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Q4 2022 Earnings Conference Call
spk05: Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to UWM Holdings Corporation's fourth quarter and full year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If at any time you'd like to remove yourself from the queue, please repress star one. Thank you. Blake Colo, you may begin your conference.
spk01: Good morning. This is Blake Colo, Chief Business Officer and Head of Investor Relations. Thank you for joining us and welcome to the fourth quarter and full year 2022 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 Matt Ishbia, Chairman and CEO of UWM Holding Corporation and United Wholesale Mortgage. Thanks,
spk07: Blake. And thank you everyone for joining us today. Appreciate you guys being here and looking forward to going through another great quarter and an awesome year here at UWM. 2022 is great across the board. As I've been saying all along, a higher interest rate environment is where you'll see the best mortgage companies separate even further from the rest of mortgage companies remaining. And we definitely saw that happen in 2022. I'm confident UWM is the best mortgage company in America because of our efficiencies and partnership with mortgage brokers. The broker channel is the best place for consumers to get a loan and the best place for loan officers to work and we're seeing that happen in front of all of our eyes. With that being said, UWM is not slowing down. Regardless of interest rates, we continue to invest in our people and our technology. We continue to focus on our effort to help brokers win in the market. Our 54% market share of the broker channel in the fourth quarter is proof of that partnership has never been stronger. I'm sure everyone knows on this call that is an all time market share record in mortgage and it's truly a magazine accomplishment for the broker channel and for UWM as their partner. Before talking about the fourth quarter, I'd like to touch base on the new, you know, a few full year financial and business highlights. So first off, Best purchase year of all time 2022, about $91 billion. In addition, is our third best production year with a hundred over $127 billion of total production. We delivered almost a billion dollars in profit in a market where most lenders lost money, you know, we're laying people off or went out of business altogether. I'm also very proud to announce that this is our ninth consecutive quarter paying a 10 cent per share dividend, which is close to a 10% yield at today's stock price. I explained nine quarters ago when we first went public, I feel comfortable paying this dividend in various market environments and we continue to demonstrate this in the best market conditions and even very tough market conditions. This will continue. Lastly, and most important to me, while my competitors are cutting investments and laying off thousands and thousands of people, we continue to invest in technology, take care of our people and have never laid off a single team member in our 37 year history. I'm extremely proud of our team members and the brokers for continuing to push forward and grind and ultimately win regardless of the market. 2023 is another huge opportunity for UWM and the broker community to continue to separate ourselves further from our competition, invest in the future and continue to win together as a team. Now, let's look closely at the fourth quarter. We closed $25.1 billion of production for the quarter, about 21.7 of this coming from purchase. Brokers are dominant purchase market. We see that continue to happen in 2023 and beyond. As I mentioned earlier, UWM has 54% broker market share in the fourth quarter, the highest share reading ever, up from 41% in the third quarter. This is 100% result of our commitment to the broker channel. Our partners continue to improve and win regardless of the market. Helping our partners grow faster than the rest of the market has been a huge part of this success. We'll remain dedicated and committed to helping the mortgage brokers across America dominate, provide the best service rates and technology to their consumers so they can grow in their individual markets as they continue to win as well. The fourth quarter was our second consecutive quarter as the number one overall mortgage lender in America. To add a little perspective on this, this is the third consecutive year as the number one purchase lender. The eighth consecutive year as the number one wholesale lender. As I said before, everyone doing mortgages looks decent when rates are low and having success in a purchase market continues to set us apart. High rate purchase market, are you succeeding or are you not? That's a difference to UWM. If you actually look at the market with brokers being about 20% and us being about 54%, we're about 11% of the overall mortgage market, which is crazy to think about while we only are in the wholesale channel. It's great for brokers, it's great for UWM, and we'll continue to win together as a team. Now, in the fourth quarter, we showed a $62.5 million loss, but that's inclusive of about a $151 million decrease of fair value of MSRs. So really, operationally profitable once again. Our gain margin was 51% based on this well within our guidance. And the momentum of the broker channel has never been stronger. The last six months since announcing Game On strategy has resulted in more retail loan officers joining the wholesale channel than ever before. In addition, the second largest month of all time of retail loan officers converting over was January of this year, just a month and a half ago. And so, amazing numbers and a lot of that stuff takes 6, 9, 12 months for them to actually produce, get going, get licenses just over. So all of the benefits have still not really come to fruition. We're really proud of the Game On strategy and all the great thing that's done for the broker community and for UWM as a partner with brokers. As you can tell, I'm excited about 2023, a year in which we can expect our competitive advantage to continue to become clearer to everybody as we continue to invest in our people, the brokers, and our business. We know this formula works because we've seen it in similar market cycles. Every time we've emerged stronger and more dominant, right now is not any different. Before I turn things over to Andrew Huvacher, I want to congratulate him on officially being named our Chief Financial Officer. He's done great work since joining us over two years ago, and I'm excited for him to continue to take this next step in his career and continue to help UWM grow and be more successful. So, Andrew, take it away.
spk06: Thanks, Matt. We finished 2022 strong with fourth quarter production volume on the high end of our outlook and gain margin well within the range we expected. Our fourth quarter profitability was impacted by negative MSR fair value marks, but we delivered strong net income for 2022 in a challenging and volatile mortgage market. The rising rate environment throughout the year resulted in positive MSR fair value marks, but our core purchase business was strong in 2022 with the year over year increase in purchase origination volume. We've said this before, but it's worth repeating. Our servicing portfolio remains very strong with a total UPB of approximately 312 billion as of the end of 2022. As newly originated and retained MSRs largely kept pace with sales and payoffs throughout the year. With a low WAC, very low delinquencies and high asset quality, our MSR portfolio remains strong and continues to provide balance to our business model, a recurring quarterly cash flow stream and strategic and a strategic source of additional liquidity, if and when we choose to sell our MSRs in the bulk secondary market. On the call last quarter, we discussed steps we took in Q3 to further enhance our access to liquidity, which included establishing a line of credit secured by our agency MSRs. Our available borrowing capacity on this secured facility was 750 million at the end of the year and our total available liquidity increased to approximately 2.1 billion as of the end of 2022 compared to just over 700 million at the end of 2021. We believe the measures we took last year and plan to continue to take in 2023 to enhance our liquidity will allow for our continued investments in growing both the wholesale channel and our market share. On the cost side, we continue to focus on prudent cost management in the current origination environment. Excluding the impact of an incremental addition to our repurchase reserves recorded in Q4 due to changes in estimates and increased interest expense from borrowings on our secured line of credit, total expenses decreased in Q4. Year to date, total operational expenses are also down as our cost structure aligns with the current mortgage origination environment. Okay, turn things back over to our Chairman and CEO, Manish Viga, for some closing remarks.
spk07: Yeah, thanks a lot, Andrew. Before the Q&A, I want to make a quick few points to everybody. 2023 will be the year that continues to separate the best lenders from the rest. Okay, we'll continue to support the broker channel, do everything we can to help them be successful and continue to grow. At UWM, we're investing in people process technology, continuing to deliver the best service experience for our brokers. In fact, this year, we're expecting to have 20,000 plus loan officers out to our campus to get trained, improve their game, and continue to grow their business, including, as many of you guys know, UWM Live, which has been a huge success. Many of you guys actually on the call are at it last year, but you can come again this year. It's May 4th. We expect to have that to be the biggest mortgage event of the year. In all of the industry here at UWM, I'll be speaking at it with Tony Robbins will be speaking at it. We'll have a couple of great brokers. It'll be a great all-around event. We'd love to have a couple of you out there. Lastly, I want to touch on aspects of business that I think is undervalued by the business investment community. We have control of our business. The decisions we make are intentional. And for the long-term success of the business, what I continue to tell you on these calls continues to happen quarter over quarter over quarter. I think we continue to demonstrate having great control of our margins and our business in general. I've consistently said that 75 to 100 annualized margins is what you can expect in a really purchase heavy market or a higher rate environment. And as you saw the full year ended in that range. And now we're back to guiding that rage again for Q1 2023. So realize with that said, we expect Q1 production to be between 16 and 23 billion and our margins would be in the range of 75 to 100 base points. We have complete control of our business, complete control of our margins, complete control of what's going on here at UWM. And we've been consistent with our message on strategy and the results have shown that. I want to thank our amazing team members at UWM for a great year in 2022. We look forward to dominating again in 2023. I'll pause now and turn it back over to Q&A for all of you guys and look forward to answering some of your questions.
spk05: At this time, I'd like to remind everyone in order to ask a question press star then the number one on your telephone keypad. If at any time you'd like to remove yourself from the queue, please repress star one. At this time, we'll pause momentarily to assemble our roster. We'll now begin the Q&A session. The first question is from both George with KBW. Your line is open.
spk03: Hey, good morning. I wanted to start with the question just on market share. Obviously, very impressive level just in terms of both the share overall and of the broker channel. Just can you remind us where you think the broker channel as a whole could go to and that with your share at 54%. Do you think that's peak or where do you think that trends?
spk07: Yeah, thanks for the question. I appreciate it. So, you know, if you go back to the road show, even when we're in public, you know, and that's why I think it's important people go back and see what we said then is happening now. What I said back then was, hey, UWM could get to 40% markets here in the channel and the broker channel should be 30% of the overall market. I said 33% by 2025, 26. Like I say to that stuff, I still believe in those numbers. 54% is off the charts crazy, right? 11% of the overall market, right? But what I told you back then, 40% of the broker channel, 30% of the overall channel of the overall industry is brokers would be about 12% overall market share. That's kind of what I still see the trend. Do I think UWM will stay 54% forever? No. But I do think UWM being 11%, 12% of the overall market is very realistic. And if you look at what we said back in the road show, you know, we're a lot less impacted by the cycles as everyone else. Like, you know, no one expected 2022 and we still made about a billion dollars. We are very competitive, very successful in market share and profitability and we continue to pay the dividend. So the way I look at the market share, the broker channel will get to 30, then eventually 33%. I think I stated by 25 or 26. We will, our belief system is we can be at 40% plus of that market share. So 40% of a bigger pie being 11%, 12% of the mortgage market in general, one out of every eight or nine loans in America. We're pretty proud of that, especially in a purchase market.
spk03: Okay, great. Makes sense. Thank you. And then just one on the margin guidance, you know, just to increase. Does that imply that Game On being a sort of playing a smaller role in the first quarter?
spk07: Yeah, so we look at it as Game On has made a big impact. We still have very, very competitive pricing. That's why the margins are still in that 75 to 100 range. But as I told you, I have control of it. I decide when we want to change things and tweak things and we've done things to help our brokers in certain ways and we have different initiatives out there to help brokers succeed in Excel. I don't know if that's your phone, but Sorry, no worries. It's all good. And so, you know, so as you can see with Game On, our pricing is still extremely competitive. Brokers have extremely competitive pricing. It's helping them grow their business right now. But we aren't going to be at, you know, that investment of being at 50 basis point margins, as you saw for two quarters. I don't expect that to continue unless I decide to do it again in the future. Right now, I have no expectation of that. And I think that's because you'll see everyone else will follow because we do control the margins in this industry.
spk03: Okay, great. Thanks a lot.
spk05: The next question is from Eric Hagen with BTIG. Your line is open. Hey,
spk00: good morning. Good to hear from you guys. I think I've got a couple of questions. You know, we know that the interest rate buy downs have been popular for borrowers that are confronting affordability challenges. Are there any limitations that you see to continue offering that solution if rates had even higher and just maybe how valuable is that opportunity going forward?
spk07: Yeah, thanks for the question, Eric. Appreciate it. And the buy down opportunity is great. It's a 2-1 buy down, 1-0 buy down. There's even a -2-1 buy down. And I think the key is mortgage brokers are knowledgeable. They understand they have those options. Those are still viable. Those will continue to be viable. Those don't go away or change. Those are very good opportunities. And you know, whether it affects affordability or really what they're more for is to give a borrower the consistency of a 30-year fix, but the lower rate or the lower payment for the first two or three years or one year depending on the buy down of the buy down product. It's been a very successful product. Instead of real estate agents and sellers lowering their price, you can contribute towards a buy down and it creates opportunity. We're seeing a lot of it. And it's been very successful. And we're the largest personal end of the country. We're kind of leading on that and people are using it quite a bit right now.
spk00: Yep, that's a really helpful detail. So there's lots of focus out there on bulk MSR supply and there being a pretty robust pipeline. Just curious how you guys are thinking about the opportunity and sort of the value in selling MSRs against that backdrop. Even how you think about doing that versus drawing against the MSR financing that you have. Thank you guys.
spk07: Yeah, thanks for the question on that too. So I think there's a lot more made out of this crazy amount of supply hitting the market. I think that's a little bit more of a fun media story than a reality. UWM's liquidity is extremely strong. We think the MSR market is actually more liquid than you guys are recognizing. And we're taking advantage of that if we want to. We have complete control of it. We can either A, tap the MSR line as you pointed out or B, sell MSRs, sell the X. We have all different options. Liquidity is not a concern. Let me say it differently. Liquidity is always a concern in any mortgage business. It's not a concern for UWM with a great job that our finance team and our MSR sales team, everyone's been doing to make sure that we don't have to think about that stuff. And so we're opportunistic. We're in exactly the position we want to be. Our MSR book is strong. It produces a lot of liquidity. And at the same time we want to sell, we can sell that as well. And so I think a lot more has been made of this supply and market. It's because of who we are that people want to buy our servicing. And when you're a company that's maybe struggling, people don't want to buy your servicing because of Rep and Warrants and other things. We're the strongest mortgage company in America, period. And people know that. So for us it's not an issue. I don't think it's as much of an issue as people make. But maybe it's a little more for some of the weaker counterparties.
spk00: Yep. That's helpful to tell. Thank you guys very much.
spk05: The next question is from Doug Harder with Credit Suisse. Your line is open.
spk02: Thanks. Just apologize if this is asked, but just can you talk about how you think your market share trends as you kind of have pulled back from GainOn and how sticky kind of the additions of brokers that you've added will be?
spk07: Yeah, thanks for the question. So Doug, I think I talked about it even when we rolled out GainOn, that the expectation of what I consider success on it. And my expectations, GainOn was not a market share play. It obviously helped market share. It was a let's grow the broker channel play. Help the loan off from the broker channel get new real estate agents, build relationships, win more loans, continue to educate consumers and educate the markets. What you guys have to be happy to wrote, it's $9,400 cheaper to go through a mortgage broker than a retail lender or mega bank. That's why the big mega banks, you heard Wells back out, you see Rocket falling through the ground. All these companies are really struggling because they are charging so much more to consumers. GainOn accelerates that and shows even more. So it's going to be very interesting to watch and see how that happens. And that was the expectation of the market share. And then the market share obviously went up. Do I expect the market share to stay at 54%? No, I probably don't expect it to stay there. But I never expected it to get there to be clear. What we said was, hey, can we get over 40% and maintain it at that level? We've seen this happen before. We did this. This isn't like a new thing. We just went public last time I did it back in 2019. We've seen it. We know the stickiness. We understand how to control the stickiness and make sure clients understand the value. And that's what we're going to do. Because once a loan officer, and you can call any loan officer you want, Doug, and go to findamorgasbroker.com, call a loan officer, ask them, and they'll say, once you use UWM, you realize it's faster, it's easier, it's cheaper. They look good to realtors, they look good to consumers. Why would they not use UWM? And so GainOn helped bring a couple of those loan officers to use UWM that hadn't in a while, and they see it. They're going to see the value of UWM and they're going to stick with us for the long term. We've seen it happen before. You'll see it play out. It will happen. We'll see it happen in the quarter record. It will stay 54%. I don't think so. But it will be higher market share than I had before it. Absolutely, without question.
spk02: Appreciate that. Thanks, Matt. Thank you.
spk05: The next question is from Steve Delaney, who's a research analyst. Your line is open.
spk04: Thanks. Good morning, Matt and everyone at UWM. A lot of focus, obviously, on Originations side of the business, but I'd love to talk about servicing for a bit. Rising rates, the economy really hasn't broken from an employment standpoint yet, but at some point, the higher rates are going to have an impact. Just curious if you're seeing any increase in delinquency, special servicing, servicing advances that obviously follow delinquency. Are your costs per unit on the servicing side of the business? Are you seeing any pressure there that those are moving higher? Thanks.
spk07: Thank you for the question and the focus on the servicing. I understand that is important. What we've done differently is this. It's just not been effective and no impact at all. Our delinquency is one thing that people don't give us credit for, although we're the largest lender in the country, I focus on being the best lender in the country. We've been the best for years. The delinquency rate at UWM is lower than almost anyone in the country. The FICO scores of the loans UWM does is the highest in the country. I'm not just comparing to other non-banks. I'm looking at banks, non-banks, credit unions. We are the elite on this. Our delinquency rates aren't impacting. Lower delinquency rates, better credit quality, not doing the loans. We don't go below 612. We don't go lower credit scores. They're doing riskier loans. We just don't do it. Therefore, my servicing costs stay low. My delinquency stays low. My concerns about unemployment going up, impacting it, it's less of an impact. Same thing on the region. We're less cyclical. We're less impacted. We're a little bit more protected on this same exact thing because of our business strategy and business model on the type of loans we
spk04: do. That's helpful. One last comment and question, I guess, is, look, it's been widely publicized that you've been successful in your bid to acquire a leading MBA franchise. Congratulations on that interesting and exciting part of your life. I guess from an investor standpoint in UWMC, what could you say to your investors, or would you if you can, what impact, if any, on that successful business opportunity? What impact could that have on your equity commitment to UWMC going forward because of that new opportunity? Thank you.
spk07: Thank you for the question. First off, real excited about the Phoenix Suns and Phoenix Mercury. It's something completely outside of UWM and been a lifelong dream and something I'm excited to be involved with. With that being said, there's actually zero impact. Actually, I'd reverse that and say 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. I have a bigger platform personally. More people following me, more people listening to me, more people learning and being educated about brokers. It's only going to help. It's not taking any more of my time. I actually can argue that I spent more time trying to research to find the right team and getting lucky enough to get the Suns and Mercury was like the elite of the elite. That I actually think I have more time on my hands now that I'm not chasing a team and trying to find the right thing for me and then I actually can focus on UWM. It will have zero impact is probably what I would say, but I would probably say on the reverse side, a positive impact on UWM and the broker channel and consumers with the new platform we have. Thank you.
spk04: Thank you. Appreciate it.
spk07: I think there's some issue with the operator. If anyone wants to reach out, you can reach out to Blake Kolow, business officer, head of investor relations. I'm happy to jump on a call. I guess I'll close with this. Amazing 2022 at UWM, 2023. I'm so optimistic about and excited about the opportunity ahead. We are the biggest and best mortgage company in the country and we will maintain that and continue to grow and dominate, take the market share, continue to help brokers win, and help consumers across the board. And UWM and our investors are going to be excited about it with the dividend and all the great things we've got going. So thanks for the questions. We're excited about 2023.