Velocity Financial, Inc. (VEL) stock intrinsic value fair value estimate & owner earnings analysis

Velocity Financial (Westlake Village, California) is a non-bank mortgage lender that originates and acquires residential and commercial investor real estate loans. It holds most of its loans and funds them mainly with securitized debt. In 2025 the average loan book was about $5.8 billion earning 9.45%, against average debt costing 6.35%, and net interest income was about $186 million. How we measured earnings. Reported 2025 net income was $105.0 million ($2.75 per share), but about $86 million of that was net valuation gains on loans and securitized debt, which are accounting marks and not cash. Since October 2022 the company has carried new loans at estimated fair value, so growth in the loan book now shows up as paper gains. We count only cash: operating cash flow, less swings in receivables and payables, less stock compensation, less capital spending. That gives about $0.29 per share for 2025, $0.33 for 2024 and $0.75 for 2023 (2021 and 2022 were higher, at $1.25 and $1.85, but were reported largely under the older loan accounting and are not comparable). We use the 2023 to 2025 median of $0.33 as the earnings level. This is a deliberately strict view: if the marked-up loan values turn out to be collectible in cash, the shares are worth more than we show, and we could not reconcile the two views from the filings alone. Growth. Owner earnings per share fell about 13% in 2025, and we assume none in year one. The company's June 2026 quarterly report shows operating cash flow of $15.8 million for the first half of 2026 versus $11.2 million a year earlier, so the decline is not deepening, but we do not credit a rebound. We credit no growth: the company originated $1.08 billion of held-for-investment loans in 2023, $1.82 billion in 2024 and $2.67 billion in 2025, but that growth is funded by new debt rather than its own cash and depends on lending conditions, so it is not counted. Base case, $3.08 per share. Earnings stay at $0.33 per share for ten years, then fade to zero over the following ten. The lending operation kept originating loans through the 2020 downturn (held-for-investment originations were $344 million that year and $1.34 billion in 2021), which supports ten more years, but we do not assume it lasts forever. Bear case, $0.83 per share. The company relies heavily on borrowing, with about $5.1 billion of average securitized debt and $290 million of corporate debt at 8.47%. Charge-offs on loans carried at cost rose from 0.07% in 2024 to 0.25% in 2025. In this case cash earnings halve to $0.15 per share for five years and fade to zero by year ten. Bull case, $7.02 per share. Cash earnings return to the 2023 level of $0.75 per share, the best year since the change in loan accounting, hold for ten years and then fade to zero over the following ten. Margin-of-safety price, $1.50. The business is highly leveraged, its earnings swing with accounting marks and working capital, and even our base case is thin relative to reported profits, so the margin-of-safety price sits well below the base value. What would make this wrong is the marked-up loan values converting into cash as loans are repaid, which would raise all three cases.