TIAA Sells Everbank; Mortgage Earnings Wrap

November 4, 2022 | Premium Service | As the week comes to a close, there is much news in the world of banking and mortgage finance. The Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA), a $1.3 trillion insurance and investment conglomerate, is selling TIAA FSB (f/k/a Everbank).

And as Q3 earnings grind on, there is lot’s more news from the world of mortgage finance, good and bad. Subscribers to the Premium Service of The Institutional Risk Analyst read the details below. The big news this week starts with the poor showing by Rocket Companies (RKT), reporting a loss for Q3 2022 and a big decline in volumes.

“Like most home lenders, its production volumes were decimated by rising rates and evaporating refinances,” writes Paul Muolo at Inside Mortgage Finance. “In 3Q, Rocket funded $25.6 billion, down 25.9% on a sequential basis. For comparison purposes, the company originated $75.9 billion in the fourth quarter of 2021, when rates were still comparatively low.”

As of September 30, RKT’s mortgage servicing portfolio included 2.5 million clients with $531 billion in unpaid principal balance. At the end of the third quarter, the value of RKT’s mortgage servicing rights was $7.3 billion, an increase of $1.9 billion or 26% year-to-date. In '20 and '21, nearly 50% of the mortgages that RKT originated came from were clients that were in firm’s servicing book, meaning there's virtually no cost to acquire the new asset.

During the quarter, the value of the RKT MSR asset increased by $600 million, including a $400 million positive mark-to-market adjustment, yet the company still lost money. Why? Because RKT is slow-walking expense reductions due to the firm’s significant excess capital and liquidity position.

“The decision-making, of course, is not based on the profitability of a day, a week, or a month,” said Rocket CEO Jay Farmer. “The decision-making is based on the metrics that will tell us that the investments we're making are going to pay off in the long run.”

In other words, RKT is not going to chase United Wholesale Mortgage (UWMC) as it buys market share at the cost of profitability. UWMC reported earnings this AM and, as noted above, the company is buying market share with both hands.

UWMC originations of $33.5 billion in 3Q22 compared to $29.9 billion in 2Q22 and $63.0 billion in 3Q21. Purchase originations were $27.7 billion in 3Q22, the best purchase quarter in UWMC's history, a 24% increase compared to $22.4 billion in 2Q22 and a 5% increase compared to $26.5 billion in 3Q21.

Of note, even as mortgage profitability has been cut in half, UWMC has been offsetting dwindling production income with MSR sales. “Through the first nine months of 2022, UWM transferred $85.5 billion in MSRs to other shops,” according to Inside Mortgage Trends. “Transfers reflect MSR sales.”

In sharp contrast to the volatility shown in RKT and UWMC results, Guild Mortgage (GHLD) reported another profitable quarter, confirming our earlier view that this mortgage issuer is one of the best managed businesses in the industry. The press release says it all:

• GHLD generated GAAP net income of $77.4 million, or $1.26 per diluted share, compared to $58.3 million, or $0.95 per diluted share, in 2Q22

• Adjusted net income was $24.1 million, or $0.40 per share, compared to $13.9 million, or $0.23 per share, in 2Q221

• Net revenue totaled $261.2 million compared to $287.5 million in 2Q22

• GHLD’s adjusted EBITDA totaled $32.9 million compared to $22.0 million in 2Q221. And total originations were $4.4 billion or 91% purchase loan volumes.

The announcement that TIAA is selling the $33 billion savings bank (f/k/a Everbank) into a club deal led by Warburg Pincus is hardly a surprise. TIAA never knew what to do with the bank and now, five years later is selling the bank in a down market. TIAA will remain a minority investor, but intends to spin the trust business into a new regulated bank.

As in the case of past successful WP bank investments (Varo, Citizens, National Penn), Warburg is a very credible lead. No investors will "control" the bank per se, but will have substantial influence on the deal via the board. Investors will include Stone Point Capital, Warburg Pincus, Reverence Capital Partners, Sixth Street and Bayview Asset Management.

The bank will be renamed and operated independently of TIAA and its investment affiliate Nuveen. The bank will, however, have an arms' length relationship with all investors per Reg W.

Bayview is an investor in the deal, but that will not really help them fund the mortgage business even if they deposit escrows in the bank. Only by owning 100% and merging Bayview’s mortgage operations into the bank would any real benefits be realized.

TIAA FSB bank is a peer performer, but loan yields are low and there is a large slug of non-core funding. The bank’s low efficiency ratio (37%) may change on a standalone basis once the parent-bank connection with TIAA is ended.

Virtually everything on the balance sheet is held-to-maturity, so there may be some surprises in the portfolio awaiting the buyers. TIAA FSB has a surprising amount of foreign exchange exposure and also $10 billion in footings held off balance sheet.

At the end of Q2 2022, TIAA FSB reported an over $100 million deficit in terms of accumulated other comprehensive income (AOCI), but that number magically turned into a profit in Q3 2022. It will be very interesting to see how this bank looks once the transaction closes.

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