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The nation’s largest mortgage lender, United Wholesale Mortgage, has bolstered its balance sheet by more than $1 billion this year by selling servicing rights and excess servicing cash flow on nearly $90 billion in loans.

UWM sold the servicing rights on $70 billion in mortgages backed by Fannie Mae, Freddie Mac and Ginnie Mae for $941.2 million, the company disclosed in a note appended to the end of its annual report to investors.

In addition to selling nearly one-fourth of its mortgage servicing rights (MSR) portfolio outright, UWM said it sold excess servicing cash flows on an additional $19.4 billion in loans for $150.9 million.

The two servicing deals, which raised a total of $1.09 billion, took place some time after Dec. 31, 2023, the company said.

“We suspect the sales went to only a few buyers which possess enough scale to finance and onboard bulk product, including select servicers and REITs [real estate investment trusts] … which rank in the top 15 for market share,” BTIG analyst Eric Hagen said in a note to clients Monday.

In addition to being the nation’s largest provider of home loans, UWM also acts as a loan servicer, collecting payments from borrowers on behalf of investors who buy the loans it originates. Although 93 percent of the loans UWM originated last year were sold to investors, UWM retains the mortgage servicing rights on most of the loans it originates, earning $818.7 million in fees as a loan servicer in 2023.

Being in the mortgage servicing business can create accounting headaches, since changes in interest rates can affect the fair value of mortgage servicing rights. When mortgage rates go down, that can reduce the fair value of MSRs, since borrowers are more likely to refinance and end up with another loan servicer.

In reporting a $461 million fourth-quarter net loss on Feb. 28, UWM said it continues to be “operationally profitable,” with the net loss driven by a $634.4 million write-down of the fair value of UWM’s MSR portfolio.

UWM’s MSR portfolio peaked in 2021

Source: UWM annual reports to investors.

Having sold $112.9 billion in MSRs in 2022 and $99.2 billion in 2023, UWM ended 2023 with an MSR portfolio totaling $299.5 billion in unpaid principal balance, down 6 percent from a 2021 peak of $319.8 billion.

With 2024 MSR sales already totaling at least $70 billion, UWM’s MSR portfolio is now closer to $230 billion than $300 billion. BTIG estimates UWM will sell another $60 billion in MSRs this year, but end 2024 with an MSR portfolio of $265 billion by originating $120 billion in mortgages and keeping the servicing rights for much of that business.

BTIG theorizes that most of the MSRs UWM has sold this year were tied to loans with higher interest rates originated in the last 12 to 18 months. While those are the type of loans that would have required MSR markdowns, the borrowers who took out those loans would also be good refi candidates for UWM to “recapture” on the origination side if interest rates fall.

“Unlike some of our competitors, we have not historically specifically hedged the MSR portfolio,” UWM Chief Financial Officer Andrew Hubacker said on a Feb. 28 call with investment analysts. “Rather we maintain our portfolio at levels such that we are confident that fair value impacts due to interest rate declines will, over time, be more than offset by an increase in origination income.”

Hagen said BTIG analysts “still like the sales because it avoids the potential for further [markdowns] driven by lower interest rates, and we see it as an effective form of hedging if the recapture opportunity looks limited” for UWM.

Shares in UWM, which in the last 12 months have traded for as little as $4.16 and as much as $7.43, closed at $6.81 Monday, up 17 percent from a 2024 low of $5.82 registered on Feb. 28 after the company announced a fourth quarter earnings.

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