Snapshot of lenders’ Q1 earnings: Profitable players leverage servicing portfolio against origination drop

As banks and non-bank lenders recently released earnings for the first quarter of 2022, two things became clear: Origination volume plummeted across the board, but those that managed to muster up a good quarter benefited from servicing portfolios. As refinancing became less appealing, lenders also sold off a large portion of mortgage servicing rights (MSRs), cut costs and diversified revenue stream to survive the mortgage storm.

Rocket Companies ($1 billion), United Wholesale Mortgage ($453.2 million) and Homepoint ($11.9 million) are among the non-bank lenders that benefited from the sale of MSRs, offsetting the decline in closed loan volume in the first quarter of 2022.

UWM, the nation’s largest wholesale lender, sold MSR on loans with an aggregate unpaid principal balance of about $56.6 billion for processes of about $656.7 million, according to the firm’s first quarter filing with the U.S. Securities and Exchange Commission (SEC).  

With mortgage rates surging, MSR prepayment speeds drop, a byproduct of diminished refinancing activity. That, in turn, amplifies the value of MSRs because they pay out over a longer period of time.

UWM’s first quarter earnings were led by a $172 million increase in the fair value of MSRs. UWM had $303.4 billion in the unpaid principal balance of MSRs as of March 31, 2022 compared to $221 billion exactly a year earlier.

Proceeds from the sale of MSRs for Detroit-based Rocket Companies, the parent company of Rocket Mortgage, totaled $254 million in the first quarter of 2022, up from $10.2 million during the same period in 2021. 

Rocket posted a 17% year-over-year increase of $546 billion in unpaid principal balance as of March 31 regarding its servicing book. Rocket has 2.6 million clients in the servicing portfolio and generates $1.4 billion annually in recurring servicing fee income, according to the firm. 

Homepoint reduced its servicing portfolio and completed sales of MSRs of single-family mortgage loans of about $434.5 million in the first three months of 2022. The firm said it generated $83.2 million from servicing mortgages during that period, up $64.8 million from the same quarter in 2021 and $74.4 million from the previous quarter. 

Other firms achieving a profitable first quarter by leaning on their servicing portfolios include California-based nonbank lender Pennymac ($173.6 million), nonbank mortgage lender and servicer New Residential Investment Corp. ($690 million), Mr. Cooper ($658 million) and Ocwen ($58 million). 

Without an abundance of refis, lenders also have been tasked with increasing purchase mortgage volume. Mortgage executives, consultants and loan officers had forecast that players who perform well with purchase mortgages – or in other words, get closer to the borrower – are better positioned in the downmarket.

Rocket posted $54 billion in closed loans from January to March, down from $75.8 billion in the previous quarter and $103.5 billion in 2021. The company’s purchase volume grew 43% year over year, but it represented only 16.7% of the lender’s total mix last year. 

“I’ve been very confident about our ability to grow purchases organically,” said Jay Farner, vice chairman and chief executive officer of Rocket Companies, during its earnings call. “That said, there are opportunities that may allow us to lean into the purchase market.” 

Analysts say Rocket has advantages in the purchase market as it does most of its business through consumer direct retail and is also the second-biggest lender in wholesale. Rocket originated about $113.5 billion in the broker channel last year, according to Inside Mortgage Finance. 

UWM originated $38.8 billion in mortgage loans in the first quarter of 2022, a 29.7% decrease compared to the previous quarter and a 20.8% decline year-over-year. Purchase loans grew 49% of the total origination volume in the first quarter of 2022 to $1.9 billion from 24.9% in the same period last year. 

Refi-heavy loanDepot had a tough three months reporting a net loss of $91.3 million in the first quarter; it expects to be in the red for the remainder of 2022.

Loan origination volume dropped 26% to $21.6 billion from the previous quarter, bringing the company’s market share down to 3.1%. The decrease in rate lock volume and gain-on-sale margin were responsible for the massive quarter-over-quarter decline, according to the firm.

“The increase in mortgage rates during the quarter happened much more quickly and sharply than anyone anticipated when the quarter began and resulted in significant and rapid decreases in profit margins,” said Anthony Hsieh, loanDepot’s founder and executive chairman, to analysts.  

Rate lock volume in the first three months of 2022 dropped 13.7% to $30 billion from $34.8 billion in the previous quarter. Gain-on-sale margin was down to 1.96% in the first quarter from 2.23% in the previous quarter.

The firm’s net loss of $68.4 million on the change in the fair value of its servicing rights didn’t help its first quarter performance. The unpaid principal balance of the servicing portfolio dropped to $153 billion as of the first quarter this year from $162 billion in the last quarter 2021. 

Two of the nation’s largest banks, JPMorgan Chase and Wells Fargo & Co., reported double-digit declines in origination volume and net earnings, partially offset by strong performances in their respective servicing portfolios. 

Wells Fargo, the fourth-largest U.S. mortgage lender by volume, originated $37.9 billion in the first quarter of 2022, down 21% quarter over quarter and 27% year over year. The share of refinancings declined from 64% in the first quarter of 2021 to 56% in the same period of this year.

At JPMorgan, the fifth-biggest mortgage lender in the country, origination volume totaled $24.7 billion from January to March, a decline of 41% compared to the prior quarter, and down 37% in comparison with the first quarter of 2021.

“The mortgage origination market experienced one of its largest quarterly declines that I can remember, and it will take time for the industry to reduce excess capacity,” said Charlie Scharf, CEO of Wells Fargo, during its earnings call. 

While both banks saw about a 20% decline of revenue in home lending business, higher servicing revenue offset the decline in origination revenue. Wells Fargo’s mortgage servicing rights rose 13% to $8.5 billion in the first quarter of 2022 from $7.5 billion. JP Morgan’s servicing rights increased to $7.2 billion in the first quarter of 2022 from $4.4 billion in the same period last year. 

To manage business during the storm, headcount reductions were inevitable for some lenders. 

Finance of America Companies, which reported a $64 million loss in the first quarter, cut 598 jobs between March 2021 and March 2022. With refis expected to drop more in the second quarter, it will keep the headcount aligned with the volume of business, although specific details were not released. 

Pennymac announced layoffs of 236 employees in six California offices in March. Most of the reduced positions were specialists in home loans, including those with expertise in refinancing. 

Layoffs also were imminent at loanDepot, which did not offer details regarding a timeline or positions affected. 

“We are aggressively managing our cost structure to return to profitability by the end of the year,” said Patrick Flanagan, loanDepot’s chief financial officer. “We expect to achieve this goal by further reducing marketing expenses and personnel expenses through the addition of headcount reductions,” Flanagan added.

Navigating the downturn in a cyclical industry also meant lenders rolled out new products and services. 

In the third quarter of this year, loanDepot is rolling out its new home equity line of credit (HELOC) product for which customers can apply and be approved in as few as seven days. The product is within its mello business unit, which was launched in 2017 and operates side-by-side with loanDepot’s mortgage origination and servicing division.

In January, loanDepot announced it is bringing the servicing of the Federal Housing Administration, Department of Veterans’ Affairs and United States Department of Agriculture-funded Ginnie Mae loans in-house. The move leverages “ongoing investment in the firm’s servicing platform, allowing the company to scale for operational efficiency and enhanced customer service,” loanDepot execs said at the time. 

FoA is diversifying its portfolio beyond traditional mortgage products with the best performance in reverse originations for the quarter. The product’s funded volume increased from $1.32 billion in Q4 2021 to $1.47 billion in Q1 2022, up 12%. Compared to the same period in 2021, when the volume was $769 million, it increased 92%.

“Our reverse and commercial originations businesses faced pressures in the first quarter as rates and spreads rose at the fastest pace in decades; however, the pipeline for reverse and commercial originations continues to be strong,” said Patti Cook, CEO of FoA. “Our reverse pipeline has never been bigger, driven by strong home price appreciation over the past couple of years.”

The pandemic delivered banner years for the mortgage industry, which originated more than $4.3 trillion in volume in 2020 and $4.4 trillion in 2021, according to Black Knight. While purchase lending posted an all-time high of $1.7 trillion in 2021, the $2.7 trillion in refinance lending was below 2020 levels. 

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