WD Q2 2024: GSE Relationship Strength Fuels MSR Revenue Growth
- Strong GSE Relationships and Outlook: Management expressed confidence that GSEs are shifting focus to future loan originations and that their close engagement with GSEs positions WD to benefit from a renewed lending environment, supporting increased transaction volumes and improved MSR revenues.
- Focus on Durable, Cash Flow–Based Growth: Emphasis on adjusted core EPS and mortgage servicing rights highlights WD’s commitment to building a resilient, long-term revenue stream. This focus on cash earnings and MSR bookings supports profitability beyond short-term GAAP fluctuations.
- Robust Pipeline and Strategic Diversification: The Q&A highlighted a healthy property sales and new origination pipeline, bolstered by the integration of affordable equity platforms and the firm’s ability to win large portfolio transactions. This diversification strengthens WD’s competitive positioning as market activity recovers.
- GSE Regulatory Scrutiny and Lending Environment: Management acknowledged increased media and regulatory attention on the GSEs (e.g., heightened asset management standards) that could lead to continued pressure on GSE lending volumes and potential adjustments in loan caps, impacting W&D's core business.
- Earnings Volatility from MSR Adjustments: Although adjusted core EPS showed strong growth, the significant decline in GAAP EPS by 18% highlights a vulnerability to non-cash adjustments related to mortgage servicing rights, potentially undermining confidence in sustained profitability.
- Competitive and Operational Risks: Concerns were raised about competitive positioning, with lower volumes noted in certain segments and fixed expenses that may not flex sufficiently with demand, meaning any downturn or slower-than-expected recovery in transaction flow (e.g., investment sales volumes) could negatively impact overall margins.
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GSE Scrutiny
Q: Impact of GSE scrutiny on lending?
A: Management explained that concerns over GSE asset management issues aren’t new; they’re now focused on future loan originations through close work with Fannie and Freddie, signaling maintained stability. -
Profitability Metrics
Q: Focus: GAAP EPS or adjusted core EPS?
A: They stressed continued emphasis on GAAP EPS because booking mortgage servicing rights drives long‑term value, even as adjusted core EPS highlights cash flow improvements. -
Property Pipeline
Q: How is the property sales pipeline evolving?
A: Management noted a robust pipeline for multifamily transactions, with strong positioning despite slightly lower overall sale volumes. -
Escrow Impact
Q: Effect of Fed cuts on escrow revenue?
A: They described that a 25 bp reduction would proportionately lower escrow income on reserves of about $2.2–2.5bn, while lower rates also ease borrowing costs. -
Affordable Housing
Q: Outlook for affordable housing businesses?
A: Management admitted disappointment over the LIHTC bill but remains positive, citing solid progress in integrating Affordable Equity and growing HUD refinancing volumes.
Research analysts covering Walker & Dunlop.