UWM Holdings Corp annual report, FY2021

UWM Holdings Corp. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a stand-alone Q4 report; amounts below are full-year unless noted. UWM is a wholesale mortgage lender originating exclusively through independent mortgage brokers. It completed its business combination on January 21, 2021; SFS Corp. retained a 94.25% economic interest in Holdings LLC at year-end.

Key financial metrics

Metric	FY2021	FY2020
Mortgage originations	$226.5 billion	$182.5 billion
Total revenue, net	$2.97 billion	$4.94 billion
Net income, consolidated	$1.57 billion	$3.38 billion
Adjusted EBITDA (non-GAAP)	$1.42 billion	$3.45 billion
Net cash from operating activities	$(10.0) billion	$56.4 million
Cash and cash equivalents at year-end	$731.1 million	$1.22 billion
Warehouse lines outstanding at year-end	$15.95 billion	$6.94 billion
Senior notes, face amount	$2.00 billion	$800 million

FY2021 net income attributable to UWM Holdings Corporation was $98.4 million, reflecting its approximately 6% ownership interest in Holdings LLC after the business combination; consolidated net income includes earnings attributable to the non-controlling interest. The filing does not present a clear comparable FY2020 parent-company earnings-per-share figure.

Loan production income fell 43.2% to $2.59 billion. Management reported gain margin of 114 basis points versus 249 basis points in 2020, citing a narrower primary/secondary mortgage rate spread, rising rates and competition. Loan servicing income increased 121.6% to $638.7 million as the servicing portfolio grew. Revenue also included a $587.8 million negative change in MSR fair value; this reflected $859.3 million of cash-flow realization/decay, partly offset by a $286.3 million benefit from valuation-input changes.

Consolidated net income declined 53.6%. Total expenses were $1.39 billion versus $1.55 billion, but the comparison is affected by the change in MSR accounting: beginning in 2021, subsequent MSR fair-value changes are reported in revenue rather than amortization and impairment expense. Excluding FY2020’s $573.1 million MSR amortization, impairment and pay-offs, expenses increased, including higher compensation, interest, marketing and servicing costs.

Liquidity, debt and cash flow

• Operating cash outflow was $10.0 billion, principally because mortgage loans held for sale rose to $17.47 billion at year-end from $7.92 billion. The company said the year-end increase reflected early adoption of higher conforming loan limits and aggregation of loans for private-label securitizations. By January 31, 2022, mortgage loans at fair value had fallen to $7.9 billion and warehouse borrowings to $7.0 billion as loans were sold.
• Warehouse borrowings were $15.95 billion at December 31, 2021; nearly all warehouse facilities were uncommitted and could be terminated by lenders. Only $251 million of facility capacity was committed, according to the filing. These facilities are secured primarily by mortgage loans and expose the company to renewal, collateral valuation and margin-call risks.
• Senior notes totaled $2.0 billion face value: $800 million due 2025 at 5.50%, $500 million due 2027 at 5.75%, and $700 million due 2029 at 5.50%. The filing estimates annual senior-note interest payments of approximately $111.3 million.
• Year-end total assets were $22.53 billion and total liabilities were $19.36 billion. The filing reports $118.8 million of borrowings against retained securitization interests and $58.0 million of finance lease liabilities.
• UWM exceeded agency minimum net worth, liquidity and capital-ratio requirements at year-end; the most restrictive stated minimums were $802.0 million net worth, $105.3 million liquidity and a 6% capital ratio. It reported compliance with financing covenants.

Material changes and notable items

• Originations increased 24% year over year to $226.5 billion, while net income and Adjusted EBITDA fell sharply as production gain margins contracted. The company reported approximately 31% wholesale-channel market share and 4.7% of total U.S. residential mortgage originations.
• The servicing portfolio expanded to approximately 1.02 million loans and $319.8 billion unpaid principal balance, from 607,000 loans and $188.3 billion a year earlier. The 60-plus-day delinquency rate improved to 0.81% from 1.93%.
• UWM adopted fair-value accounting for MSRs on January 1, 2021, recording a $3.4 million opening retained-earnings increase. MSRs were $3.31 billion at year-end, up from $1.76 billion under the prior accounting method. Valuation depends on significant assumptions, including prepayment speeds and discount rates; the auditor identified MSR valuation as a critical audit matter.
• The company began private-label securitizations in Q2 2021 and retained interests to meet risk-retention requirements. It also issued $1.2 billion of senior notes during 2021 and completed the business combination, receiving approximately $895 million in net proceeds.
• UWM repurchased 11.5 million Class A shares for $81.6 million through year-end. It declared quarterly dividends of $0.10 per Class A share in 2021; the fourth-quarter dividend was paid in January 2022.

Outlook, risks and contingencies

The filing provides no quantified earnings, volume or margin guidance. Management describes a strategy centered on wholesale-channel growth, technology investment, broker partnerships, purchase lending and high-quality, predominantly agency-eligible loans. It also notes rising interest rates and inflation could reduce refinancing demand, pressure purchase volumes and margins, and increase funding costs. A material portion of MSR value may benefit from higher rates, but this does not eliminate the company’s sensitivity to rate movements.

• Funding and liquidity: reliance on short-term warehouse facilities and secondary-market loan sales creates exposure to non-renewal, margin calls, collateral declines and disruptions in GSE or private securitization markets. Year-end operating cash outflow and elevated warehouse balances merit particular attention.
• Concentration and regulation: the business depends heavily on Fannie Mae, Freddie Mac, Ginnie Mae and government loan programs, and is subject to extensive federal and state mortgage regulation. UWM may face repurchase or indemnification obligations for breaches of loan representations and warranties; the year-end reserve was $86.8 million.
• Legal matters: pending cases include broker claims concerning origination fees, an antitrust class action related to UWM’s “All-In” broker policy, and a wage-and-hour action. UWM also sued former client America’s Moneyline in February 2022; the former client asserted counterclaims. Management said ordinary-course matters were not then expected to materially affect financial position, performance or cash flows, but outcomes remain uncertain.
• Other exposures: risks include MSR valuation uncertainty, servicing advances and sub-servicer dependence, cybersecurity and technology disruptions, interest-rate hedging and counterparty risk, and the evolving transition from LIBOR. The tax receivable agreement requires payment to SFS Corp. of 85% of certain realized tax savings and may affect liquidity.
• Governance and related parties: SFS Corp. controls approximately 79% of combined voting power under the stated voting limitation. The company is a controlled company and leases its Pontiac headquarters from entities controlled by its CEO and founder; FY2021 payments to commonly controlled entities were approximately $21.1 million.

Most important facts for investors to verify

1. Whether originations, gain margins and earnings hold up as mortgage rates rise and refinance activity changes.
2. Whether year-end warehouse funding and loan inventory normalized as expected after the January 2022 loan sales, and the availability and terms of warehouse facilities.
3. How MSR fair value responds to actual prepayments and updated valuation assumptions, given the $587.8 million negative fair-value change in FY2021 and the sensitivity of the estimate.
4. Whether the $86.8 million repurchase reserve adequately covers potential claims, and the outcomes or financial implications of the broker, antitrust, employment and other legal matters.
5. Cash available after debt service, dividends and proportional distributions to SFS Corp., including obligations under the tax receivable agreement.
6. The effects of concentrated voting control, related-party leases and the “All-In” broker policy on governance, broker relationships and future loan volumes.