Mat Ishbia, the outspoken CEO of UWM Holdings Corporation, has always been adamant about one thing: UWM does not hedge its Mortgage Servicing Rights (MSRs). It's a bold claim, especially in a volatile interest rate environment, but one he's reiterated time and again. Yet, a subtle shift in language during the Q1 2024 earnings call raises a compelling question: is UWM quietly changing its tune on MSR hedging?

Historically, Ishbia has positioned UWM's approach to MSRs as a calculated risk. The company doesn't actively hedge, relying instead on a "natural hedge" derived from its dominant position in the broker channel. The logic is simple: when rates decline, the resulting MSR markdown will be more than offset by a surge in origination volume, particularly refinancing. This strategy hinges on UWM's ability to capture a significant portion of the refi boom when rates inevitably fall.

However, the Q1 2024 transcript introduces a new element to the conversation. When addressing the impact of market rate fluctuations on MSR valuations, Ishbia states, "Don't give me credit for that...just like I hope you don't give me...like it doesn't matter." He's referring to the significant MSR write-up UWM experienced in Q1 due to rising interest rates, claiming it's inconsequential. Yet, this seemingly dismissive statement could mask a more nuanced reality.

Conflicting Statements and Potential Hedging Activity

Let's look at the numbers. UWM reported a $15 million write-down on the fair value of its MSRs in Q1. This seems to contradict Ishbia's claim of a write-up due to rising rates. It suggests that there were other factors at play, potentially mitigating the positive impact of rising rates. Could this be a sign of a subtle hedging strategy being employed?

Furthermore, Ishbia emphasizes the fact that UWM is the only originator consistently originating loans at current rates. He notes that this results in a higher proportion of high-rate loans in their MSR portfolio, leading to greater volatility in valuation. While true, this highlights the heightened risk UWM faces from rate declines. The potential for substantial MSR markdowns in a refi boom becomes even greater, making a natural hedge less reliable.

Adding to the intrigue, Ishbia mentions the company has "done some trades already this year" in relation to MSRs. This further hints at the possibility of strategic actions being taken to manage MSR risk. While he doesn't elaborate on the nature of these trades, it's plausible they involve some form of hedging activity.

It's important to note that Ishbia doesn't explicitly deny hedging in the Q1 transcript. Instead, he focuses on downplaying the impact of rate movements on MSR valuations. This could be a deliberate strategy to avoid acknowledging a shift in their approach.

Hypothesis and Implications

**Hypothesis:** UWM is implementing a more active, albeit subtle, MSR hedging strategy.

**Supporting Evidence:**

- Conflicting statements regarding MSR write-up vs. write-down in Q1.

- Acknowledgement of greater MSR valuation volatility due to high-rate loan concentration.

- Mention of "trades" related to MSRs in 2024.

- Lack of outright denial of hedging activity.

**Implications:**

- UWM may be less reliant on a natural hedge for managing MSR risk.

- The company could be better positioned to mitigate losses in a refi boom.

- Ishbia's previous statements about not hedging may need to be re-evaluated.

Analyzing UWM's Production Guidance and Gain Margin

Looking at UWM's guidance, we can visualize the projected production and gain margin for Q1 and Q2 2024.

The chart demonstrates UWM's positive outlook for the upcoming quarters, with anticipated growth in both production volume and gain margin. This suggests a potential shift in market conditions that could favor UWM's business model.

Further Research and Conclusion

This subtle shift in UWM's approach to MSRs may have gone unnoticed by many analysts. However, the evidence suggests a strategic evolution is underway, potentially enhancing the company's risk management profile. This raises further questions about the future of UWM's MSR strategy and its potential impact on the company's profitability. It's a development that warrants close attention from investors and industry observers alike.

**Further Research:**

- Analyzing the specific details of UWM's MSR trades.

- Comparing UWM's MSR valuation trends to competitors who actively hedge.

- Monitoring Ishbia's future commentary on MSR hedging strategies.

"Fun Fact: UWM Holdings Corporation is the parent company of United Wholesale Mortgage, the largest wholesale mortgage lender in the United States for the past nine consecutive years. Wholesale lenders work exclusively through mortgage brokers, offering consumers access to a wider range of loan options and potentially lower rates compared to retail lenders."

Q1 2024 Earnings Call Transcript

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Q4 2023 Earnings Call Transcript

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