWM originated $25.1 billion in mortgage loans in the fourth quarter of 2022, compared to $33.4 billion in the previous quarter and $55.2 billion during the fourth quarter of 2021. Rocket originated $19 billion in the fourth quarter of 2022. 

In 2022, UWM’s production touched $127.3 billion, compared to $226.5 billion in the prior year. Purchase loans grew from 38.5% of the total share in 2021 to 71% in 2022. 

Higher margins ahead?

Despite initiatives to reduce prices, UWM’s total gain-on-sale margins went from 52 basis points in the third quarter to 51 basis points in the fourth quarter. In June 2022, the company launched ‘Game On’, in which it slashed prices across all loans by 50 to 100 basis points. In January 2023, the company announced that it would give 125 basis points to brokers as a discount for any loans, with up to 40 basis points per loan. It could be risky, according to mortgage compliance experts. 

The initiatives were enough for UWM to wreak havoc on competitors who were already struggling with compressed margins, although Ishbia says the main goal was to increase the share of brokers by attracting retail loan officers to the space.

The company estimates its share at 11% of the overall mortgage market and 54% share of the wholesale channel for the fourth quarter of 2022, a record high. 

Ishbia said UWM may not have 54% of the brokers channel forever, however it’s “very realistic” that the company will keep the 11% overall share of the mortgage pie. 

After achieving such a high market share, the company projects first-quarter production will be between $16 billion and $23 billion. The gain-on-sale margin is estimated to be between 75 and 100 basis points, which suggests its pricing incentives will be trimmed back. 

Asked if Game On will have a smaller role in the coming quarters, Ishbia said that differently from the last two quarters, UWM is not going to be “at that investment of being at 50 basis point margins.” 

“I don’t expect that to continue. Unless I decide to do it again in the future,” Ishbia said. “We still have very competitive pricing.” 

According to Ishbia, he consistently said that 75 to 100 bps annualized margin is what investors can expect from UWM in an especially purchase-heavy market or higher rate environment. “And as you saw, the full year ended in that range.” 

UWM’s servicing portfolio strategy 

Fourth quarter earnings were impacted by a $150.8 million decline in the fair value of MSRs. UWM had $312.5 billion in the unpaid principal balance of MSRs as of December 31, 2022, compared to $319.8 billion one year earlier.

According to Andrew Hubacker, UWM’s chief financial officer, the company’s servicing portfolio has very low delinquencies and high asset quality. “It continues to provide balance to our business model, a recurring quarterly cash flow stream and strategic source of additional liquidity, if and when we choose to sell our MSRs.”

Regarding MSR sales, Ishbia said the market has more liquidity than analysts recognize and UWM is taking advantage of it. “We’re opportunistic,” he said.  

UWM ended the fourth quarter with $886.2 billion in cash and self-warehouse. 

According to Moody’s senior vice president Warren Kornfeld, UWM’s strong capitalization levels allow the company to continue to invest in further strengthening its franchise. “Given the company’s strong franchise, we expect profitability to improve over the next couple of quarters as gain-on-sale margins begin increasing, even though they will likely remain well below historic averages in 2023,” he said.