Velocity Financial (VEL) Q1 2025: Originations Jump 69% as Commercial Lending Channel Scales
Velocity Financial’s record loan origination growth and expanding commercial lending channel signal a business model scaling beyond its residential roots. Margin discipline and robust capital markets execution support a confident outlook, even as macro volatility persists. Investors should watch how Velocity leverages technology and capital deployment to sustain portfolio growth and ROE in a shifting rate environment.
Summary
- Commercial Lending Expansion: New small commercial division is driving incremental growth and portfolio diversification.
- Capital Markets Execution: Multiple securitizations and equity raise support continued loan growth and liquidity.
- Technology-Driven Productivity: Focus on tech-enabled scaling aims to boost funded balances per employee without proportional headcount increases.
Performance Analysis
Velocity Financial delivered a standout first quarter, originating $640 million in new loans, a 69% year-over-year increase and the highest single-quarter production in its history. This surge drove a 27% rise in net revenue and a 17% increase in core pre-tax earnings, with the loan portfolio reaching nearly $5.5 billion in unpaid principal balance (UPB), up 7.8% sequentially and 27.3% year-over-year.
Loan yields remained strong, with new health investment originations at a weighted average coupon of 10.5%, and the overall portfolio yield ticking up to 9.59%. Net interest margin (NIM) normalized at 3.35% after a Q4 boost from non-performing loan (NPL) recoveries, and cost of funds edged up modestly. Non-performing assets (NPAs) held steady at 10.8% of the portfolio, with in-house special servicing continuing to deliver above-par resolutions. Capital markets activity was robust, featuring three securitizations (including a short-term product), collapse of a re-REMIC freeing $52.6 million, and an accretive equity raise of $29 million.
- Record Loan Production: 1,500 loans funded, up 18% QoQ, with a shift toward commercial lending.
- Margin and Credit Discipline: Weighted average loan-to-value (LTV) for new originations held below 63%, supporting credit quality.
- Liquidity and Funding: $75.6 million in liquidity and $238 million available on warehouse lines enable continued origination pace.
Velocity’s operational execution reflects both disciplined risk management and an ability to capture share as other channels retrench, particularly in commercial real estate. The company’s capital deployment and funding flexibility position it well for sustained growth, provided macro headwinds remain manageable.
Executive Commentary
"The strong momentum we experienced in 2024 carried into the first quarter this year as we originated $640 million in new loans, an increase of 69% versus the prior year, which drove a 27% increase in net revenue and a 17% increase in core pre-tax earnings. Our team grew production and remained disciplined by preserving our spreads and credit standards."
Chris Farrar, President and Chief Executive Officer
"The strong Q1 production at a record growth, the healthy WAC, the low LTV, continues to show borrower demand for our product through all different market cycles and environments."
Mark Supaniak, Chief Financial Officer
Strategic Positioning
1. Commercial Lending Channel Scaling
Velocity’s recent focus on small commercial real estate lending, a division launched just 18 months ago, is now a material growth driver. This channel, primarily targeting owner-occupied properties, is less about market-wide demand and more about Velocity’s direct expansion efforts. The company’s willingness to invest in new origination channels is diversifying its revenue mix and mitigating reliance on investor one-to-four residential loans.
2. Capital Markets Agility
Three securitizations and an accretive equity raise in Q1 underscore Velocity’s ability to tap funding markets even amid volatility. Notably, the April securitization achieved a 30 basis point improvement in pricing versus an earlier deal, despite “the heart of all of the disruption in the market.” The collapse of a re-REMIC and redeployment of released capital further enhance balance sheet flexibility.
3. Technology-Enabled Productivity
Management is prioritizing technology to scale loan volume without linear headcount growth. The average funded balance per loan officer continues to rise, and the company aims to minimize back-office expansion by automating processes. This approach is designed to sustain high return on equity (ROE) as the portfolio grows toward a $10 billion target over five years.
4. In-House Special Servicing
Velocity’s in-house special servicing team manages all delinquent assets, delivering consistent above-par NPL resolutions and offsetting net charge-offs. By outsourcing primary servicing but retaining control of loss mitigation, Velocity maximizes recoveries and keeps credit risk management close to the core business.
5. Disciplined Capital Allocation
All incremental capital is being deployed into new loan originations, with management citing “very high ROEs” on new assets. The company’s approach is to reinvest earnings and selectively raise capital solely to support portfolio growth, not to delever or build excess reserves.
Key Considerations
The quarter highlights a business model that is both scaling and evolving, with several levers supporting continued growth and risk management:
Key Considerations:
- Origination Mix Shift: Commercial loan production is becoming a larger share of originations, diversifying risk and revenue streams.
- Funding Diversification: Multiple securitization types (including short-term) and warehouse lines offer flexibility as market conditions shift.
- Portfolio Credit Quality: Weighted average LTV remains conservative, and NPL rates are stable, supporting asset quality in a choppy macro.
- Operational Leverage: Technology investments are increasing productivity per employee, aiming for scalable growth without excessive cost inflation.
- Capital Deployment Discipline: Management’s explicit focus on high-ROE asset growth rather than deleveraging or stock buybacks signals a growth-first capital allocation stance.
Risks
Velocity’s growth is exposed to interest rate volatility, as origination coupons and portfolio yields are sensitive to Treasury rates and funding costs. While credit standards remain disciplined, a macroeconomic downturn or deterioration in real estate values could pressure NPL rates and recovery values. The company’s reliance on capital markets for funding introduces refinancing risk, especially if investor appetite wanes. Management’s confidence in stable demand and spreads is contingent on continued market liquidity and economic stability.
Forward Outlook
For Q2 2025, Velocity expects:
- Net interest margin (NIM) to remain in the 3.35% to 3.50% range, reflecting normalized portfolio yields and funding costs.
- Origination volumes to sustain at current elevated levels, with potential upside only if rates drop materially.
For full-year 2025, management maintained a constructive outlook:
- Continued robust portfolio growth, driven by both residential and commercial channels.
Management highlighted:
- Healthy real estate market demand and functioning credit markets as key tailwinds.
- Capital deployment into new assets as the primary use of incremental funds.
Takeaways
Velocity’s Q1 results reinforce a narrative of operational discipline, strategic channel expansion, and capital markets agility.
- Origination Growth Outpaces Peers: Record production and portfolio growth demonstrate Velocity’s ability to capture demand as competitors retrench, particularly in commercial lending.
- Capital Markets Execution is a Strategic Advantage: Successful securitizations and equity raises provide funding flexibility and support scalable asset growth.
- Technology and Productivity Will Be Key to Long-Term ROE: Investors should monitor how well Velocity can continue to grow funded balances per employee and leverage tech investments as the portfolio targets $10 billion over the next five years.
Conclusion
Velocity Financial’s Q1 2025 results showcase a business scaling both in volume and complexity, with new channels and disciplined capital deployment underpinning a confident growth trajectory. Execution on technology and credit quality will determine whether the company can sustain high returns as it moves toward its ambitious portfolio targets.
Industry Read-Through
Velocity’s record origination growth and capital markets access highlight a bifurcated environment for non-bank lenders: those with diversified origination channels and disciplined risk management are capturing share as traditional lenders and less nimble peers pull back. The successful pricing of securitizations despite market volatility signals ongoing investor appetite for well-underwritten real estate credit. Other specialty finance and mortgage REITs may look to emulate Velocity’s approach to channel expansion, technology leverage, and active capital markets participation as industry funding conditions remain dynamic.