Refis bolstered Flagstar as it grappled with coronavirus impact

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Strong refinance volume drove a 75% year-over-year increase in mortgage banking revenue during the first quarter at Flagstar Bancorp, offsetting downward pressure from other coronavirus-related developments that emerged in March.

Mortgage revenue for the first quarter of $96 million was driven by a 36% quarter-to-quarter and 69% year-over-year increase in fallout adjusted locks and a $9 million increase from the fourth quarter in its return on mortgage servicing rights.

"Our gain-on-sale margin was 80 basis points, a strong first-quarter performance despite the impact that the unprecedented Federal Reserve purchases of agency mortgage-backed securities had on our hedge effectiveness," Alessandro DiNello, president and CEO said in a press release.

The coronavirus affected Flagstar's operations in a number of ways. Most notably, on March 23 Flagstar suspended warehouse funding to nonconforming mortgage lenders in large part due to the illiquidity in the private-label securitization market.

Overall, first-quarter mortgage revenue was down from $98 million in the fourth quarter, but up from $55 million in the first quarter of 2019.

Net gain on sale was $90 million in the first quarter. That was down from $101 million in the fourth quarter, but up from $49 million a year ago. The gain-on-sale margin in the fourth quarter was 123 basis points, and in the first quarter last year it was 72 basis points.

The company's servicing business turned around on a quarter-to-quarter basis, with a net return of $6 billion in the first quarter, versus a $3 billion loss in the fourth quarter. Compared with the first quarter of 2019, there was no change.

"We closed the quarter servicing or subservicing nearly 1.1 million loans, consistent with the prior quarter. Despite the high prepayment activity driven by lower interest rates, we held our ground in servicing which is a testament to our capability to leverage our mortgage origination business to replace loans that prepaid," DiNello said.

Flagstar closed $8.6 billion in loans during the first quarter, of which $5.5 billion were refinances. That was down from $9.3 billion ($5.7 billion refi) in the fourth quarter, but an increase from $5.5 billion in the first quarter of 2019 ($1.9 billion refi).

By channel, $5.5 billion of its first-quarter originations were correspondent loan purchases, $2 billion was originated through the retail network and $1.1 billion came from mortgage brokers.

Flagstar reported net income of $46 million, down from $58 million in the fourth quarter, but up from $36 million a year ago.

"We demonstrated the underlying strength of our diversified business model as our mortgage business was a standout, servicing was solid and banking held its own against headwinds," DiNello said.

Compared to the fourth quarter 2019, net interest income fell $4 million, or 3%, reflecting a 10 basis point decrease in net interest margin, despite a full quarter's impact from prior rate cuts and the partial impact of March rate cuts.

“Margin compression was partially cushioned by growth in interest earnings assets. We also adopted CECL during the quarter, which increased our credit reserves by almost 40% to $152 million,” said DiNello.

Flagstar had $6.2 billion of warehouse line commitments available at the end of the first quarter, of which $4 billion was outstanding.

Its servicing portfolio was $225 billion as of March 31, down from $228.2 billion three months earlier.

The company took a $14 provision for credit losses and unfunded commitments for the quarter, driven by its economic forecast, including the impact related to COVID-19 as of March 31. This was partially offset by strong asset quality and low delinquencies.

"Our results this quarter show the power of our business model and the reason we remain so committed to it," DiNello remarked. "Thanks to our mortgage and warehouse businesses, we are uniquely positioned among banks to take advantage of the strong refinance market to carry us through what is likely to be a challenging credit and rate cycle."

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