Flagstar has record quarter driven by 'super-charged' mortgage market

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Flagstar Bancorp had the best quarter in its history, even after setting aside $100 million to cover coronavirus-related loan losses.

The Troy, Mich., company logged second-quarter net income of $116 million, compared with net income of $46 million in the first quarter and net income of $61 million in the same quarter one year ago.

"All cylinders were firing in mortgage as we got a lift from a market that was super-charged and banking and servicing continued to provide stable and consistent earnings," Alessandro DiNello, Flagstar's president and CEO, said in a press release.

"It's important to note that we earned over $2 per share even while setting aside $100 million for loan losses, which raised our credit reserves to $250 million," he added. "This pushed our coverage ratio to 1.69% overall and 2.6% excluding our warehouse business, which has a history of virtually no losses."

Because of the uncertainties created by the pandemic, the company took a conservative approach to the Current Expected Credit Losses framework of modeling economic variables, DiNello noted.

Its mortgage business had revenue of $295 million in the second quarter on the strength of a 139-basis-point increase in its gain-on-sale margin to 219 basis points, he said.

"We capitalized on market opportunities, leveraged the diversity of our platform and shifted our product and channel mix to optimize results," DiNello said. "This, along with stronger secondary market performance, resulted in net gain-on-loan sales of $303 million."

Flagstar originated $12.2 billion in the quarter, with $6.6 billion from the correspondent channel, $3.7 billion in retail production and $1.9 billion originated through brokers.

This is up from $8.6 billion for both the first quarter and second quarter of 2019.

While production increased in all three channels, the biggest percentage gain was in retail, where Flagstar originated $2 billion in the first quarter and $1.6 billion one year ago.

By product mix, conventional loans made up $10.1 billion of originations, up from $5.2 billion in the first quarter and $5 billion in the second quarter last year.

But government production fell to $900 million from $1.8 billion in the first quarter and $2 billion last year, while jumbo volume fell to $1.2 billion from $1.6 billion for both of those prior periods.

Flagstar's net return on mortgage servicing rights decreased by $14 million to an $8 million net loss for the second quarter, compared with a $6 million net gain for the first quarter, primarily driven by higher prepayments. It recorded a $5 million net gain for the second quarter last year.

Flagstar reported $33 million in nonperforming loans as of June 30, compared with $29 million on March 31 and $26 billion at the end of the second quarter last year. However, a year ago the balance sheet also included the $37 billion nonperforming warehouse loan to the defunct reverse mortgage lender Live Well, from which Flagstar was able to make a partial recovery.

Speaking of its warehouse lending program, Flagstar had $7.9 billion of commitments (of which $5.2 billion were outstanding fundings) at the end of the quarter, up from $6.2 billion ($4 billion outstanding) on March 31 and $4.2 billion ($2.6 outstanding) on June 30, 2019.

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