UWM Holdings Corp., the parent of United Wholesale Mortgage, has adopted a strategy that differs from its peers to take advantage of a business landscape that is expected to include lower mortgage rates and more refinance activity. 

The Pontiac, Michigan-based company has opportunistically sold mortgage servicing rights (MSRs) with higher coupons to deleverage its balance sheet and invest in the origination business — for example, by offering incentives on some refi loans. Meanwhile, competitors such as Mr. Cooper and Rocket Mortgage have acquired servicing assets at higher coupon rates to offer refis and other products to customers when rates drop. 

Mat Ishbia, chairman and CEO of UWM, said in a call with analysts that when rates drop, lenders will “get flooded with refinances” because of trillions of dollars of loans originated in the 6.5% to 8% range. Volumes will increase, as will gain-on-sale margins. In turn, “MSR write-downs will be massive,” he added.    

“Obviously, nobody controls the MSR write-ups and write-downs. We never take credit when it goes up. We don’t want to take credit when it goes down. We want to focus on origination,” Ishbia said. “For us, we don’t buy MSRs, we originate them. I don’t see a slowdown in people buying them because that’s the only way they can originate.”  

As a result of the strategy, UWM reported a non-GAAP net income of $59.8 million during the second quarter of 2024, compared to a profit of $141 million in the previous quarter. Meanwhile, GAAP net income was $76.3 million, including a $115.3 million decline in the fair value its MSRs, according to documents filed with the Securities and Exchange Commission (SEC). 

UWM originated $33.6 billion in mortgages in the second quarter, higher than the $27.6 billion figure in the previous quarter and the $31.8 billion originated in Q2 2023. The company’s volume in Q2 2024 consisted mainly of purchase loans, which accounted for $27.2 billion.

To compare, UWM’s primary rival, Rocket Mortgage, generated $24.6 billion in closed loan volume from April to June. But Rocket also delivered a higher profit of $171 million. 

Gain-on-sale margins for UWM declined to 106 basis points in the second quarter, compared to 108 bps in the previous quarter and 88 bps in the same period last year. Ishbia said he expects “margins to go up” in a lower rate environment.

Analysts at Jefferies said in a report that, following the implementation of its “Game-On“ initiative, when UWM cut margins to gain market share, “we have seen pricing quickly improve above historical levels, as we believe the broker market remains firmly bifurcated.”

In a report on Tuesday morning, the analysts added that “purchase volumes represented 81% of the volume mix, as the company continues to capitalize on the purchase-oriented originations market. However, we expect this mix to begin to shift modestly to refinance volume in the near term.”

Servicing book

Regarding its servicing portfolio, as UWM continues to sell MSRs opportunistically, it ended the second quarter at $189.5 billion in unpaid principal balance (UPB), compared to $299.7 billion in the previous quarter and $294.9 billion in Q2 2023. 

The company generated nearly $2.4 billion in net proceeds from these sales in the second quarter. Most sales involved servicing rights on loans with coupons above 5.5%, with one-third being Ginnie Mae collateral. As a result, the company said its portfolio’s weighted average coupon (WAC) was 4.31% on June 30, compared to 4.58% on March 31. 

Looking forward, Ishbia said the company is not focused on selling MSRs to lessen risk. Rather, it is preparing to scale its operational technology, since that was the strategy for the first three to six months of the year.

“It’s playing out how we expected,“ he said. “I’m not saying we won’t sell any more MSRs, because people call us all the time to try to buy them. However, it’s not a focus of mine right now. My focus is on origination, scale and dominance in this industry.” 

UWM ended the quarter with $2.7 billion of available liquidity, including $680.2 million in cash. 

The company anticipates third-quarter production between $31 billion and $38 billion. Meanwhile, the gain-on-sale margin is expected to be between 85 bps and 110 bps.  

“The last couple of days, the market has 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] stays where it’s at right now and mortgage interest rates stay with that right now, we will beat this guidance from a production perspective.

“We’re not quite there yet, but we’re on the cusp of a potential, very interesting time.”

UWM shares were trading near $8.50 on Tuesday, down less than 2% from the previous closing amid stock-market turbulence tied to investor fears of a recession in the U.S.