UWM Holdings Corp Q2 FY2025 Earnings Call

Hello, everyone, and good morning. My name is Jim, and I will be your conference operator today. I would like to welcome everyone to the UWM Holdings Corporation Second Quarter 2025 Earnings Conference Call. Blake Kolo, you may begin your conference.

Good morning. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us, and welcome to the second quarter 2025 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. Our commentary today will also include non-GAAP financial measures. For information on our non-GAAP metrics and the reconciliation between GAAP and non-GAAP metrics for the reported results, please refer to the earnings release issued earlier today as well as our filings with the SEC. I will now turn the call over to Matt Ishbia, Chairman, President and CEO of UWM Holdings Corporation and United Wholesale Mortgage.

Thanks, Blake, and thank you, everyone, for joining today. UWM's strong, consistent, and differentiated values continue to be the foundation for everything we do here. Every day, our team of more than 9,000 people delivers the best products and services to the broker community, which in turn benefits homeowners with significant cost savings and a world-class mortgage experience. Our operating profile and relentless drive to deliver results resonate with the investment community. UWM is uniquely positioned to win in any market environment. While others have pulled back, UWM has doubled down, proving that we can and will dominate the purchase market regardless of market cycles. And when rates come down, we'll leverage our world-class operating system and industry-best technology that we have developed for brokers to scale and dominate. Over the last several years, we've built scalability in our business by investing in technology. While many companies are using AI as a buzzword, the difference is that at UWM, we have products and services that are powered by AI that are already impacting our business today and will make a bigger impact when rates drop going forward. Years ago, we invested heavily to build our AI-based underwriting system, BOLT. While underwriters and most lenders can do 2 or 3 loans per day, maybe even 4, we can do 2 or 3 times or more per day than anyone else in the country. Our loan quality is better because of this technology and will continue to improve. So here at UWM, we can confidently say AI is making a big impact on our business today. Another example of AI actually working is ChatUWM, which is similar to ChatGPT, but for mortgages. Our brokers and team members now use this as a primary resource for accessing job aids, guidelines, and other information that arises that they need on a mortgage transaction. Within this is LEO, the loan estimate optimizer, which we launched at UWM Live on May 16. LEO helps brokers compete and win by showing exactly how they can beat a competitor's loan estimate. All they need to do is drag and drop the borrower's loan estimate into LEO, and they get a detailed analysis of tips and how to win a specific loan. Finally, the big noise and big opportunity is around Mia. Mia has been a huge success. She's an AI loan officer assistant designed to help loan officers do more loans and get more business. She is the ultimate loan officer; she works 24/7, 365. She doesn't take days off. We rolled this out at UWM Live back in May. The broker feedback has been incredible. We've been using it every single day, and it's achieving immense success as we're scheduling meetings and helping brokers generate more business, and that's really the game. Now, a statistic that we're big on here at UWM is that now 97% of all consumers that work with a mortgage broker give a 5-star review, which is phenomenal information. However, only 10% of those people remember who the mortgage broker is when they go to refinance their mortgage because so much time has gone by. Until now, brokers haven't had great tools to stay in front of their past borrowers. So Mia changes all of that. She'll stay in front of them, and we think that the 10% number could rise to 30%, 40%, maybe even 50%, which guarantees more business for brokers, helping UWM and the broker channel continue to grow. She makes thousands of outbound calls every single day. She takes inbound calls and sets appointments. All of this is happening today. It's not something we plan to do in the future; it's happening today and it's impacting business now. If rates decrease a little more, it will greatly impact business this year. Supplying brokers with the best tools and technology helps them win, and the channel continues to gain higher overall market share. Broker share of all direct lending has more than doubled since 2016, reaching about 30%. Our goal is for brokers to be number one. In my mind, that means 50.1%. I don't know if that will take 5 years or 15 years, but we're going to grind it out and make sure it happens. It's best for consumers, it's best for real estate agents, and it’s best for loan officers, which is why the channel continues to grow. I'm super excited about the opportunity as we continue to build this together. The AI initiatives I talked about will help brokers scale, help UWM scale, and we're all going to win together. Okay, let's get into the quarter. We closed $39.7 billion of production, our best quarter since 2021, and almost 20% higher than last year's second quarter. We did about $12.4 billion of refinance volume, which is double what we did in last year's second quarter, representing about 11% of the industry volume. This is interesting because most people think you need to have the client in your servicing book to refinance them. First, we don't refinance any borrowers; our brokers do. Secondly, we only own about 2% of the industry's servicing market. For us to manage over 11% really just proves the theory that you must have servicing to refinance. When you deliver a world-class experience, we get 97% of borrowers giving a 5-star rating. It doesn't matter how big your servicing book is. It gives brokers the ability to excel on refinances, and you're witnessing that in real-time here with UWM. Additionally, we originated $27.3 billion of purchases. This is our third-best purchase quarter of all time, and this is a significant number in the current market, tracking to exceed $100 billion this year. Our gain on sale margin was 113 basis points, significantly up from the first quarter. We also had a strong quarter with earnings of $314.5 million in net income, demonstrating the earnings power of our business, which included an $111 million decline in the fair value of our mortgage servicing rights. Our playbook remains unchanged: invest in our business, win, grow the broker channel, and repeat. I'll now turn the call over to our CFO, Rami Hasani, to go over some more numbers.

Thank you, Matt. Q2 was a strong quarter for us with a net income of $314.5 million and adjusted EBITDA of $195.7 million. Production volume of $39.7 billion, up $7.3 billion from Q1, and a gain margin of 113 basis points, up by 19 basis points from Q1. We've consistently maintained a strong MSR portfolio of $211.2 billion in unpaid principal balance with a weighted average coupon of 5.51%. All this while maintaining a best-in-class Net Promoter Score of 87, marking a strong and successful quarter by all measures. To support our growth, we continue to invest in our people, processes, and innovative technology to prepare us and our broker partners for growth in 2025 and beyond. We remain on track with our investments to be well-positioned for significant market opportunities for us and our broker partners. As we've said before, we believe our business can handle twice our current production volume with minimal impact on fixed costs. We are well-capitalized with total equity of $1.7 billion, up from $1.6 billion in Q1, and continue to be in a strong liquidity position with cash of $490 million and total available liquidity of $2.2 billion. Additionally, we have an MSR portfolio of $3.4 billion. We are assessing and evaluating the opportunistic refinancing of our $800 million unsecured notes maturing in November of 2025. Given the current market conditions and strong investor demand for our last offering, we expect a favorable outcome in refinancing these notes. Throughout this process, we continue to maintain capital and liquidity leverage ratios within what we believe are acceptable ranges in the current market environment. In summary, Q2 was a great quarter for us with strong production, gain margin, and net income performance. We continue to invest to be the most prepared mortgage company in America. We are also prepared from a capital liquidity perspective and believe we are well-positioned operationally and financially for any market cycle. I will turn things back over to our Chairman, President and CEO, Matt Ishbia, for closing remarks.

Thanks, Rami. I appreciate it. I'll close with a few points before the Q&A. First, our work to bring servicing in-house is progressing nicely. As I mentioned before, we'll have that done in the first quarter of next year, which should have a positive financial impact on our business in 2026 and beyond. More importantly, it gives UWM complete control of the borrower experience. We'll deliver the same world-class service we're known for on the servicing side, which will drive increased loyalty to brokers in UWM. Currently, the way servicing is done in the market is not optimal, and UWM will be best-in-class. We recently partnered with a company called Built, which will help create an amazing front-end experience for consumers in several places, and I'll explain more about that soon. I'm really excited about bringing servicing in-house and helping UWM dominate this part of the business just like we do in origination. Now regarding guidance, based on where rates are and where they've been, I expect third-quarter production to be around $33 billion to $40 billion. I'm also improving the guidance on the margin, raising it by 2 levels to 100 to 125 basis points. This is the first time in 4 years that I've been comfortable moving the margins up to this level. I'm excited about the opportunities ahead, even in this challenging market, and I see reasons to believe the market is opening up positively. I truly believe that UWM is positioned to excel in the third quarter, fourth quarter, and into 2026. We're very excited about our business. I'll now turn it over to questions from all of you.

Your first question today comes from Bose George at KBW.

Actually, just first on the guidance and the higher gain on sale margins. Does that reflect market trends? Or are you prioritizing higher margins a little more? Can you give us some insight on this?

Yes. No, we just understand the market. We have a view of the market, and we know what our clients need regarding market dynamics. Others may not have the same insights, as you've seen, our margins sometimes differ significantly from others. I feel very confident in my guidance, and I believe we'll hit that range. Obviously, we had a solid quarter from both volume and margin perspectives, and we expect the same in the third quarter.

Okay, great. What about the servicing in-house? Did this quarter's OpEx number already include costs related to that? Should we see any change?

No, you'll see some of those costs come out as savings and opportunities for us in '26. Currently, some of the increasing costs are tied to moving everything to one subservicer. We are also building out technology tied to servicing, partnering with various companies to make it all happen quickly. You'll see some costs drop off positively in '26, and we plan to bring servicing in-house by early '26, leading to cost savings throughout that year and beyond.

Your next question comes from Eric Hagen at BTIG.

Do you feel like the speed to close loans has room to fall further while keeping your margin the same? What processes or catalysts would support an even faster turnaround from here?

Yes. Thanks, Eric. Our speed to close loans will continue to improve due to our AI investments and technological advancements. There are laws that prevent closing quicker than 8 days, but regarding clear to close, purchases and refinancing, we've already demonstrated our efficiency is increasing. When rates do decrease further and more refinancing occurs, others may face longer turnaround times, while we will maintain our efficiency due to these investments. This creates a competitive advantage, allowing us to capture more business and margins.

Has the playbook or parameters around selling MSRs changed? Do you think the market has the capacity to buy more than you're selling at these interest rates? How much capacity would be available for MSRs if rates fall?

Yes, the market is robust. We've had new buyers coming in and aggressively trying to purchase our servicing. We are one of the few that originate at scale, so if you want to enter the servicing game, you need to come to UWM. Additionally, many believe buying servicing is necessary to refinance people, but that's not the case. As I mentioned earlier, that's not how it works anymore, but it's fine for them to continue that strategy. There are many buyers looking at us and willing to hedge parts of their portfolio with our servicing. We’re optimally selling, but we can also choose not to sell anything and evaluate all options carefully before making a deal. Overall, we feel confident in our strategy regarding the MSR side.

Next question comes from Terry Ma at Barclays.

I wanted to follow-up on expenses. Your noninterest expense growth has been elevated in the last 6 quarters, but it moderated the last 2. How should we think about the trajectory of noninterest expense growth as we look towards the back half of the year?

Yes, that's a good question, Terry. We manage and monitor our fixed expenses, many of which are investments in scalability, AI, and servicing. I believe these will moderate, as you pointed out, and they will continue to do so. The variable expenses will increase if we double our volume, which is possible, but our position from an ability to handle the volume is solid due to our investments in broker business, servicing, and AI technology. While I can't say expenses will never rise again, I feel confident we’re not in for significant increases.

Just on the 10b5, you've been active since about mid-June. Any updated thoughts on it and how long you plan to keep it active?

Yes, the 10b5 is a plan that can't be modified once launched. The stock price is low right now, which is not ideal, but it's a long-term strategy. Our focus is on building float to benefit all our investors. My strategy is that the remaining portion of what I own will appreciate in value as more float enters the market.

Our next question will come from the line of Doug Harter at UBS.

Matt, you provided an update on Mia. Can you discuss the broker and consumer reaction to it and any metrics on the success of that rollout?

Yes, thanks. It's been great. While we haven't reached 100,000 calls a day yet due to market demand, Mia has been making a lot of calls. I've played some examples in our sales huddles for our brokers; almost 10,000 people saw it and could hear Mia interaction with borrowers, setting up appointments for the brokers. As rates decrease, we're anticipating higher volumes of calls. Brokers are not typically good at maintaining visibility with consumers, and our innovations are helping them get more business and reap benefits from this. Mia has been a great success and will continue to grow. This isn't just theoretical; we're actively doing this today. We are making strides in using AI effectively and driving efficiency.

Can you provide insights on the derivative gain this quarter? Was that opportunistic or indicative of a change in your approach?

No, it's opportunistic. We understand the market and look for opportunities to manage our positions effectively. As observed, the 10-year yield dropped significantly, posing a challenge to our MSR book, leading to the loss of $111 million. We executed a trade to manage some of that, taking advantage of the situation while having our analytical team make decisions on active trades. We feel positive about our approach moving forward.

Our next question comes from Jeff Adelson at Morgan Stanley.

I wanted to follow-up on the guidance for originations. The $33 billion to $40 billion range seems to imply a decline versus this quarter and last year. Many industry forecasts suggest a more positive outlook than that, especially with recent weekly data. Can you share your perspective on this cautious outlook?

Yes, it’s all about understanding the market. Currently, rates and fluctuations from June and July are impacting the purchase market. The guidance is a careful estimate, and I'm confident in our margins being higher. Volume and margin are intertwined, and we always work to maximize both. Of course, factors such as market dynamics play a role, and I wanted to give a range of $33 billion to $40 billion, which is realistic. Overall, we are market leaders, and while some variables may present headwinds or tailwinds based on refinancing, we're gearing up for a strong third quarter, and I believe you'll be pleased with our outcomes.

Could you elaborate on your hedging strategy for the MSR book? It seems like you're shifting to a more opportunistic approach. What's your strategy moving forward?

Yes, we're opportunistic with all our strategies at UWM, from MSR sales to derivatives. Our approach is comprehensive and considers market evaluations. I don’t strictly adhere to a fixed strategy; instead, we adapt to current market conditions and overall performance. Selling MSRs does help hedge our position, but we remain flexible and analyze our options. The positive trends we've observed so far justify this opportunistic approach as we assess every decision based on immediate market conditions.

Our next question comes from Mikhail Goberman at Citizens JMP.

Congrats on a great quarter. Could I follow-up on margins? What would you identify as the main drivers behind your recent decision to increase margin guidance by 10 basis points?

Thanks for the question. I’m aligned with the promises we’ve made regarding margin and volume, as is evident from our history. The increase comes from a comprehensive understanding of the market, including the housing market, interest rates, inventory levels, and bond trading. It's the first adjustment in a long time, but I firmly believe this new range reflects the reality of margin opportunities in our channel. Ultimately, it gives us control over our margins, and I'm confident in our predictions moving forward.

That was the final question in our queue today. I'm happy to turn the floor back to management for any additional or closing remarks.

Thank you for your time today. I appreciate your questions, and I look forward to speaking with you all again after another great quarter. Have a great day.

This does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your lines.