Update: Guild Mortgage

March 12, 2022 | This week Guild Holdings Co (GHLD) reported results for Q4 2021 and the full year. GLHD is one of the older independent mortgage banks (IMBs) in the US and also one of the more stable and better managed shops. The proof of this statement is seen in the financial results of GHLD, which in 2022 illustrated that not all IMBs are the same. GHLD focuses on purchase mortgage business and does so in a way that delivers more stable volumes, more consistent gain-on-sale (GOS) margins and more even financial results through the economic cycle. Subscribers to the Premium Service of The Institutional Risk Analyst read on to find out why.

One of the first things to notice about GHLD is that the company has very close control over operating expenses and did not “overshoot” revenues as 2021 ended. While many issuers large and small allowed expenses to run ahead of business volumes, GHLD managed down expenses with revenue.

Source: EDGAR

GHLD is largely a purchase mortgage lender that has a strong retail channel. Retail mortgages are the most expensive channel in residential finance, thus GHLD has always needed to be sensitive to operating expenses given the ebb and flow of interest rates and mortgage volumes. This focus on expense management and retail production has resulted in less volatility in operating results and more stable margins that the industry average of 228bp in Q3 2021. In Q4, GHLD earned a gain on sale margin of 3.47% based on in-house originations and 3.94% based on pull-through adjusted locked volume.

Source: GHLD

“I am pleased with the results Guild delivered during the fourth quarter and full year of 2021 despite a more challenging second half of the year for our industry,” said Mary Ann McGarry, Chief Executive Officer. “In originations, we funded $37 billion of mortgage loans last year at higher gain on sale margins relative to those typically generated in the wholesale or correspondent channels. Much of our resiliency can be attributed to our purchase-focused mortgage business that sets us apart, as well as industry volumes increasingly shifting toward purchase loans."

In addition to managing the decline in earnings, GHLD continued to build its servicing book with relatively low leverage, growing the unpaid principal balance (UPB) of its book. Some highlights from the GHLD earnings presentation are below. Note in particular the relatively low leverage on the mortgage servicing rights (MSR) portfolio, which was marked at 95bp at year end after a small downward adjustment:

• Net income for the servicing segment totaled $27.3 million compared to a loss of ($24.5) million in 4Q20,

• In-house servicing portfolio increased 18% to $71 billion from 4Q20; retained servicing rights on 80% of loans sold,

• Servicing portfolio leverage ended the quarter at 37% with $250 million of borrowings and a fair value of $675 million, and

• Recaptured 61% of refinance opportunities, highlighting the power of Guild’s business model

As the residential mortgage industry goes through a tough period of cost-reduction in coming months, we expect GHLD to continue to outperform the industry. “We think that there's going to be continued pressure on margins, but now starting to see some of these companies' final shed some excess capacity will help, but the natural volume drop, and the competitive nature and the volatility of the market is pushing those down right now,” McGarry said on the GHLD call.

Like most other mortgage banks, GHLD has given up a good deal of ground since its second IPO in October 2020 but less than some of its peers. Notice in the table below, for example, that GHLD has the lowest market volatility (beta) in the group and is trading at 0.75x book.

Source: Bloomberg

Bottom line is that, in our view, Guild is one of the highest quality lending and servicing businesses in the residential mortgage space. McGarry and her team have spent the past several decades building value in their business, from the relationships in the retail channel to a growing book for mortgage servicing rights, that will feed future originations even as many other players in the industry are forced to retrench.

Disclosures: L: EFC, NLY, CVX, NVDA, WMB, BACPRA, USBPRM, WFCPRZ, WFCPRQ, CPRN, WPLCF, NOVC

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