UWM Holdings Corp Q3 FY2023 Earnings Call

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.

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.

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 with speed, 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, 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. 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. You 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 as 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.

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 non-operational expenses, are down approximately 4% year-to-date. Our balance sheet, including our capital, available liquidity, and leverage, remains strong and very consistent for 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, self-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 with 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. I will now turn things back over to our Chairman and CEO, Mat Ishbia, for closing remarks.

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 the panic, missing sometimes. Would 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 officers 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 and 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. 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 to range from 75 to 100 basis points. I'm going to turn it over to the operator now for a Q&A.

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 guidance looks like you expect kind of normalized trends in the fourth quarter. Any sort of one-time items to call out there? Or anything you'd highlight there?

Thank you for the question. It was a strong quarter. There are no one-time items to mention, and as we discussed, we are ensuring our brokers remain competitive. We set the margins daily, and it seems to be working well. I continue to project margins in the same range of 75 to 100 basis points, even in challenging markets. For this quarter, we are at the higher end of that margin.

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 $280 billion number kind of the ballpark we should expect to be in going forward?

Opportunistically. We make the decision on a monthly basis. We also discuss what's best for the business. But yes, we feel good about it. We've been basically in that, I call it, $300 billion range for years now, so between $250 billion and $350 billion seems like the right number. Does it go down to $230 billion at some point? Does it go up to $370 billion at some point? Probably, it will at one point. But right now, we feel pretty steady that it's going to be more of the same as what you've seen.

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 for 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?

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 trade 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 in 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.

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?

Yes, thanks for the question. I don’t really see any significant change from what we currently observe. It fluctuates up and down. Are banks more competitive in the jumbo segment than in other loans? Yes. So, as they slightly pull back from the market or face some challenges or shift their focus elsewhere, could there be opportunities? Yes, but that’s not a key factor driving our success or volume. It really revolves around the overall year. Jumbos present good opportunities, and brokers excel in this area. Brokers are the best option for consumers across all loan types, and that trend will continue to grow and thrive, whether in jumbos or loans around $81,000. Brokers are actively working on those loans and providing excellent service to consumers.

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?

I provide a range because I typically anticipate that results will be near the middle of that range, give or take. You are right to highlight the cyclicality. Many people may not realize that with refinancing, the fourth and first quarters don't show cyclicality. However, in terms of actual business, these quarters tend to be slower for business purchases, as evidenced in our first quarter earlier this year. Therefore, we expect some slowdowns in the fourth and first quarters, which is why I have set my guidance accordingly. I believe we will achieve our targets as we have consistently done for twelve consecutive quarters. You are perceptive to note that the fourth and first quarters are slower for mortgages, while the second and third quarters tend to be stronger, especially for purchases, and we are notably the largest purchaser in the country.

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?

Yes. As I've mentioned for years, I determine the margins on a daily basis. We decide what the margins will be and have complete control over them, ensuring they remain positive. This process is driven by UWM, not the market. We are closely involved in the details and aim to establish favorable pricing for brokers to maintain their competitiveness. Thus, the market doesn't have as significant an impact on our margins. I realize that some may find this hard to accept, but the reality is that I personally review and set the pricing alongside our capital markets team every day. We are aware of our margin expectations, which is why I confidently state that it will be in the range of 75 to 100 this quarter. When the market shifts, as you've suggested, that range may also adapt, potentially expanding to 80 to 105, 85 to 110, or even 100 to 125. These adjustments reflect the changes in the market while the margins remain fundamentally connected to UWM’s actions, influencing others to follow suit.

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?

Yes. So we've seen a very active market. And what we found actually, I have to do a little research, and Blake Kolo and his team do a great job at 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 anytime we bring something out. We get people usually bidding it up, 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 will be looking for the product again. If there's less originations out there, and there's less opportunity out there, the less people they have the low rate, and there's less people that are originating the current product. And so I think there's actually a really big market out there for MSR buying 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.

This is actually Jeff Adelson 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.

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

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

So it's not related to your question because the expenses are intended to enhance affordability, which is supported by FHFA, Fannie, and Freddie. While it falls into that category, that’s not the entire story. Our expenses haven't increased by 50% on a per loan or product basis, especially not on a variable cost basis.

Understood. Okay. There have been some recent headlines about the increase in loan repurchase requests from Fannie and Freddie. I’m curious if you’re noticing anything related to that and what impact you foresee for the industry moving forward. I know your Ginnie repurchase eligible loans have increased, but that seems unrelated to the current situation. Can you discuss that?

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 the same old thing. And I think actually, with some of the changes they'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 some of it got a little bit out of normal course because of some of the interpretations tied to COVID, if 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.

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 580 from 620. 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?

Yes, that move is not really connected to what we were discussing. The main issue is that brokers are eager to send their business to UWM. The primary request I receive is for them to place 100% of their business with us. They want to utilize UWM. That's why we introduced some non-QM products and are exploring various options with Fannie and Freddie. We roll out new offerings because our brokers prefer to work with UWM, knowing that doing so will lead to referrals from real estate agents and consumers due to our quicker and easier processes. Over the last 2 to 3 years, much of our product expansion has focused on assisting brokers with loans they are already processing, which isn't directly tied to affordability. The 1% down program is one initiative we’re investing in to support FHFA, Fannie, and Freddie in achieving their affordability objectives with VLIP and LIP programs. At the same time, we prioritize taking care of our brokers. We will continue to increase market share and enhance the client experience for them because it's crucial. We recognize that many of these loans will be refinanced in the next 1 to 2 years, and it’s important they have an excellent experience. When they use other lenders, frankly, the experience doesn’t match up, which is why they prefer to work with UWM.

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. What was the average coupon on the servicing that you are selling and how much it was?

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. When we do some service and 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 any business, mortgage business that we're in. So that's kind of what we're seeing.

What percentage of your portfolio has a WAC or coupon greater than 5%? Also, which of these might present an opportunity for refinancing if we see a slight decline in rates in the future?

The loans we are currently originating typically have a weighted average coupon above 5%. That figure is somewhat arbitrary; our current loans are actually around 6.5%, 7%, 7.5%, and even up to 8%. Previously issued loans tend to have lower rates due to market fluctuations. I believe you are aware of the market dynamics, so there isn’t any data worth discussing further. 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.

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