Housing Finance in the Age of Volatility: GHLD, UWMC, RKT, COOP, JPM

May 9, 2025 | Premium Service | As we get to the back of the Q1 2025 reporting period, issuers such as Guild Mortgage (GHLD) and United Wholesale Mortgage (UWMC) have released earnings. The common themes seem to include compressing loan gain margins and volatility in the mortgage servicing asset.  As the belly of the Treasury yield curve rallied at the end of Q1, mortgage servicing rights (MSRs) were discounted heavily by the model driven world of Wall Street. But do the models mark to the actuals?

In the regulatory world, they call MSRs “assets” rather than "rights" because the servicing strip can suddenly become a liability given enough interest rate volatility. The past quarter illustrates this tension. Below we look at the results for GHLD, UWMC and other residential issuers for the edification of our Premium Service subscribers. But first let’s check in on continuing the train wreck known as commercial real estate and particularly multifamily rental properties as a federal bailout looms.

When you hear President Donald Trump exhorting the Federal Open Market Committee to cut interest rates, that’s because he knows that much of the legacy multifamily sector is slowly, painfully sliding into default and restructuring. While residential issuers still benefit from the post-COVID surge in home prices, multifamily assets did not and actually saw declines in appraised values as interest rates and, more important, cap rates rose dramatically. Post-default net loss rates on bank-owned multifamily loans went back to 100% by 2021 due to the surge in progressive political interference in the housing markets during and after COVID. Markets in progressive blue states are tight because there is no supply of affordable homes.

As of Q1 2025, default rates in single family real estate are still close to zero for high FICO, low LTV assets typically owned by banks.  This will change, however, over the next several years, as the distortions caused by QE slowly subside, supply grows and the cost of default reverts to the LT mean of ~ 70% net loss.  This process of adjustment will proceed based upon the change in home prices since loss given default (LGD) is essentially a reflection of collateral values.

The chart below shows LGD for $3.7 trillion in bank 1-4s and $630 billion in bank-owned multifamily loans. Notice that net loss rates for bank owned 1-4s are still averaging near zero, but at the end of 2021 this metric was -100% for multifamily, using the Basel I methodology employed by WGA.

Source: FDIC/WGA LLC

In the prime land of bank multifamily real estate, average loss given default continues to be near 100% of the loan amount. Losses for many loans are higher than the original amount of the loan. Why? This reflects the fact that a number of multifamily properties are deep underwater on a cash flow basis, mostly due to excessive debt at lower rates. Lenders don't want these moribund properties and the ostensive "owners" are just trying to survive, as shown in our favorite chart below. Note that real-estate owned by banks post-foreclosure is near zero and the banking industry still has two quarters worth of earnings "earned but not collected."

Source: FDIC

Many multifamily owners are waiting to be rescued by the Federal Reserve, as occurred in 2020. But the owners and their investors may be disappointed because the next interest rates cycle may not see LT rates fall along with the target for Fed funds. Indeed, the sheer weight of negative leverage is starting to cause significant distress for the supposed “owners” of new and old multifamily. One of our favorite reads in the world of multifamily real estate, MTS Observer, sets the stage nicely:

“Negative leverage” is a set of conditions whereby the initial, unlevered return on an asset is lower than the prevailing cost of debt. As a mathematical fact, this means that the levered return on such an asset will be lower than the unlevered return, thus injuring the buyer-owner for using leverage. Despite this, negative leverage in commercial real estate today is common. In apartments specifically, it is ubiquitous.

As we’ve noted for the past several years, multifamily real estate is the new subprime market, a situation driven by the fact that consumer income has been flat to down for years, but the cost of rent (and operating expenses of multifamily properties) is only going up. In states like New York, the fact of progressive rent control legislation has rendered many of these multifamily assets impaired, being unsalable at previous valuations and thus unfinanceable at current interest and cap rates. When the FDIC finally sells the remaining majority shares of the Signature Bank portfolio, the dismal results will confirm the cost of progressive politics for New York consumers.

The only hope of survival for many underwater multifamily properties is the Fed, but even a large cut in ST interest rate targets may not rescue these firms from the twin hazard of high financing costs and equally high cap rates. By no surprise, Senators Ruben Gallego (D-AZ) and Dave McCormick (R-PA) have cosponsored legislation to increase Federal Housing Administration (FHA) multifamily loan limits just as the sector is getting ready to roll over. Even as President Trump talks about protecting the taxpayer, Washington is preparing to bail out the multifamily sector.

“The Trepp CMBS Delinquency Rate rose again in April 2025, with the overall rate increasing 38 basis points to 7.03%,” the CRE data firm reports. “In April, the overall delinquent balance was $41.9 billion, up from $39.3 billion in March. The overall rate has now cleared the 7.00% mark for the first time since January 2021… The multifamily delinquency rate soared another 113 basis points to 6.57%. This follows March’s increase, which marked the highest reading since March 2015, when the rate stood at 8.28%.”

Residential Lenders: GHLD, UWMC, RKT, COOP, JPM

Markets were distracted during Q1 by the trade policy of the Trump Administration, but the fact is that the belly of the Treasury yield curve rallied strongly into the end of the quarter, then shot back up. The movement of the yield curve accounted for much of the hedge cost to lenders, both for loan pipelines and MSRs. Why do we hedge MSRs? To keep institutional investors happy. The result was a lot of down marks for MSRs that were made more prominent by low volume levels.

In the last two weeks of March, 30-year conforming mortgages for the FHA market just touched 6.2% but then soared in April back up to 6.6% and conforming assets were near 7%. This level of volatility makes it difficult to price loans and even more difficult to model MSR prices. GHLD surged at the end of Q1 2025, but then sold off as Q2 2025 began, as shown in the chart below. UWMC has performed poorly compared to its peers through all of 2025.

GHLD swung from an $80 million positive mark for its MSR in Q4 2024, but then reported a $70 million negative mark in Q1 2025. Some $50 million of this adjustment reflected model inputs. While volumes fell in Q1 2025, profitability per loan improved. Mr. Cooper (COOP) displayed the same drop in volumes but improvement in profitability. Less is more. The table below shows the Q1 2025 income statement for GHLD. 

Guild Holdings

Total originations for GHLD fell 23% in Q1 2024, reflecting the volatility in interest rates and the end of the surge in lending in Q3 2024. The firm reported a loss of $23 million in Q1 2025 vs a profit of $97 million in Q4 2025. Yet when the GAAP results are adjusted to eliminate the non-cash charges, GHLD actually made more money in Q1 than in Q4. Likewise, GHLD generated more operating cash flow in Q1 2025 than in Q4 2024, again illustrating the difficulty of parsing financial statements for mortgage lenders. The table below shows the non-GAAP income for GHLD.

While GHLD provides a lot of good information about their business, the investor disclosure provided by UWMC is a bad joke, especially when you remember that UWMC is the largest nonbank lender in the US. The Q1 2025 press release is just 9 pages in length and lacks some of the most basic financial information available from UWMC’s peers. Yo Matt: Give us a proper five-year financial supplement, like Citi or even Block Inc (XYZ). The table below shows the summary income statement for UWMC from Q1 2025 earnings.

Note that UWMC lost $250 million in Q1 2025 on a GAAP basis, but still was in the red $150 million after making non-GAAP adjustments. Like many lenders, UWMC saw its gain margin on loans drop 10bp, but UWMC does not use industry standard terms for reporting gain on sale. Operating cash flow fell from $118 million in Q4 2024 to just $50 million in Q1 2025. The big event in Q1 was the $388 million down mark on the firm’s MSR. The statement of operations for UWMC for Q1 2025 is shown below.

As you can see from the table, UWMC has a lot of moving parts, starting with the changes in the valuation of the MSR. UWMC has been selling MSRs for the past several years to finance a brutal price war with RKT in the wholesale channel. Notice the large swings in the firm's gains and losses on interest rate derivatives, a line item that thankfully has been eliminated in Q1 2025. But the bottom line is that the company lost a quarter of a billion dollars in the last quarter and the stock's performance reflects this reality. The float on UWMC is thin and thus it is difficult for the firm to get credit for its market position. Less volume, more profits and retention of MSRs would be well-received.

Both GHLD and UWMC face significant challenges in the future. In the wake of the transactions by Rocket Mortgage (RKT) to acquire Redfin (RDFN) and then Mr. Cooper, all of the top residential mortgage lenders are facing a decision. What is that decision: How to compete with the two dominant seller servicers:

• JPMorgan (JPM): The largest bank servicer at $1 trillion UPB and $9.1 billion in retained MSR, the industry leading mortgage warehouse and prime residential securitization platform, and over a trillion in core deposits and gazillions more cash in escrow balances. JPM has a taste for prime loans and the raw market power to set prices in non-QM. Led by JPM, the top five money center banks dominate the top half of the conventional mortgage market and most of jumbo loans. U.S. Bancorp (USB) is right behind JPM in correspondent volumes. BAC, WFC and Citi all churn out significant volumes primarily via their branch system. If the banks want the jumbo condo loan in a given market, they'll get it.

  
  

• RKT+RDFN+COOPER: This promises the creation of an integrated nonbank loan acquisition machine that includes a national realtor to gather prospective borrowers, the number two player in wholesale and direct to consumer right behind UWMC, and the low-cost provider of servicing and asset management in COOP. The post-close Rocket will be the biggest nonbank owned servicing and subservicing provider, with above peer recapture capability and direct to consumer channels, and nascent asset management capacity acquired in 2023 with Roosevelt Management. COOP does not mind some Ginnie Mae exposures, but it is closely aligned with RKT in terms of the view of risk vs reward. And RKT has not followed UWMC into the black hole of overpaying for business in the belief that any advantages last beyond today. When Matt takes his hand off the throttle in wholesale, he knows that RKT could easily pass him in loan volumes.

GHLD needs to grow, probably by combining with another lender with a larger servicing book. GHLD's MSR represents less than $100 billion in unpaid principal balance (UPB) of high quality purchase loans. COOP plus RKT is well over $1.5 trillion in UPB. In our view, any national mortgage firm with less than $500 billion in UPB of servicing is not viable long term. GHLD is acquisitive and has a skilled, stable management team that is laser focused on cost control. To date they have mostly acquired smaller firms, but GHLD could easily combine with one or more mid-size firms to create an impressive competitor focused on high touch purchase business.

UWMC and other large lenders face a different problem, namely acquiring additional servicing assets, long-term debt and also asset management capability to raise more capital. The idea of UWMC getting into servicing de novo, for example, is ill-advised in our view, but an acquisition makes a lot of sense. There are several firms in the top 20 servicers that could give UWMC the servicing capacity they need for the next round of competition.

UWMC is a classic example of a hyper-efficient lender that has focused on making and selling loans. But the industry of the future is not just about sales, but looks more and more like the moated castles such as JPM and RKT, which control so many assets and cash flows that they essentially become self-sustaining systems. For that reason, we like the firms that hold MSRs and have the tools to build toward that trillion dollar level of servicing UPB, which is still less than 10% market share in a $14 trillion UPB residential mortgage market.

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