The nation’s biggest wholesale mortgage lender, United Wholesale Mortgage, said its decision to roll out higher conforming loan limits last fall in advance of an official government announcement cut into already slim profit margins.

In the end, however, the move was a boon for UWM’s customers that ultimately paid off for the company as well, according to fourth-quarter and full 2021 earnings released Tuesday.

UWM originated a record $226.5 billion in mortgages last year, up 24 percent from 2020. But net income was down 54 percent to $1.57 billion, as total gain margin slipped from 2.49 percent in 2020 to 1.14 percent in 2021.

That’s a story most mortgage lenders are familiar with, as rising interest rates have the industry pivoting from refinancing existing loans to funding more laborious — and less profitable — purchase loans.

As a wholesale lender that funds loans arranged by mortgage brokers, UWM has maintained that it’s in a better position to adapt, thanks to brokers connections to real estate agents and homebuyers in their local market. UWM is also investing in technology that it says gives mortgage brokers an edge in winning business from homebuyers.

UWM mortgage originations by type

Source: Data from UWM regulatory filings compiled by Inman.

The numbers seem to substantiate UWM’s case that it’s adapting to the new lending environment. During the fourth quarter, purchase loans accounted for 44 percent of UWM’s $55.2 billion in loan production, up from 22 percent a year ago.

But even though total loan production for the quarter was also up slightly from a year ago, fourth quarter profits fell 82 percent from 2020, to $239.8 million. With purchase loans accounting for a bigger share of UWM’s business, total gain margin fell to 0.80 percent, down from 3.05 percent during the same quarter a year ago.

Another factor was UWM’s Sept. 30 decision to treat mortgages with balances of up to $625,000 as if they were conforming loans eligible for purchase by Fannie Mae and Freddie Mac — more than $75,000 higher than the 2021 conforming loan limit of $548,250 in most markets.

The conforming loan limit is adjusted each year if home prices rise. On Nov. 30, Fannie and Freddie’s federal regulator did announce a record-setting 18 percent increase in the conforming loan limit — to $647,200 in most of the country, and close to $1 million in high-priced housing markets.

But UWM and other lenders who jumped the gun on the official announcement had to keep higher balance loans exceeding the 2021 conforming loan limit on their books until the increase took effect on Jan. 1.

Tim Forrester

“We sold around $5.8 billion more in loans in the first week of January than we originated, and around $9.5 billion more for the month,” UWM Chief Financial Officer Tim Forrester said on a call with investment analysts.

The hedging costs of holding the loans “further pushed down the margins from an already competitive environment,” Forrester said. But in the end, “the economics made sense for us to hold the loans. It just shows up in different line items.”

In a statement accompanying UWM’s earnings release, CEO Mat Ishbia said that the Pontiac, Michigan-based lender had the flexibility to hold the loans on its books thanks to its move to go public in a September, 2020 merger with a special purpose acquisition company (SPAC).

Mat Ishbia

“Our decision to temporarily increase our assets and utilize our cash during Q4 is a great example of the benefits of being a public company and having significantly more cash, equity and liquidity than we have had through most of our history,” Ishbia said in a statement. “Being able to opportunistically roll out higher conforming loan limits early was a strategic move giving borrowers and brokers a financing option that they would not have otherwise had. It serves as another example of the partnership and value that UWM provides to independent mortgage brokers.”

UWM said it expects to originate between $33 billion and $42 billion in loans during the first quarter of 2022, with expected gain margin between 0.75 and 0.85 percent.

“With these being some of the lowest margins we’ve seen in a quarter history, we still remained very, very profitable,” Ishbia told investment analysts. While Ishbia said he believes “margin numbers are near the bottom,” the company will “be very profitable with these numbers and will remain so even if it were lower.”

Shares in UWM, which in the past 12 months have traded for as little as $3.93 and for as much as $12.45, gained 6.45 percent Tuesday, closing at $4.62.

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Email Matt Carter