Add Guild Mortgage to the list of lenders with profitability propelled by the servicing portfolio in the first quarter — a trend that will continue in the coming months, as pressure on origination margins will remain, executives believe.
The California-based nonbank mortgage lender reported a $208 million net income from January to March, an increase of 393% quarter over quarter and 29% year over year.
“Origination volumes and gain on sale margins were compressed compared to prior quarters, consistent with broader industry trends,” Mary Ann McGarry, Guild’s CEO, said during a call with analysts on Friday morning. “Our servicing platform acted as a hedge, with strong growth in servicing fees, as well as sizable gains in the underlying value of the MSRs.”
The main contribution for the quarterly earnings came from adjustments in the fair value of the mortgage servicing rights (MSR), which brought in $184.6 million in net revenues in the period, compared to a negative $17 million in Q4 2021 and $35.7 million in Q1 2021.
MSR values tend to initially increase as mortgage rates rise and borrowers are less likely to refinance. “Going forward, assuming interest rates continue to trend higher, slower prepayment speeds will likely persist, thereby driving further measured markups in the underlying value of our MSR assets on our balance sheet,” Terry Schmidt, Guild’s president, said to analysts.
In total, Guild ended the first quarter with $73.2 billion in unpaid principal balance, up 3% quarter over quarter and 16% year over year. The net income attributed to the servicing segment was $226.8 million, compared to $27.3 million in the previous quarter and $67.1 million in the same quarter of 2021.
Guild, a purchase-focused lender with a distributed retail model, registered a deterioration in the origination business. The company reported $6 billion in origination volume, down 31% from the previous quarter and 38% from the same period of 2021, with purchases representing 66% of the total.
The gain-on-sale margin on pull-through adjusted locked volume declined from 4.80% in the first quarter of 2021 to 3.94% in the fourth quarter of 2021 and 3.34% in the first quarter of 2022.
Executives believe margin compression will remain for the second quarter. “The margin on unadjusted locked volume in the first quarter is more indicative of the trajectory in the short term,” Amber Kramer, Guild’s CFO, said during the conference call. “We’re just not seeing from a competitive pricing standpoint that we’re necessarily near the bottom.”
The origination segment’s net income was $63.4 million in Q1 2022, compared to $53.4 million in the previous quarter, a 19% increase due to adjustments made to reflect changes in the fair value of contingent liabilities related to acquisitions. Compared to the first quarter of 2021, the origination segment profit declined 60%.
Guild had $243 million in cash and $1.9 billion of unutilized loan funding capacity as of March 31, 2022. The liquidity, according to executives, may support mergers and acquisitions and a $20 million share repurchase program approved by the board on Thursday.
Guild’s share were trading on Friday afternoon at $9.10, up 5.81% from the previous day.