SECURITIES AND EXCHANGE COMMISSION
Washington,
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☒ | ANNUAL REPORT PURSUANT TO SECTIONSSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
2017OR
2023or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File No. 001-14667WMIH Corp.
file number: 001-35449
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Mr. Cooper Group Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 91-1653725 |
(State or other jurisdiction of
| | (I.R.S. Employer
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| 8950 Cypress Waters Blvd, Coppell, TX | | 75019 |
| (Address of principal executive offices) | | (Zip Code) |
800 FIFTH AVENUE, SUITE 4100
SEATTLE, WASHINGTON 98104
(Address of principal executive offices) (Zip Code)
(206) 922-2957
(
Registrant’s telephone number, including area code)code: (469) 549-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.00001 per share
Name of each exchange on which registered:
The Nasdaq Stock Market
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | COOP | The Nasdaq Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☒ No ☒☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer” andfiler,” “smaller reporting
company”company,” and
“emerging“emerging growth company” in Rule
12b-212(b)-2 of the Exchange Act.
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| Large Accelerated Filer | ☒ | ☐
| | Accelerated Filer | | ☒
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Non-Accelerated Filer | ☐ | ☐ (Do not check if a smallerSmaller reporting company)
company | | Smaller Reporting Company
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Emerging growth company | ☐ | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of the error corrections are restatements that required recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The
Number of shares of common stock, $0.01 par value, outstanding as of February 22, 2024 was 64,602,234.
As of June 30, 2023 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s voting and non-voting common equitystock held by non-affiliates computed by reference toof the lastregistrant was $3,275,695,445 based on the closing sales price ($1.25)of $50.64 as reported by Theon the Nasdaq Stock Market as of the last business day of the most recently completed second fiscal quarter (June 30, 2017) was $258.4 million.As of February 28, 2018, 206,714,132 shares of the registrant’s common stock, $0.00001 par value, were outstanding.
Market.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has
Portions of our definitive Proxy Statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company’s fiscal year-end, are incorporated
by reference into Part III,
Items 10-14 of
this Annual Report on Form
10-K, by reference, portions of its Proxy Statement for its 2018 Annual Meeting of Stockholders.10-K.
WMIH CORP.
2017
MR. COOPER GROUP INC.
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT | | | | | | | | |
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PART I
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Item 1.
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Item 1A. | | | | 6
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Item 1B. | | | | 22
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Item 2. 1C. | | | | 22
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Item 4. | | | | 22
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Item 5. | | | | 23
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Item 6. | | | | 26
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Item 7. | | | | 27
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Item 7A. | | | | 42
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Item 8. | | | | 43
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Item 9. | | | | 43
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Item 9A. | | | | 43
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Item 9B. | | | | 45
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Item 10. | | | | 46
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Item 11. | | | | 46
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Item 12. | | | | 46
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Item 13. | | | | 47
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Item 14. | | | | 47
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PART IV
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Item 15. | | | | 48
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Item 16. | | | | 52
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Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaningTable of the Private Securities Litigation Reform Act of 1995 including, but not limited to, our expectations or predictions of future financial or business performance or conditions. All statements other than statements of historical or current fact included in this Annual Report on Form 10-K that address activities, events, conditions or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and these statements are not guarantees of future performance. Forward-looking statements may include the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “strategy,” “future,” “opportunity,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. Certain of these risks are identified and discussed in this Annual Report on Form 10-K for the year ended December 31, 2017 under Risk Factors in Part I, Contents
PART I.
Item 1A. These risk factors will be important to consider in determining future results and should be reviewed in their entirety. These forward-looking statements are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Forward-looking statements speak only as of the date they are made, and we are not under any obligation, and expressly disclaim any obligation, to update, alter or otherwise revise any forward-looking statement, except as required by law. Readers should carefully review the statements1. Business
The disclosures set forth in
this item are qualified by Item 1A. Risk Factors and the
reports, which we have filed or will file from time to time with the SEC.* * * * *
As used in this Annual Report on Form 10-K, unless the context requires otherwise, (i) the terms “Company,section within Item 1, captioned “Caution Regarding Forward-Looking Statements.” “we,” “us,” or “our,” refer collectively to WMIH Corp. (formerly WMI Holdings Corp. and, prior to WMI Holdings Corp., Washington Mutual, Inc.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp., without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp., without regard to its subsidiaries; (iv) “WMMRC” means WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” means WMI Investment Corp. (formerly a wholly-owned subsidiary of WMIH).
As used in this Annual Report on Form 10-K, unless the context requires otherwise, the terms “First Lien Notes,” “Second Lien Notes,” “Runoff Notes,” “Runoff Proceeds,” “First Lien Indenture,” “Second Lien Indenture,” and “Indentures” have the meanings set forth in “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Redeemed Notes”Operations of this report and other cautionary statements are set forth elsewhere in Part II,this report.
OVERVIEW
Mr. Cooper Group Inc., including our consolidated subsidiaries (collectively, “Mr. Cooper,” the “Company,” “we,” “us” or “our”), is the largest non-bank servicer of residential mortgage loans in the U.S. according to the latest publications from Inside Mortgage Finance as of the third quarter of 2023, and a major mortgage originator. We also provide Real Estate disposition services through our Xome subsidiary.
Our success depends on working with residential mortgage borrowers (our customers), government sponsored and private investors, and business partners, to help customers achieve home ownership and manage what is typically their largest and most important financial asset. Investors primarily include government sponsored enterprises (“GSE”) such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), investors in private-label securitizations, the Government National Mortgage Association (“Ginnie Mae” or “GNMA”), as well as organizations owning mortgage servicing rights (“MSR”), which engage us to subservice. We are regulated both at the Federal and individual state levels.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), of this Form 10-K.
In 2023, we continued to grow our servicing portfolio with the acquisition of Home Point Capital Inc. (“Home Point”) and expanded our special servicing product offering with the acquisition of Rushmore Loan Management Services, LLC (“Rushmore”). We also broadened our business offerings with the acquisition of investment advisor Roosevelt Management Company, LLC (“Roosevelt”). For further discussion regarding these transactions, refer to Note 3, Acquisitions in the Notes to Consolidated Financial Statements within Item 8.
BUSINESS SEGMENTS
We conduct our operations through two operating segments: Servicing and Originations.
See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 21, Segment Information in the Notes to Consolidated Financial Statements within Item 8, for additional financial information about our segments.
Servicing
As of December 31, 2023, we served 4.6 million customers with an aggregate unpaid principal balance (“UPB”) of $992 billion, consisting of $588 billion in owned servicing and $404 billion in subservicing and other. During 2023, we acquired $340 billion UPB of loans, with $97 billion of UPB related to subservicing.
We service loans on behalf of investors or owners of the underlying mortgages. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio.
Servicing
Where we own the right to service loans, we recognize MSR assets in our consolidated financial statements and have elected to mark this portfolio to fair value each quarter. We primarily generate recurring revenue through contractual servicing fees, which include late payment, modification, and other ancillary fees and interest income on custodial deposits. As the MSR owner, we are obligated to make servicing advances to fund scheduled principal, interest, tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments and to cover foreclosure costs and various other items that are required to preserve the assets being serviced. As the MSR owner, we generally have the right to solicit our customers for refinance opportunities, which are processed through our direct-to-consumer channel in our Originations segment. Additionally, we may be able to modify or refinance loans pursuant to government programs and earn incentive fees or gain-on-sale revenues from redelivering modified loans to new securitizations.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K.1
10-K 4
Subservicing
We service loans on behalf of clients who own the underlying servicing rights. Since we do not own the right to service the loan, we do not recognize an MSR asset in our consolidated financial statements. We primarily generate revenue based upon a stated fee per loan per month that varies based on the loan’s delinquency status. As a subservicer, we may be obligated to make servicing advances; however, advances are generally limited, with recoveries typically following within 30 days. Additionally, our exposure to foreclosure-related costs and losses is a corporation duly organized and existing undergenerally limited in our subservicing relationships as those risks are retained by the lawsowner of the StateMSR. Capital requirements for subservicing arrangements are substantially lower than for owned MSRs. We also offer high-touch, special servicing through our brand Rushmore Servicing in connection with the acquisition of Delaware since May 11, 2015. WMIH isRushmore Loan Management Services, LLC. The acquisition of the direct parentRushmore Servicing special servicing business brings us additional capacity and positions us for revenue growth opportunities across a wide range of WM Mortgage Reinsurance Company, Inc.adverse environments.
As of December 31, 2023, our subservicing portfolio had a Hawaii corporation (“WMMRC”)total UPB of $404 billion, which accounted for 41% of the total servicing portfolio. We believe the subservicing operations allows us to leverage the scale of our technology and waslabor capital to provide cost effective servicing to customers while limiting the direct parentuse of WMI Investment Corp.,cash resources, thereby producing a Delaware corporation (“WMIIC”), until the dissolution of WMIIChigher return on January 18, 2018. Additionally, WMIH is the direct parent of Wand Merger Corporation, a Delaware corporation (“Merger Sub”). For more informationequity.
Focus on the dissolutionCustomer
We are focused on providing quality service to our customers and building strong, lasting relationships. We have developed a culture of WMIIC, see “WMIIC” undercustomer advocacy and celebrate and reward our team members for providing excellent service that helps our customers achieve their goal of homeownership and manage what is for many of them their largest financial asset. Additionally, we have invested significantly in technology solutions to improve the customer experience.
For each loan we service or subservice, we utilize a customer-centric model designed to increase borrower performance and to decrease borrower delinquencies. Keys to this Item 1model include frequent borrower interactions and Note 15: Subsequent Events,utilization of multiple loss mitigation strategies, particularly in the early stages of default. We train our customer service representatives to find solutions that work for homeowners when circumstances allow. We believe this commitment to continued home ownership helps preserve neighborhoods and home values and improves asset performance for our investors.
Originations
Our Originations segment originates residential mortgage loans, providing both purchase and refinance opportunities to our existing servicing customers through our direct-to-consumer channel and purchases loans from other originators through our correspondent channel. According to the
consolidated financial informationlatest publication by Inside Mortgage Finance, as of the third quarter of 2023, we were the 26th largest overall mortgage loan originator in
Part II, Item 8 of this Annual Report on Form 10-K.Since emerging from bankruptcy on March 19, 2012 (the “Effective Date”), we have had limited operations other than WMMRC’s legacy reinsurance business, which is being operated in runoff mode. Since the Effective Date, our primary strategic objective has been to identify and consummate one or more acquisitions of an operating business, either through a merger, purchase, business combination or other form of acquisition. To that end, we have continued to seek, identify and evaluate acquisition opportunities of varying sizes across an array of industries for the purpose of facilitating an acquisition by WMIH of one or more operating businesses.United States. During the year ended December 31, 20172023, we focused primarilyfunded $12.6 billion mortgage loans. We generate revenue through gains related to the selling of mortgage loans sourced through our direct-to-consumer and correspondent channels and fees associated with originating loans. We originate and purchase conventional mortgage loans conforming to the underwriting standards of the GSEs. We also originate and purchase government-insured mortgage loans, which are insured by the Federal Housing Administration (“FHA”), Department of Veterans Affairs (“VA”) and U.S. Department of Agriculture (“USDA”). Additionally, we offer non-agency Jumbo purchase loans and closed-end second lien refinance loans in our direct-to-consumer channel, originating to the standards of our investors.
We utilize warehouse facilities to fund originated loans. When we sell originated mortgage loans to secondary market investors, we generally retain the servicing rights on
acquisition targetsmortgage loans sold. The mortgage loans are typically sold within 30 days of origination in
order to both mitigate credit risk and minimize the
financial services industry, including companies with consumer finance, commercial finance, specialty finance, leasing and insurance operations. Since 2014, in additioncapital required. The majority of our mortgage loans were sold to,
management’s ongoing efforts, WMIH has worked with our strategic partner, an affiliate of KKR & CO. L.P. (together with its affiliates, “KKR”), to identify and evaluate potential acquisition opportunities.On February 12, 2018, WMIH, Merger Sub and Nationstar Mortgage Holdings Inc., a Delaware corporation that is currently listed on the New York Stock Exchange under the ticker “NSM” (“Nationstar”), entered into an Agreement and Plan of Merger (the “Merger Agreement”),or were sold pursuant to, which, subjectprograms sponsored by Fannie Mae, Freddie Mac or Ginnie Mae.
Direct-to-Consumer Channel
We originate loans directly with borrowers through our direct-to-consumer channel. This channel utilizes our call centers, website and mobile apps, specially-trained teams of licensed mortgage originators, predictive analytics and modeling utilizing proprietary data from our servicing portfolio to reach those of our existing 4.6 million servicing customers who may benefit from a new mortgage. Depending on borrower eligibility, we will refinance existing loans into conventional, government or non-agency products. Through lead campaigns and direct marketing, the satisfaction or waiverdirect-to-consumer channel seeks to convert leads into loans in a cost-efficient manner. We earn gain-on-sale revenues from securitizing newly-originated loans.
Our direct-to-consumer channel represented 47% and 63% of
our mortgage originations for the
conditions set forth therein, Merger Sub will merge withyears ended December 31, 2023 and
into Nationstar (the “Nationstar Transaction” or the “Merger”), with Nationstar continuing as the surviving corporation2022, respectively, based on funded volume. Pull through adjusted lock volume for this channel was $5.7 billion and
a wholly-owned subsidiary of WMIH. Subject to the terms$14.8 billion in 2023 and
conditions of the Merger Agreement, at the effective time of the Merger (the “Merger Effective Time”) and as a result of the Merger, each share of Nationstar’s common stock issued and outstanding immediately prior to the Merger Effective Time (other than shares owned, directly or indirectly, by Nationstar, WMIH or Merger Sub or by any Nationstar stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law) will be converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, par value $0.00001 per share (“WMIH Common Stock”), subject in each case to pro rata cutbacks to the extent cash or stock is oversubscribed (the “Merger Consideration”). The aggregate amount of cash to be paid as Merger Consideration in the Merger is approximately $1.2 billion. The Merger is expected to close in the second half of 2018, subject to regulatory approvals and customary closing conditions. An entity owned by investment funds managed by an affiliate of Fortress Investment2022, respectively.
5 Mr. Cooper Group LLC (“Fortress”), holding approximately 68% of Nationstar’s voting shares, has contractually agreed to support the Merger and elect cash consideration for approximately 34 million shares, subject to proration. KKR, which owns shares of WMIH stock representing approximately 24% of WMIH’s voting power on an as converted basis, also has agreed to support the Merger. Upon consummating the Merger, and on a pro forma basis, WMIH shareholders will own approximately 64% of the common stock of the combined company and Nationstar shareholders will own approximately 36%.On January 5, 2015, WMIH completed its $600.0 million offering (the “Series B Preferred Stock Financing”) of 600,000 shares of 3% Series B Convertible Preferred Stock, par value $0.00001, liquidation preference $1,000 per share (the “Original Series B Preferred Stock”), in the amount of aggregate gross proceeds equal to $600.0 million. Net proceeds of $598.5 million were deposited into an escrow account and have been, and will be, released from escrow to us from time to time in amounts needed to finance our efforts to explore and fund, in whole or in part, certain acquisitions, whether completed or not, including reasonable attorney fees and expenses, accounting expenses, due diligence, contractual payments such as termination fees and financial advisor fees and expenses. On December 8, 2017, we amended the Original Series B Preferred Stock (the “Series B Amendment”), which amendment became effective at 12:00 a.m., New York City time, on January 5, 2018, and effected an exchange of the previously outstanding Original Series B Preferred Stock for shares of WMIH’s 5.00% Series B Convertible Preferred Stock (the “Series B Preferred Stock”). For further information on the Series B Preferred Stock Financing and the Series B Amendment, see Note 9: Capital Stock and Derivative Instruments and Note 15: Subsequent Events, to the consolidated financial information in Part II, Item 8 of thisInc. - 2023 Annual Report on Form 10-K.
Upon10-K
Correspondent Channel
We purchase closed mortgage loans from community banks, credit unions, mortgage brokers and independent mortgage bankers. We primarily generate revenue from the closingreceipt of underwriting fees from correspondents earned on a per loan basis, as well as the gain on sale of loans sold into the secondary market. The correspondent channel serves as a cost-effective means of acquiring new customer relationships for our servicing portfolio.
Our correspondent channel represented 53% and 37% of our mortgage originations for the years ended December 31, 2023 and 2022, respectively, based on funded volume. Pull through adjusted lock volume for this channel was $7.1 billion and $10.1 billion in 2023 and 2022, respectively.
Competition
Our Servicing segment primarily competes against large financial institutions and non-bank servicers. The subservicing market in which we operate is also highly competitive and we face competition related to subservicing pricing and service delivery. Our competitive position is also dependent on our ability to provide excellent customer service, manage delinquent loans and mitigate investor losses, demonstrate compliance with local, state, federal and investor regulations, and improve technology and processes while controlling our costs.
Our Originations segment competes based on product offerings, rates, fees and customer service. Many of our competitors consist of large banks or other financial institutions with greater financial resources, more diverse funding sources with lower funding costs, and less reliant on the sale of mortgage loans into the secondary markets to maintain their liquidity. Additionally, newer competitors are reinventing aspects of the Nationstar Transaction allmortgage loan industry and capturing profit pools historically collected by existing market participants.
Our primary competitive strength flows from our ability to market our products to our servicing portfolio customers. We believe our origination capabilities provide a significant advantage compared to other servicers and subservicers. Our Originations segment is highly dependent on our customer relationships. Many smaller and mid-sized financial institutions may find it difficult to compete in the mortgage industry due to the significant market share of the
Series B Preferred Stock will be mandatorily converted into WMIH Common Stock at a conversion price of $1.35 per share, and holders of Series B Preferred Stock also will be entitled to a special, one-time distribution of WMIH Common Stock and accrued and unpaid dividends payable in WMIH Common Stock.2
If we do not consummate a Qualified Acquisition, as defined in our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) prior to October 5, 2019 (the “Series B Redemption Date”), as such date may be extended in accordancelargest competitors, along with the provisionscontinual need to invest in technology in order to reduce operating costs while maintaining compliance with underwriting standards and regulatory requirements. Our ability to win new clients and maintain existing customers is largely driven by the level of our Certificate of Incorporation, the outstanding shares of Series B Preferred Stock would be required to be redeemed. The redemption of the Series B Preferred Stock would substantially deplete our available cashcustomer service we provide and our ability to (i) utilizecomply and adapt to an increasingly complex regulatory environment.
Government Regulation
The residential mortgage industry is highly regulated. We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our net operating loss (“NOL”) carry-forward, (ii) access significant alternative sourcesservicing, originations and ancillary business and the fees we may charge. These regulations directly impact our business and require constant compliance.
Cyclicality and Seasonality
The U.S. residential real estate industry is seasonal, cyclical and affected by changes in general economic conditions. Industry demand is affected by consumer demand for home loans and the market for buying, selling, financing and/or refinancing residential real estate, which in turn, is affected by the national and global economy, regional trends, property valuations, interest rates, and socio-economic trends by state and federal regulations and programs which may accelerate or slow certain real estate trends.
Human Capital Resources
Over the last few years, we have cultivated a people-first culture, utilizing team member feedback to drive new initiatives. Mr. Cooper had approximately 6,800 employees as of capitalDecember 31, 2023 across the U.S. and (iii) continue business operations would likely be significantlyIndia.
As a company, Mr. Cooper is grounded in a set of intangible values - being challengers of convention, champions for our customers and adversely impacted.WMMRC
WMMRCcheerleaders for our team. Our most recent engagement survey, which led to our fifth Great Place to Work
® certification and inclusion on the 2023 Great Place to Work® and Fortune Best in Financial Services and Best Workplaces in Texas lists, shows how these intentional efforts are making a difference, with 88% of survey participants having said that Mr. Cooper is a wholly-owned subsidiary of WMIH. Priorgreat place to August 2008 (atwork.
These efforts are governed by the Company’s policy, which time WMMRC becameoutlines Mr. Cooper Group’s dedication to supporting human rights through a direct subsidiary of WMI), WMMRC was a wholly-owned subsidiary of FA Out-of-State Holdings,robust diversity, equity, and inclusion (DE&I) Team Member programs and competitive compensation.
Mr. Cooper Group Inc., a second-tier subsidiary of Washington Mutual Bank (“WMB”) and third-tier subsidiary of WMI. WMMRC is a pure captive insurance company domiciled in the State of Hawaii. WMMRC was incorporated on February 25, 2000, and received a Certificate of Authority, dated March 2, 2000, from the Insurance Division of the State of Hawaii.WMMRC was originally organized to reinsure private mortgage insurance risk for seven primary mortgage insurers then offering private mortgage insurance on loans originated or purchased by certain former subsidiaries of WMI. The seven primary mortgage insurers are United Guaranty Residential Insurance Company, Genworth Mortgage Insurance Corporation (“GMIC”), Mortgage Guaranty Insurance Corporation, PMI Mortgage Insurance Company, Radian Guaranty Incorporated (“Radian”), Republic Mortgage Insurance Company and Triad Guaranty Insurance Company.
All of WMMRC’s reinsurance agreements are on an excess of loss basis, except for a certain reinsurance treaty with GMIC during 2007, which is reinsured on a 50% quota share basis. Pursuant to the excess of loss reinsurance agreements, WMMRC reinsures a second loss layer which ranges from 5% to 10% of the risk in force in excess of the primary mortgage insurer’s first loss percentages which range from 4% to 5%. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25% to 40%.
WMMRC previously commuted three reinsurance agreements, one each, in 2009, 2012 and 2014, respectively, and the related trust assets were distributed in accordance with the commutation agreements. On October 23, 2017, the reinsurance agreement with Radian was commuted and the related trust assets were released to WMMRC. We also may seek opportunities to extract excess capital through commutation of one or more of WMMRC’s remaining reinsurance agreements or otherwise, with a view toward accelerating the distribution of capital in excess of the amounts needed to pay claims.
WMIIC
From the Effective Date through January 18, 2018, the date on which WMIIC was dissolved, WMIIC was an inactive subsidiary and had no operations or assets. For more information on the dissolution of WMIIC see Note 15: Subsequent Events, to the consolidated financial information in Part II, Item 8 of this - 2023 Annual Report on Form 10-K.
Competition
With respect10-K
6
Diversity and Inclusion Initiatives: Our success as a business is directly tied to our current operations,ongoing efforts to attract and retain diverse talent, promote fairness and equity, and maintain an inclusive and progressive environment where each team member can thrive. We established our internal Office of Diversity, Equity, and Inclusion to serve as a driver and a resource for our team members and the community. The Office of Diversity, Equity, and Inclusion has spearheaded numerous programs and oversees 11 Employee Resource Teams as of December 31, 2023. The Office of DE&I facilitated events honoring Heritage Months, while our Employee Resource Teams sponsored events, comprised of speaking engagements, career development workshops, and community service. With our expanded educational offerings, in 2023, we offered courses for team members across a variety of DE&I topics.
In addition to creating an inclusive environment for our team members, we understand the importance of supporting the communities where we live and work. In 2023, we continued our efforts in the community by providing housing education and outreach, resulting in $360 million in governmental funding secured to support homeowners in need. As part of our community support, in 2023, we also created a supplier diversity program, including launching a supplier diversity web portal to ensure we maintain a robust and diverse vendor pipeline as part of our procurement efforts. We recognize supplier diversity as a business strategy that strengthens the local, national and broader global community while generating economic opportunity for disadvantaged communities. We appreciate the strategic benefits and value derived from robust supplier diversity initiatives and commit to their continuous improvement.
Talent Management: We invest in attracting, developing and retaining the best talent, and we know that focusing on a holistic experience will continue to be key in our journey from better to best. We operate an overarching Talent Management function, which combines our Training, Leadership Development and Talent Acquisition teams into one group. Over the past year, we offered our employees training across a broad range of categories, including leadership, inclusion, professional skills, and performance management.
Performance Management and Compensation: We abide by a pay for performance philosophy that links rewards to a team member’s performance. Rewards are differentiated, which results in top performers receiving higher rewards, showing team members they are being compensated based on their individual contributions. To ensure our compensation practices are fair and market competitive, we evaluate our pay ranges every year using data from several industry surveys.
Additional Information
To learn more about Mr. Cooper Group Inc., please visit our website at www.mrcoopergroup.com. From time to time, we use our website as a channel of distribution of material Company operates a single business, WMMRC, whose sole activity isinformation. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the reinsuranceSecurities Exchange Act of mortgage insurance policies. WMMRC has been operated in runoff mode since September 26, 2008. Since that date, WMMRC has not underwritten any new policies (and by extension any new risk). WMMRC, through predecessor companies, began reinsuring risks in 1997 and continued reinsuring risks through September 25, 2008. Because WMMRC’s business is in runoff mode,1934 (“Exchange Act”) available free of charge under the Investors section of our website as soon as reasonably practicable after we currently have no competitors in that line of business. With respectelectronically file the reports with, or furnish them to, our acquisition strategy, we compete for acquisition opportunities with strategic and financial buyers, including private equity firms, and some of those potential competitors are substantially larger and have considerably greater financial, technical, marketing and management resources than we do.Government Regulation
We are subject to the regulations of the Securities and Exchange Commission (“SEC”). Our reports, proxy and information statements and other information filed electronically with the Insurance DivisionSEC can also be accessed at
www.sec.gov.
Our website also provides access to reports filed by our directors, executive officers and certain significant stockholders pursuant to Section 16 of the StateExchange Act. In addition, our Corporate Governance Guidelines, Code of Hawaii. WeBusiness Conduct and Ethics, Code of Ethics, and charters for the standing committees of our Board of Directors are also subjectavailable on our website. Any information on our website is not incorporated by reference into this Annual Report on Form 10-K.
7 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies, and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
•macroeconomic and U.S. residential real estate market conditions;
•changes in prevailing interest rates and/or changes in home prices;
•our ability to maintain or grow the size of our servicing portfolio;
•our ability to maintain or grow our originations volume and profitability;
•our ability to recapture voluntary prepayments related to our existing servicing portfolio;
•our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
•our ability to prevent cyber intrusions and mitigate cyber risks;
•delays in our ability to collect or be reimbursed for servicing advances;
•our ability to obtain sufficient liquidity and capital to operate our business;
•disruptions in the secondary home loans market;
•our ability to successfully implement our strategic initiatives and hedging strategies;
•our ability to realize anticipated benefits of our previous acquisitions;
•our ability to use our net operating loss, other tax carry forwards and certain built-in losses or deductions;
•changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•third-party credit, servicer and correspondent risks;
•our ability to pay down debt;
•our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•issues related to the accounting rulesdevelopment and regulationsuse of the SECartificial intelligence;
•health pandemics, hurricanes, earthquakes, fires, floods and the Financial Accounting Standards Board. Anyother natural catastrophic events; and
•our ability to maintain our licenses and other regulatory approvals.
All of these laws or regulationsfactors are difficult to predict, contain uncertainties that may materially affect actual results and may be modified or changedbeyond our control. New factors emerge from time to time, and thereit is no assurancenot possible for our management to predict all such factors or to assess the effect of each such factor on our business. Although we believe that such modifications or changes will not adversely affect us.3
Employees
Asthe assumptions underlying the forward-looking statements contained herein are reasonable, any of December 31, 2017, we employed four full-time employees. We also have retained the servicesassumptions could be inaccurate, and any of two individuals on a non-exclusive basis to serve as executive officers of WMIH. None of our employees is covered by a collective-bargaining agreement. We consider our relations with our employeesthese statements included herein may prove to be good.
On March 22, 2012, WMIH entered into employment agreements with twoinaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of our employees. On May 15, 2015, WMIH entered into employment agreements with two additional employees, one of whom servessuch information should not be regarded as a director on WMIH’s Board of Directors (the “Board”) in addition to his role as Chief Executive Officer, and the other serves as President and Chief Operating Officer. These agreements have been filed with the SEC on Form 8-K, dated March 23, 2012, and on Form 8-K12G3, dated May 13, 2015, respectively. WMIH has two additional executive officers, Charles Edward Smith, Chief Legal Officer and Secretary, and Timothy F. Jaeger, Interim Chief Financial Officer, who are independent contractors.
Executive Officers of the Registrant
WMIH has four executive officers: William C. Gallagher, Chief Executive Officer, Thomas L. Fairfield, President and Chief Operating Officer, Charles Edward Smith, Chief Legal Officer and Secretary and Timothy F. Jaeger, Interim Chief Financial Officer and Interim Chief Accounting Officer. Mr. Gallagher and Mr. Fairfield provide services under employment agreements each dated May 15, 2015. Mr. Smith provides services to WMIH under the Transition Services Agreement, dated March 22, 2012, as amended (the “TSA”), entered into between WMIH and the WMI Liquidating Trust (the “Trust”), under which Mr. Smith provides chief legal officer and other services to WMIH on a non-exclusive basis. Mr. Jaeger provides non-exclusive services to WMIH under an engagement agreement with CXO Consulting Group, LLC, under which Mr. Jaeger acts as Interim Chief Accounting Officer and Interim Chief Financial Officer to WMIH. Subject to the terms of the agreements, the executive officers are electedrepresentation by and serve at the discretion of the Board of Directors. There are no arrangementsus or understandings between the executive officers and any other person pursuantthat the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to which he was or is to be selected as an officer, other than the designated agreements, which agreements designate the service or positions to be held by the executive officer. NoneItem 1A,
Risk Factors, and Item 7, Management’s Discussion and Analysis of the executive officers is related to one another or to any membersFinancial Condition and Results of the BoardOperations, sections of Directors. Mr. Gallagher serves as a director on the Board.William C. Gallagher, age 59, has served as Chief Executive Officer and as a member of the Board since May 15, 2015. Mr. Gallagher served as a consultant to WMIH from November 21, 2014 to May 15, 2015. Mr. Gallagher was previously an Executive Vice President and member of the Board of Directors at Capmark Financial Group Inc. (now known as Bluestem Group Inc. and referred to herein as “Capmark”). Mr. Gallagher served as President and CEO of Capmark from February 2011 to November 2014. He was Executive Vice President and Chief Risk Officer of Capmark from March 2009 to February 2011. Prior to joining Capmark, Mr. Gallagher was the Chief Credit Officer of RBS Greenwich Capital from September 1989 to February 2009.
Thomas L. Fairfield, age 59, has served as President and Chief Operating Officer since May 15, 2015, and served as a member of the Board from May 15, 2015 until June 1, 2017. Mr. Fairfield is currently a director of Wand Merger Corporation, a subsidiary of WMIH. Mr. Fairfield served as a consultant to WMIH from November 21, 2014 to May 15, 2015. Mr. Fairfield was previously an Executive Vice President and member of the Board of Directors at Capmark. Mr. Fairfield was Chief Operating Officer of Capmark from February 2011 to November 2014. From March 2006 to February 2012, Mr. Fairfield served as Executive Vice President, Secretary and General Counsel of Capmark. Prior to joining Capmark, Mr. Fairfield was a partner at the law firm of Reed Smith LLP from September 2005 to March 2006 and prior to that at Paul, Hastings, Janofsky & Walker LLP from February 2000 to August 2005 and LeBoeuf, Lamb, Greene & MacRae, LLP from January 1991 to February 2000, where his practice focused primarily on general corporate and securities law, mergers and acquisitions, corporate finance and financial services.
Charles Edward Smith, age 48, has served as Chief Legal Officer and Secretary since the Effective Date and President and Interim Chief Executive Officer from the Effective Date through May 15, 2015. In addition, since the Effective Date, Mr. Smith has served as the Executive Vice President, General Counsel and Secretary of the Trust. Mr. Smith is currently a director of Wand Merger Corporation, a subsidiary of WMIH. During the significant portion of WMI’s Chapter 11 proceedings, Mr. Smith served as the Executive Vice President, General Counsel and Secretary of WMI. Prior to the closure of WMB on September 25, 2008, Mr. Smith was a First Vice President, Assistant General Counsel and Team Lead (Corporate Finance) for WMB, where he supported the Treasury Group and led a team of lawyers and other professionals who supported the Company’s capital, liquidity, mergers and acquisitions and structured finance activities.
Timothy F. Jaeger, age 59, has served as Interim Chief Financial Officer since June 25, 2012 and Interim Chief Accounting Officer since May 28, 2012. He is a Certified Public Accountant with over 30 years of accounting experience. Most recently, from December 2006 to March 2012, Mr. Jaeger served as Senior Vice President-Chief Accounting Officer/CFO of Macquarie AirFinance, Ltd., a global aviation lessor providing aircraft and capital to the world’s airlines. From November 2006 to December 2009, Mr. Jaeger was a partner at Tatum Partners, LLC, an executive services and consulting firm in the United States.
4
Available Information
We file annual, quarterly and other reports, proxy statements and other information with the SEC under the Exchange Act. You may obtain copies of these reports and filings, without charge, through our corporate website located at www.wmih-corp.com. The information on our corporate website is not incorporated into this report or into any other communication delivered to security holders or furnished to the SEC. You can also inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its Public Reference Rooms. The SEC also maintains an Internet website at http://www.sec/gov/ where you can obtainthese and other factors affecting our SEC filings.
Upon written request, we will furnish to you without charge a paper copy of ourbusiness.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K for fiscal year ended December 31, 2017 (including8
Item 1A. Risk Factors
You should carefully consider the following risk factors together with all of the other information included in this report, including the financial statements and
schedules, but without exhibits). Copies of exhibitsrelated notes, when deciding to
our Annual Report on Form 10-K,invest in us. The risks and
copies of our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, will be furnished for a payment of a fee of $0.50 per page upon written request directed to Secretary, WMIH Corp., 800 Fifth Avenue, Suite 4100, Seattle, WA 98104.5
The risksuncertainties described below could materially and adversely affect our business, financial condition and results of operations. These risksoperations in future periods and are not the only risks that we face. Our business operations could also be affected by additional factors that apply to all companies operating in the United States and globally, as well as otherfacing our Company. Additional risks that are not presentlycurrently known to us or that we currently considerdeem to be immaterial.immaterial also may materially adversely affect our business, financial condition and results of operations in future periods.
Risk Factor Summary
Market, Financial Reporting, Credit and Liquidity Risks Related to
•Our BusinessWMIHrevenues in Originations and its subsidiaries have limited operations; WMIH is a holding company, and its only material assetsServicing are cash on hand, cash held in trust, restricted cash and its equity interests in its operating subsidiary and its other investments, and WMIH’s principal source of revenue and cash flow are distributions and certain payments from our wholly-owned subsidiary, WMMRC, which is operating in runoff mode and is subject to restrictions from paying us dividends and investment income from our investment portfolio.
As a holding company, our only material assets are our cash on hand, cash held in trust, restricted cash, the equity interests in WMMRC and other investments. As of December 31, 2017, WMIH had no operations other than WMMRC’s legacy reinsurance business with respect to mortgage insurance which is being operated in runoff mode and activities related to identifying and consummating an acquisition. WMMRC has not written any new business since September 26, 2008. As of December 31, 2017, excluding restricted cash and assets held in trust, we had approximately $28.9 million in cash, cash equivalents, and investments, which includes $7.6 million held by our wholly-owned subsidiary, WMMRC. Prior to consummating a Qualified Acquisition, we expect that our principal source of revenue and cash flow will be investment income from our investment portfolio, if any, cash and cash equivalents on hand, distributions from our operating subsidiary, if any, and certain payments made to us by WMMRC pursuant to the Administrative Services Agreement, dated as of March 19, 2012, between WMIH and WMMRC (the “Administrative Services Agreement”) and the Investment Management Agreement, dated as of March 19, 2012, between WMIH and WMMRC (the “Investment Management Agreement”). WMMRC is restricted by insurance law from making distributions to WMIH unless prior approval is obtained from the Insurance Division of the State of Hawaii. Thus, our current ability to fund our operations, including costs associated with the Nationstar Transaction, or if the Nationstar Transaction does not close, costs associated with identifying, evaluating, negotiating and closing other potential acquisition opportunities ishighly dependent on (i) the abilitymacroeconomic and U.S. residential real estate market conditions.
•Our earnings may decrease because of changes in prevailing interest rates and/or declines in home prices.
•We may be unable to obtain sufficient capital to operate our business, and our substantial indebtedness may limit our financial and operating subsidiary to generate sufficient net incomeactivities and cash flows to make upstream cash distributions to us, and (ii) our ability to obtain accessincur additional debt to the funds held in escrow from the Series B Preferred Stock Financing. Anyfund future subsidiaries will be separate legal entities, and although they may be wholly-owned or controlled by us, they will have no obligation to make any funds available to us, whetherneeds.
•A disruption in the form of loans, dividends, distributionssecondary home loan market, including the MBS market, could have a detrimental effect on our business.
•If our estimates or otherwise. The ability ofassumptions in our operating subsidiaryfinancial models prove to distribute cash to us is also subject to, among other things, availability of sufficient funds and applicable state laws and regulatory restrictions. Claims of creditors of any subsidiaries generally have priority as to the assets of such subsidiaries overbe incorrect, it may affect our claims and claims of our creditors and stockholders. To the extent our ability to access funds held in escrow from the Series B Preferred Stock Financing could be limited in any way, or the ability of our operating subsidiary to distribute dividends or other payments to us could be limited in any way, such limitations could materially limit our ability to grow, pursue business opportunities or make acquisitions that could be beneficial to our businesses, fund and conduct our business, or fund redemptions or repurchases.If we are unable to consummate the Nationstar Transaction or identify and/or complete another Acquisition or there are delays in finding suitable acquisition targets or the Nationstar Transaction isearnings.
•We may not successful or any other Acquisitions that we may make are not successful, WMIH may never achieve sustained profitability, which would adversely affect the valuerealize all of the Company.If we are unable to consummate the Nationstar Transaction, weanticipated benefits of previous or potential acquisitions and dispositions.
•Our hedging strategies may not be able to identify or completesuccessful in mitigating our risks associated with interest rates.
•We have third-party credit, servicer and correspondent risks.
•Changes in tax legislation and challenges from tax authorities may have an alternative acquisition in a timely manner or at all and any delays we encounter in the selection, acquisition and/or development of other acquisition targets could adversely affect our value. WMIH’s inability to consummate the Nationstar Transaction or make one or more other suitable Acquisitions would impair WMIH’s ability to become profitable. If WMIH consummates the Nationstar Transaction or makes another Acquisition, we may fail to achieve profitability on a sustained basis which would adversely affect the value of the Company. See “—Risk Factors Relating to the Pending Nationstar Transaction.”6
Until July 5, 2019, we are required to obtain prior consent from KKR Wand Holdings Corporation (“KKR Wand”) to enter into any definitive agreement with respect to any Acquisition.
Under a Letter Agreement (as amended, the “Letter Agreement”) with KKR Wand and KKR Wand Investors Corporation (“KKR Investors,” and together with KKR Wand, the “KKR Holders”), affiliates of KKR that hold Series A Convertible Preferred Stock (the “Series A Preferred Stock”), warrants to purchase common stock of WMIH, and Series B Preferred Stock, from December 8, 2017 through July 5, 2019, WMIH is prohibited from entering into a definitive agreement with respect to any Acquisition without the prior written consent of KKR Wand; subject to a minimum stock ownership level by the KKR Holders, and their affiliates, and defined notice time periods which are detailed in the Letter Agreement. As a result, KKR Wand’s consent must be obtained prior to WMIH entering into a definitive agreement with respect to any Acquisition. KKR Wand has consented to the Nationstar Transaction; however, if we do not consummate the Nationstar Transaction, the failure or refusal of KKR Wand to provide its consent timely, or at all, and without conditions to another potential acquisition transaction may adverselyadverse impact our ability to successfully execute our acquisition strategy and complete an Acquisition. There can be no assurance that we will be able to receive consent from KKR Wand with respect to any Acquisition or Qualified Acquisition other than the Nationstar Transaction.
A mandatory redemption of the Series B Preferred Stock would likely have a material adverse effect on our financial condition and business operations.
If we do not consummate the Nationstar Transaction or another Acquisition or Qualified Acquisition, on or prior to the Series B Redemption Date or take other actions to extend the redemption date applicable to, or to refinance or modify the terms of, the Series B Preferred Stock, then we will be obligated to redeem any outstanding Series B Preferred Stock on the Series B Redemption Date. The execution and public announcement by WMIH of the Merger Agreement has extended the Series B Redemption Date to the earlier of April 5, 2020 and the day immediately following the date the Merger Agreement is terminated or the date the Merger is closed. All or a portion of the Series B Preferred Stock automatically converts into WMIH Common Stock upon consummation of a Qualified Acquisition (including the Nationstar Transaction) or an Acquisition, as the case may be. If an Acquisition occurs but a Qualified Acquisition does not occur, we are obligated to redeem any remaining portion of the Series B Preferred Stock that have not converted into WMIH Common Stock and remain outstanding on the Series B Redemption Date. “Acquisition” means any acquisition by the Company (or any of its direct or indirect wholly-owned subsidiaries), in a single transaction or a series of transactions, whether by purchase, merger or otherwise, of all or substantially all of the assets of, or of 80% or more of the equity interests in, or a business line, unit or division of, any person. A “Qualified Acquisition” means an Acquisition that, taken together with prior Acquisitions (if any), collectively utilizes aggregate net proceeds of the Series B Preferred Stock Financing of $450.0 million.
There can be no assurances that we will be able to consummate the Nationstar Transaction or another Acquisition or Qualified Acquisition prior to the Series B Redemption Date. A mandatory redemption of the Series B Preferred Stock would substantially deplete our cash on hand to continue seeking acquisitions and would likely have a material adverse effect on our financial condition and business operations. Relatedly, under those circumstances, we also may not have access to alternative sources of capital or liquidity.
WMIH, together with its subsidiaries,condition.
•We may not be able to fully utilize our net operating loss (“NOL”) and, other tax carry forwards.forwards and certain built-in losses or deductions.
Business & Operational Risks
Servicing
•A significant increase in delinquencies for the loans that we own and service could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.
•We may not maintain or grow our business if we do not acquire MSRs or enter into favorable subservicing agreements.
•We service higher risk loans which are more expensive to service than conventional mortgage loans.
•We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable.
•Our counterparties may terminate our servicing rights and subservicing contracts.
•We could have a downgrade in our servicer ratings.
Originations
•We may not be able to maintain the volumes in our loan originations business.
•We may be required to indemnify or repurchase loans we sold, or will sell, if these loans fail to meet certain criteria.
•We are highly dependent upon loan programs administered by the Agencies to generate revenues.
Corporate/Other
•Our Real Estate exchange business could be further impacted by delays in foreclosure sales, as well as economic slowdowns and recessions.
9 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
General Business & Operational Risks
•We may not be successful in implementing certain strategic initiatives.
•Technology failures or cyber-attacks against us or our vendors could damage our business operations, and new laws and regulations could increase our costs.
•Our capital investments in technology may not achieve anticipated returns.
•We and our vendors have operations in India that could be adversely affected by changes in political or economic stability or by government policies.
•Our vendor relationships subject us to a variety of risks.
•Our risk management policies and procedures may not be effective.
•We could have, appear to have or be alleged to have conflicts of interest with Xome.
•Our business could suffer if we fail to attract, or retain, highly skilled employees and changes in our executive management team may be disruptive to our business.
•Negative public opinion could damage our reputation and adversely affect our business.
•Issues related to the development and use of artificial intelligence could give rise to legal and/or regulatory action, damage our reputation or otherwise materially harm our business.
•We may have lapses in disclosure controls and procedures or internal control over financial reporting.
•Our business is subject to the risks of natural catastrophic events and health pandemics.
Regulatory, Compliance and Legal Risks
•We operate within a highly regulated industry on federal, state and local levels.
•We are subject to numerous legal proceedings, federal, state or local governmental examinations and enforcement investigations.
•We are subject to state licensing and operational requirements that result in substantial compliance costs.
•Our business would be adversely affected if we lose our licenses.
•We may incur increased litigation costs and related losses if a court overturns a foreclosure or if a loan we are servicing becomes subordinate to a Home Owners Association lien.
•Delays in residential mortgage foreclosure proceedings could have a negative effect on our ability to liquidate loans timely and slow the recovery of advances and thus impact our earnings or liquidity.
Risks Related to Owning our Stock
•Our common stock is subject to transfer restrictions.
•Anti-takeover provisions in our charter and under Delaware law could limit certain stockholder actions.
•The market price of our common stock may decrease, resulting in a loss for investors.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 10
Risk Factors
Market, Financial Reporting, Credit and Liquidity Risks
Our revenues in Originations and Servicing are highly dependent on macroeconomic and U.S. residential real estate market conditions.
Our success depends largely on the health of the U.S. residential real estate industry, which is seasonal, cyclical and affected by changes in general economic conditions beyond our control. Economic factors such as increased interest rates, inflation, slow economic growth or recessionary conditions, the pace of home price appreciation or the lack of it, changes in household debt levels, and increased unemployment or stagnant or declining wages affect our customers’ income and thus their ability and willingness to make loan payments. Although inflation has slowed during 2023, it remains above the Federal Reserve’s 2% target, and it is expected that interest rates will remain elevated for some time. Additionally, global events affect all such macroeconomic conditions. Instability in the global credit markets, the impact of uncertainty regarding global central bank monetary policy, the instability in the geopolitical environment in many parts of the world (including as a result of the on-going Ukraine-Russia conflict, China-Taiwan relations, and the recent eruption of hostilities in Israel and Gaza), global economic ramifications of the current economic challenges in China, and other disruptions may continue to put pressure on global economic conditions.Weak, or a significant deterioration in economic conditions, reduces the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of qualified potential customers to take out loans. As a result, such economic factors affect loan origination volume. Additional macroeconomic factors including, but not limited to, rising government debt levels, the withdrawal or augmentation of government interventions into the financial markets, changing U.S. consumer spending patterns, changing expectations for inflation and deflation, and weak credit markets may create low consumer confidence in the U.S. economy or the U.S. residential real estate industry. Excessive home building or high foreclosure rates resulting in an oversupply of housing in a particular area may also increase the amount of losses incurred on defaulted mortgage loans. Any or all of the circumstances described above may lead to further volatility in or disruption of the credit markets at any time and adversely affect our financial condition.
Any uncertainty or deterioration in market conditions that leads to a decrease in loan originations will result in lower revenue on loans sold into the secondary market. Lower loan origination volumes generally place downward pressure on margins, thus compounding the effect of the deteriorating market conditions. Companies focusing on mortgage originations may experience severe financial distress and this may result in numerous companies exiting the mortgage business or filing bankruptcy. This could cause a contagion effect resulting in the banks which provide us financing lines to reduce the lines or increase financing costs. Such events could be detrimental to our business. Moreover, any deterioration in market conditions that leads to an increase in loan delinquencies will result in lower revenue for loans we service for the GSEs and Ginnie Mae as servicing fees are collected only for current performing loans. While increased delinquencies generate higher ancillary revenues, including late fees, these fees are sometimes unrecoverable if the related loan is liquidated. Increased delinquencies may also increase the cost of servicing the loans for all market participants. The decreased cash flow from lower servicing fees or higher cost to service could decrease the estimated value of our MSRs, resulting in recognition of losses when we write down those values. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and increases our obligation to advance certain principal, interest, tax and insurance obligations owed by the delinquent mortgage loan borrower. An increase in delinquencies could therefore be detrimental to our business.
Our earnings may decrease because of changes in prevailing interest rates and/or declines in home prices.
Our profitability is directly impacted by changes in prevailing interest rates. Interest rates have risen further and faster than any time in modern history. The following are certain material risks we face related to changes in interest rates:
Servicing:
•a decrease in interest rates may increase prepayment speeds which lead to (i) increased amortization expense; (ii) decreased servicing fees; and (iii) decreased fair value of our MSRs;
•an increase in interest rates, together with an increase in monthly payments when an adjustable mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, may cause increased delinquency, default and foreclosure. Increased mortgage defaults and foreclosures may adversely affect our business as they increase our expenses and reduce the number of mortgages service fees that are collected. Additionally, payment savings on modifications are directly tied to market interest rates, and increasing interest rates may reduce the number of customers eligible to receive modifications or increase the likelihood of re-default for those who receive a modification. Loan modifications for government insured mortgages are more difficult in a high-rate environment, which may result in higher delinquency levels for loans in Ginnie Mae securities. An increase in interest rates also lowers unhedged early buyout (“EBO”) revenues;
11 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Originations:
•an increase in interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a purchase money loan may be more difficult for consumers;
•an increase in interest rates could also adversely affect our production margins due to increased competition among originators;
Other:
•an increase in interest rates could adversely affect Xome’s Real Estate exchange property sales, particularly non-distressed sales, as financing may become less attractive to borrowers;
•an increase in interest rates could increase the cost of servicing our outstanding debt, including our ability to finance servicing advances and loan originations and for borrowing for acquisitions; and
•a decrease in interest rates could reduce our earnings from our custodial deposit accounts.
Home prices in many areas of the country have risen dramatically. Home values may deflate significantly, especially in those areas with the highest rates of increase. Falling home prices may result in higher defaults, greater loss severity, increased foreclosures and losses to investors and stakeholders. The decrease in housing values may greatly affectmortgage loan originations for years, with dramatic decreases in volume due in part from borrowers’ inability to sell or refinance their properties as a result of the lower values. In addition, as investors take losses and liquidity in capital markets evaporates, investors and originators may tighten underwriting criteria and scrutiny of loan production. These eventscould decrease our revenue from loan originations or loan purchases, and increase our expenses due to repurchases, the resources needed to validate claims, and servicing costs to manage higher defaults and foreclosures.
Any of the foregoing could adversely affect our business, financial condition and results of operations.
A disruption in the secondary home loan market, including the MBS market, could have a detrimental effect on our business.
Demand in the secondary market and our ability to complete the sale or securitization of our mortgage loans depends on a number of factors, many of which are beyond our control. This includes general economic conditions, general conditions in the banking system, the willingness of lenders to provide funding for mortgage loans, the willingness of investors to purchase mortgage loans and MBS, and changes in regulatory requirements. In September 2022, the U.S. Federal Reserve withdrew from the mortgage securities market and ceased purchasing MBS. Additionally, the yield on U.S. Treasury bonds, often referred to as one of the primary market indicator rates, remains high and the spread between mortgage rates and 10-year Treasury yield continues to remain at 2008 financial crisis levels. Customers have little to no rate incentive to refinance and there is minimal demand from buyers of MBS. Any continued significant disruption or period of illiquidity in the general MBS market could directly affect our liquidity because no existing alternative secondary market would likely be able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Accordingly, if the MBS market experiences a period of illiquidity, we may be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices, which could be detrimental to our business.
We may be unable to obtain sufficient capital to operate our business.
Our financing strategy includes the use of significant leverage because, to make servicing advances and fund originations, we require liquidity in excess of the capital generated by our operations. Accordingly, our ability to finance our operations depends on our ability to secure financing on acceptable terms and to renew and/or replace existing financings as they expire. These financings may not be available on acceptable terms or at all. If we are unable to obtain these financings, we may need to raise the funds we require in the capital markets or through other means, any of which may increase our cost of funds.
We are generally required to renew a significant portion of our debt financing arrangements each year, which exposes us to refinancing and interest rate risks. Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors including:
•the available liquidity in the credit markets;
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 12
•prevailing interest rates;
•an event of default, a negative ratings action by a rating agency and limitations imposed on us under the indentures governing our current debt that contain restrictive covenants and borrowing conditions that may limit our ability to raise additional debt;
•the strength of the lenders from which we borrow; and
•limitations on borrowings on advance facilities imposed by the amount of eligible collateral pledged, which may be less than the borrowing capacity of the advance facility.
Additionally, the Basel III “endgame” regulations released in response to recent regional bank failures are expected to discourage banks from investing in MSRs and other mortgage assets, which may make it more difficult to secure or to obtain acceptable terms for our various debt facilities.
If we are unable to obtain sufficient capital on acceptable terms for any of the foregoing reasons, this could adversely affect our business, financial condition and results of operations.
Our substantial indebtedness may limit our financial and operating activities and our ability to incur additional debt to fund future needs.
As of December 31, 2012, WMIH2023, the aggregate principal amount of our unsecured senior notes was $3,200 million. Although we and our subsidiaries have substantial indebtedness, we believe we have the ability to incur additional indebtedness in the future, subject to the limitations contained in the agreements governing our indebtedness. These agreements generally restrict us and our restricted subsidiaries from incurring additional indebtedness; however, these restrictions are subject to important exceptions and qualifications. If we incur additional debt, the related risks could be magnified and could limit our financial and operating activities.
Our current and any future indebtedness could:
•require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on our current indebtedness and any indebtedness we may incur in the future, thereby reducing the funds available for other purposes;
•make it more difficult for us to satisfy and comply with our obligations with respect to the unsecured senior notes;
•subject us to increased sensitivity to increases in prevailing interest rates;
•place us at a competitive disadvantage to competitors with relatively less debt in economic downturns, adverse industry conditions or catastrophic external events; or
•reduce our flexibility in planning for or responding to changing business, industry and economic conditions.
In addition, our substantial level of indebtedness could limit our ability to obtain financing or additional financing on acceptable terms to fund future acquisitions, working capital, capital expenditures, debt service requirements, and/or general corporate and other purposes, which could have a material adverse effect on our business and financial condition. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance and many other factors outside of our control. Our substantial obligations could have other important consequences. For example, our failure to comply with the restrictive covenants in the agreements governing our indebtedness, which limit our ability to incur liens, to incur debt and to sell assets, could result in an event of default that, if not cured or waived, could harm our business or prospects and could result in our bankruptcy.
13 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
We use financial models that rely heavily on estimates in determining the fair value of certain assets and liabilities, such as MSRs and MSR financing liabilities, and if our estimates or assumptions prove to be incorrect, it may affect our earnings.
We use internal financial models that utilize, wherever possible, market participant data to value certain of our assets, including our MSRs and MSR financing liabilities and for purposes of financial reporting. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. In determining value for MSRs, we make certain assumptions, many of which are beyond our control, including, among other things:
•the rates of prepayment and repayment within the underlying pools of mortgage loans and our ability to recapture mortgage prepayments through the origination platform;
•projected rates of delinquencies, defaults and liquidations;
•future interest rates;
•cost to service the loans;
•ancillary revenues; and
•amounts of future servicing advances.
If these assumptions or relationships prove to be inaccurate, if market conditions change or if errors are found in our models, the value of certain assets and liabilities could materially vary, which could impact our ability to satisfy minimum net worth covenants and borrowing conditions in our debt agreements and adversely affect our business, financial condition and results of operations.
We may not realize all of the anticipated benefits of previous or potential acquisitions and dispositions.
Our ability to realize the anticipated benefits of previous or potential acquisitions, including the acquisition of assets, will depend, in part, on our ability to scale-up to appropriately service these assets and integrate the businesses of the acquired companies with our business.
The risks associated with acquisitions include, among others:
•unknown or contingent liabilities;
•unanticipated issues in integrating information, management style, controls and procedures, servicing practices, communications and other systems including information technology systems;
•the value of non-cash consideration received and its subsidiariespotential change in value;
•unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
•not retaining key employees or clients; and
•inaccuracy of valuation and/or operating assumptions supporting our purchase price.
When we acquire a platform, we may elect to operate this platform in addition to our current platform for a period of time or indefinitely. Individually or collectively, these transactions could substantially increase the UPB, or alter the composition of our portfolio of mortgage loans that we service or have an otherwise significant impact on our business. Additionally, we may make potentially significant acquisitions which could expose us to greater risks than we currently experience in servicing our current portfolio and adversely affect our business, financial condition and results of operations.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 14
The risks associated with disposition include, among other things:
•difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner;
•destabilization of the applicable operations;
•loss of key personnel;
•ability to obtain necessary governmental or regulatory approvals;
•post-disposal disputes and indemnification obligations;
•access by purchasers to certain of our systems and tools during transition periods;
•the migration of data and separation of systems; and
•data privacy matters.
We can provide no assurances that we will enter into any such agreements or as to the timing of any potential strategic transactions. The strategic transaction process may disrupt our business including diverting management’s attention from ongoing business concerns. We also may not realize all of the anticipated benefits of potential future strategic transactions, which could adversely affect our business, financial condition and results of operations.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates.
We use various derivative financial instruments to provide a level of protection against interest rate risks related to our both our pipeline (LHFS and IRLCs spanning our Originations and Servicing segments) and our MSR portfolio (in our Servicing segment), but no hedging strategy can protect us completely. The nature and timing of hedging transactions influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility, and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available on favorable terms or at all, particularly during periods of heightened volatility or economic downturns. Any of the foregoing risks could adversely affect our business, financial condition and results of operations.
We have third-party credit, servicer and correspondent risks which could have a material adverse effect on our business, liquidity, financial condition and results of operation.
Consumer Credit Risk: We provide representations and warranties to purchasers and insurers of the loans that we sell that range between three years and the life of the loan. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us. Our loss estimates are affected by factors both internal and external in nature, including, level of loan sales, as well as to whom the loans are sold, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands, our ability to recover any losses from third parties, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economies. Many of the factors are beyond our control and may lead to judgments that are susceptible to change. In adverse market conditions, loans may decrease in value due to an increase in delinquencies, borrower defaults and non-payments. In addition, property values may experience losses at liquidation due to extensions in foreclosure and real estate owned (“REO”) sales timelines, as well as home price depreciation.
Counterparty Credit Risk: We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. Although certain credit facilities and warehouse lines are committed, we may experience a disruption in operations due to a lender withholding funds of a borrowing request on the respective credit facility.
15 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Prior Servicer Risk: We service mortgage loans under guidelines set forth by regulatory agencies and GSEs. Failure to meet stipulations of the servicing guidelines can result in the assessment of fines and loss of reimbursement of loan related advances, expenses, interest and servicing fees. When the servicing of a portfolio is assumed either through purchase of servicing rights or through a subservicing arrangement, various loans in the acquired portfolio may have been previously serviced in a manner that will contribute towards our not meeting certain servicing guidelines. If not recovered from a prior servicer, such events frequently lead to the eventual realization of a loss to us. The recovery process against a prior servicer can be prolonged based upon the time required by us to meet minimum loss deductibles under the indemnification provisions in our agreements with the prior servicer and for the time requirements by the prior servicer to review underlying loss events and our request for indemnification. The amounts ultimately recovered from prior servicers may differ from our estimated recoveries recorded based on the prior servicer’s interpretation of responsibility for loss, which could lead to our realization of additional losses.
Correspondent Risk: We purchase closed loans from correspondent lenders. The failure of these correspondent lenders to comply with any applicable laws, regulations and rules may subject us to monetary penalties or other losses. Although we have controls and procedures designed to assess areas of risk with respect to these acquired loans, including, without limitation, diligence regarding compliance with underwriting guidelines and applicable laws or regulations, we may not detect every violation of law by these correspondent lenders. In an economic downturn, a number of these correspondent lenders may not be financially viable, and any issues with respect to loans purchased from them and sold to Fannie Mae and Freddie Mac would transfer any manufacturing defect risk of origination to us. Additionally, we expect occupancy fraud and income fraud in the correspondent channel to increase. As housing prices and interest rates increase, loan terms become less favorable, and affordability becomes more challenging. As a result, borrowers may be more inclined to either inflate their income or misrepresent their occupancy intentions.
Any of the above could adversely affect our business, liquidity, financial condition and results of operations.
Changes in tax legislation and challenges from tax authorities may have an adverse impact on our financial condition.
U.S. federal and state tax authorities may periodically revise legislation that may result in changes to the interpretation of established tax concepts. Future revisions in tax legislation and interpretations thereof could adversely impact our provision for income taxes, cash flow and financial condition. In addition, challenges arising from taxing authorities, including the Internal Revenue Service (IRS) and state and local jurisdictions, on the interpretation of tax laws and regulations could result in adjustments to our effective tax rate, the amount of taxes due or otherwise have an adverse impact on our financial condition.
We may not be able to fully utilize our NOLs, other tax carry forwards and certain built-in losses or deductions.
As of December 31, 2023, we had U.S. federal NOLs of approximately $7.5 billion,$354 million, of which approximately $6.0 billion was allocated to that portion of 2012 after the ownership change described below, that, if unused, will begin to expire in 2031. We believe that, as of December 31, 2017, WMIH and WMMRC had NOLs$186 million were not subject to limitation under Section 382 (“Section 382”) of the United States Internal Revenue Code of 1986, as amended (the “Code”), of approximately $6.0 billion. Both WMIH and WMMRC caused 100% valuation allowances to be recorded against these deferred tax assets.On the Effective Date, we believe that we experienced an “ownership change” within the meaning of Sections 382 and 383 of the Code. An ownership change is generally defined as a more than 50 percentage point collective increase in equity ownership by “5-percent shareholders” (as that term is defined for purposes of Sections 382 and 383 of the Code) in any rolling three-year period or since the last ownership change if such prior ownership change occurred within the prior three-year period. As a result of such ownership change on the Effective Date, the limitations on the use of pre-change losses and other carry forward tax attributes in Sections 382 and 383 of the Code apply and we will be able to utilize only a small portion of the NOL carry forwards from the years prior to 2012 and the portion of the NOL for 2012 allocable to the portion of the year prior to March 20, 2012. The utilization of the NOL for 2012 allocable to the portion of the year after the Effective Date and the NOLs from subsequent years should not be affected by the ownership change on the Effective Date.
7
. Our ability including the ability of any subsidiary or subsidiaries acquired in any Acquisition, to utilize NOLs, and other tax carry forwards and certain built-in losses or deductions to reduce taxable income in future years could be limited for various reasons, including if projected future taxable income is insufficient to recognize the full benefit of such NOL carry forwards prior to their expiration and/or the Internal Revenue Service (“IRS”) challenges that a transaction or transactions were concluded with the principal purpose of evasion or avoidance of Federal income tax. There can be no assurance that we will have sufficient taxable income in later years to enable us to use the NOLs before they expire, or that the IRS will not challenge the use of all or any portion of the NOLs. Additionally, our ability (and the ability of any future subsidiary or subsidiaries) to fully use these tax assets could also be adversely affected if the respective companies were deemed to have another “ownership change” within the meaning of Sections 382 and 383 of the Code.expiration. Although we have certain transfer restrictions in place under theour Certificate of Incorporation, our Board of Directors could issue additional shares of stock or permit or effect future conversions, amendments or redemptions of our stock, (including the Series B Preferred Stock), which, depending on their magnitude, could result in ownership changes that would trigger the imposition of additional limitations on the utilization of our NOLs under Sections 382 and 383 of the Code. Based on the priceSimilar provisions of WMIH’s common stock as of March 1, 2018, if all currently issued and outstanding Series B Preferred Stock are redeemed, we believe we would experience an “ownership change.” Accordingly, there can be no assurance that, in the future, WMIH and/or its subsidiary (and any future subsidiary) will be able to utilize its NOLs or not experience additional limitations on utilizing thestate tax benefits of their NOLs and other tax carry forwards. Such limitations could have a material adverse effect on WMIH’s and/or its subsidiary’s (or any future subsidiary’s) results of operations, cash flows or financial condition.
law may also apply. In an attempt to minimize the likelihood of an additional ownership change occurring, our Certificate of Incorporation contains transfer restrictions limiting the acquisition (and disposition) of our stock or any other instrument treated as stock for purposes of Section 382 by persons or group of persons treated as a single entity under Treasury Regulation Section 1.382-3 owning (actually or constructively), or who would own as a result of the transaction, 4.75% of the total value of our stock (including any other interests treated as stock for purposes of Section 382). Nevertheless, it is possible that we could undergo an additional ownership change, either by events within or outside of the control of our Board, e.g., indirect changes in the ownership of persons owning 5% of our stock. Moreover, approximately 1.5 million shares of WMIH’s common stock are held in escrow in an account known as the Disputed Equity Escrow. A subsequent release or transfer of the stock potentially could result in an ownership change of WMIH at that time. In the event of a subsequent ownership change, all or part of the NOLs from 2012 and subsequent yearsor built-in losses that were not previously subject to limitations under Section 382 could also become subject to an annual limitation.
The IRS could challenge Section 384 may also apply in the amount, timing and/or useevent of our NOL carry forwards.
The amount of our NOL carry forwards has not been audited or otherwise validated by the IRS. Among other things, the IRS could challenge whether an ownership change occurredresulting from an acquisition, which would limit the utilization of our NOLs to only certain income or gains generated from assets owned subsequent to the acquisition.
In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 16
Business & Operational Risks
Servicing
A significant increase in delinquencies for the loans that we own and service could have a material impact on our revenues, expenses and liquidity and on the Effective Date, as well as the amount, the timing and/or our usevaluation of our NOLs. Any such challenge,MSRs.
•Revenue. An increase in delinquencies will result in lower revenue for loans we service for GSEs and Ginnie Mae as servicing fees are collected only for current performing loans. Additionally, while increased delinquencies generate higher ancillary revenues, including late fees, these fees do not offset the higher cost to service a delinquent loan and are sometimes unrecoverable if successful, could significantly limit our ability to utilize a portion or all of our NOL carry forwards.the loan is liquidated. In addition, calculating whether an ownership change has occurred withinincrease in delinquencies reduces cash held in collections and other accounts and lowers the meaning of Section 382 is subjectinterest income we receive.
•Expenses. An increase in delinquencies will result in a higher cost to inherent uncertainty, both because of the complexity of applying Section 382 and because of limitations on a publicly-traded company’s knowledge asservice due to the ownership of,increased time and transactionseffort required to collect payments from delinquent borrowers and an increase in its securities. Therefore, the calculation of the amount of our utilizable NOL carry forwards could be changedinterest expense as a result of a successful challenge by the IRS or as a result of new information about the ownership of, and transactionsan increase in our securities.advancing obligations.
•Liquidity. An increase in delinquencies could also negatively impact our liquidity because of an increase in servicing advances resulting in an increase in borrowings under advance facilities and/or insufficient financing capacity to fund increases in advances.
•Valuation of MSRs.We cannot fully predictbase the impact of recently enacted U.S. tax reform legislationprice we pay for MSRs on, our NOLs, business or financial condition.On December 22, 2017, H.R. 1, informally titled the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act makes major changes to the Code, and includes a number of provisions that affect the taxation of corporations, such as, among other things, lowering the corporate income tax rate from 35% to 21%, modifying the rules regarding limitations on certain deductions for executive compensation, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses arising in taxable years ending after December 31, 2017, and the migration from a worldwide system of taxation to a modified territorial system with corresponding measures to prevent base erosion. Given that our current deferred tax assets are offset by a full valuation allowance, we do not believe that the Tax Act would result in a net change to our financial statements, although if we become profitable, we will obtain a reduced benefit from such deferred tax assets. We continue to examine the impact that the Tax Act will have on us and our business. However, because at this time the overall impactprojections of the Tax Actcash flows from the related pool of mortgage loans based on market participant assumptions. Expectation of delinquencies is unclear,a significant assumption underlying those cash flow projections. If delinquencies were significantly greater than expected, the ultimate effectestimated fair value of the Tax Act on our business and financial condition is uncertain andMSRs could be adverse.
Possible changes in legislation could negatively affect our ability to usediminished. If the tax benefits associated with our NOL carry forwards.
The rules relating to U.S. federal income taxation are periodically under review by persons involved in the legislative and administrative rulemaking processes, by the IRS and by the U.S. Departmentestimated fair value of the Treasury, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Future revisions in U.S. federal tax laws and interpretations thereof couldMSRs is reduced, we would record a loss which would adversely impact our ability to use somesatisfy borrowing conditions in our debt agreements which could have a negative impact on our financial results.
An increase in delinquency rates could therefore adversely affect our business, financial condition and results of operations.
We may not be able to maintain or allgrow our business if we do not acquire MSRs or enter into additional subservicing agreements on favorable terms.
Our servicing portfolio is subject to “run off,” meaning that mortgage loans serviced by us may be prepaid prior to maturity or repaid through standard amortization of principal. As a result, our ability to maintain the size of our servicing portfolio depends on our ability to acquire the right to service additional pools of residential mortgages, enter into additional subservicing agreements or to retain the servicing rights on newly originated mortgages. We have also shifted the mix of our servicing portfolio to a greater mix of subserviced loans. While we expect this strategy to have longer-term benefits, in the short-term, since subservicing revenues are earned on a fee per loan basis, this shift in our servicing portfolio to subservicing could reduce our revenue and earnings. In addition, we may not be able to maintain our pipeline of subservicing opportunities. and do not have control of whether a subservicing client sells off its portfolio or the volume and timing of such sales.
The Federal Housing Finance Agency (“FHFA”) could enact more stringent requirements on the GSEs, or other federal or state agencies may enact additional requirements that are more stringent regarding the purchase or sale of MSRs. Additionally, if we do not comply with our seller/servicer obligations, the investors may not consent to approve future transfers of MSRs.
If we do not acquire MSRs or enter into additional subservicing agreements on terms favorable to us, our business, financial condition and results of operations could be adversely affected.
17 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Some of the tax benefits associatedloans we service are higher risk loans, which are more expensive to service than conventional mortgage loans and may lead to liquidity challenges.
Some of the mortgage loans we service are higher risk loans, meaning that the loans are to less credit worthy borrowers, delinquent or for properties the value of which has decreased. These loans are more expensive to service because they require more frequent interaction with
our NOL carry forwards.8
Litigation against uscustomers and greater monitoring and oversight. Additionally, in connection with the ongoing mortgage market reform and regulatory developments, servicers of higher risk loans are subject to increased scrutiny by state and federal regulators and will experience higher compliance and regulatory costs, which could be costly and time consuming to defend.
result in a further increase in servicing costs. We may fromnot be able to pass along any of the additional expenses we incur in servicing higher risk loans to our servicing clients. The greater cost of servicing higher risk loans, which may be further increased through regulatory reform, consent decrees or enforcement, could adversely affect our business, financial condition and results of operations. We have a portfolio of higher risk loans guaranteed by Ginnie Mae. In an adverse economic scenario or a pandemic similar to COVID-19, where defaults rise rapidly and unexpectedly, we may have funding challenges since Ginnie Mae does not allow the separate utilization of advances as a form of collateral, and we may not be able to secure financing for advances on acceptable terms or at all. If we are unable to obtain these financings, we may need to raise the funds we require in the capital markets or through other means, any of which may increase our cost of funds. Additionally, Ginnie Mae issued new guidelines on early buyouts of reperforming loans which could affect our liquidity.
As a result of the COVID pandemic, most investors have changed their loss mitigation program procedures and requirements. New program interpretation, implementation, and testing are time intensive and are subject to timeoperational risk. While we have extensive validation in place to ensure timeliness and accuracy of these updated loss mitigation programs, the multitude of changes and differences in programs announced by each investor creates risk of error. The risk subjects us to loss indemnification requirements.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums, legal
proceedingsexpenses and
claims from third parties. Litigationother protective advances. We also advance funds to maintain, repair and market real estate properties on behalf of investors. As home values change, we may
resulthave to reconsider certain of the assumptions underlying our decisions to make advances, and in
substantial costs andcertain situations our contractual obligations may
divert our attention and WMIH resources, which may seriously harm our business, consolidated results of operations and consolidated financial condition.An unfavorable judgment against us in any legal proceeding or claim could require us to pay monetary damages.make certain advances for which we may not be reimbursed. In addition, when a mortgage loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or liquidation occurs. Market disruptions where a temporary period of forbearance may be offered for customers unable to pay on certain mortgage loans may also increase the number of defaults, delinquencies or forbearances related to the loans we service, increasing the advances we make for such loans.
We have sold to a joint venture capitalized by certain entities formed and managed by Rithm Capital Corp. (“Rithm”) and certain third-party investors the rights to mortgage servicing rights and servicer advances related to certain loan pools. In connection with these transactions, Rithm purchased the equity of wholly owned special purpose subsidiaries of Mr. Cooper Group that issued limited recourse funding to finance the advances. We continue to service these loans. In the event that Rithm receives requests for advances in excess of amounts that they or their co-investors are willing or able to fund, we are obligated to fund these advance requests. Since we have transferred the related advance facilities to Rithm, we may have to obtain other sources of financing which may not be available. Our inability to fund these advances could result in a termination event under the applicable servicing agreement, an unfavorable judgment in whichevent of default under the counterparty is awarded equitable relief, such as an injunction,advance facilities and a breach of our purchase agreement with Rithm. Our inability to fund these advance requests could have an adverse impact onadversely affect our business, consolidatedfinancial condition and results of operationsoperations.
Our counterparties may terminate our servicing rights and consolidatedsubservicing contracts.
The owners of the loans we service and the primary servicers of the loans we subservice may, under certain circumstances, terminate our MSRs or subservicing contracts, respectively.
Agency Servicing: We are party to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with both of the GSEs, FHA and Ginnie Mae. As is standard in the industry, under the terms of these seller/servicer agreements, the agencies have the right to terminate us as servicer of the loans we service on their behalf at any time and also have the right to cause us to sell the MSRs to a third party.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 18
We are subject to minimum financial
condition.Our limited staffing may curtaileligibility requirements established by the Agencies. These minimum financial requirements, include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidly needed to service Agency mortgage loans and MBS and cover the associated financial obligations and risks. To meet these minimum financial requirements, we are required to maintain cash and cash equivalents in amounts that could impede us from growing our abilitybusiness and place us at a competitive disadvantage in relation to attain WMIH’s business objectives.
We have very limited staffing and management resources and are highly dependent on consultantsfederally chartered banks and certain key employees.other financial institutions. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth. The FHFA and Ginnie Mae have updated their minimum financial eligibility requirements for GSE seller/servicers and Ginnie Mae issuers, the majority of which became effective on September 30, 2023. The updated minimum financial eligibility requirements modify the definitions of tangible net worth and eligible liquidity, modify their minimum standard measurement and include a new risk-based capital ratio, among other changes. On October 21, 2022, Ginnie Mae extended the compliance date for its risk-based capital requirements to December 31, 2024. Although we believe that we will be in compliance with these updated requirements, to the extent that these capital and liquidity requirements are not met, the applicable agency may suspend or terminate these agreements, which would prohibit us from further servicing these specific types of mortgage loans or being an approved servicer. If we are unable to meet these capital and liquidity requirements, this could adversely affect our business, financial condition and results of operations.
Subservicing: Our subservicing portfolio is highly concentrated with a small number of parties who may elect to transfer their subservicing relationship to other counterparties or may go out of business. As of December 31, 2017,2023, 93% of our subservicing portfolio is with 6 counterparties. Under our subservicing contracts, the primary servicers for which we conduct subservicing activities have the right to terminate our subservicing contracts with or without cause, with limited notice and with no termination fee upon a change of control. Entering into additional subservicing contracts will expose us to similar risks with new counterparties.
If our servicing rights or subservicing contracts are terminated on a material portion of our servicing portfolio, this could adversely affect our business, financial condition and results of operations.
We could have a downgrade in additionour servicer ratings.
Standard & Poor’s and Fitch rate us as a residential loan servicer. Favorable ratings from these agencies are important to Messrs. Gallagherthe conduct of our loan servicing business. Downgrades in servicer ratings could:
•adversely affect our ability to finance servicing advances and Fairfield,maintain our status as an approved servicer by Fannie Mae, Freddie Mac, Ginnie Mae, and other investors;
•lead to the Company had two additional employees. WMIH’s Chief Legal Officerearly termination of existing advance facilities and Secretary, Charles Edward Smith, is an employeeaffect the terms and availability of advance facilities that we may seek in the future;
•cause our termination as servicer in our servicing agreements that require that we maintain specified servicer ratings; and
•further impair our ability to consummate future servicing transactions.
Any of the Trust,above could adversely affect our business, financial condition and results of operations.
19 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Originations
We may not be able to maintain the volumes in our loan originations business, which would adversely affect our ability to replenish our servicing business.
The volume of loans funded within our loan originations business is subject to multiple factors, including changes in interest rates and availability of government programs. Volume in our originations business is based on the refinancing of existing mortgage loans that we service, which is highly dependent on interest rates and other macroeconomic factors, and originations through our Correspondent channel. Our loan origination volume may decline if interest rates increase, if government programs terminate and are not replaced with similar programs or if we cannot replace this volume with other loan origination channels such as Correspondent, new customer acquisitions or purchase money loans. Any such slowdown may materially decrease the number and volume of mortgages we originate. As interest rates have rapidly risen, our refinancing volumes have significantly decreased as fewer consumers are incentivized to refinance their mortgages. As a result, our Originations revenues have decreased substantially. In addition, consumers are increasingly completing the mortgage process using online and/or digital tools. The proliferation of these tools and their ease of use may present challenges in retaining and attracting new loan applicants if we are unable to effectively implement new technology-driven products and services as quickly as competitors or be successful in marketing these products and services to consumers. Additionally, newer market participants, often called “disruptors,” are reinventing aspects of the mortgage loan industry and capturing profit pools historically collected by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. If we are unable to maintain our loan originations volume, our business, financial condition and results of operations could be adversely affected.
We may be required to indemnify or repurchase loans we sold, or will sell, if these loans fail to meet certain criteria or characteristics or under other circumstances.
The indentures governing our securitized pools of loans and our Interim Chief Financial Officer, Timothy F. Jaeger,contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
•our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
•we fail to secure adequate mortgage insurance within a certain period after closing;
•a mortgage insurance provider denies coverage;
•we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment; or
•the borrower fails to make certain initial loan payments due to the purchaser, or terminates employment between the time validation is performed and the time the loan funds.
We are subject to repurchase claims and may continue to receive claims in the future. If we are required to indemnify or repurchase loans that we originate or have previously originated and sell or securitize that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
We are highly dependent upon loan programs administered by Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (collectively, the “Agencies”) to generate revenues through mortgage loan sales to institutional investors.
There are various proposals which deal with GSE reform, including winding down the GSEs and reducing or eliminating over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders and investors in the mortgage market, including reducing the maximum size of loans that the GSEs can guarantee, phasing in a self-employed consultant engagedminimum down payment requirement for borrowers, improving underwriting standards and increasing accountability and transparency in the securitization process. Uncertainty remains regarding the future of the GSE’s, including with respect to the duration of conservatorship, the extent of their roles in the market and what forms they will have, and whether they will be government agencies, government-sponsored agencies or private for-profit entities. The extent and timing of any regulatory reform regarding the GSEs and the U.S. housing finance market, as well as any effect on our business operations and financial results, are uncertain. It is not yet possible to determine whether such proposals will be enacted and, if so, when, what form any final legislation or policies might take or how proposals, legislation or policies may impact our business.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 20
Our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by WMIHthe Agencies that facilitate the issuance of mortgage-backed securities in the secondary market. These Agencies play a critical role in the residential mortgage industry, and we have significant business relationships with many of them. Almost all of the conforming loans we originate qualify under existing standards for inclusion in guaranteed mortgage securities backed by one of these Agencies. We also derive other material financial benefits from these relationships, including the assumption of credit risk on loans included in such mortgage securities in exchange for our payment of guarantee fees and the ability to provide financial reporting services. Minimal staffingavoid certain loan inventory finance costs through streamlined loan funding and any inabilitysale procedures. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in Agency programs, we may lack liquidity under our mortgage financing facilities to continue to fund mortgage loans, and our revenues and margins on new loan originations would be materially and negatively impacted.
Our GNMA loan portfolio may experience higher default risk as these loans typically have high Loan to engage new executive officersValue Ratios (LTV). In case of default, we may not recover all servicing expenses and experience losses due to limited collateral value. The loss can be higher if there is any structural damage to the property due to natural disasters such as floods, fire, hurricanes and other environmental factors from climate change. A requirement of FHA is to convey property in habitable condition, and damage from natural hazards may require us to repair properties to conveyable condition. Our loan originations business may not be able to sell these loans, and we may not recover all our capital which leads to higher losses. Additionally, we may not be able to recover all expenses related to damage caused by water and wind. Inflationary pressures may limit a borrower’s disposable income which may lead to additional incumbrances on title, impeding our foreclosure efforts. Our REO portfolio from foreclosed government loans, may experience higher losses due to declines in market value and extended sale timelines. This may occur due to multiple factors beyond our control, such as higher interest rates, which would limit a potential buyer’s capacity to purchase, inflationary pressure limiting surplus cash or key employeeseconomic deterioration of local neighborhoods where properties are located. Our servicing business may experience higher advance requirements, increasing our interest expense cost from credit lines.
We are largely reliant on Agency MBS issuances to sell the loans that we originate. In recent years, the Agencies have instituted periodic limits on products such as investor properties, second homes, and products with multiple risk characteristics such as borrowers with below average credit scores and high LTV. If these periodic limits for purchasing these loans become permanent, we must find other investors for loans within our pipeline, which may be at a material discount to the expected pricing.
Any discontinuation of, or significant reduction in, the eventoperation of these Agencies or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of these Agencies could materially and adversely affect our executive officersbusiness, liquidity, financial position and results of operations.
Corporate/Other
Our Real Estate exchange business could be further impacted by delays in foreclosure sales, as well as economic slowdowns and recessions.
The foreclosure moratoriums instituted during the COVID-19 pandemic have impacted and are continuing to impact our REO exchange business. The Exchange business consists of the Xome.com auction platform that provides efficient execution for sales of foreclosed properties. States, agencies and regulators have previously issued forbearance programs and placed a moratorium on foreclosures and evictions. Many of the measures have been lifted; however, there has been a delay in the selling of FHA foreclosed properties, which adversely impacts our REO exchange revenues. A continued economic slowdown, recession, or
key employees terminates employmentdeclining consumer confidence in the economy could have a material adverse
impacteffect on
our operations or delay or curtailvalues of residential real estate properties. The volume of residential real estate transactions is highly variable which is primarily affected by the
attainmentaverage price of
WMIH’s objectives.We are subjectreal estate sales, the availability of funds to regulation by various federalfinance purchases, mortgage interest rates, consumer confidence in the economy and state entities.
We are subject togeneral economic factors affecting the regulations of the SECreal estate markets. A decline in real estate transactions could materially and the Insurance Division of the State of Hawaii. New regulations issued by these agencies may adversely affect our abilityREO exchange business.
General Business & Operational Risks
We may not be successful in implementing certain strategic initiatives.
Certain strategic initiatives, which we discuss in our MD&A, are designed to
carry on our business activities.We are subject to various federal and state laws and certain changes in these laws and regulations may adversely affect our operations. Noncompliance with certain of these regulations may impact our business plans.
We are also subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board as well as the listing rules and regulations of The Nasdaq Stock Market LLC. Changes in accounting rules could adversely affect the reported financial statements orimprove our results of operations and may also require extraordinary efforts or additional costs to implement. Any of these laws or regulations may be modified or changed from time to time, and theredrive long-term stockholder value.
There is no assurance that such modificationswe will be able to successfully implement these strategic initiatives, that we will be able to realize all of the projected benefits of our plans or changesthat we will be able to compete successfully in new markets and our efforts may be more expensive and time consuming than we expect, which could adversely affect our business, financial condition and results of operations.
21 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Technology failures or cyber-attacks against us or our vendors could damage our business operations, and new laws and regulations could increase our costs.
The business industry as a whole is characterized by rapidly changing technologies, system disruptions and failures caused by fire, power loss, telecommunications failures, system misuse, unauthorized intrusion (cyber-attack), computer viruses and disabling devices, natural disasters, health pandemics and other similar events that may interrupt or delay our ability to provide services to our borrowers. As a part of conducting business, we receive, transmit and store a large volume of personally identifiable information and other user data. Additionally, Xome, which utilizes a real estate auction website, is reliant on information technology networks and systems to securely process, transmit and store sensitive electronic information. Cybersecurity risks for the financial services industry have increased significantly in recent years due to new technologies, the reliance on technology to conduct financial transactions and the increased sophistication of organized crime and hackers. Those parties also may attempt to misrepresent personal or financial information to obtain loans or other financial products from us or attempt to fraudulently induce employees, customers, or other users of our systems to disclose confidential information in order to gain access to our data or that of our customers. Additionally, cyberattacks on financial institutions are increasingly becoming a tactical risk of modern warfare. Cyberattacks performed as an act of war are typically excluded from insurance coverage and could result in material financial loss to the organization with limited recourse from insurance providers. We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of individuals) through a variety of means, including computer viruses, malware, phishing, ransomware and other attack vectors. These attacks may result in unauthorized individuals obtaining access to our confidential information or that of our customers, or otherwise accessing, damaging, or disrupting our systems or infrastructure. In particular, as initially disclosed on November 2, 2023, and supplemented in our disclosures on November 9, 2023, and December 15, 2023, on October 31, 2023, we experienced a cybersecurity incident in which an unauthorized third party gained access to certain of our technology systems and obtained personal information relating to substantially all of our current and former customers.
In addition, to access our products and services, including our Home Intelligence app, our customers may use personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems. Third parties with which we do business or that facilitate our business activities or vendors that provide services or security solutions for our operations could also be sources of operational risk and information security risk to us, including from cyber-attacks, information breaches or loss, breakdowns, disruptions or failures of their own systems or infrastructure, or any deficiencies in the performance of their responsibilities. Additional security breaches, acts of vandalism and developments in computer intrusion capabilities could cause our financial, accounting, data processing or other operating systems and facilities to fail to operate properly or become disabled and could result in a compromise or breach of the technology that we or our vendors use to protect our borrowers’ personal information and transaction data.
Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or implement effective preventive measures against additional internal and external security breaches, especially because the techniques used change frequently, are becoming more sophisticated and are not recognized until launched, and because security attacks can originate from a wide variety of sources. This is especially applicable in the shift to having most of our team members work in a home-centric environment, as our team members access our secure networks through their home networks. These risks may increase in the future as we continue to increase our reliance on telecommunication technologies (including mobile devices), the internet and use of web-based product offerings.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 22
While we have implemented policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can be no assurance that cyber intrusions, whether external or internal, will not
occur. An additional successful penetration or circumvention of the security of our or our vendors’ systems or a defect in the integrity of our or our vendors’ systems or cybersecurity could cause serious negative consequences for our business, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or operating systems and to those of our customers and counterparties. Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and harm to our reputation, all of which could adversely affect
our business, financial condition and results of operations. This risk is enhanced in certain jurisdictions with stringent data privacy laws. For example, the California Consumer Privacy Act of 2018 which went into effect in January 2020, as amended by the California Privacy Rights Act, which went into effect in January 2023 (collectively, the “Privacy Acts”), provides data privacy rights for consumers and operational requirements for us.
The Privacy Acts include a statutory damages framework and private rights of action against businesses that fail to comply with certain Privacy Acts terms or implement reasonable security procedures and practices to prevent data breaches. Several other states have enacted similar legislation, and many other states are currently considering similar legislation, and there remains increased interest at the federal level as well. Additionally, while we have obtained insurance to cover us against certain cybersecurity risks and information theft, there can be no guarantee that all losses will be covered or that the insurance limits will be sufficient to cover such losses.
In addition, increasing attention is being paid by the media, regulators and legislators to matters relating to cybersecurity, and regulators and legislators may enact laws or regulations regarding cybersecurity. For example, the New York Department of Financial Services has adopted regulations that are far-ranging in scope, including not only specific technical safeguards but also requirements regarding governance, incident planning, data management and system testing, and the FTC promulgated a revised Safeguards Rule. New laws and regulations could result in significant compliance costs, which may adversely affect our cash flows and net income.
Our capital investments in technology may not achieve anticipated returns.
Our business is becoming increasingly reliant on technology investments, and the returns on these investments are less predictable. We are currently making, and will continue to make, significant technology investments to support our originations and servicing offerings by implementing improvements to our customer-facing technology and evolving our information processes and computer systems to run our business more efficiently and remain competitive and relevant to our customers. Additionally, we have sold certain intellectual property rights related to our proprietary, cloud-based technology platform for mortgage servicing and received an equity stake in the buyer. These technology initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. We must monitor and choose the right investments and implement them at the right pace. Failing to make the best investments or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations.
We and our vendors have operations in India that could be adversely affected by changes in political or economic stability or by government policies.
We currently have operations located in India, which is subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. The political or regulatory climate in the United States, or elsewhere, also could change so that it would not be lawful or practical for us to use international operations in the manner in which we currently use them. If we or our vendors had to curtail or cease operations in these countries and transfer some or all of these operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations. In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are deemedprohibited by laws and regulations applicable to be an investment company under the Investment Companyus, such as The Foreign Corrupt Practices Act of 1940,1977, as amended (the “Investment Company Act”(“FCPA”),. Any violations of the FCPA or local anti-corruption laws by us, our subsidiaries or our local agents could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
23 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Our vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us with financial, technology and other services to support our businesses. With respect to vendors engaged to perform activities required by the applicable servicing criteria, we assess compliance with the applicable servicing criteria for the applicable vendor (or in certain cases require vendors to provide their own assessments and attestations) and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing criteria applicable to the vendor. In the event that a vendor’s activities do not comply with the servicing criteria, it could negatively impact our servicing agreements. Additionally, key vendors may misuse our data which could expose our customers to unauthorized transactions or other potential adverse events, which may adversely affect our business and reputation. In addition, if our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies, we may be
requiredunable to
institute burdensome compliance requirementsprocure alternatives from other vendors in a timely and
our activities may be restricted, which may make it difficult for us to complete an Acquisition.If the nature of our operationsefficient manner and on acceptable terms, or the assets on our balance sheet causes us to no longer be exempt from the definition of “investment company,”at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
We could have, appear to have or be deemedalleged to have conflicts of interest with Xome.
Xome provides services to us which could create, appear to create or be
subjectalleged to
the Investment Company Act. If we were deemedcreate conflicts of interest. By obtaining services from a subsidiary, there is risk of possible claims of collusion or claims that such services are not provided by Xome upon market terms. We have adopted policies, procedures and practices that are designed to
be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expenses for which we have not allotted fundsidentify and
may hinder our ability to complete an Acquisition.If we are deemed to be an investment company under the Investment Company Act, our activities may be restricted, including restrictions on the natureaddress conflicts of our investments and restrictions on the issuance of securities, each of which may make it difficult for us to complete an Acquisition.interest. In addition, we mayundertake practices to identify and deal with potential conflicts. Further, we have imposed upon us burdensome requirements, including:
registration asengaged an investment company;
adoption ofindependent third party to conduct a specific form of corporate structure;pricing study in an attempt to ensure that the fees charged are customary and
reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations.
We do not believe that our principal activities subject us to the Investment Company Act. To this end, the proceeds from the issuance of the Series A Preferred Stock, the warrants to purchase WMIH Common Stock and the Series B Preferred Stock are only (i) held in cash or (ii) invested (a) in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 180 days or less or (b) in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act. By restricting the investment of the proceeds to these instruments, and by having a business objective of consummating one or more acquisitions of an operating business (rather than on buying and selling businesses in the manner of a merchant bank or private equity fund), we intend to avoid being deemed an “investment company” within the meaning of the Investment Company Act. reasonable. However, there can be no assurance that WMIHsuch measures will be effective in eliminating all conflicts of interest or that third parties will refrain from making such allegations. Appropriately identifying and dealing with conflicts of interest is complex and difficult, and our reputation, which is one of our most important assets, could be damaged and the willingness of counterparties to enter into transactions with us may be affected if we fail, or appear to fail, to identify, disclose and deal appropriately with conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or regulatory enforcement actions.
Our risk management policies and procedures may not be deemedeffective.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, monitor and manage the types of risk to which we are subject, including credit risk, market and interest rate risk, liquidity risk, cyber risk, regulatory, legal and reputational risk. Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, these policies and procedures, as well as our risk management techniques such as our hedging strategies, may not be fully effective. There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. As regulations and markets in which we operate continue to evolve, our risk management framework may not always keep sufficient pace with those changes. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
Our business could suffer if we fail to attract, or retain, highly skilled employees and changes in our executive management team may be disruptive to our business.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization. Many of the companies with which we compete for experienced employees are large banks who have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could materially affect our business, financial condition and results of operations. From time to time, we may have staffing reductions and may be exposed to unanticipated consequences of our staffing reductions, including attrition beyond the planned reductions, increased difficulties in our day-to-day operations, including a loss of continuity, loss of accumulated knowledge and/or efficiency, reduced employee morale and reduced ability to attract and retain qualified personnel. Employees who were not affected by our planned staffing reductions may seek alternate employment, which may harm our productivity.
Additionally, the experience of our executive management team is a valuable asset to us. Our executive management team has significant experience in the residential loan originations and servicing industry and would be difficult to replace. Disruptions in management continuity could result in operational or administrative inefficiencies and added costs, which could adversely impact our results of operations and stock price, and may make recruiting for future management positions more difficult or costly.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 24
Negative public opinion could damage our reputation and adversely affect our business.
Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, technology failures, cyber attacks, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from media coverage, whether accurate or not. Additionally, the proliferation of social media websites as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets.
Our reputation may also be negatively impacted by our environmental, social and governance (“ESG”) practices and disclosures, including climate change practices and disclosures. In addition, various private third-party organizations have developed ratings processes for evaluating companies on their approach to ESG matters. These third party ESG ratings may be used by some investors to assist with their investment companyand voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders.
These factors could impair our working relationships with government agencies and investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers and employees, and adversely affect our results of operations.
Issues related to the development and use of artificial intelligence (AI) could give rise to legal and/or regulatory action, damage our reputation or otherwise materially harm our business.
We currently incorporate generative AI driven automation in our call centers. We also developed a mortgage-centric AI platform to onboard loan portfolios that we use internally and market to third parties. Our research and development of such technology remains ongoing, and we may begin to use AI in other areas in our business operations. AI presents risks, challenges, and unintended consequences that could affect our and our customers’ adoption and use of this technology. AI algorithms and training methodologies may be flawed. Additionally, AI technologies are complex and rapidly evolving. While we aim to develop and use AI responsibly and attempt to identify and mitigate ethical and legal issues presented by its use, we may be unsuccessful in identifying or resolving issues before they arise. AI-related issues, deficiencies and/or failures could (i) give rise to legal and/or regulatory action, including as a result of new applications of existing data protection, privacy, intellectual property, and other laws; (ii) damage our reputation; or (iii) otherwise materially harm our business.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.
Our disclosure controls and procedures may not be effective in every circumstance. Similarly, we may experience a material weakness or significant deficiency in internal control over financial reporting. Any lapses or deficiencies may materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to spend significant resources to correct the lapses or deficiencies, expose us to regulatory or legal proceedings, subject us to fines, penalties or judgments, harm our reputation, or otherwise cause a decline in investor confidence.
Our business is subject to the risks of earthquakes, hurricanes, fires, floods, health pandemics and other natural catastrophic events.
Earthquakes, hurricanes, fires, floods, health pandemics, and similar events could have a material adverse effect on the macro economy and affect our loan servicing costs, increase our servicing advances, increase servicing defaults and negatively affect the value of our MSRs and loans in our pipeline.
Regulatory, Compliance and Legal Risks
We operate within a highly regulated industry on federal, state and local levels and our business results are significantly impacted by the laws and regulations to which we are subject, as well as scrutiny from governmental or regulatory agencies.
Our businesses are subject to extensive, complex and comprehensive regulation under
federal, state and local laws in the
Investment Company Act.9
Business interruptions couldUnited States, as well as governmental scrutiny from regulators and law enforcement agencies. These laws, regulations and governmental inquiries can significantly affect the way that we do business, can restrict the scope of our existing businesses, limit our ability to operateexpand our product offerings or to pursue acquisitions, or can make our costs to service or originate loans higher, which could impact our financial results.
25 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Federal, state and local governments have proposed or enacted numerous laws, regulations and rules related to mortgage loans and registered investment advisors. Due to the highly regulated nature of the residential mortgage industry, we are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our servicing, originations and ancillary business, including Xome and Roosevelt Management Company, and the fees we may charge. These regulations directly impact our business and require constant compliance, which includes enhancing our compliance program, procedures and controls, monitoring and internal and external audits. A failure in maintaining an effective compliance program or a material failure to comply with any of these laws or regulations could subject us to lawsuits or governmental actions, which could materially adversely affect our business, financial condition and results of operations. In addition, there continue to be changes in legislation and licensing, which require technology changes and additional implementation costs for loan originators and new state and federal privacy legislation could impact mortgage operations, marketing, and data governance. We expect legislative changes will continue in the foreseeable future, which may increase our operating expenses. For example, on December 30, 2022 the state of New York signed into law a new measure which strictly enforces the state statute of limitations period to foreclose on a mortgage lien before losing the ability to enforce the security instrument. The law has not yet had sufficient time to be tested or challenged, but could subject the company to substantial losses for investors in properties in New York which could increase the potential of losses to the company. Furthermore, there continue to be changes in state laws that are adverse to mortgage servicers that increase costs and operational complexity of our business and impose significant penalties for violation. Any of these changes in law could adversely affect our business, financial condition and results of operations.
Regulatory requirements or changes to existing requirements that the CFPB or other federal or state agencies, including HUD and the FCC, related to our business may result in increased compliance and operational costs and impair the profitability of such business.
Our For example, Regulation C of the Home Mortgage Disclosure Act (“HMDA”) requires us to collect and report certain mortgage data for every loan application. These requirements for gathering and submitting large amounts of data regarding loan applications to regulators and the public are complex. Thus, any inadvertent errors in our gathering or reporting the data could result in fines or penalties being levied by the CFPB or other regulators against us. In addition, the authority of state attorneys general to bring actions to enforce federal consumer protection legislation, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), could be expanded and we could be subject to additional state lawsuits and enforcement actions, thereby further increasing our legal and compliance costs. The cumulative effect of these changes could result in a material impact on our earnings. The implementation of the originations and servicing rules by the CFPB and the CFPB’s continuing examinations of our business, could increase our regulatory compliance burden and associated costs and place restrictions on our operations, which could in turn adversely affect our business, financial condition and results of operations. Additionally, our sub-servicing of loans for federally regulated depositories creates indirect regulatory risk with the OCC, FDIC, and the U.S. Federal Reserve. Recent enforcement actions by these regulators over competitors in the mortgage servicing business increases our risks with both the CFPB and indirectly through our subservicing business partners.
We could be subject to additional regulatory requirements or changes under the Dodd-Frank Act beyond those currently proposed, adopted or contemplated. There also continues to be discussion of potential GSE reform which would likely affect markets for mortgages and mortgage securities in ways that cannot be predicted. In addition, FHFA initiatives may be implemented by the GSEs that could materially affect the market for conventional and/or government insured loans. Further, on November 3, 2023, the Financial Stability Oversight Council (the “FSOC”) unanimously voted to issue final versions of a new analytic framework for financial stability risks and updated guidance on the FSOC’s nonbank financial company determinations process. The updated guidance for Nonbank Financial Company Determinations sets forth the FSOC’s procedures for considering whether to designate a nonbank financial company for Federal Reserve supervision and prudential standards under section 113 of the Dodd-Frank Act.
Individual states have also been active in regulatory enforcement, as have other regulatory organizations such as the Multi-State Mortgage Committee, as well as various state Attorneys General. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage originators and servicers. In addition to their traditional focus on consumer protection laws, licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to such areas as corporate governance, low-to-moderate income lending requirements, safety and soundness, and risk and compliance management.
Certain regulators took steps to block the acquisition of MSRs by one of our competitors. It is possible that we could become subject to similar actions with respect to our acquisition of MSRs or other key business operations such as entering into subservicing contracts, which could adversely affect our business, financial condition and results of operations.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 26
The influx of new laws, regulations, and other directives adopted in response to the COVID-19 pandemic exemplifies the ever-changing and increasingly complex regulatory landscape we operate in. While some regulatory reactions to COVID-19 may have relaxed certain compliance obligations (e.g., relaxing work location requirements for loan personnel working remotely during COVID-19 emergency declarations) other updates related to servicing delinquent mortgages and providing new mortgage assistance programs have substantially increased mortgage servicers responsibilities and risks. While some regulators have granted permanent ability to work away from a licensed location, those that have not may determine that prior leniency surrounding work locations may no longer apply. We have received, and may continue to receive, inquiries from various federal and state lawmakers, attorneys general and regulators seeking information on our COVID-19 response and its impact on our business, team members, and clients. Future regulatory scrutiny and enforcement resulting from COVID-19 is unknown.
Additionally, the CFPB iteratively adopted rules over the course of several years regarding mortgage servicing practices that required us to make modifications and enhancements to our mortgage servicing processes and systems. While the CFPB announced its flexible supervisory and enforcement approach during the COVID-19 pandemic on certain consumer communications required by the mortgage servicing rules, managing to the CFPB's loss mitigation rules is challenging. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, we could face increased litigation, including class action lawsuits, and reputational damage.
We are subject to numerous legal proceedings, federal, state or local governmental examinations and enforcement investigations. Some of these matters are highly complex and slow to develop, and results are difficult to predict or estimate.
Legal Proceedings: We are routinely and currently involved in a significant number of legal proceedings concerning matters that arise in the ordinary course of our business. There is no assurance that the number of legal proceedings will not increase in the future, including certified class or mass actions. These legal proceedings range from actions involving a single plaintiff to putative class action lawsuits. These actions and proceedings are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and numerous other laws, including, but not limited to, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Servicemember’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, the Bankruptcy Code, False Claims Act, the CARES Act and Making Home Affordable loan modification programs (while MHA programs have ended, claims may continue to arise). Additionally, along with others in our industry, we are subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loan securitizations. We are also subject to legal actions or proceedings related to loss sharing and indemnification provisions of our various acquisitions. Additionally, third parties may assert claims against us that our content, website processes or software applications infringe their intellectual property rights. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or, statutory damages or claims for an indeterminate amount of damages.
Litigation and other proceedings may require that we pay settlement costs, legal fees, damages, including punitive damages, penalties or other charges, or be subject to injunctive relief affecting our business practices, any or all of which could adversely affect our financial results. In particular, ongoing and other legal proceedings brought under federal or state consumer protection statutes may result in a separate fine for each violation of the statute, which, particularly in the case of class action lawsuits, could result in damages substantially in excess of the amounts we earned from the underlying activities and that could have a material adverse effect on our liquidity, financial position and results of operations. The costs of responding to the investigations can be substantial.
27 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Regulatory Matters: We operate within highly regulated industries on a federal, state and local level. In the normal and ordinary course of our business, we are routinely subject to extensive examinations, investigations, subpoenas, inquiries and reviews by various federal, state and local governmental, regulatory and enforcement agencies, including CFPB, the Securities and Exchange Commission, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, various State mortgage banking regulators and various State Attorneys General, related to our residential loan servicing and origination practices, our financial reporting and other aspects of our businesses. For example, in 2020, we resolved certain legacy regulatory matters with the CFPB, the multi-state committee of mortgage banking regulators and various State Attorneys General, and the Executive Office of the United States Trustee, all of which involved findings from examinations and discussions that were completed in 2014 and 2015, and related to certain loan servicing practices which occurred during 2010 through 2015. Several large mortgage originators or servicers have been subject to similar matters, which have resulted in the payment of fines and penalties, changes to business practices and the entry of consent decrees or settlements. The trend of large settlements with governmental entities may adversely affect the outcomes for other financial institutions, including us. We continue to manage our response to each matter, but it is not possible for us to reliably predict the outcome of any of them, including predicting any possible losses resulting from any judgments or fines, which can lead to substantial disparities between legal reserves and subsequent settlements or penalties.
Responding to these matters requires us to devote substantial legal and regulatory resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices, limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition and results of operation. To the extent that an examination or other regulatory engagement reveals a failure by us to comply with applicable law, regulation or licensing requirement this could lead to (i) loss of our licenses and approvals to engage in our businesses, (ii) damage to our reputation in the industry and loss of client relationships, (iii) governmental investigations and enforcement actions, (iv) administrative fines and penalties and litigation, (v) civil and criminal liability, including class action lawsuits, and actions to recover incentive and other payments made by governmental entities, (vi) enhanced compliance requirements, (vii) breaches of covenants and representations under our servicing, debt or other agreements, (viii) inability to raise capital and (ix) inability to execute on our business strategy. Any of these occurrences could further increase our operating expenses and reduce our revenues, require us to change business practices and procedures and limit our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition and results of operation.
Moreover, regulatory changes established under the Dodd-Frank Act, which continue to be expanded, other regulatory changes such as the CFPB having its own examination and enforcement authority and the “whistleblower” provisions of the Dodd-Frank Act and guidance on whistleblowing programs issued by the NYDFS could further increase the number of legal and regulatory enforcement proceedings against us. In addition, while we take numerous steps to prevent and detect employee misconduct, such as fraud, employee misconduct cannot always be deterred or prevented and could subject us to additional liability.
We establish reserves for pending or threatened legal proceedings when it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. Legal proceedings are inherently uncertain, and our estimates of loss are based on information available at that time. Our estimates may change from time to time for various reasons, including factual or legal developments in these matters. There cannot be any assurance that the ultimate resolution of our litigation and regulatory matters will not involve losses, which may be material, in excess of our recorded accruals or estimates of reasonably possible losses.
Unlike competitors that are national banks, we are subject to state licensing and operational requirements that result in substantial compliance costs.
Because we are not a depository institution, we do not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all 50 states, the District of Columbia and other U.S. territories, and we are sensitive to regulatory changes that may increase our costs through stricter licensing laws, disclosure laws or increased fees or that may impose conditions to licensing that we or our personnel are unable to meet. In addition, we are subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees earned by us, and we may be required to pay substantial penalties imposed by state regulators due to compliance errors. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary revenues, including late fees that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 28
Our business would be adversely affected if we lose our licenses.
Our operations are subject to regulation, supervision and licensing under numerous federal, state and local statutes, ordinances and regulations. In most states in which we
depend, are vulnerableoperate, a regulatory agency regulates and enforces laws relating to
damagemortgage servicing companies, mortgage originations companies and real estate brokers and auctioneers. These rules and regulations generally provide for licensing as a mortgage servicing Company, mortgage originations Company or
interruption from fire; natural disasters, including earthquakes; computer viruses; human error; power shortages; telecommunication failures; international actsthird-party debt default specialist, licensed auctioneer, and other similar types of
terror; and similar events. Our offices are located in Seattle, Washington and we currently obtain certain key services from the Trust pursuantrequirements as to the
TSA. The TSA, as amended, is currently in effect through June 30, 2018,form and content of contracts and other documentation, licensing of our employees and employee hiring background checks, licensing of independent contractors with
automatic renewals thereafter for successive additional three-month terms,which we contract, restrictions on certain practices, disclosure and record-keeping requirements and enforcement of borrowers’ rights. We are subject to
non-renewal at the end of any additional term upon written noticeperiodic examination by
either party at least 30 days prior to the expiration of the additional term.Althoughstate regulatory authorities.
We believe that we
have certain business continuity plans in place, we have not established a formal comprehensive disaster recovery plan,maintain all material licenses and
permits required for our
back-upcurrent operations and
business interruption insuranceare in substantial compliance with all applicable federal, state and local laws, rules, regulations and ordinances. We may not be
adequateable to
compensate for losses we may suffer. A significant business interruption, including an unexpected non-renewal or termination ofmaintain all requisite licenses and permits, and the
TSA,failure to satisfy those and other regulatory requirements could result in
lossesa default under our servicing or
damages incurred by usother agreements and
require that we cease or curtailhave a material adverse effect on our operations.
The states that currently do not provide extensive regulation of our businesses may later choose to do so, and if such states so act, we may not be able to obtain or maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could result in a default under our servicing agreements and have a material adverse effect on our operations. Furthermore, the adoption of additional, or the revision of existing, rules and regulations could adversely affect our business, financial condition and results of operations.
We may incur increased litigation costs and related losses if a court overturns a foreclosure or if a loan we are servicing becomes subordinate to a Home Owners Association lien.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. In addition, if a court rules that the lien of a Home Owners Association takes priority over the lien we service, we may incur legal liabilities and costs to defend such actions. If a court dismisses or overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to the loan owner, a borrower, title insurer or the purchaser of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. A significant increase in litigation costs could adversely affect our liquidity, and our inability to be reimbursed for an advance could adversely affect our business, financial condition and results of operations.
Residential mortgage foreclosure proceedings in certain states have been delayed due to lack of judicial resources and legislation, all of which could have a negative effect on our ability to liquidate loans timely and slow the recovery of advances and thus impact our earnings or liquidity.
In some states, such as New York, our industry has faced, and may continue to face, increased delays and costs caused by state law and local court rules and processes. In addition, California and Nevada have enacted Homeowner’s Bill of Rights legislation to establish complex mandatory loss mitigation practices for homeowners which cause delays in foreclosure proceedings. Delays in foreclosure proceedings could also require us to make additional servicing advances by drawing on our servicing advance facilities, or delay the recovery of advances, all or any of which could materially affect our earnings and liquidity and increase our need for capital.
Risks Related to Owning
WMIH’sour Stock
WMIH’s
Our common stock, and any other instruments treated as stock for purposes of Section 382,
including the Series A Preferred Stock and the Series B Preferred Stock, areis subject to transfer restrictions under
theour Certificate of Incorporation which, if not complied with, could result in the forfeiture of such stock and related distributions.
Our Certificate of Incorporation contains significant transfer restrictions in relation to the transfer of
WMIH’sour common stock and any other instruments treated as stock for purposes of Section
382 (including the Series A Preferred Stock and the Series B Preferred Stock).382. These transfer restrictions have been adopted in order to minimize the likelihood that we will be deemed to have an “ownership change” within the meaning of Section 382 that could limit our ability to utilize
WMIH’sour NOLs under and in accordance with regulations promulgated by the IRS.
29 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
In particular, without the approval of our Board, (i) no person or group of persons treated as a single entity under Treasury Regulation Section 1.382-3 will be permitted to acquire, whether directly or indirectly, and whether in one transaction or a series of related transactions, any of
WMIH’sour common stock or any other instrument treated as stock for purposes of Section 382, to the extent that after giving effect to such purported acquisition (a) the purported acquirer or any other person by reason of the purported acquirer’s acquisition would become a Substantial Holder (as defined below), or (b) the percentage stock ownership of a person that, prior to giving effect to the purported acquisition, is already a Substantial Holder would be increased; and (ii) no Substantial Holder may dispose, directly or indirectly, of any class of stock or any other instrument treated as stock for purposes of Section 382. A “Substantial Holder” is a person that owns (as determined for purposes of Section 382) at least 4.75% of the total value of our stock, including any instrument treated as stock for purposes of Section 382.
Because of the complexity of applying Section 382, and because the determination of ownership for purposes of Section 382 does not correspond to SEC beneficial ownership reporting on Schedules 13D and 13G, holders and potential acquirers of WMIHour securities should consult with their legal and tax advisors prior to making any acquisition or disposition of WMIHour securities. Pursuant to Article VIII of theour Certificate of Incorporation, the Board has the sole power to determine compliance with the transfer restrictions, and we cannot assure you that the Board will concur with any conclusions reached by any holder of WMIHour securities or their respective advisors, and/or approve or ratify any proposed acquisitions or dispositions of WMIHour securities. Under Article VIII, Section 3(b), of theour Certificate of Incorporation, if the Board determines that a Prohibited Transfer (as defined in theour Certificate of Incorporation) has occurred, such Prohibited Transfer shall, to the fullest extent permitted by law, be void ab initio and have no legal effect, and upon written demand by WMIH,us, the Purported Transferee (as defined in theour Certificate of Incorporation) shall disgorge or cause to be disgorged WMIHour securities, together with any dividends or distributions received, with respect to such securities.10
Despite WMIH’s common stock being listed on the Nasdaq Capital Market (“Nasdaq”), an active market for its common stock may not be sustained, and the market price of its common stock may be volatile.
Despite WMIH’s common stock being listed on Nasdaq, we cannot assure you as to (a) whether or not WMIH’s common stock will remain in compliance with Nasdaq’s continued listing requirements or whether a public trading market for WMIH’s common stock can be sustained, (b) the liquidity of any public trading market, (c) the ability of WMIH shareholders to sell their shares of common stock, or (d) the price that WMIH shareholders may obtain for their shares of WMIH’s common stock. The market price for shares of WMIH’s common stock may be highly volatile and could be subject to wide fluctuations. We cannot predict how the shares of WMIH’s common stock will trade in the future. Some of the factors that could affect the share price of WMIH’s common stock include: (i) our ability to consummate the Nationstar Transaction, or if the Nationstar Transaction does not close, our ability to consummate another Qualified Acquisition; (ii) the financial results of Nationstar; (iii) our financial condition; (iv) actual or anticipated variations in our operating results; (v) publication of research reports and recommendations by financial analysts; (vi) additions or departures of key management personnel; (vii) proposed or adopted regulatory or tax law changes or developments; (viii) speculations reported in the press or investment community; (ix) issuances of new equity pursuant to future offerings; (x) general market and economic conditions; and (xi) any required redemption or repurchase of our Series B Preferred Stock. In some cases, U.S. stock markets have produced downward pressure on stock prices for some issuers without regard to those issuers’ underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders.
WMIH’s common stock is currently listed on Nasdaq. If we do not comply with Nasdaq’s continued listing requirements, these shares may be delisted from Nasdaq, which would likely result in WMIH’s shares being traded on the OTC Markets OTCQB electronic quotation system (or the lesser tier OTC Pink), and negatively affect the liquidity and trading prices of WMIH’s common stock.
WMIH’s common stock is currently listed on Nasdaq. In order to maintain eligibility for continued listing on Nasdaq, WMIH must fulfill certain minimum listing requirements, including specified financial and corporate governance criteria. Although currently in compliance with Nasdaq’s listing requirements, WMIH was not, until recently, in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2), which requires listed securities to maintain a minimum bid price of $1.00 per share. While WMIH regained compliance with the minimum bid price rules on February 27, 2018, there can be no assurance that WMIH can maintain such minimum listing requirements, and in the event that WMIH cannot, such failure would likely result in WMIH’s shares being traded on the OTC Markets OTCQB electronic quotation system (or the lesser tier OTC Pink). If WMIH is not able to maintain the listing of its common stock on Nasdaq, WMIH could face material adverse consequences, including:
a limited availability of market quotations for its common stock;
reduced liquidity for its common stock;
a determination that its common stock is a “penny stock” which will require brokers trading in such common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for WMIH’s common stock; and
a decreased ability to issue additional securities or obtain additional financing in the future.
Anti-takeover provisions in our Certificate of Incorporation and Amended and Restated Bylaws (“Bylaws”) and under Delaware law, as well as certain existing contractual arrangements, make a third-party acquisition of WMIHus difficult.
WMIH’s
Our Certificate of Incorporation, including Article VIII thereof, and Bylaws as well as certain contractual arrangements with KKR and Nationstar, contain provisions that make it difficult for a third party to acquire WMIH,us, even if doing so might be deemed beneficial by WMIH’sour stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of WMIH’sour common stock. WMIH is also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of WMIH. See “—Until July 5, 2019, we are required to obtain prior consent from KKR Wand Holdings Corporation (“KKR Wand”) to enter into any definitive agreement with respect to any Acquisition.” and “—Risk Factors Relating to the Pending Nationstar Transaction—
The
Merger Agreement restricts the Company’s ability to take certain action which would otherwise be permitted and which our stockholders may consider desirable.”11
We may sell additional shares of WMIH’s common stock or other securities, or amend outstanding WMIH securities, including the Series B Preferred Stock, in the future to meet WMIH’s capital requirements. In such circumstances, the ownership interests of WMIH’s stockholders prior to such sale could be substantially diluted.
WMIH has 3,500,000,000 shares of common stock authorized for issuance and 10,000,000 shares of preferred stock authorized for issuance. As of February 28, 2018, WMIH had 206,714,132 shares of its common stock issued and outstanding. The possibility of dilution posed by shares available for future sale could reduce the market price of WMIH’sour common stock may decrease, and could make it more difficult for WMIH to raise funds through equity offerings in the future. In fact, WMIH has consummated two corporate financing transactions that are, on an as-converted basis, dilutive to stockholders. Specifically, effective January 30, 2014, WMIH issued 1,000,000 sharesyou may lose all or part of Series A Preferred Stock, which may be converted into 10,065,629 sharesyour investment.
The market price of
WMIH’sour common stock
could decrease, and
Warrants to purchase 61,400,000 shares of WMIH’s common stock. Also, on January 5, 2015, WMIH issued 600,000 shares of Series B Preferred Stock that were initially convertible, upon a Qualified Acquisition, into as much as 342,857,143 shares of WMIH’s common stock. As a result of the Series B Amendment, effective as of January 5, 2018, the terms of the Series B Preferred Stock were amended to change the conversion price to a fixed conversion price of $1.35 per share of common stock and provide for a special distribution of 19.04762 shares per Series B share upon any Acquisition as well as to change the dividend rate to a 5.00% semi-annual payment in shares of common stock. Accordingly, the number of shares of WMIH common stock issuable upon conversion of the Series B Preferred Stock increased to 444,444,444. In addition, the Series B Amendment entitles the holders of the Series B Preferred Stock to special distributions of up to 11,428,572 shares of WMIH’s common stock in connection with Acquisitions as well as up to 64,285,714 shares of WMIH’s common stock in the form of regular dividends.The value of WMIH’s common stock, and our ability to raise capital in the financial markets at times and at prices favorable to us, may be materially and adversely affected by the future sale of additional shares of WMIH’s common stock or other securities, the future amendment of outstanding WMIH securities, including the Series B Preferred Stock, or the perception that either of the foregoing could occur or become necessary, and by the terms and conditions of the Series B Preferred Stock, which is senior in priority to WMIH’s common stock. See “Risks Related to the Series B Preferred Stock.”
The redemption or repurchase of our Series B Preferred Stock may have a material adverse effect on holders of WMIH’s common stock.
We currently have limited business operations and assets. If we are obligated to redeem or repurchase some or all of our Series B Preferred Stock on the Series B Redemption Date because we have not completed an Acquisition or Qualified Acquisition prior to such date, it is likely that our business and financial prospects will be adversely affected and the holders of WMIH’s common stock are likely to lose a significant part or all of their investment. While we would expect to seek alternative financing under those circumstances, any such alternative financing could cause an ownership change and there can be no assurance such financing would be available at terms we would determine to be acceptable, or at all.
Risks Related to the Series B Preferred Stock
The Series B Preferred Stock ranks junior to all of our indebtedness and other liabilities.
In the event of our bankruptcy, liquidation, reorganization or other winding-up, our assets will be available to pay obligations on the Series B Preferred Stock only after all of our indebtedness and other liabilities have been paid. The rights of holders of the Series B Preferred Stock to participate in the distribution of our assets will rank pari passu with our Series A Preferred Stock and any parity stock we issue in the future. In addition, we are a holding company and the Series B Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities of our subsidiaries and any capital stock of our subsidiaries not held by us. The rights of holders of the Series B Preferred Stock to participate in the distribution of assets of our subsidiaries ranks junior to the prior claims of that subsidiary’s creditors and any other equity holders. Consequently, if we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets remaining to pay amounts due on any or all of the Series B Preferred Stock then outstanding. We and our subsidiaries may incur substantial amounts of additional debt and other obligations that will rank senior to the Series B Preferred Stock.
We are subject to restrictions on the redemption or repurchase of the Series B Preferred Stock.
Under our Certificate of Incorporation, we will be obligated to redeem the Series B Preferred Stock (if not previously converted) on the Series B Redemption Date, and to repurchase the Series B Preferred Stock tendered for repurchase upon certain events. However, we may be unable to redeem or repurchase the Series B Preferred Stock due to restrictions under applicable law or contractual restrictions.
12
Delaware law provides that a redemption or repurchase payment on capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the then-current or the preceding fiscal year. Unless we operate profitably, our ability to redeem or repurchase the Series B Preferred Stock would require the availability of adequate “surplus,” which is defined as the excess, if any, of our net assets (total assets less total liabilities) over our capital. Since the Effective Date, we have often not achieved profitability, and when profitable, did not achieve significant profitability. We do not expect to achieve significant profits in the future unless we consummate an Acquisition.
We may also enter into debt or other agreements in the future that may restrict us from redeeming or repurchasing the Series B Preferred Stock.
Further, even if we are permitted under our contractual obligations and Delaware law, as applicable, to redeem or repurchase the shares of Series B Preferred Stock, we may not have sufficient cash to do so. See “—We may not have sufficient funds to redeem or repurchase the Series B Preferred Stock.”
Weyou may not be able to consummate an Acquisitionresell your shares at or a Qualified Acquisition priorabove the price at which your shares were acquired. Those fluctuations could be based on various factors, including:
•our operating performance and the performance of our competitors and fluctuations in our operating results;
•macro-economic trends, including changes in interest rates and economic growth and unemployment;
•the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
•changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;
•global, national or local economic, legal and regulatory factors unrelated to our performance;
•announcements of negative news by us or our competitors, such as announcements of poorer than expected results of operations, data breaches or significant litigation;
•actual or anticipated variations in our or our competitors’ operating results, and our or our competitors’ growth rates;
•failure by us or our competitors to meet analysts’ projections or guidance we or our competitors may give the market;
•changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;
•changes in accounting standards, policies, guidance, interpretations or principles;
•the departure of key personnel;
•the number of shares publicly traded; and
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 30
•other developments affecting us, our industry or our competitors.
In addition, in recent years the stock market has experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the
Series B Redemption Date.Ifoperating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes, may cause declines in the market price of our common stock, and you may not realize any return on your investment in us and may lose some or all of your investment.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cyber Risk Management and Strategy
Our cyber risk management and strategy has been incorporated into our compliance and risk management program across a number of verticals. For example, information security risk assessments are performed across our business processes, including, but not limited to, third-party services, vendors and systems that process sensitive data. We undergo external annual penetration assessments to evaluate susceptibility to attack, for example, through social engineering, application websites and system/network vulnerabilities. We aim to continuously evolve our information security program in response to the ever-changing landscape of best practices, industry-specific risks, company-specific risks, and potential threats. This evolution is also driven by validation tests in an effort to ensure our program remains robust and effective. In the wake of the October 2023 cybersecurity incident, we prioritized implementation of enhanced safeguards consistent with our incident response process and further fortifying our commitment to information security.
We also have a process to evaluate third-party providers, which is designed to understand the potential risks and impact of threats to our supply chains as well as potential privacy risks associated with external data management. This process has multiple components and is designed to assess our providers performance across several domains, including data security, asset management, communications and operations management, access control, business continuity management, financial, and legal compliance.
Considering the complexity and evolving nature of cybersecurity threats, we engage with a range of external experts, including cybersecurity assessors, consultants, and auditors, in evaluating and testing our risk management systems. These engagements allow us to leverage specialized knowledge and insights, including leading industry practices, to better inform our cybersecurity strategies and processes. Our collaboration with these third parties includes audits, threat assessments, and consultations to enhance our security measures.
In addition, we undergo several compliance audits annually, which include a SOX compliance audit, and a SOC1 audit. Our approach to managing compliance-related risks includes maintaining a data loss prevention program, centralized compliance management, an identity management platform, ongoing Managed Security monitoring, threat and vulnerability monitoring, and information security risk insurance.
Governance Related to Cybersecurity Risks
The full Board of Directors conducts several reviews throughout the year in an effort to ensure that our cyber strategy and risk management is appropriate and prudent. It is the responsibility of the Board of Directors to understand and oversee our strategic plans, the associated risks, and the steps that our senior management team is taking to manage and mitigate those risks. Principle responsibility in this domain is shared by our Chief Risk and Compliance Officer, who has approximately 20 years of leadership experience in the financial services sector with an extensive background in the mortgage industry, and our Chief Information Officer who has approximately 20 years of experience leading technology and product engineering functions.
Our Enterprise Risk Committee reviews and discusses cybersecurity, information security and data privacy risks at regular intervals. A quarterly Enterprise Risk Committee meeting is chaired by our Chief Risk and Compliance Officer and includes information security briefings led by the Chief Information Security Officer.
31 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
We also hold quarterly Audit and Risk Committee meetings, during which our Board of Directors receives briefings on information security matters. Risks that are unableidentified during these processes are reviewed by executive leadership and corrective action plans are established to consummateaddress and manage the Nationstar Transaction, there can be no assurancesissues, as applicable and appropriate.
We believe in a proactive approach to enterprise risk management. A major tenet of our cybersecurity program includes training to educate and inform team members on cyber hygiene and threat management as well as regular testing to check for understanding. We have invested in technology and dedicated internal resources to facilitate training for application developers, conduct tabletop exercises, run anti-phishing campaigns, and train on privacy regulations. These training activities, along with other key risk indicators, are tracked and reported to our Enterprise Risk Committee on a quarterly basis.
Recent Cybersecurity Activity
As previously disclosed on a Form 8-K dated November 2, 2023, as amended by the Form 8-K/As dated, November 9, 2023, and December 15, 2023, on October 31, 2023, we experienced a cybersecurity incident in which an unauthorized third party gained access to certain of our technology systems and obtained personal information relating to substantially all of our current and former customers. Following detection of this incident, we initiated response protocols that included deploying containment measures involving shutting down certain systems as a precautionary measure. We notified law enforcement, regulatory authorities, and other stakeholders. We worked with our existing cybersecurity firms and retained additional cybersecurity experts to support our actions.
Our engagement with law enforcement and regulators, and defense of litigation is ongoing. To assist our customers, we have offered identity protection services, including credit monitoring, to all of our current and former customers for two years.
The cybersecurity incident did not result in a misstatement to the interim consolidated financial statements previously filed or included in this Annual Report on Form 10-K. In addition, while we cannot presently quantify the full extent of remediation and legal expenses associated with this cyber-attack, we do not believe the incident has materially affected or is reasonably likely to materially affect, our business strategy, results of operations, or financial condition.
Item 2. Properties
We lease and maintain our principal executive office in one building totaling approximately 176,000 square feet in Coppell, Texas. Our business operations and support offices are in leased facilities in various other locations in the United States, as well as locations in India. Our locations in the United States include (i) Texas and California, which houses our Servicing and Originations segments, and (ii) Arizona, Michigan, Florida, and Colorado, which house the remainder of our Servicing segment. Our India locations include Chennai, which supports our Servicing and Originations segments, and Bengaluru, which supports our Servicing segment. We believe that our facilities are adequate for our current requirements and are being appropriately utilized. We periodically review our space requirements, and we believe we will be able to timely identify and/or consummate an alternative Acquisition oracquire new space and facilities as and when needed on reasonable terms. We also look to consolidate and dispose of facilities we no longer need, as and when appropriate.
Item 3. Legal Proceedings
We are routinely and currently involved in a Qualified Acquisition due to inability to find an appropriate target company or companies, an inability to obtain appropriate financing, an inability to agree to the terms of an acquisition(s) or for any other reason prior to the Series B Redemption Date. Additionally, the Letter Agreement, subject to certain conditions and until July 5, 2019, requires WMIH to obtain prior written consent from KKR Wand before entering into a definitive agreement with respect to any Acquisition. In the event that the Nationstar Transaction is not consummated, we anticipate that the assessment of each specific target business, and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments relevant to the acquisition of any such target business, will require substantial time and attention on the part of our management and substantial costs for advisors including accountants, attorneys and others. If we do not consummate the Nationstar Transaction and we decide not to complete an alternative Acquisition or Qualified Acquisition that is being pursued, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Also, if we reach an agreement relating to a specific target business, we may fail to complete our initial business combination for any number of reasons, including those beyond our control. Any such event will result in a loss to us of the related costs incurred which could materially and adversely affect subsequent attempts to locate and acquire or merge with another business.Furthermore, under those circumstances, we expect to encounter intense competition from other entities, some having a business objective similar to ours, including private investors (which may be investment partnerships or individuals) and other entities, domestic and international, competing for the types of businesses we may consider for acquisition. Many of these potential competitors are well-established, have extensive experience in identifying and effecting, directly or indirectly, acquisitions of companies operating in or providing services to various industries and possess greater financial, technical, human and other resources or more local industry knowledge than we do. Our ability to compete with respect to the acquisition of certain target businesses may be limited by our available resources compared to those of competing bidders and may give others an advantage in pursuing the acquisition of such target businesses. Furthermore, because we are required to redeem the Series B Preferred Stock (if not previously converted) on the Series B Redemption Date if we have not consummated the Nationstar Transaction or an alternative Qualified Acquisition (as the case may be), we may be at a competitive disadvantage in successfully negotiating a business combination.
The Series B Preferred Stock is not convertible at the option of holders.
All or a portion of the Series B Preferred Stock automatically converts into WMIH’s common stock upon a Qualified Acquisition or an Acquisition, as the case may be at a fixed $1.35 conversion price even if such conversion is unfavorable because WMIH’s common stock is trading below the conversion price. The closing of the Nationstar Transaction will constitute a Qualified Acquisition and result in the mandatory conversion of all of the Series B Preferred Stock.
The price of WMIH’s common stock, and the Series B Preferred Stock, may fluctuate significantly, which may make it difficult for a holder to resell the Series B Preferred Stock or WMIH’s common stock issuable upon mandatory conversion thereof at such times as or at prices a holder may find attractive.
The market price of WMIH’s common stock may continue to fluctuate due to a variety of factors, many of which are beyond our control. In addition, financial markets in general (including the stock market) have, of late, experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of WMIH’s common stock. Because the Series B Preferred Stock is mandatorily convertible into shares of WMIH’s common stock upon the consummation of an Acquisition or a Qualified Acquisition, volatility or depressed prices for WMIH’s common stock could have a similar effect on the trading price of the Series B Preferred Stock. Holders who have received shares of WMIH’s common stock upon mandatory conversion of their shares of Series B Preferred Stock could also be subject to the risk of volatility and depressed prices.
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In addition, the market price of WMIH’s common stock could also be affected by possible sales of WMIH’s common stock by investors who view the Series B Preferred Stock as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that may develop involving WMIH’s common stock. The hedging or arbitrage could, in turn, affect the trading price of the Series B Preferred Stock or any WMIH common stock that holders receive upon conversion of the Series B Preferred Stock.
The conversion price of the Series B Preferred Stock may not be adjusted for all dilutive events that may adversely affect the market price of the Series B Preferred Stock or WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock.
The number of shares of WMIH’s common stock that holders of Series B Preferred Stock are entitled to receive upon mandatory conversion of the Series B Preferred Stock is subject to adjustment for certain specified events,legal proceedings, including, but not limited to, stock splits, stock recombinations, or tender or exchange offers for common stock of WMIH (which events are more limited than customary for convertible securities because the holders of Series B Preferred Stock participate in dividends on WMIH’s common stock on an as converted basis). However, other events, which may adversely affect the market price of WMIH’s common stock, may not result in any adjustment, such as the issuance of WMIH’s common stock in an acquisition or for cash. Further, if any of these other events adversely affects the market price of WMIH’s common stock, we expect it to also adversely affect the market price of our Series B Preferred Stock. In addition, the terms of our Series B Preferred Stock do not restrict our ability to offer WMIH’s common stock or securities convertible into WMIH’s common stock in the future or to engage in other transactions that could dilute WMIH’s common stock. We have no obligation to consider the interests of the holders of our Series B Preferred Stock in engaging in any such offering or transaction. See “—Risk Factors Relating to the Pending Nationstar Transaction—The Merger Agreement restricts the Company’s ability to take certain action which would otherwise be permittedjudicial, arbitration, regulatory and which our stockholders may consider desirable” for information on restrictions on certain actions by WMIH under the Merger Agreement.
We may issue additional series of preferred stock that rank equally to the Series B Preferred Stock as to dividend payments and liquidation preference.
Neither our Certificate of Incorporation nor the terms governing the Series B Preferred Stock prohibits us from issuing additional series of preferred stock that would rank equally to the Series B Preferred Stock as to dividend payments and liquidation preference. Our Certificate of Incorporation provides that we have the authority to issue 10,000,000 shares of preferred stock, including the 600,000 shares of Series B Preferred Stock and the 1,000,000 shares of Series A Preferred Stock currently issued. The issuances of other series of preferred stock could have the effect of reducing the amounts available to the Series B Preferred Stock in the event of our liquidation, winding-up or dissolution. See “—Risk Factors Relating to the Pending Nationstar Transaction—The Merger Agreement restricts the Company’s ability to take certain action which would otherwise be permitted and which our stockholders may consider desirable” for information on restrictions on certain actions by WMIH under the Merger Agreement.
Holders of Series B Preferred Stock will have limited rights with respect to the shares of WMIH’s common stock they are entitled to receive in connection with a mandatory conversion, a special distribution or a regular dividend until the Series B Preferred Stock is converted, a special distribution is made, or regular dividends are declared, but may be adversely affected by certain changes made with respect to WMIH’s common stock.
Holders of Series B Preferred Stock will have limited rights with respect to the shares of WMIH’s common stock they are entitled to receive in connection with a mandatory conversion, a special distribution or a regular dividend, including limited voting rights, and no rights to respond to tender offers for the common stock by virtue of holding shares of Series B Preferred Stock, prior to the issuance of shares of WMIH’s common stock upon such mandatory conversion, a special distribution or a regular dividend, if any, but an investment in our Series B Preferred Stock may be negatively affected by these events. Upon a mandatory conversion, special distribution or regular dividend, a holder of Series B Preferred Stock will be entitled to exercise the rights of a holder of WMIH’s common stock only asgovernmental proceedings related to matters for which the relevant record date occurs on or after the applicable mandatory conversion date.
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We may not have sufficient funds to redeem or repurchase the Series B Preferred Stock.
We are required to redeem the Series B Preferred Stock (if not previously converted) on the Series B Redemption Date (i.e. October 5, 2019) in the event we have not consummated a Qualified Acquisition; provided, if prior to the Series B Redemption Date we have publicly announced that WMIH has entered into a definitive agreement for an Acquisition, the Series B Redemption Date will be extended to the earlier of April 5, 2020 and the day immediately following the date such definitive agreement is terminated or the date such Acquisition is closed. The aggregate redemption cost, assuming all 600,000 shares remain outstanding, of all of the Series B Preferred Stock is $600.0 million, plus shares of WMIH’s common stock in respect of any accrued and unpaid dividends, if any, whether or not declared. In addition, we are required to offer to repurchase (if not previously converted) the Series B Preferred Stock upon a Change of Control (as such term is defined in Article VI of the Certificate of Incorporation). However, we may not have sufficient funds, and we may be unable to obtain additional financing, to make such a redemption or repurchase as required, each of which could have a material adverse effect on the Company and the value of our capital stock. This risk is increased by the fact that we (i) have very limited operations, (ii) in the past have not generated significant cash flows, (iii) may use net proceeds that have been deposited into the escrow accountarise in connection with the Series B Preferred Stock Financing to explore and fund, in whole or in part, Acquisitions whether completed or not, including reasonable attorney fees and expenses, accounting expenses, due diligence, termination fees and other contractual obligations related to the transaction, and financial advisor fees and expenses, and (iv) may consummate one or more Acquisitions that do not constitute a Qualified Acquisition (and accordingly may use net proceeds that have been deposited into the escrow account), which may cause us to have insufficient funds to redeem or repurchase the remaining outstanding Series B Preferred Stock as required. The Company will periodically assess our ability to redeem or repurchase the Series B Preferred Stock. If the Company determines that conditions exist that raise substantial doubt about our ability to continue as a going concern within one year after the financial statements are issued or available to be issued, due to our inability to redeem or repurchase the Series B Preferred Stock, and we are unable to demonstrate our ability to refinance or obtain access to additional funding, our auditors could issue a going concern qualification to our financial statements. A “going concern” opinion could impair our ability to finance our operations through the sale of equity, incurrence of debt or other financing alternatives and could have a material adverse effect on the Company and the valueconduct of our capital stock.
We may not have sufficient earnings and profits in order for dividends on the Series B Preferred Stock to be treated as dividends for U.S. federal income tax purposes.
Cash dividends and other non-cash distributions treated as distributions under Sections 305(b) or 305(c) of the Code payable by us on the Series B Preferred Stock may exceed our current and accumulated earnings and profits, as calculated for U.S. federal income tax purposes. If that occurs,business. While it will result in the amount of the dividends that exceed such earnings and profits being treated for U.S. federal income tax purposes first as a return of capital to the extent of the holder’s adjusted tax basis in the Series B Preferred Stock, and the excess, if any, over such adjusted tax basis as capital gain. Such treatment will generally be unfavorable for corporate holders and may also be unfavorable to certain other holders.
Stock dividends with respect to the Series B Preferred Stock may be treated as taxable dividends under Sections 305(b) or 305(c) of the Code.
A stock distribution made by a corporation to its shareholders is generally a tax-free transaction for U.S. federal income tax purposes under Section 305(a) of the Code, except as provided in Sections 305(b) and 305(c) of the Code. WMIH believes that distributions of stock with respect to the Series B Preferred Stock should be treated, under Section 305(a) of the Code, as a nontaxable distribution for U.S. federal income tax purposes. There can be no assurance that this position will not be challenged successfully by an applicable taxing authority, or significantly modified by new legislation, changes in an applicable taxing authority’s positions or court decisions.
If such a stock dividend is treated as a distribution described in either Section 305(b) or 305(c) of the Code, then the receipt of such stock dividend would be treated as a taxable dividend in an amount equal to the lesser of the fair market value of such stock dividend and the holder’s allocable share of the Company’s current and accumulated earnings and profits. Any excess would be treated first as a tax-free return of capital to the extent of such holder’s adjusted basis in its Series B Preferred Stock and then as capital gain.
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Holders of Series B Preferred Stock may be subject to tax if we make or fail to make certain adjustments to the conversion price of the Series B Preferred Stock even though a holder of Series B Preferred Stock does not receive a corresponding cash distribution.
The conversion price of the Series B Preferred Stock is subject to adjustment in certain circumstances. If the conversion price is adjusted as a result of a distribution that is taxable to WMIH’s common stockholders, a holder of Series B Preferred Stock may be deemed to have received a dividend subject to U.S. federal income tax to the extent of our current and accumulated earnings and profits without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the conversion price after an event that increases a Series B Preferred Stockholder’s proportionate interest in us could be treated as a deemed taxable dividend to such holder. If a holder of Series B Preferred Stock is a non-U.S. holder, any deemed dividend may be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable treaty, which may be set off against subsequent payments on the Series B Preferred Stock. A non-U.S. holder is a beneficial owner of Series B Preferred Stock or WMIH’s common stock received in respect thereof (other than a partnership or entity treated as a partnership for U.S. federal income tax purposes) and that is not a U.S. holder.
Affiliates of KKR own a substantial amount of equity interests in us, and have other substantial interests in us and agreements with us, including an approval right with respectpossible to Acquisitions, and may have conflicts of interest with us or the other holders of our capital stock.
As of February 28, 2018, affiliates of KKR held shares of WMIH stock representing approximately 24% of WMIH’s voting power on an as-converted basis. Affiliates of KKR are parties to the Investment Agreement and the Investor Rights Agreement (as such terms are defined in Note 8: Financing Arrangements to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K). Furthermore, the Letter Agreement, subject to certain conditions and until July 5, 2019, requires WMIH to obtain prior written consent from KKR Wand, an affiliate of KKR, before entering into a definitive agreement with respect to any Acquisition.
As a result, affiliates of KKR may have substantial influence over our decisions to enter into any corporate transaction, including with respect to any Acquisition, and may have the ability to prevent any transaction that requires the approval of stockholders regardless of whether other holders of our capital stock believe that any such transactions are in their own best interests. For example, affiliates of KKR could potentially cause us to refrain from making acquisitions in a manner that is not in the best interests of other holders of the Series B Preferred Stock, whether or not such acquisitions are in the best interests of holders of WMIH’s common stock. KKR will not provide oversight of or have control over or be involved with the investment activities or other operations of the Company.
Neither KKR nor its director appointees are required to present us with investment opportunities and may pursue them separately or otherwise compete with us.
Our management team, with support from KKR personnel, are focused on closing the Nationstar Transaction. Nevertheless, if we are unable to consummate the Nationstar Transaction, neither KKR nor its director appointees are obligated to present us with alternative investment opportunities. Moreover, each of KKR, its officers and its directors presently has, and any of them in the future may have, additional fiduciary or contractual obligations to another entity pursuant to which KKR, such officer or such director is required to present an acquisition opportunity to such entity. Accordingly, if any of KKR, its officers or its directors becomes aware of an acquisition opportunity which is suitable for an entity to which he or she has then current fiduciary or contractual obligations, it, he or she will honor its, his or her fiduciary or contractual obligations to present such acquisition opportunity to such other entity, and only present it to us if such entity rejects the opportunity. Our Certificate of Incorporation provides that we renounce our interest or expectancy in any corporate opportunity in which KKR or its director appointees seek to participate unless such opportunity (i) was first presented to KKR’s director appointees solely in their capacity as directors of WMIH or (ii) is identified by KKR or its director appointees solely through the disclosure of information by or on behalf of us. We will not be prohibited from pursuing an investment opportunity with respect to which we have renounced our interest or expectancy.
Additionally, KKR is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or that compete with us for acquisitions. KKR may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, KKR’s interest in its portfolio companies could impact our ability to pursue acquisition opportunities.
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Other than under specific circumstances, KKR is not our investment advisor and owes no fiduciary duty to us or to holders of WMIH’s common stock, Series A Preferred Stock or Series B Preferred Stock.
WMIH engaged KKR Capital Markets as a financial advisor in connection with the Nationstar Transaction, including the placement of certain debt securities to be issued in connection with closing that transaction. Apart from providing WMIH with specific financial advisory services in connection with the Nationstar Transaction, KKR is not our investment adviser and otherwise has no advisory, fiduciary or similar relationship with us or with holders of WMIH’s common stock or Series B Preferred Stock. KKR is not our sponsor, and the Company is not an investment product offered by KKR. KKR has no obligations (contractual, fiduciary or otherwise) to us, disclaims having any liability for our performance, investments or activities, and will not be responsible for any action or inaction of our management.
Under Delaware law, we can amend Article VI of the Certificate of Incorporation, which governs the terms of the Series B Preferred Stock, without the consent of the common stockholders as long as we obtain the consent of holders of at least a majority of the shares of Series B Preferred Stock.
Under Delaware law, Article VI of the Certificate of Incorporation, which governs the terms of the Series B Preferred Stock, can be amended without the consent of the common stockholders if WMIH receives the consent of holders of at least a majority of the shares of Series B Preferred Stock. Therefore, a holder of Series B Preferred Stock will be governed by the terms as they may be amended from time to time even if such holder does not approve such amendment to the terms of the Series B Preferred Stock. See “—Risk Factors Relating to the Pending Nationstar Transaction—The Merger Agreement restricts the Company’s ability to take certain action which would otherwise be permitted and which our stockholders may consider desirable” for information on restrictions on certain actions by WMIH under the Merger Agreement.
Risks Related to WMMRC’s Business
General economic conditions that negatively affect housing prices may negatively affect the credit performance of WMMRC’s underlying portfolio of mortgage loans and could continue to have an adverse effect on our future performance.
There can be no assurances that recent improvement in the housing and credit markets will continue or improve. Prolonged high unemployment or deterioration in the housing markets could negatively impact the performance of WMMRC’s underlying mortgage assets leading to a potential increase in defaults and losses.
The negative financial performance of the primary mortgage insurers with whom WMMRC does business may negatively affect our financial performance and results.
One or more of the primary mortgage insurers with whom we do business may be vulnerable to adverse market conditions and because of that uncertainty there can be no assurances that such insurers can withstand the market and financial pressures they may face from time to time. In fact, at least one counterparty is currently operating subject to state supervision. These factors could have negative consequences for WMMRC’s cash flows and WMMRC’s ability to pay dividends to WMIH in the future.
WMMRC is dependent on primary mortgage insurers to provide it with services. A disruption in the provision of such services could negatively affect WMMRC’s operations and financial performance.
WMMRC depends upon our primary mortgage insurers to provide us with several services, including providing us with the monthly cession statements that provides the basis for our accounting and financial records, information regarding applicable minimum capital thresholds, the establishment of ceded loss reserves, the payment of ceded premium (i.e., revenue) and the withdrawal of funds for paid losses. If our counterparties are unable to provide such services or if such services are otherwise interrupted or modified as a result of actions beyond our control (e.g., the placement of a counterparty into receivership or conservatorship), then such actions may be detrimental to our future financial performance.
Because loss reserve estimates are subject to uncertainties and are based on assumptions that are volatile, ceded paid losses may be substantially different from our ceded loss reserves.
The establishment of loss reserves is complex and requires judgment by management about the effect of matters that is inherently uncertain. In addition, establishing such loss reserves requires management to make various assumptions and judgments based on a variety of factors, including frequency of losses, severity of losses and timing of losses. As a result, WMMRC periodically monitors and adjusts its assumptions based on actual loan performance information, market indicators and other factors. Nevertheless, factors outside of WMMRC’s control, such as the overall performance of the economy, volatile housing prices, public policy considerations and borrower behavior all influence its assumptions and are subject to considerable change over time.
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Loan loss mitigation efforts (including efforts to modify loans, effect short sales, loan rescissions and claim denials) by the firms servicing our underlying reinsured mortgage loans may not be effective.
WMMRC relies on the servicers of the mortgage loans to provide surveillance, loss mitigation and salvage efforts to ensure that the mortgage loans it reinsures are serviced according to the appropriate guidelines and significant efforts are made to ensure a beneficial outcome. Nevertheless, there can be no assurances that such efforts will be successful or have any effect on the ultimate ability of a borrower to satisfy such borrower’s obligations under a mortgage WMMRC has reinsured.
Low interest rates can negatively affect WMMRC’s financial performance.
A low interest rate environment can negatively affect WMMRC’s financial performance. Low interest rates provide an opportunity for generally well-qualified borrowers to refinance their mortgage loans. This typically results in a cancelation of the mortgage insurance policy applicable to such loans and terminates any ceded future premiums we would expect from those loans. As a result, the portfolio of mortgage loans WMMRC reinsures could experience a larger percentage in the number of borrowers who are less creditworthy. Additionally, a low-interest rate environment generally results in lower yields on WMMRC’s investment portfolio, as maturing investments are generally reinvested at lower yields thereby reducing investment income.
WMMRC is subject to comprehensive regulations, including minimum capital standards, which are subject to change and may harm our business.
WMMRC is domiciled in the State of Hawaii and is subject to the rules and regulations as promulgated by the State of Hawaii and its Insurance Division, its primary state regulator. Foremost among those rules and regulations are minimum capital standards. Management believes that as of December 31, 2017, WMMRC satisfied such minimum capital standards and other applicable rules and regulations. Nevertheless, there can be no assurances of WMMRC’s future ability to meet those standards, or as they may be revised.
In addition, WMMRC’s business may be affected by legislative or regulatory reforms of the U.S. housing finance system, as well as the application of certain public or private sector programs designed to assist homeowners avoid foreclosure. In each case, these reforms and programs could change the economic behavior of either the mortgage insurance policyholders or the mortgage insurance companies to the detriment of WMMRC. Following the severe financial dislocations of 2008, new, sweeping rules and regulations were promulgated by federal, state and local regulatory authorities, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Because WMMRC is currently operating its business in runoff mode, it has not, to date, needed to materially change any of its business practices in response to various regulatory initiatives, including the Dodd-Frank Act. Nevertheless, there can be no assurances that WMMRC will not be required to undertake changes to its business practices in the future in response to one or more regulatory initiatives.
In addition, WMMRC’s reinsurance counterparties with active underwriting and other businesses have disclosed heightened regulatory oversight of their operations, including by the Consumer Financial Protection Bureau (“CFPB”) and we cannot predict the extent to which such heightened scrutiny may affect how those counterparties do business with WMMRC. Likewise, neither WMMRC nor its counterparties can predict the full impact various regulatory initiatives currently pending or being considered may have on their respective businesses or operations.
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Risk Factors Relating to the Pending Nationstar Transaction
Completion of the Nationstar Transaction is subject to a number of conditions and if these conditions are not satisfied or waived, the Merger will not be completed as contemplated.
The obligations of WMIH and Nationstar to complete the Nationstar Transaction are subject to satisfaction or waiver of a number of conditions, including, among others (i) the adoption of the Merger Agreement by the holders of a majority of Nationstar’s outstanding common stock; (ii) the approval of the issuance of shares of WMIH Common Stock by a majority of all votes cast by holders of outstanding shares of WMIH Common Stock and preferred stock (voting on an as-converted basis in accordance with WMIH’s Certificate of Incorporation); (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iv) obtaining required regulatory approvals as specified in the schedules to the Merger Agreement without the imposition of a condition that would have a material adverse effect on the combined surviving company and its subsidiaries, taken as a whole, following the Merger (“Burdensome Condition”); (v) the effectiveness of a registration statement on Form S-4 relating to the Merger; (vi) the approval for listing the WMIH Common Stock issuable in the Merger on the Nasdaq Stock Market LLC, subject to official notice of issuance; (vii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (viii) subject to specified materiality standards, the continuing accuracy of certain representations and warranties of each party; and (ix) performance by each party in all material respects with its covenants. The receipt of a tax opinion from WMIH’s tax advisor that there should not have been an “ownership change” (within the meaning of Section 382(g) of the Internal Revenue Code) since March 19, 2012, and the Merger, taken together with the other transactions contemplated by the Merger Agreement and occurring on the closing date, should not result in such an ownership change, is a condition to the obligations of Nationstar to consummate the Merger. The closing of the Merger is not subject to a financing condition. There can be no assurance that the conditions to closing of the Nationstar Transaction will be satisfied or waived, or that the Merger will be completed.
In particular, completion of the Nationstar Transaction is conditioned upon the expiration or early termination of the waiting periods relating to the Merger under the HSR Act and obtaining the required governmental authorizations, including the requisite approval from the various federal and state agencies regulating the mortgage industry, having been obtained and being in full force and effect. Although WMIH and Nationstar have agreed in the Merger Agreement to use their reasonable best efforts, subject to certain limitations, to make certain governmental filings or obtain the required governmental authorizations, as the case may be, there can be no assurance that the relevant waiting periods will expire or that the relevant authorizations will be obtained. In addition, the governmental authorities with or from which these authorizations are required have broad discretion in administering the governing regulations. As a condition to authorization of the Merger or related transactions, these governmental authorities may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined surviving company’s business after completion of the Merger. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined company following the Merger, or will not otherwise be considered a Burdensome Condition. There can be no assurance that the conditions to closing of the Nationstar Transaction will be satisfied, and we can provide no assurance that these conditions will not result in the delay or abandonment of the Merger.
The Merger Agreement restricts the Company’s ability to take certain action which would otherwise be permitted and which our stockholders may consider desirable.
Until the earlier of the consummation of the Merger or termination of the Merger Agreement, we and our subsidiaries are required to conduct our business in the ordinary course of business consistent with past practices since December 31, 2015. We have agreed not to, subject to limited exceptions, among other things: (i) pay dividends, split or issue securities, purchase or redeem our securities, other than payment of the semi-annual 5.00% dividend to the holders of the Series B Preferred Stock; (ii) amend our Certificate of Incorporation or bylaws; (iii) issue, pledge, sell or otherwise encumber to any lien of any shares of our securities or amend the terms or rightsoutcome of any of these matters, based on our securities; (iv) make any acquisitions which would reasonably be expected to prevent, delay or impair the consummationassessment of the Merger; (v) enter any new businesses; (vi) make any loans or advances; (vii) amendfacts and circumstances, we do not believe any of our material agreements; (viii) incur any indebtedness; (ix) modify any severancethese matters, individually or termination pay benefits or increase any compensation arrangements; and (x) permit any Transfers under Section 2(a) of Article VIII of our Certificate of Incorporation.
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Failure to complete the Nationstar Transaction as contemplated could negatively impact the Company’s ability to consummate a Qualified Transaction, WMIH’s common stock price and the future business and financial results of WMIH.
If for any reason the Merger is not completed as contemplated or the closing of the Merger is significantly delayed, the business and results of operations of WMIH and/or the combined company would likely be adversely affected.
If the Merger Agreement is terminated, we may be obligated to pay Nationstar a cash termination fee, which could range from approximately $29.4 million to $125.0 million, depending on the circumstances surrounding termination. In the event that the Merger Agreement is terminated because the WMIH stockholders do not approve the share issuance in connection with the Merger, WMIH will have to pay Nationstar’s expenses of approximately $29.4 million, and if WMIH enters into an agreement for or completes an acquisition in the subsequent 12 months, weaggregate, will owe Nationstar additional amounts up to a total of $65.0 million. Payment of such large amounts of cash would deplete a significant portion of WMIH’s escrowed proceeds from the offering of Series B Preferred Stock, which would adversely affect our ability to consummate a Qualified Acquisition. WMIH could also be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against WMIH to perform its obligations under the Merger Agreement.
Further, failure to consummate the Nationstar Transaction could cause negative reactions from the financial markets, including negative impacts on WMIH’s Common Stock price. Upon the announcement of the Merger, WMIH’s closing stock price increased above the $1.00 trading price for the requisite period and WMIH regained compliance with Nasdaq continued listing requirements. In the event the Merger is not completed, WMIH’s Common Stock price could be adversely impacted and WMIH may fail to continue to satisfy continued listing requirements.
WMIH has incurred and will continue to incur substantial costs in connection with the proposed Merger. These costs are primarily associated with the fees of attorneys, accountants and financial advisors. In addition, WMIH has diverted significant management resources in an effort to complete the Merger, which would otherwise have been devoted to the pursuit of other transaction opportunities, day-to-day operations and other opportunities that may have been beneficial to WMIH. WMIH is also subject to restrictions contained in the Merger Agreement on the conduct of the Company’s business during the pendency of the Merger. Such restrictions, the waiver of which is subject to the consent of Nationstar (in certain cases, not to be unreasonably withheld, conditioned or delayed), prevent WMIH from making Acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Merger. If the Merger is not completed, the Company will have received little or no benefit in respect of such costs incurred or opportunities forgone.
If the Merger is not completed as contemplated, these risks may materialize and may adversely affect WMIH’s prospects, businesses, financial condition, financial results and stock prices.
The Merger Agreement limits our ability to pursue alternatives to the Nationstar Transaction and in certain circumstances could require us to pay substantial termination or other fees which would reduce our cash position and have a material adverse effect on our financial conditionposition, results of operations or cash flows. For a description of our material legal proceedings, see
Note 20, Commitments and could impair our ability to consummate an alternative Qualified Acquisition.While the Merger Agreement contains provisions that prohibit both WMIH and Nationstar from soliciting proposals relating to alternative business combination transactions while the Merger is pending, we are further prohibited from responding to unsolicited proposals while Nationstar is permitted to entertain unsolicited offers, in certain circumstances. In the event that prior to the adoption of the Merger Agreement by the Nationstar stockholders, Nationstar receives an unsolicited superior proposal, the Nationstar board of directors may in certain circumstances exercise their fiduciary out and withhold, withdraw, qualify or modify its recommendation that Nationstar’s stockholders adopt the Merger Agreement, subject to complying with notice and other specified conditions, including giving WMIH the opportunity to propose revisions to the Merger Agreement for a four-day period following notice. If the Nationstar board of directors withdraws or changes their recommendation in favor of the adoption of the Merger Agreement in favor of a superior proposal and either party terminates the Merger Agreement in connection therewith, Nationstar must promptly pay WMIH a $65 million termination fee. Even though in this instance we would receive a $65.0 million termination fee, such fee would be used to offset the substantial expenses that WMIH has already incurred in connection with the Nationstar Transaction, and the passage of time could impair our ability to consummate an alternative Qualified Acquisition prior to the Series B Redemption Date.
Our Board may only change its recommendation that its stockholders approve the Merger Contingencies
in the limited caseNotes to Consolidated Financial Statementswithin Item 8. Financial Statements and Supplementary Data, of an unforeseeable event (not related to an acquisition proposal) that was not known or reasonably foreseeable tothis Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 32
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Stockholders
Our common stock has been traded on the Board. ShouldNasdaq Stock Market under the WMIH Board make the determination that such an intervening event has occurred, WMIH shall notify Nationstar and the parties shall have four business days to negotiate in good faith (should Nationstar desire to negotiate) regarding any revisions to the termsticker symbol “COOP.”
As of the Merger based on such intervening event. If our Board chooses to change its recommendation to the February 22, 2024, there were 1,629 stockholders at such time, Nationstar has the right to terminate the Merger Agreement and we would be required to pay a $65.0 million termination fee to Nationstar. 20
Further, if we are unable to obtain the requisite approval of our stockholders, either party may terminate the Merger Agreement. In such case, we would be obligated to pay Nationstar $29.4 million for their expenses. If we enter into an agreement for or consummate a business combination within the twelve months after such termination, we would be obligated to pay Nationstar (a) in the event that such transaction relates to a proposition that was made to us or by us after the date of the Merger Agreement and before the termination of the Merger Agreement (whether or not such proposal was withdrawn), a fee of $65.0 million less any portion of the Nationstar expenses that may have previously been paid by us or (b) in the event that such transaction does not relate to such a prior proposal, an additional fee of approximately $18.6 million, in each case within two business days.
The payment of any termination fees by us would reduce the escrowed proceeds from the Series B Preferred Stock Financing and could impair our ability to consummate an Acquisition or a Qualified Acquisition.
Certain of our executive officers and directors have interests in the Merger that may be different from your interests as a stockholder.
The interests of some of our directors and executive officers may be different from thoserecord of our common stockholders and directors and officers may be participants in agreements or arrangements that provide them with interests in the Merger, including financial interests, that may be different from, or are in addition to, thosestock. A substantially greater number of our other common stockholders. These interests include but not are not limited to:
the rights of certain executive officers to receive payments or other benefits in connection with, upon and following the consummation of a Qualified Acquisition or a change in control;
the expected service of Chris Harrington, Tagar Olson and Steven Scheiwe as directors following the Merger;
the continued indemnification of directors and officers following the Merger for acts or omissions that occurred in their capacity as directors or officers prior to the closing of the Merger;
payments to KCM, an affiliate of certain of our directors, in connection with the closing of the Merger including $8.25 million pursuant to an engagement letter, $25.0 million pursuant to a financial advisory engagement letter and a fee of 0.25% of the aggregate amount of the aggregate commitments under a $2.75 billion bridge facility upon initial funding under a placement agent fee letter; and
the issuance of 21,197,619 sharesholders of our common stock to KKR Wand Holdings, an affiliate of certain of our directors, in exchange for certain common stock purchase warrants, conditioned upon the effectiveness of the Merger.
The issuance of WMIH’s common stock to Nationstar shareholders under the Merger Agreement will be dilutive to WMIH shareholders
Under the terms of the Merger Agreement, it is expected that WMIH will issue approximately 400.7 millionare “street name” or beneficial holders, whose shares of WMIH common stock to Nationstar shareholders at the closing of the Merger, which will reduce the ownershipare held by WMIH shareholders in the combined company to approximately 64%.
WMIH may not be able to obtain its preferred form of financing to consummate the Merger, and the terms of the financing may be less favorable to WMIH than expected, depending on market conditions (although subject to committed terms).
There is no financing condition under the Merger Agreement, which means that if the conditions to closing are otherwise satisfied or waived, WMIH is obligated to consummate the Merger whether or not it has sufficient funds to pay the consideration under the Merger Agreement. WMIH currently intends to use escrowed funds and also finance a portion of the cash portion of the Merger consideration, repay and redeem certain outstanding indebtedness of Nationstar and its subsidiaries and pay related fees and expenses in connection with the Merger using a combination of proceeds from the issuance of debt securities (or, to extent such debt securities are not issued, borrowings under a high-yield bridge credit facility), borrowings under a 364-day credit facility, and cash on hand. Although WMIH has obtained $2.75 billion in debt commitments from certain lenders in connection with its financing plan, such commitment is subject to a number of conditions and WMIH cannot provide any assurances that it will be able to close the financing as anticipated. In addition, although the debt commitment letter for the financing specifies a number of terms for the different facilities, WMIH retains some exposure to changes in pricingbanks, brokers and other terms based on market conditions at the time the financing is consummated, which could result in less favorable terms for the financing than expected (although subject to committed terms). If terms for the debt financing are less favorable than expected, financing costs could increase, potentially significantly, and WMIH’s financing or operating flexibility may be constrained. If WMIH cannot close on any element of its financing plan, it will need to pursue other financing options, which may result in less favorable financing terms that could increase costs and/or materially adversely affect the credit rating or financing and operating flexibility of the combined company.
21
Any legal proceedings or governmental inquiries in connection with the Nationstar Transaction, the outcomes of which are uncertain, could delay or prevent the completion of the Nationstar Transaction.
In connection with the Nationstar Transaction, plaintiffs may file lawsuits against WMIH or Nationstar and/or the directors and officers of either company. In addition, either company may face inquiries from governmental entities in connection with the Nationstar Transaction. The outcome of such litigation or governmental inquiry is uncertain. Such legal proceedings or governmental inquiries could also prevent or delay the completion of the Nationstar Transaction and result in additional costs to us. One of the conditions to completion of the Merger is the absence of any injunctions or laws that prevents, makes illegal or prohibits the consummating the transactions contemplated under the Merger Agreement. Accordingly, if a plaintiff is successful in obtaining a judgment prohibiting completion of the Nationstar Transaction, then such judgment may prevent the Nationstar Transaction from being completed, or from being completed within the expected time frame.
financial institutions. Item 1B.
| Unresolved Staff Comments.
|
None.
Our corporate headquarters are located in Seattle, Washington. We lease office space for our Company personnel.
Item 3.
| Legal Proceedings.
|
As of December 31, 2017, the Company was not a party to, or aware of, any pending legal proceedings or investigations requiring disclosure at this time.
Item 4.
| Mine Safety Disclosures.
|
Not applicable.
22
PART II
Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Market Information
Since September 28, 2015, WMIH’s common stock has traded on The Nasdaq Capital Market under the trading symbol “WMIH.” From the Effective Date until September 25, 2015, WMIH’s common stock was quoted on the over-the-counter market under the symbol “WMIH.”
The following table shows the range of reported high and low daily closing prices for WMIH’s common stock for each full quarterly period during the years ended December 31, 2017 and December 31, 2016, from The Nasdaq Capital Market exchange.
Period | | High | | | Low | |
Fourth Quarter – 2017 | | $ | 1.00 | | | $ | 0.61 | |
Third Quarter – 2017 | | $ | 1.30 | | | $ | 0.95 | |
Second Quarter – 2017 | | $ | 1.55 | | | $ | 1.10 | |
First Quarter – 2017 | | $ | 1.55 | | | $ | 1.10 | |
Fourth Quarter – 2016 | | $ | 2.28 | | | $ | 1.30 | |
Third Quarter – 2016 | | $ | 2.49 | | | $ | 2.22 | |
Second Quarter – 2016 | | $ | 2.39 | | | $ | 2.11 | |
First Quarter – 2016 | | $ | 2.58 | | | $ | 2.14 | |
On February 28, 2018, the price of WMIH’s common stock traded on Nasdaq ranged from a high of $1.31 per share to a low of $1.23 per share.
Holders
As of February 28, 2018, there were approximately 7,669 stockholders of record of WMIH’s common stock. This does not reflect holders who beneficially own WMIH’s common stock held in nominee or street name.
Dividends
We have not declared or paid anycash dividends on WMIH’sour common stock, since the Effective Date. So long as any share of Series B Preferred Stock remains outstanding, no dividend shall be paid on WMIH’s common stock unless and until all accrued and unpaid regular dividends on all outstanding shares of Series B Preferred Stock have been declared and paid in full. Except for stock dividend payments on the Series B Preferred Stock, we currently do not anticipate payingexpect to declare or pay any cash dividends on WMIH’s capital stock at this time or forin the foreseeable future. See The timing and amount of any future dividends, if any, will be determined by the Board of Directors and will depend, among other factors, upon our earnings, financial condition, cash requirements, the capital requirements of subsidiaries and investment opportunities at the time any such transaction is considered.
Issuer Purchases of Equity Securities
In October 2022, our Board of Directors authorized a new repurchase plan of $200 million of our outstanding common stock. In July 2023, our Board of Directors authorized an additional $200 million of our outstanding common stock. The stock repurchase program may be suspended, modified or discontinued at any time at our discretion. As of December 31, 2023, $137 million of common stock remain available for repurchase. During the three months ended December 31, 2023, we repurchased shares of our common stock at a total cost of $72 million under our share repurchase program. The number and average price of shares purchased are set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased (in thousands) | | (b) Average Price Paid per Share(1) | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (in thousands) | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program (in millions)(1) |
| October 2023 | | 419 | | | $ | 54.82 | | | 419 | | | $ | 186 | |
| November 2023 | | 547 | | | $ | 57.59 | | | 547 | | | $ | 155 | |
| December 2023 | | 277 | | | $ | 63.36 | | | 277 | | | $ | 137 | |
| Total | | 1,243 | | | | | 1,243 | | | |
(1)Excludes excise tax.
Stockholder Return Performance
The following graph shows a comparison of the cumulative total stockholder return for our common stock, the S&P 500 Index and the S&P Composite 1500 Financials Index from December 31, 2018 through December 31, 2023. This data assumes an investment of $100 on December 31, 2018.
33 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Comparative results for our common stock, the S&P 500 Index and the S&P Composite 1500 Financials Index are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| Mr. Cooper | 100 | | | 107 | | | 266 | | | 357 | | | 344 | | | 558 | |
| S&P 500 Index | 100 | | | 129 | | | 150 | | | 190 | | | 153 | | | 190 | |
| S&P Composite 1500 Financials Index | 100 | | | 128 | | | 123 | | | 162 | | | 142 | | | 156 | |
Item 6. [RESERVED]
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. See also “Dividend Policy” under Note 2: Significant Accounting Policies, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K and Note 8: Financing Arrangements, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this Annual Report on Form 10-K.
23
Sales of Unregistered Equity Securities
On March 19, 2012, WMIH issued 200,000,000 shares of its common stock. The Company relied on Section 1145(a)(1) of the Bankruptcy Code to exempt from the registration requirements of the Securities Act the issuance of the new securities.
On October 18, 2012, WMIH issued a total of 1,156,078 restricted shares of its common stock under the Company’s 2012 Long-Term Incentive Plan (the “2012 Plan”) to outside directors. On August 13, 2013, 686,273 restricted shares of WMIH’s common stock were issued under the 2012 Plan to outside directors. The restricted shares vest in three equal installments commencing on the date of grant over a three year period (subject to continued service as a director through each vesting date and subject to certain stock ownership guidelines in which the director must at all times during service on the Board hold shares of WMIH’s common stock equal to 50% of the aggregate number of shares awarded to the director as director compensation and that have vested, and such shares may not be sold without the prior approval of the Compensation Committee). Effective February 10, 2014, we increased the number of shares reserved and available for awards under our 2012 Plan from 2.0 million to 3.0 million shares of WMIH’s common stock and issued 250,000 restricted shares to members of our Corporate Strategy and Development Committee and Michael Willingham, the current Chairman of the Board’s Audit Committee and former Chairman of the Board. On June 4, 2014, 250,894 restricted shares of WMIH’s common stock were issued under the 2012 Plan to our outside directors. Effective February 25, 2015, we increased the number of shares authorized and available for awards under the 2012 Plan from 3.0 million to 12.0 million shares of WMIH’s common stock, subject to approval of stockholders of WMIH, which approval was subsequently received on April 28, 2015 at our annual meeting. On April 28, 2015, 269,234 restricted shares of WMIH’s common stock were issued under the 2012 Plan to outside directors. On May 15, 2015, WMIH issued a total of 3,555,556 restricted shares (1,777,778 restricted stock grants each) to William C. Gallagher and Thomas L. Fairfield under the 2012 Plan. On June 1, 2016, 212,765 restricted shares of WMIH’s common stock were issued under the 2012 Plan to outside directors. On June 1, 2017, 333,332 restricted shares of WMIH’s common stock were issued under the 2012 Plan to outside directors. We issued these shares relying on Section 4(a)(2) of the Securities Act, and Rule 506 of Regulation D thereunder.
1,000,000 shares of Series A Preferred Stock, and warrants to purchase 61,400,000 shares of WMIH’s common stock were issued effective January 30, 2014, in reliance on Section 4(a)(2) of the Securities Act, and Rule 506 of Regulation D thereunder.
In connection with the Series B Preferred Stock Financing, 600,000 shares of Original Series B Preferred Stock were issued effective January 5, 2015 in reliance on Section 4(a)(2) of the Securities Act, and Rule 506 of Regulation D thereunder. As more fully described in Note 15: Subsequent Events, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K, on December 11, 2017, we announced an amendment of the Original Series B Preferred Stock, which amendment became automatically effective at 12:00 a.m., New York City time, on January 5, 2018, and effected an exchange of the previously outstanding Original Series B Preferred Stock for shares of Series B Preferred Stock. The Series B Preferred Stock that has been issued as a result of the Series B Amendment is in reliance upon an exemption from registration provided under Section 4(a)(2) of the Securities Act.
24
Performance Graph
The following graph shows the cumulative total stockholder return for WMIH’s common stock during the period from December 31, 2012 to December 31, 2017. The chart also shows the cumulative returns of (a) the Standard & Poor’s 500 Index (“S&P 500”) and (b) an index of two peer companies selected by the Company. The peer group is comprised of the following companies: MGIC Investment Corporation and Radian Group Inc. This peer group index will be subject to occasional change as WMIH or its competitors change their focus, merge or are acquired, undergo significant changes, or as new competitors emerge. The comparison assumes $100 was invested on the Effective Date, in WMIH’s common stock and in each of the indices shown and assumes that all dividends were reinvested.
The comparisons are required by the SEC and, therefore, are not intended to forecast or be indicative of possible future performance of WMIH’s common stock.
Date | | December 31, 2012 | | | December 31, 2013 | | | December 31, 2014 | | | December 31, 2015 | | | December 31, 2016 | | | December 31, 2017 | |
S&P 500 | | $ | 100 | | | $ | 132 | | | $ | 150 | | | $ | 153 | | | $ | 171 | | | $ | 208 | |
WMIH | | $ | 100 | | | $ | 336 | | | $ | 244 | | | $ | 308 | | | $ | 185 | | | $ | 101 | |
Peer | | $ | 100 | | | $ | 278 | | | $ | 312 | | | $ | 278 | | | $ | 337 | | | $ | 442 | |
Tax Attribute Preservation Provision
In order to preserve valuable tax attributes following emergence from bankruptcy, restrictions are included in our Certificate of Incorporation on transfers of WMIH’s common stock. Until the Restriction Release Date (as defined in our Certificate of Incorporation), unless approved by our Board, any attempted transfer of WMIH’s common stock is prohibited and void to the extent that, as a result of such transfer (or any series of transfers) either (i) any person or group of persons shall become a “Substantial Holder” of WMIH (as defined in the Certificate of Incorporation); or (ii) the ownership interest of any Substantial Holder shall be increased. Additionally, until the Restriction Release Date, Substantial Holders cannot dispose of WMIH’s common stock without the consent of our Board.
25
Item 6.
| Selected Financial Data.
|
Operations(in thousands, except share and per share amounts) | Year ended December 31, 2017 | | Year ended December 31, 2016 | | Year ended December 31, 2015 | | | Year ended December 31, 2014 | | | Year ended December 31, 2013 | | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Premiums earned | $ | 1,220 | | $ | 3,147 | | $ | 5,121 | | | $ | 7,169 | | | $ | 10,946 | | |
Net investment income (loss) | | 6,670 | | | 2,249 | | | 879 | | | | 1,379 | | | | (778 | ) | |
Total revenues | | 7,890 | | | 5,396 | | | 6,000 | | | | 8,548 | | | | 10,168 | | |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expense (benefit) | | 19 | | | (669 | ) | | (1,115 | ) | | | 3,281 | | | | (6,159 | ) | |
Ceding commission expense | | 137 | | | 306 | | | 456 | | | | 653 | | | | 1,325 | | |
General and administrative expense | | 14,457 | | | 7,043 | | | 20,940 | | | | 6,526 | | | | 5,665 | | |
Loss contract reserve value change | | (5,645 | ) | | (3,978 | ) | | (2,926 | ) | | | (33,770 | ) | | | (5,898 | ) | |
(Gain) loss from contract termination | | (383 | ) | | — | | | — | | | | 6,563 | | | | — | | |
Interest expense | | 1,788 | | | 2,616 | | | 3,702 | | | | 22,225 | | | | 14,897 | | |
Total operating expense | | 10,373 | | | 5,318 | | | 21,057 | | | | 5,478 | | | | 9,830 | | |
Net operating (loss) income | | (2,483 | ) | | 78 | | | (15,057 | ) | | | 3,070 | | | | 338 | | |
Other (income) and expense: | | | | | | | | | | | | | | | | | | |
Other income | | (123 | ) | | (123 | ) | | (7,845 | ) | | | — | | | | — | | |
(Gain) loss on change in fair value of derivative embedded conversion feature | | (28,242 | ) | | (201,499 | ) | | 54,621 | | | | — | | | | — | | |
Total other (income) expense | | (28,365 | ) | | (201,622 | ) | | 46,776 | | | | — | | | | — | | |
Income (loss) before income taxes | | 25,882 | | | 201,700 | | | (61,833 | ) | | | 3,070 | | | | 338 | | |
Income tax expense (benefit) | | — | | | — | | | — | | | | — | | | | — | | |
Net income (loss) | | 25,882 | | | 201,700 | | | (61,833 | ) | | | 3,070 | | | | 338 | | |
Redeemable convertible series B preferred stock dividends | | (18,050 | ) | | (18,000 | ) | | (17,748 | ) | | | — | | | | — | | |
Preferred deemed dividend | | — | | | — | | | — | | | | (9,455 | ) | | | — | | |
Net income (loss) attributable to common and participating stockholders | $ | 7,832 | | $ | 183,700 | | $ | (79,581 | ) | | $ | (6,385 | ) | | $ | 338 | | |
Basic net income (loss) per share attributable to common and participating stockholders | $ | 0.01 | | $ | 0.33 | | $ | (0.39 | ) | | $ | (0.03 | ) | | $ | 0.00 | | |
Shares used in computing basic net income (loss) per share | | 202,595,288 | | | 202,270,887 | | | 201,746,613 | | | | 200,869,928 | | | | 200,304,068 | | |
Diluted net income (loss) per share attributable to common and participating stockholders | $ | 0.01 | | $ | 0.30 | | $ | (0.39 | ) | | $ | (0.03 | ) | | $ | 0.00 | | |
Shares used in computing diluted net income (loss) per share | | 212,660,917 | | | 235,406,360 | | | 201,746,613 | | | | 200,869,928 | | | | 200,304,068 | | |
| | | | | | | | | | | | | | | | | | |
Statement of cash flow data: | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by | | | | | | | | | | | | | | | | | | |
Operating activities | $ | (6,417 | ) | $ | (6,537 | ) | $ | (14,180 | ) | | $ | (31,249 | ) | | $ | (50,351 | ) | |
Investing activities | | 73,048 | | | 21,980 | | | (39,127 | ) | | | 156,159 | | | | 51,292 | | |
Financing activities | | (36,824 | ) | | (20,969 | ) | | 554,215 | | | | (56,555 | ) | | | (31,841 | ) | |
| | | | | | | | | | | | | | | | | | |
Balance Sheet data (as of end of period): | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 26,709 | | $ | 2,491 | | $ | 9,924 | | | $ | 78,009 | | | $ | 11,986 | | |
Restricted cash | | 578,936 | | | 573,347 | | | 571,440 | | | | 2,447 | | | | 115 | | |
Derivative asset - embedded conversion feature | | — | | | 80,651 | | | — | | | | — | | | | — | | |
Total assets | | 614,121 | | | 736,190 | | | 685,060 | | | | 156,139 | | | | 267,638 | | |
Notes payable - principal | | — | | | 18,774 | | | 21,743 | | | | 31,220 | | | | 105,502 | | |
Losses and loss adjustment reserves | | 474 | | | 811 | | | 5,063 | | | | 18,947 | | | | 44,314 | | |
Loss contract reserve | | — | | | 5,645 | | | 9,623 | | | | 12,549 | | | | 46,319 | | |
Derivative liability - embedded conversion feature | | — | | | — | | | 120,848 | | | | — | | | | — | | |
Other liabilities | | 16,303 | | | 14,063 | | | 14,357 | | | | 3,021 | | | | 1,218 | | |
Total liabilities | | 16,816 | | | 39,841 | | | 173,069 | | | | 67,909 | | | | 202,509 | | |
Redeemable convertible series B preferred stock, $0.00001 par value; 600,000, 600,000, 600,000, zero and zero shares issued and outstanding as of December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013, respectively; aggregate liquidation preference of $600,000,000, $600,000,000, $600,000,000, zero and zero as of December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013, respectively | | 503,713 | | | 502,213 | | | 502,213 | | | | — | | | | — | | |
Total stockholders’ equity | $ | 93,592 | | $ | 194,136 | | $ | 9,778 | | | $ | 88,230 | | | $ | 65,129 | | |
26
Item 7.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion should be read in conjunction with the information contained in our consolidated financial statements, including the notes thereto. The following discussion contains, in addition to the historical information, forward-looking statements that include risks and the related notesuncertainties (see discussion of “Forward-Looking Statements” included elsewhere in Part II, Item 8 of this Annual Report on Form 10-K. The following is a discussion and analysis of our results of operations for the periods ended December 31, 2017, 2016 and 2015 and our financial condition as of December 31, 2017 and December 31, 2016 (dollars in thousands, except share and per share data and as otherwise indicated)10-K).
References as used herein, unless the context requires otherwise, to (i) the “Company,” “we,” “us,” or “our” refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp., without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp., without regard to its subsidiaries; (iv) “WMMRC” refers to WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” refers to WMI Investment Corp. (formerly, a wholly-owned subsidiary of WMIH).
FORWARD-LOOKING STATEMENTS AND OTHER STATEMENTS
As discussed under “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K and “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K, Our actual results may differ materially from the results contemplated by forward-looking statements. We are not undertaking any obligation to updatethose anticipated in these forward-looking statements or other statements we may make in the following discussion oras a result of certain factors, including those factors set forth under Item 1A,
Risk Factors, and elsewhere in this document, even though these statements may be affected by events or circumstances occurring after the forward-looking statements were made. Therefore, you should not rely on these statements being current as of any time other than the time at which this document was filed with the SEC.OVERVIEW
Our Business Strategy and Operating Environment
WMIH Corp. (“WMIH”) is a corporation duly organized and existing under the laws of the State of Delaware. On May 11, 2015, WMIH merged with its parent corporation, WMI Holdings Corp., a Washington corporation (“WMIHC”), with WMIH as the surviving corporation in the merger. This transaction occurred as part of the reincorporation of WMIHC from the State of Washington to the State of Delaware effective May 11, 2015.
WMIH, formerly known as WMI Holdings Corp. (“WMIHC”) and Washington Mutual, Inc. (“WMI”), is the direct parent of WM Mortgage Reinsurance Company, Inc. (“WMMRC”) and, until its dissolution on January 18, 2017, as more fully described in Item 1 under “WMIIC” of Part I of this Annual Report on Form 10-K10-K.
All dollar amounts presented herein are in millions, except per share data and in Note 15: Subsequent Events,other key metrics, unless otherwise noted.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.
Basis of Presentation
The below presentation discusses the results of the operations for the year ended December 31, 2023 compared to the consolidated financial information year ended December 31, 2022. For a discussion of results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations,in Part II, Item 8 of thisour Annual Report on Form 10-K WMI Investment Corp. (“WMIIC”)for the year ended December 31, 2022.
We are a leading servicer and a major originator of residential mortgage loans. Our purpose is to keep the dream of homeownership alive, and we do this by helping mortgage borrowers (our customers) manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio UPB from $10 billion in 2006 to $992 billion as of December 31, 2023. We believe this track record reflects our strong operating capabilities, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology.
Our strategy to position the Company for continued, sustainable long-term growth includes initiatives to improve profitability and generate a return on tangible equity of 12% or higher. Key strategic initiatives include the following:
•Strengthen our balance sheet by building capital and liquidity, and managing interest rate and other forms of risk;
•Improve efficiency by driving continuous improvement in unit costs for Servicing and Originations segments, as well as by taking corporate actions to eliminate costs throughout the organization;
•Grow our servicing portfolio to $1 trillion in UPB by acquiring new customers and retaining existing customers;
•Achieve and sustain a refinance recapture rate of 60%;
•Delight our customers and keep Mr. Cooper a great place for our team members to work;
•Reinvent the customer experience by acting as the customer’s advocate and by harnessing technology to deliver digital solutions that are personalized and friction-less;
•Sustain the talent of our people and the culture of our organization; and
•Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.
35 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Anticipated Trends
In the fourth quarter of 2023, our Servicing segment generated income before income tax expense of $184, and our servicing portfolio grew to $992 billion, bringing us very close to our $1 trillion UPB target. We anticipate achieving this target during the first quarter of 2024, once boarding of a $90 billion subservicing portfolio for a new client is complete. We expect growth conditions to remain favorable, especially for MSR bulk purchases, which are coming to market with attractive margins. Overall, we expect our Servicing segment income to lag our servicing portfolio growth, as we anticipate lower interest rates in 2024, which increase prepayment speeds and amortization expense and lower net interest income.
In the fourth quarter of 2023, our Originations segment generated income before income tax expense of $9 on funded volume of $2,661. We expect the Originations segment to operate at higher levels of profitability during the first quarter of 2024 compared to the fourth quarter of 2023 due to business interruptions caused by the cybersecurity incident in 2023. Refer to Item 1C. Cybersecurity, for more information on the cybersecurity incident.
On February 1, 2024, we completed an offering of $1,000 unsecured senior notes due 2032 at 7.125%, and used the proceeds from the offering to repay a portion of the MSR facilities, which hadhave a higher run rate than the new unsecured senior notes. The offering will result in incremental corporate interest expense going forward, partially offset by a decrease in interest expense for our Servicing segment.
While the recent inflation rate increase appears to have subsided, the inflation rate remains relatively high. Inflationary pressures may limit a borrower’s disposable income, which can decrease a borrowers’ ability to enter into mortgage transactions. Inflationary pressures may also increase our operating costs. However, historically changes in interest rates have a greater impact on our financial results than changes in inflation. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or extent as the inflation rate.
Results of Operations
| | |
| Table 1. Consolidated Operations |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
Revenues - operational(1) | $ | 1,769 | | | $ | 1,643 | | | $ | 126 | |
| Revenues - mark-to-market | 25 | | | 821 | | | (796) | |
| Total revenues | 1,794 | | | 2,464 | | | (670) | |
| Total expenses | 1,172 | | | 1,274 | | | (102) | |
| Total other income, net | 32 | | | 24 | | | 8 | |
| Income before income tax expense | 654 | | | 1,214 | | | (560) | |
| Less: Income tax expense | 154 | | | 291 | | | (137) | |
| Net income from continuing operations | $ | 500 | | | $ | 923 | | | $ | (423) | |
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
Income before income tax expense decreased during the year ended December 31, 2023 compared to 2022 primarily due to a decrease in total revenues, partially offset by lower total expenses. The decrease in total revenues was primarily attributable to lower favorable MTM adjustment as the increase in mortgage rates was greater in 2022 compared to 2023. The MTM adjustment was partially offset by the increase in operational revenues in our Servicing segment driven by a larger servicing UPB portfolio in 2023, partially offset by decreased origination revenues due to lower origination volumes. The decrease in total expenses was primarily driven by lower salaries, wages and benefits in our Originations segment due to lower headcount in both the direct-to-consumer and correspondent channels as a result of reducing headcount commensurate with lower origination volumes in 2022. Partially offsetting the decrease in total expenses was cybersecurity incident related costs of $27 in 2023. Refer to Item 1C. Cybersecurity, for more information on the cybersecurity incident.
Income tax expense was $154 with an effective tax rate of 23.5% in the year ended December 31, 2023 compared with $291 with an effective tax rate of 24.0% in 2022. For further information on income taxes, please refer to Note 17, Income Taxes, in the Notes to Consolidated Financial Statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 36
Our operations are conducted through two segments: Servicing and Originations.
•The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages and mortgage servicing rights, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and, when necessary, performing collections, foreclosures, and the sale of REO. In 2023, we expanded our special servicing product offering with the acquisition of Rushmore Loan Management Services.
•The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent channel, which purchases or originates loans from mortgage bankers.
Refer to Note 21, Segment Information, in the Notes to Consolidated Financial Statements for a summary of segment results.
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer and subservicer, including our low-cost platform that creates operating leverage, our skill in mitigating losses for investors and clients, our commitment to strong customer service, industry leading compliance management, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive purchase and refinance options. We believe that our operational capabilities are reflected in our strong servicer ratings and recent agency recognition.
| | |
| Table 2. Servicer Ratings |
| | | | | | | | | | | | | | | | | |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | January/February 2024 | | May 2023 | | January 2024 |
| | | | | |
| Residential | RPS2 | | SQ2- | | Above Average |
| Master Servicer | RMS2+ | | SQ2+ | | Above Average |
| Special Servicer | RSS2 | | SQ2- | | Above Average |
| Subprime Servicer | RPS2 | | SQ2- | | Above Average |
Rushmore Special Servicer(4) | RSS2 | | SQ3+ | | Above Average |
(1)Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
(2)Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)
(3)S&P Rating Scale of Strong to Weak
(4)In connection with the acquisition of Roosevelt in 2023, the Company acquired Rushmore Loan Management Services, LLC, which is a residential mortgage servicer with services that focuses on special servicing.
37 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The following table sets forth the results of operations for the Servicing segment:
| | |
| Table 3. Servicing Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2023 | | 2022 | | Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps |
| Revenues | | | | | | | | | | | |
| Operational | $ | 1,917 | | 22 | | | $ | 1,530 | | 19 | | | $ | 387 | | 3 | |
| Amortization, net of accretion | (563) | | (6) | | | (693) | | (9) | | | 130 | | 3 | |
| Mark-to-market adjustments - Servicing | 25 | | — | | | 821 | | 10 | | | (796) | | (10) | |
| Total revenues | 1,379 | | 16 | | | 1,658 | | 20 | | | (279) | | (4) | |
| Expenses | | | | | | | | | | | |
| Salaries, wages and benefits | 340 | | 4 | | | 324 | | 4 | | | 16 | | — | |
| General and administrative | | | | | | | | | | | |
| Servicing support fees | 91 | | 1 | | | 76 | | 1 | | | 15 | | — | |
| Corporate and other general and administrative expenses | 194 | | 2 | | | 125 | | 2 | | | 69 | | — | |
| Foreclosure and other liquidation related expenses, net | 27 | | 1 | | | 16 | | — | | | 11 | | 1 | |
| Depreciation and amortization | 12 | | — | | | 18 | | — | | | (6) | | — | |
| Total general and administrative expenses | 324 | | 4 | | | 235 | | 3 | | | 89 | | 1 | |
| Total expenses | 664 | | 8 | | | 559 | | 7 | | | 105 | | 1 | |
| Other income (expense) | | | | | | | | | | | |
| Other interest income | 491 | | 6 | | | 208 | | 3 | | | 283 | | 3 | |
| | | | | | | | | | | |
| Advance interest expense | (55) | | (1) | | | (31) | | (1) | | | (24) | | — | |
| Other interest expense | (269) | | (3) | | | (190) | | (2) | | | (79) | | (1) | |
| Interest expense | (324) | | (4) | | | (221) | | (3) | | | (103) | | (1) | |
| | | | | | | | | | | |
| Total other income (expenses), net | 167 | | 2 | | | (13) | | — | | | 180 | | 2 | |
| Income from continuing operations before income tax expense | $ | 882 | | 10 | | | $ | 1,086 | | 13 | | | $ | (204) | | (3) | |
| | | | | | | | | | | |
| Weighted average cost - advance and MSR facilities | 7.9 | % | | | | 4.6 | % | | | | 3.3 | % | | |
| Weighted average cost - excess spread financing | 8.7 | % | | | | 8.8 | % | | | | (0.1) | % | | |
(1)Calculated basis points (“bps”) are as follows: Annual dollar amount/Total average UPB X 10000.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 38
| | |
| Table 4. Servicing - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2023 | | 2022 | | Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps |
| MSR Operational Revenue | | | | | | | | | | | |
| Base servicing fees | $ | 1,466 | | | 16 | | | $ | 1,227 | | | 15 | | | $ | 239 | | | 1 | |
| Modification fees | 19 | | | — | | | 13 | | | — | | | 6 | | | — | |
| | | | | | | | | | | |
| Late payment fees | 63 | | | 1 | | | 59 | | | 1 | | | 4 | | | — | |
| Other ancillary revenues | 117 | | | 2 | | | 53 | | | 1 | | | 64 | | | 1 | |
| Total MSR operational revenue | 1,665 | | | 19 | | | 1,352 | | | 17 | | | 313 | | | 2 | |
| Subservicing-related revenue | 323 | | | 3 | | | 283 | | | 3 | | | 40 | | | — | |
| Total servicing fee revenue | 1,988 | | | 22 | | | 1,635 | | | 20 | | | 353 | | | 2 | |
| MSR financing liability costs | (30) | | | 1 | | | (19) | | | — | | | (11) | | | 1 | |
| Excess spread payments and portfolio runoff | (41) | | | (1) | | | (86) | | | (1) | | | 45 | | | — | |
| Total operational revenue | 1,917 | | | 22 | | | 1,530 | | | 19 | | | 387 | | | 3 | |
| Amortization, Net of Accretion | | | | | | | | | | | |
| MSR amortization | (604) | | | (7) | | | (779) | | | (10) | | | 175 | | | 3 | |
| Excess spread accretion | 41 | | | 1 | | | 86 | | | 1 | | | (45) | | | — | |
| Total amortization, net of accretion | (563) | | | (6) | | | (693) | | | (9) | | | 130 | | | 3 | |
| Mark-to-Market Adjustments - Servicing | | | | | | | | | | | |
| MSR MTM | 121 | | | 2 | | | 1,328 | | | 17 | | | (1,207) | | | (15) | |
| Loss on MSR hedging activities | (68) | | | (1) | | | (332) | | | (4) | | | 264 | | | 3 | |
| Gain (loss) on MSR sales | 23 | | | — | | | (3) | | | — | | | 26 | | | — | |
Reclassifications(2) | (33) | | | (1) | | | (30) | | | (1) | | | (3) | | | — | |
| Excess spread / financing MTM | (18) | | | — | | | (142) | | | (2) | | | 124 | | | 2 | |
| Total MTM adjustments - Servicing | 25 | | | — | | | 821 | | | 10 | | | (796) | | | (10) | |
| Total revenues - Servicing | $ | 1,379 | | | 16 | | | $ | 1,658 | | | 20 | | | $ | (279) | | | (4) | |
(1)Calculated basis points (“bps”) are as follows: Annual dollar amount/Total average UPB X 10000.
(2)Reclassifications include the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no operations, assets or liabilities sincelonger part of the MSR portfolio.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing - Operational revenue increased during the year ended December 31, 2023 compared to 2022, primarily due to an increase in base servicing fees as a result of a higher average MSR UPB portfolio in 2023 and an increase in other ancillary revenues due to a $67 gain from the sale of mortgage loans that were acquired in connection with the collapse of a securitization trust due to over-collateralization.
MSR amortization decreased for the year ended December 31, 2023 as compared to 2022, primarily due to lower prepayments driven by higher mortgage rates in 2023, partially offset by a higher average MSR UPB portfolio and higher average MSR fair value.
MSR MTM, excess spread/financing MTM and loss on MSR hedging activities decreased during the year ended December 31, 2023 compared to 2022, as the increase in mortgage rates was greater in 2022 compared to 2023.
Subservicing - Subservicing fees increased during the year ended December 31, 2023 as compared to 2022, primarily due to subservicing UPB portfolio acquisitions, including the specialty UPB portfolio acquired from Rushmore during the second quarter of 2023, which was fully operational beginning in the third quarter of 2023, partially offset by the deboarding of a few subservicing clients.
39 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Servicing Segment Expenses
Total expenses increased during the year ended December 31, 2023 as compared to 2022, primarily driven by an increase in corporate and other general and administrative expenses and salaries, wages, and benefits. The increase in corporate and other general administrative expenses was primarily driven by the growth in our MSR UPB portfolio and an increase in allocated cost in 2023 due to a higher percentage of total headcount in the Servicing segment following the workforce reduction in the Originations segment in 2022. Salaries, wages and benefits increased primarily due to a higher headcount driven by the growth in our MSR UPB portfolio.
Servicing Segment Other Income (Expenses), net
Total other income (expenses), net changed during the year ended December 31, 2023 as compared to 2022, primarily due to higher interest income attributable to higher interest rates, partially offset by higher interest expenses from MSR and advance financing.
| | |
| Table 5. Servicing Portfolio - Unpaid Principal Balances |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Year Ended December 31, |
| | | | | | | | | 2023 | | 2022 |
| Average UPB | | | | | | | | | | | |
| MSRs | | | | | | | | | $ | 476,442 | | | $ | 383,809 | |
Subservicing and other(1) | | | | | | | | | 416,153 | | | 425,255 | |
| Total average UPB | | | | | | | | | $ | 892,595 | | | $ | 809,064 | |
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| UPB | | Fair Value | | bps | | UPB | | Fair Value | | bps |
| MSRs | | | | | | | | | | | |
| Agency | $ | 561,656 | | | $ | 8,774 | | | 156 | | $ | 380,502 | | | $ | 6,322 | | | 166 |
| Non-agency | 26,286 | | | 316 | | | 120 | | 30,880 | | | 332 | | | 108 |
| Total MSRs | 587,942 | | | 9,090 | | | 155 | | 411,382 | | | 6,654 | | | 162 |
| | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | |
| Agency | 355,915 | | | N/A | | | | 437,491 | | | N/A | | |
| Non-agency | 47,863 | | | N/A | | | | 21,562 | | | N/A | | |
| Total subservicing and other | 403,778 | | | N/A | | | | 459,053 | | | N/A | | |
| | | | | | | | | | | |
| Total ending balance | $ | 991,720 | | | $ | 9,090 | | | | | $ | 870,435 | | | $ | 6,654 | | | |
| | | | | | | | | | | |
| MSRs UPB Encumbrance | | | | | | | | December 31, 2023 | | December 31, 2022 |
| MSRs - unencumbered | | | | | | | | | $ | 513,672 | | | $ | 327,598 | |
MSRs - encumbered(2) | | | | | | | | | 74,270 | | | 83,784 | |
| Total MSRs UPB | | | | | | | | | $ | 587,942 | | | $ | 411,382 | |
(1)Subservicing and other includes (i) loans we emergedservice for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights.
(2)Encumbered MSRs consist of residential mortgage loans included within our excess spread financing transactions and MSR financing liability.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 40
The following table provides a rollforward of our MSR and subservicing and other portfolio UPB:
| | |
| Table 6. Servicing and Subservicing and Other Portfolio UPB Rollforward |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| MSR | | Subservicing and Other | | Total | | MSR | | Subservicing and Other | | Total |
| Balance - beginning of year | $ | 411,382 | | | $ | 459,053 | | | $ | 870,435 | | | $ | 339,208 | | | $ | 370,520 | | | $ | 709,728 | |
| Additions: | | | | | | | | | | | |
| Originations | 12,624 | | | — | | | 12,624 | | | 27,381 | | | — | | | 27,381 | |
Acquisitions / Increase in subservicing(1) | 229,910 | | | 97,372 | | | 327,282 | | | 121,471 | | | 196,759 | | | 318,230 | |
| Deductions: | | | | | | | | | | | |
Dispositions/ Decrease in subservicing(2) | (25,239) | | | (124,621) | | | (149,860) | | | (20,902) | | | (57,127) | | | (78,029) | |
| Principal reductions and other | (18,279) | | | (11,849) | | | (30,128) | | | (16,525) | | | (13,132) | | | (29,657) | |
Voluntary reductions(2) | (20,936) | | | (15,400) | | | (36,336) | | | (38,444) | | | (37,754) | | | (76,198) | |
Involuntary reductions(3) | (1,392) | | | (777) | | | (2,169) | | | (608) | | | (213) | | | (821) | |
| Net changes in loans serviced by others | (128) | | | — | | | (128) | | | (199) | | | — | | | (199) | |
| Balance - end of year | $ | 587,942 | | | $ | 403,778 | | | $ | 991,720 | | | $ | 411,382 | | | $ | 459,053 | | | $ | 870,435 | |
(1)Amount for Subservicing and Other UPB includes transfers from bankruptcy. Since emergenceMSR for MSRs sold with subservicing rights retained.
(2)Amount for MSR UPB includes transfers to Subservicing and Other for MSRs sold with subservicing rights retained.
(3)Voluntary reductions are related to loan payoffs by customers.
(4)Involuntary reductions refer to loan chargeoffs.
The table below summarizes the overall performance of the servicing and subservicing portfolio:
| | |
| Table 7. Key Performance Metrics - Servicing and Subservicing Portfolio |
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Loan count | 4,559,578 | | | 4,149,116 | |
Average loan amount(1) | $ | 217,269 | | | $ | 209,284 | |
| Average coupon - agency | 3.9 | % | | 3.6 | % |
| Average coupon - non-agency | 4.9 | % | | 4.5 | % |
60+ delinquent (% of loans)(2) | 1.9 | % | | 2.6 | % |
90+ delinquent (% of loans)(2) | 1.6 | % | | 2.2 | % |
120+ delinquent (% of loans)(2) | 1.4 | % | | 2.0 | % |
| | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Total prepayment speed (12-month constant prepayment rate) | 4.7 | % | | 9.6 | % |
(1)Average loan amount is presented in whole dollar amounts.
(2)Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. Loan delinquency includes loans in forbearance.
Delinquency is an assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances.
41 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | |
| Table 8. MSRs Loan Modifications and Workout Units |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
Modifications(1) | 22,850 | | | 42,131 | | | (19,281) | |
Workouts(2) | 48,766 | | | 47,559 | | | 1,207 | |
| Total modification and workout units | 71,616 | | | 89,690 | | | (18,074) | |
(1)Modifications consist of agency programs designed to adjust the terms of the loan (e.g., reduced interest rates).
(2)Workouts consist of other loss mitigation options designed to assist borrowers and keep them in their homes, but do not adjust the terms of the loan.
Total modifications during the year ended December 31, 2023 decreased compared to 2022 primarily due to a decrease in modifications related to loans impacted by the COVID-19 pandemic and rising mortgage rates. Total workouts during the year ended December 31, 2023 increased compared to 2022 primarily due to the extension of the COVID-19 Recovery Loss Mitigation Options, which expanded the options to include additional eligible borrowers and resulted in an increase in workouts in 2023.
Servicing Portfolio and Liabilities
The following table sets forth the activities of MSRs:
| | |
| Table 9. MSRs - Fair Value Rollforward |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Fair value - beginning of year | $ | 6,654 | | | $ | 4,223 | |
| Additions: | | | |
| Servicing retained from mortgage loans sold | 273 | | | 554 | |
| Purchases and acquisitions of servicing rights | 3,189 | | | 1,595 | |
| Dispositions: | | | |
| Sales of servicing assets and excess yield | (573) | | | (294) | |
| Changes in fair value: | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model (MSR MTM): | | | |
| Agency | 118 | | | 1,316 | |
| Non-agency | 3 | | | 12 | |
| Changes in valuation due to amortization: | | | |
| Scheduled principal payments | (248) | | | (176) | |
| Prepayments | | | |
| Voluntary prepayments | | | |
| Agency | (325) | | | (556) | |
| Non-agency | (11) | | | (38) | |
| Involuntary prepayments | | | |
| Agency | (20) | | | (9) | |
| | | |
Other changes(1) | 30 | | | 27 | |
| Fair value - end of year | $ | 9,090 | | | $ | 6,654 | |
(1)Amounts primarily represent negative fair values reclassified from bankruptcythe MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
See Note 5, Mortgage Servicing Rights and Related Liabilities and Note 18, Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of MSRs as of December 31, 2023 and 2022.
Mr. Cooper Group Inc. - 2023 Annual Report on March 19, 2012 (the “Effective Date”)Form 10-K 42
Excess Spread Financing
As further disclosed in Note 5, Mortgage Servicing Rights and Related Liabilities, in the Notes to Consolidated Financial Statements, we have had limited operationsentered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other than WMMRC’s legacy reinsurance business, whichrevenues, is being operateddesigned to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee, as a method for efficiently financing acquired MSRs and the purchase of loans, however we have not done so in runoff mode. We continuerecent years due to operate WMMRC’s businessthe availability of lower cost sources of funding.
Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to prepayment speeds and option-adjusted spread levels. See Note 5, Mortgage Servicing Rights and Related Liabilities and Note 18, Fair Value Measurements, in runoff mode,the Notes to Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of the excess spread financing liability as of December 31, 2023 and 2022.
During 2022, the Company entered into an assignment agreement to repurchase excess spread liabilities for a total purchase price of $277.
The following table sets forth the change in the excess spread financing:
| | | | | | | | | | | | | | |
| Table 10. Excess Spread Financing - Rollforward |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Fair value - beginning of year | $ | 509 | | $ | 768 |
| Additions: | | | |
| New financings | — | | — |
| Deductions: | | | |
| Repayments | (9) | | (293) |
| Settlements | (71) | | (99) |
| Changes in fair value: | | | |
| Agency | 5 | | 113 |
| Non-Agency | 3 | | 20 |
| Fair value - end of year | $ | 437 | | $ | 509 |
43 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The strategy of our
primary strategic objective has beenOriginations segment is to
identify and consummate oneoriginate or
more acquisitions of an operating business, either through a merger, purchase, business combination or other form of acquisition, and grow our business.We have sought to identify and evaluate acquisition opportunities of varying sizes across an array of industriesacquire new MSRs for the purposeservicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain or recapture our existing customers by providing them with attractive refinance and purchase options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of facilitating anthe Servicing segment. Furthermore, by originating or acquiring MSRs at a more attractive cost than bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Our Originations segment is one way that we help underserved consumers access the financial markets. In 2023, our total originations included loans for 9,561 customers with low FICOs (<660), 10,242 customers with income below the U.S. median household income, 12,139 first-time homebuyers, and 2,928 veterans. The originations during this period included 14,534 Ginnie Mae loans, which are designed for first-time homebuyers, low- and moderate-income borrowers, and veterans, comprising $4 billion in total proceeds. Once these loans are originated, the underserved borrowers become our servicing customers.
The Originations segment includes two channels:
•Our direct-to-consumer (“DTC”) lending channel relies on our call centers, website and mobile apps, specially trained teams of licensed mortgage originators, predictive analytics and modeling utilizing proprietary data from our servicing portfolio to reach our existing customers who may benefit from a new mortgage. Depending on borrower eligibility, we will refinance existing loans into conventional, government or non-agency products. Through lead campaigns and direct marketing, the direct-to-consumer channel seeks to convert leads into loans and ultimately MSRs in a cost-efficient manner.
•Our correspondent lending channel facilitates the acquisition of oneMSRs through purchasing newly originated residential mortgage loans that have been underwritten to investor guidelines. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our correspondent lending channel enables us to replenish servicing portfolio run-off typically at a better rate of return than traditional bulk or more operating businesses. WMIH has worked with our strategic partner, an affiliateflow acquisitions.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 44
The following table sets forth the results of operations for the Originations segment:
| | |
| Table 11. Originations Segment Results of Operations |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| Revenues | | | | | |
Service related, net - Originations(1) | $ | 61 | | | $ | 98 | | | $ | (37) | |
| Net gain on mortgage loans held for sale | | | | | |
Net gain on loans originated and sold(2) | 16 | | | 139 | | | (123) | |
Capitalized servicing rights(3) | 255 | | | 493 | | | (238) | |
| Total net gain on mortgage loans held for sale | 271 | | | 632 | | | (361) | |
| Total revenues | 332 | | | 730 | | | (398) | |
| Expenses | | | | | |
| Salaries, wages and benefits | 143 | | | 329 | | | (186) | |
| General and administrative | | | | | |
| Loan origination expenses | 30 | | | 59 | | | (29) | |
| Corporate and other general and administrative expenses | 33 | | | 54 | | | (21) | |
| Marketing and professional service fees | 18 | | | 33 | | | (15) | |
| Depreciation and amortization | 8 | | | 16 | | | (8) | |
| | | | | |
| Total general and administrative | 89 | | | 162 | | | (73) | |
| Total expenses | 232 | | | 491 | | | (259) | |
| Other income (expenses) | | | | | |
| Interest income | 36 | | | 53 | | | (17) | |
| Interest expense | (37) | | | (43) | | | 6 | |
| | | | | |
| Total other (expenses) income, net | (1) | | | 10 | | | (11) | |
| Income from continuing operations before income tax expense | $ | 99 | | | $ | 249 | | | $ | (150) | |
| | | | | |
| Weighted average note rate - mortgage loans held for sale | 6.8 | % | | 4.2 | % | | 2.6 | % |
| Weighted average cost of funds - warehouse facilities (excluding facility fees) | 6.7 | % | | 3.6 | % | | 3.1 | % |
(1)Service related, net - Originations refers to identify, considerfees collected from customers for originated loans and evaluate potential mergers, acquisitions, business combinationsfrom other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting, and other strategic opportunities.similar fees.
(2)Net gain on loans originated and sold (excluding capitalized servicing rights) represents the unrealized and realized gains and losses from the origination, purchase, and sale of loans as well as the unrealized and realized gains and losses from related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity which can vary based upon mortgage interest rates.
(3)Capitalized servicing rights represent the fair value attributed to mortgage servicing rights at the time in which they are retained in connection with the sale of loans during the period.
45 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | |
| Table 12. Originations - Key Metrics |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| Key Metrics | | | | | |
DTC locked PTA volume(1) | $ | 5,704 | | | $ | 14,823 | | | $ | (9,119) | |
Correspondent locked PTA volume(1) | 7,060 | | | 10,067 | | | (3,007) | |
| Total PTA lock volume | $ | 12,764 | | | $ | 24,890 | | | $ | (12,126) | |
| | | | | |
| DTC funded volume | $ | 5,940 | | | $ | 17,857 | | | $ | (11,917) | |
| Correspondent funded volume | 6,694 | | | 10,393 | | | (3,699) | |
Total funded volume(2) | $ | 12,634 | | | $ | 28,250 | | | $ | (15,616) | |
| | | | | |
| DTC volume of loans sold | $ | 5,850 | | | $ | 19,200 | | | $ | (13,350) | |
| Correspondent volume of loans sold | 6,657 | | | 10,863 | | | (4,206) | |
| Total volume of Originations loans sold | $ | 12,507 | | | $ | 30,063 | | | $ | (17,556) | |
| | | | | |
Recapture percentage(3) | 24.0 | % | | 31.8 | % | | (7.8) | % |
Refinance recapture percentage(4) | 77.1 | % | | 58.7 | % | | 18.4 | % |
| Purchase as a percentage of funded volume | 57.2 | % | | 33.0 | % | | 24.2 | % |
| Value of capitalized servicing on retained settlements | 219 | bps | | 191 | bps | | 28 | bps |
| | | | | |
| Originations Margin | | | | | |
| Revenue | $ | 332 | | | $ | 730 | | | $ | (398) | |
| PTA lock volume | $ | 12,764 | | | $ | 24,890 | | | $ | (12,126) | |
Revenue as a percentage of PTA lock volume(5) | 2.60 | % | | 2.93 | % | | (0.33) | % |
| | | | | |
Expenses(6) | $ | 233 | | | $ | 481 | | | $ | (248) | |
| Funded volume | $ | 12,634 | | | $ | 28,250 | | | $ | (15,616) | |
Expenses as a percentage of funded volume(7) | 1.84 | % | | 1.70 | % | | 0.14 | % |
| | | | | |
| Originations Margin | 0.76 | % | | 1.23 | % | | (0.47) | % |
(1)Pull through adjusted (“PTA”) volume represents the expected funding from locks taken during the period.
(2)Funded volume for the period could include pull through adjusted lock volume from prior periods.
(3)Recapture percentage includes new loan originations from both purchase and refinance transactions where borrower retention and/or property retention occurs as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(4)Refinance recapture percentage includes new loan originations from refinance transactions where borrower retention and property retention occurs as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(5)Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(6)Expenses include total expense and total other income (expenses), net.
(7)Calculated on funded volume as expenses are incurred based on closing of the loan.
Originations Segment Revenues
Total revenues decreased for the year ended December 31, 2023 compared to 2022 primarily driven by lower originations volume in 2023 that resulted in a decrease in capitalized servicing rights and a decline in net gain on loans originated and sold.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 46
Originations Segment Expenses
Total expenses for the year ended December 31, 2023 decreased when compared to 2022 primarily due to a decline in salaries, wages and benefits expense, and loan origination expenses. Salaries, wages and benefits expense declined in 2023 primarily due to decreased headcount and lower origination volumes in both DTC and correspondent channels. Loan origination expenses declined in 2023 primarily due to cost reduction initiatives in connection with decreased origination volumes.
Originations Segment Other (Expenses) Income, Net
Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans. Due to lower originations volume, both interest income and interest expense declined, partially offset by higher interest rates, resulting in immaterial changes for total other (expenses) income, net, during the year ended December 31, 2023 as compared to 2022.
Originations Margin
The Originations Margin for the year ended December 31, 2023 decreased as compared to 2022 primarily due to lower revenue as a percentage of pull through adjusted lock volume driven by lower margins from a shift in channel mix from higher margin direct-to-consumer to lower margin correspondent and decline in total revenues as a result of lower originations volume from both the direct-to-consumer and correspondent channels. Direct-to-consumer channel mix was 45% and 60% for the years ended December 31, 2023, and 2022, respectively.
Corporate/Other includes the results of Xome’s and Roosevelt Management Company’s operations, the Company’s unallocated overhead expenses (which include the costs of executive management and other corporate functions that are not directly attributable to our operating segments), changes in equity investments and interest expense on our unsecured senior notes. In addition, Corporate/Other includes eliminations related to intersegment hedge fair value changes.
The following tables set forth the selected financial results for Corporate/Other:
| | |
| Table 13. Corporate/Other Selected Financial Results |
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| 2023 | | 2022 | | Change | |
| Corporate/Other - Operations | | | | | | |
| Total revenues | $ | 83 | | | $ | 76 | | | $ | 7 | | |
| Total expenses | 276 | | | 224 | | | 52 | | |
| Interest income | 1 | | | — | | | 1 | | |
| Interest expense | 176 | | | 160 | | | 16 | | |
| Other income, net | 41 | | | 187 | | | (146) | | |
| | | | | | |
| Key Metrics | | | | | | |
| Average exchange inventory under management | 27,120 | | | 19,663 | | | 7,457 | | |
Total revenues increased during the year ended December 31, 2023 as compared to 2022 primarily due to increased revenue from Xome driven by greater sales volume in connection with exchange inventory growth.
Total expenses increased during the year ended December 31, 2023 as compared to 2022 due to cybersecurity incident related expenses of $26 and an increase in allocated costs in 2023, driven by higher percentage of total headcount in Corporate/Other following the workforce reduction in the Originations segment in 2022. Refer to Item 1C. Cybersecurity, for more information on the cybersecurity incident.
Interest expense increased during the year ended December 31, 2023 as compared to 2022 primarily due to the senior note assumed from the acquisition of Home Point Capital Inc.
The change in other income, net during the year ended December 31, 2023 as compared to 2022 was primarily due to a gain of $223 recorded in 2022 upon completion of the mortgage servicing platform sale to Sagent M&C, LLC, partially offset by a preliminary bargain purchase gain of $96 recorded in 2023 in connection with the acquisition of Home Point Capital Inc.
47 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | |
| Liquidity and Capital Resources |
We measure liquidity by unrestricted cash and availability of borrowings on our MSR and other facilities. We held cash and cash equivalents on hand of $571 as of December 31, 2023 compared to $527 as of December 31, 2022. During the year ended December 31, 2017,2023, we generated net cash of $896 from operating activities and bought back 5.6 million shares of our outstanding common stock for a total cost of $276, excluding excise tax, as part of our stock repurchase program. We have sufficient borrowing capacity to support our operations. As of December 31, 2023, total borrowing capacity for advance, warehouse, and MSR facilities was $11,301 of which $1,848 was collateralized and immediately available to draw. During the year ended December 31, 2023, we increased capacity on our MSR facilities by $2,550. Additionally, on February 1, 2024, we completed an offering of $1,000 7.125% unsecured senior notes due 2032. We repaid a portion of the amounts outstanding on our MSR facilities with the net proceeds of the offering. For more information on our advance, warehouse, and MSR facilities, see Note 13, Indebtedness, in the Notes to Consolidated Financial Statements.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) advance, warehouse and MSR facilities, other secured borrowings and unsecured senior notes; (iii) payments received in connection with the sale of excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) payment of our technology expenses.
We believe that our cash flows from operating activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.
In addition, derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations and servicing. As part of the Company’s economic hedging strategy, the Company hedges interest rate risk related to the pipeline in Originations (comprised of IRLCs and newly originated mortgage loans held for sale) and MSR portfolio in Servicing primarily using third-party derivative instruments. See Note 12, Derivative Financial Instruments, in the Notes to Consolidated Financial Statements within Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our derivative transactions.
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be variable interest entities (“VIEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which we transfer assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, we typically receive cash and/or other interests in the SPE as proceeds for the transferred assets. See Note 14, Securitizations and Financings, in the Notes to Consolidated Financial Statements within Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances, and details of their impact on our consolidated financial statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 48
Cash Flows
The table below presents cash flows information:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| Net cash attributable to: | | | | | |
| Operating activities | $ | 896 | | | $ | 3,767 | | | $ | (2,871) | |
| Investing activities | (1,836) | | | (1,322) | | | (514) | |
| Financing activities | 978 | | | (2,784) | | | 3,762 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 38 | | | $ | (339) | | | $ | 377 | |
Operating activities
Cash generated from operating activities decreased to $896 during the year ended December 31, 2023 from $3,767 in 2022. The decrease was primarily due to a decline of $4,827 in cash generated from originations net sales activities driven by higher mortgage rates, partially offset by a decrease of $1,833 in cash used for the repurchase of loan assets out of Ginnie Mae securitizations.
Investing activities
Cash used in investing activities increased to $1,836 during the year ended December 31, 2023 from $1,322 in 2022. The increase was primarily due to cash used of $522 for the acquisitions of Roosevelt and Home Point in 2023, and an increase of $255 in cash used for the purchase of mortgage servicing rights in 2023, partially offset by an increase of $313 in cash generated from the proceeds on sale of mortgage servicing rights in 2023.
Financing activities
Our financing activities generated cash of $978 during the year ended December 31, 2023 compared to cash used of $2,784 in 2022. The change was primarily due to a net borrowing of $1,375 in 2023 compared to net repayment of $2,113 in 2022 on our advance, warehouse and MSR facilities.
49 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments.
Interest Rate Risk
Changes in interest rates negatively affect our operations primarily as follows:
Servicing Segment
•a decrease in mortgage rates may increase prepayment speeds which may impact earnings through (i) increased amortization expense; (ii) decrease in servicing fees; and (iii) decrease in the fair value of our MSRs;
•a decrease in interest rates could reduce our earnings from our custodial deposit accounts;
•an increase in interest rates would increase the cost of servicing our outstanding debt, including our ability to finance servicing advances and for borrowing for acquisitions;
•an increase in interest rates, together with an increase in monthly payments when an adjustable mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, may cause increased delinquency, default and foreclosure. Increased mortgage defaults and foreclosures may adversely affect our business as they increase our expenses and reduce the number of mortgages we service;
•an increase in interest rates could also adversely affect our redelivery margins on EBO loans and consequently reduce the volume of EBO repurchases.
Originations Segment
•an increase in interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a purchase money loan may be more difficult for consumers;
•an increase in interest rates could also adversely affect our production margins due to increased competition among originators;
Our Investment Committee establishes and maintains policies that govern our risk appetite and associated hedging programs. Factors considered include such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the type of hedge instruments used in our hedging activities and our liquidity risk profile. Management actively manages interest rate exposure associated with the MSR portfolio and the pipeline through the usage of hedge instruments in accordance with the Investment Committee policies, which specify that the MSR portfolio and the pipeline should be hedged separately. Hedge instruments permitted by our aggregate hedge strategy include highly liquid market instruments such as Forward MBS trades, Swap futures, and Treasury futures. See Note 12, Derivative Financial Instruments to the Consolidated Financial Statements for additional information regarding our use of derivatives.
MSR Hedging Strategy
MSRs are measured at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The MSR hedge strategy is focused on mitigating interest-rate risk associated with the MSR portfolio excluding PLS MSRs (referred to herein as “MSR portfolio exposure”).
Our MSR hedge strategy’s objective is to provide partial hedge coverage of our MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) is targeted at 75% of the MSR portfolio modeled interest rate risk, subject to change at the discretion of the Investment Committee. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. We periodically evaluate the coverage ratio to determine if it warrants adjustment based on market conditions and the symmetry of interest rate risk exposure and liquidity impacts of the hedge and asset profile under shock scenarios. In addition, while DV01 measures remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 50
The changes in value on the derivative instruments associated with the MSR hedging strategy are recorded in earnings as a component of “revenues - service related, net” on the consolidated statements of operations within the Servicing segment and in “loss (gain) on MSR hedging activities” on the consolidated statements of cash flows.
Pipeline Hedging Strategy - Loans Held For Sale and IRLCs
We are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market for both the Originations segment for newly originated mortgage loans and the Servicing segment related to repurchased EBO mortgage loans held for sale. IRLCs generally range to 90 days and mortgage loans held for sale are generally funded and sold within 30 days. The objective of the pipeline hedging strategy is to economically hedge the entire pipeline interest rate exposure of both IRLCs and mortgage loans held for sale within certain hedge coverage tolerance levels. The net daily market risk position of net pull-though adjusted IRLCs and mortgage loans held for sale is monitored daily and its tolerance is +/- 10% of the estimated base value risk.
The changes in value on the derivative instruments associated with the pipeline hedging strategy are recorded in earnings as a component of “revenues - net gain on mortgage loans held for sale” on the consolidated statements of operations and consolidated statements of cash flows within the Originations and Servicing segments.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The discounted cash flow model incorporates prepayment speeds, OAS, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speed, OAS and cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs, forward delivery commitments on MBS and treasury futures, we rely on a model in determining the impact of interest rate shifts. In addition, the primary assumption used for IRLCs, is the borrower’s propensity to close their mortgage loans under the commitment.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used December 31, 2023 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
51 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of December 31, 2023 given hypothetical instantaneous parallel shifts in the yield curve. Actual results could differ materially.
| | |
| Table 17. Change in Fair Value |
| | | | | | | | | | | |
| December 31, 2023 |
| Down 25 bps | | Up 25 bps |
| Increase (decrease) in assets | | | |
| Mortgage servicing rights at fair value | $ | (130) | | | $ | 116 | |
| Mortgage loans held for sale at fair value | 2 | | | (2) | |
| Derivative financial instruments: | | | |
| Interest rate lock commitments | 4 | | | (4) | |
| Forward MBS trades | 76 | | | (72) | |
| Treasury futures | — | | | — | |
| Total change in assets | (48) | | | 38 | |
| Increase (decrease) in liabilities | | | |
| Mortgage servicing rights liabilities at fair value | (2) | | | 2 | |
| Excess spread financing at fair value | (3) | | | 3 | |
| Derivative financial instruments: | | | |
| Interest rate lock commitments | — | | | — | |
| Forward MBS trades | 6 | | | (4) | |
| Treasury futures | — | | | — | |
| Total change in liabilities | 1 | | | 1 | |
| Total net change | $ | (49) | | | $ | 37 | |
Capital Resources
Capital Structure and Debt
We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.
Financial Covenants
Our credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at our operating subsidiary, Nationstar Mortgage, LLC, as well as Rushmore Loan Management Services, LLC, which was acquired during the third quarter of 2023 in connection with the acquisition of Roosevelt. As of December 31, 2023, we were in compliance with our required financial covenants.
Seller/Servicer Financial Requirements
We are also subject to net worth, liquidity and capital ratio requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac (“Enterprises”) Seller/Servicers, and Ginnie Mae for single family issuers, as summarized below. These requirements apply to our operating subsidiary, Nationstar Mortgage, LLC, and Rushmore Loan Management Services, LLC.
Minimum Net Worth
•FHFA - a net worth base of $2.5 plus a dollar amount equal to or exceeding the sum of (i) 25 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB, serviced for the Enterprises, plus (ii) 25 basis points of non-agency serviced UPB, plus (iii) 35 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB serviced for Ginnie Mae.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 52
•Ginnie Mae - a net worth equal to the sum of $2.5, plus (i) 35 basis points of the issuer’s total effective Ginnie Mae single-family outstanding obligations, plus (ii) 25 basis points of the issuer’s total Enterprises single family outstanding servicing portfolio balance, plus (iii) 25 basis points of the issuer’s total non-agency single family servicing portfolio.
Minimum Liquidity
•FHFA - a base Liquidity of eligible assets equal to or exceeding:
◦7 basis points of sellers/servicer’s residential first lien mortgage servicing UPB serviced for the Enterprises, if the seller/servicer remits (or an Enterprise draws) interest or principal, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
◦3.5 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB serviced for the Enterprises, if the seller/servicer remits (or an Enterprise draws) the interest and principal only as actually collected from the borrower, plus
◦3.5 basis points of the seller/servicer’s non-agency servicing UPB, plus
◦10 basis points of the seller/servicer’s residential first lien mortgage servicing UPB serviced for Ginnie Mae.
◦In addition, an origination liquidity equal to or exceeding 50 basis points of the sum of the following:
i.Residential first lien mortgages held for sale, at lower of cost or market
ii.Residential first lien mortgages held for sale, at fair value, plus
iii.UPB of interest rate lock commitments after fallout adjustments
◦Supplemental liquidity at all time equal to or exceeding the sum of:
i.2 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for the Enterprises, plus
ii.5 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for Ginnie Mae
•Ginnie Mae – the greater of $1 or the sum of:
◦10 basis points of the issuer’s outstanding Ginnie Mae single-family servicing UPB, plus
◦3.5 basis points of the issuer’s outstanding Enterprises single family servicing UPB, if the issuer remits (or the Enterprise draws) the principal and interest only as actually collected from the borrower, plus
◦7 basis points of the Issuer’s outstanding Enterprises single-family servicing UPB, if the issuer remits (or the Enterprise draws) the principal or interest, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
◦3.5 basis points of the issuer’s outstanding non-agency single-family servicing UPB.
•Ginnie Mae - issuers that originated more than $1 billion in UPB of any residential first mortgage in the recent four-quarter period must have liquid assets equal to the greater of at least $1 or the sum of the points listed immediately above, plus:
◦50 basis points of loans held for sale, plus
◦50 basis points of the issuer’s UPB of IRLCs after fallout adjustments
Financial Reporting Requirements
•FHFA – must obtain an assessment of the seller/servicer’s performance and creditworthiness by a qualified, independent third party on an annual basis and meet the following criteria:
◦One primary servicer rating or master servicer rating, as applicable for large non-depository institutions that have greater than or equal to $50 billion in servicing UPB, and
◦One primary servicer rating or master servicer rating, as applicable, and one third party long-term senior unsecured debt rating or long-term corporate family rating, for large non-depository institutions that have greater than $100 billion in servicing UPB, and
◦One primary servicer rating or master servicer rating, as applicable, and issued by two rating agencies, each of which must issue either a third party long-term unsecured debt rating or long-term corporate family rating for large non-depository institutions that have greater than or equal to $150 billion in servicing UPB.
Minimum Capital Ratio
•FHFA and Ginnie Mae - a ratio of Tangible Net Worth to Total Assets greater than 6%.
Secured Debt to Gross Tangible Asset Ratio
•Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
As of December 31, 2023, Nationstar Mortgage, LLC and Rushmore Loan Management Services, LLC were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
53 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
In 2022, the FHFA and Ginnie Mae revised its Seller/Servicers and single-family issuers minimum financial eligibility requirements. All revisions are effective in 2024, as summarized below. The Company is currently evaluating the impact of the revised requirements.
Capital and Liquidity Plan (effective March 31, 2024)
•FHFA - Require annual capital and liquidity plan that includes MSR stress tests as part of the plan.
Capital Requirements (effective December 31, 2024)
•Ginnie Mae – a Risk-based Capital Ratio (“RBCR”) of at least 6%. RBCR is adjusted net worth less excess MSRs divided by total risked-based assets.
Since our Ginnie Mae single-family servicing portfolio exceeds $75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. We met this requirement for all financial periods presented.
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 19, Capital Requirements, in the Notes to Consolidated Financial Statements for additional information.
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Advance facilities principal amount | $ | 682 | | | $ | 669 | |
| Warehouse facilities principal amount | 822 | | | 817 | |
| MSR facilities principal amount | 2,814 | | | 1,410 | |
| Unsecured senior notes principal amount | 3,200 | | | 2,700 | |
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As of December 31, 2023, we had a total borrowing capacity of $950, of which we could borrow an additional $268. The maturity dates of our advance facilities range from October 2024 to September 2025. As of December 31, 2023, we had $432 of borrowings outstanding under facilities maturing within less than one year and $250 of borrowings outstanding under facilities maturing within the next two years.
Warehouse and MSR Facilities
Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. As of December 31, 2023, we had a total borrowing capacity of $5,101 and $5,250 for warehouse and MSR facilities, of which we could borrow an additional $4,279 and $2,436, respectively. The maturity dates for our warehouse facilities range from February 2024 to September 2025. As of December 31, 2023, we had $664 of borrowings outstanding under warehouse facilities maturing within less than one year and $158 of borrowings outstanding under warehouse facilities maturing within the next two years. Our MSR facilities provide financing for our servicing portfolio and investments. The maturity dates for our MSR facilities range from November 2024 to September 2025. As of December 31, 2023, we had $329 of borrowings under MSR facilities maturing within less than one year and $2,485 of borrowings outstanding under MSR facilities maturing within the next two years.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 54
Unsecured Senior Notes
In 2021 and 2022, we completed offerings of unsecured senior notes with maturity dates ranging from 2027 to 2031. In connection with the acquisition targetsof Home Point in the third quarter of 2023, we assumed an unsecured senior note with a maturity date in 2026. We pay interest semi-annually to the holders of these notes at interest rates ranging from 5.000% to 6.000%. We are scheduled to pay a total of $940 of interest payments from these notes over the next eight years, of which $176 is due within less than one year.
As of December 31, 2023, the expected maturities of our unsecured senior notes based on contractual maturities are presented below:
| | |
| Table 16. Contractual Maturities - Unsecured Senior Notes |
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2024 through 2025 | | $ | — | |
| 2026 | | 500 | |
| 2027 | | 600 | |
| 2028 | | 850 | |
| Thereafter | | 1,250 | |
| Unsecured senior notes principal amount | | 3,200 | |
| Purchase discount and unamortized debt issuance costs | | (49) | |
| Unsecured senior notes, net | | $ | 3,151 | |
Other contractual obligations
Our operating lease obligations were primarily incurred for office space and equipment. The average lease terms are generally for 1 to 8 years. As of December 31, 2023, the total future minimum lease payments for our operating lease obligations was $102, of which $23 is due within less than a year. For more information regarding lease obligations, see Note 9, Leases, in the Notes to Consolidated Financial Statements.
55 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | |
| Critical Accounting Policies and Estimates |
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 18, Fair Value Measurements, in Notes to Consolidated Financial Statements and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs and (ii) the valuation of excess spread financing.
MSRs at Fair Value
We generally retain the servicing rights for existing residential mortgage loans transferred to a third party. We recognize MSRs recorded on the balance sheet in such transfers that meet the accounting requirements for sale treatment at fair value. Additionally, we may acquire the rights to service residential mortgage loans from third parties. We have elected to measure all MSRs at fair value subsequent to capitalization or acquisition, with all changes in fair value recorded within “revenues - service related, net” in the consolidated statements of operations. We estimate the fair value of these MSRs using a discounted cash flow model, which incorporates prepayment speeds, option adjusted spread, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speeds, option adjusted spread (“OAS”), and cost to service. However, the discounted cash flow model is complex and uses asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. We obtain third-party valuations, industry surveys and other available market data quarterly to assess the reasonableness of the fair value calculated by the cash flow model. For the impact of changes in estimates on MSRs at fair value, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Note 5, Mortgage Servicing Rights and Related Liabilities, in the Notes to Consolidated Financial Statements.
Excess Spread Financing
In conjunction with the acquisition of certain MSRs on various pools of residential mortgage loans (the “Portfolios”), we have entered into sale and assignment agreements related to its right to servicing fees, under which we sell to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. We measure these financing arrangements at fair value to accurately represent the future performance of the acquired MSRs and related excess servicing financing, with all changes in fair value recorded as a charge or credit to “revenues - service related, net” in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and option adjusted spread. However, the discounted cash flow model is complex and uses asset-specific collateral data and market inputs. In addition, our total market risk is influenced by a wide variety of factors including market volatility and liquidity of the markets. We obtain a third-party valuation, industry surveys and other available market data quarterly to assess the reasonableness of the fair value calculated by the cash flow model. For the impact of changes in estimates on excess spread financing, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Note 5, Mortgage Servicing Rights and Related Liabilities, in the Notes to Consolidated Financial Statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 56
Realization of Deferred Tax Assets
Our provision for income taxes is calculated using the balance sheet method, which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in the valuation allowance. We provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) anticipated taxable income resulting from the reversal of taxable temporary differences; (3) tax planning strategies; and (4) anticipated future earnings exclusive of the reversal of taxable temporary differences. Of all of the sources of taxable income, we generally rely upon reversals of existing deferred tax liabilities, tax planning strategies, and future taxable income excluding reversing differences. In determining the appropriate amount of valuation allowance required, we consider (1) internal forecasts of our future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates, among others.
Recent Accounting Developments
Below provides recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker included within each reported measure of segment profit or loss and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. We are currently evaluating the impact this ASU may have on our financial statement disclosures. The Company does not expect ASU 2023-07 to have a material impact on our consolidated financial statements.
Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information for income taxes paid by jurisdiction. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. We are currently evaluating the impact this ASU may have on our financial statement disclosures. The Company does not expect ASU 2023-09 to have a material impact on our consolidated financial statements.
See Note 1, Nature of Business and Basis of Presentation, in the Notes to Consolidated Financial Statements within Item 8 for information on recent accounting guidance adopted in 2023.
57 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency. Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (and collectively, the “Agencies”).
Agency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
Asset-Backed Securities (“ABS”). A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Client. Owner of the underlying mortgage servicing rights on behalf of whom we service loans.
Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Customer. Residential mortgage borrower.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”). The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations (“DTC”). A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Excess Yield. The remaining servicing fees above the minimum servicing fee (“GSE Base Servicing Fee”), as defined by the agencies, whereby the rights to the excess fees are separated, securitized by the GSE’s and sold, while we retain the obligation to service the loan and therefore continue to receive the GSE Base Servicing Fee.
Exchange inventory. Consists of Xome’s real estate inventory ranging from pre-foreclosure to bank-owned properties.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 58
Federal National Mortgage Association (“Fannie Mae” or “FNMA”). FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.
Federal Housing Administration (“FHA”). The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (“FHFA”). A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”). Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Forbearance. An agreement between the mortgage servicer or lender and borrower for a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”). GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”). Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Interest Rate Lock Commitments (“IRLC”). Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Investors. Our investors include agency investors and non-agency investors. Agency investors primarily consist of Government National Mortgage Association (“Ginnie Mae” or “GNMA”) and the GSEs, Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”). Non-agency investors consist of investors in private-label securitizations.
Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (“MBS”). A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (“MSRs”). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to more than adequately compensate the servicer for performing the servicing.
59 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
MSR Facility. A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Option adjusted spread (“OAS”). The incremental spread added to the risk-free rate to reflect embedded (prepayment) optionality and other risk inherent in the MSRs or excess spread financing used to discount future cash flows for fair value purposes.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations (“PLS”). Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned (”REO”). Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture. Voluntarily prepaid loans that are expected to be refinanced by the related servicer.
Refinancing. The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 60
Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I Advances, T&I Advances and Corporate Advances.
(i) P&I Advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I Advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate Advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing Advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Servicing Fee. A servicing fee is the percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, collecting, and making escrow payments, passing principal and interest payments along to the note holder.
Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”). The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
61 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 62
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mr. Cooper Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mr. Cooper Group Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.
63 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | |
| Valuation of Forward Mortgage Servicing Rights and the Excess Spread Financing Liability |
| Description of the Matter | The estimated fair values of mortgage servicing rights (MSRs) and the excess spread financing liability were $9.1 billion and $437 million, respectively, as of December 31, 2023. The excess spread financing liability is accounted for as a secured borrowing whereby the Company sold to third parties the right to receive a portion of excess cash flow generated from various pools of MSRs. As described in Note 2 and 5 to the consolidated financial statements, the Company measures MSRs and the excess spread financing liability at fair value on a recurring basis with changes in fair value recorded in the statement of operations. Such fair values are based on the present value of future cash flows from servicing the underlying loans. The significant unobservable assumptions used to estimate the fair value of MSRs are prepayment speeds, option adjusted spread, and cost to service. The significant unobservable assumptions used to estimate the fair value of the excess spread financing liability are prepayment speeds and option adjusted spread.
Auditing management’s estimate of the fair value of MSRs and the excess spread financing liability is complex and required judgment due to the subjectivity of the significant unobservable assumptions utilized in the calculation of the fair value. Changes to any of these assumptions could have a material impact on the fair value of the MSRs and the excess spread financing liability. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s process for estimating the fair value of MSRs and the excess spread financing liability, including management’s internal controls over the development of the significant unobservable assumptions and determination of the fair value of MSRs and the excess spread financing liability. This included, among others, testing internal controls over management’s review of: 1) historical results and market-based information considered in developing these assumptions; 2) comparing independent fair value ranges and assumptions obtained from third-party valuation firms to the internally developed fair value estimate and assumptions; 3) the completeness and accuracy of data used in determining the assumptions and the fair value estimate.
To test the fair value of the MSRs and the excess spread financing liability, our audit procedures included, among others, testing the reasonableness of the significant unobservable assumptions and the fair value estimate. We tested the reasonableness of the assumptions by comparing to historical Company results and independent, market-based information. We tested the completeness and accuracy of the data underlying the assumptions and historical results. We utilized an internal valuation specialist to assist in testing management’s assumptions and the fair value estimate by developing and comparing to independent expectations. We identified potential sources of corroborating and contrary information. We also compared the significant unobservable assumptions and the fair value estimate developed by management to those from the third-party valuation firms utilized by management and evaluated the competence and objectivity of these firms. |
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Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 64
| | | | | |
| Accounting for the Acquisition of Home Point Capital, Inc. |
| Description of the Matter | The Company completed its acquisition of Home Point Capital, Inc. (Home Point) in the third quarter of 2023, for total consideration of approximately $658 million, including $335 million for a bulk purchase of a portion of Home Point’s mortgage servicing rights (MSRs) portfolio and $323 million for the tender offer to acquire the outstanding shares of common stock of Home Point. As described in Note 2 and Note 3 to the consolidated financial statements, the acquisition was accounted for as a business combination under ASC 805 which resulted in recording a $96 million preliminary bargain purchase gain.
Auditing the Company’s accounting for the Home Point acquisition was complex due to the subjectivity required in determining the fair value of the acquired MSRs related to Home Point’s total servicing portfolio and the assumed repurchase reserve liability related to Home Point’s historical mortgage loan sales. The subjectivity was primarily due to determining the significant assumptions used in determining the fair value. Selecting and applying audit procedures to address the subjectivity involves auditor judgment and industry-specific knowledge including the current market conditions considered by a market participant.
The acquisition date fair value of the MSR assets were determined using market participant assumptions to estimate the present value of future cash flows from servicing the underlying loans. The significant unobservable assumptions used to estimate the fair value of the MSRs were prepayment speeds, option adjusted spread, and cost to service. The acquisition date fair value of the repurchase reserve liability was estimated using: i) historical loss rates; ii) secondary market pricing of loans; iii) the quality of underwriting procedures; and iv) borrower delinquency and default patterns. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over its accounting for Home Point acquisition, including development of the significant assumptions and determination of the fair value of acquired MSRs and assumed repurchase reserves. This included, among others, testing internal controls over management’s review of: 1) historical results and market-based information considered in developing these assumptions; 2) comparing independent fair value ranges and assumptions to third-party sources, where available, to the internally developed fair value estimates and assumptions; 3) the completeness and accuracy of data used in determining the assumptions and the fair value estimates. To test the acquisition date fair value of the MSRs and repurchase reserves, our audit procedures included, among others, testing the reasonableness of the significant assumptions and the fair value estimate. We tested the reasonableness of the assumptions by comparing to historical Company results and independent, market-based information. We tested the completeness and accuracy of the data underlying the assumptions and historical results. We also performed a sensitivity analysis of the significant unobservable assumptions to evaluate the changes in fair value of the MSRs as well changes in the repurchase reserve liability resulting from changes in the significant assumptions. We utilized internal valuation specialists to assist in testing management’s assumptions and the fair value estimates and to identify potential sources of corroborating and contrary information. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Dallas, Texas
February 28, 2024
65 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Consolidated Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Assets | | | |
| Cash and cash equivalents | $ | 571 | | | $ | 527 | |
| Restricted cash | 169 | | | 175 | |
| Mortgage servicing rights at fair value | 9,090 | | | 6,654 | |
| Advances and other receivables, net of reserves of $170 and $137, respectively | 996 | | | 1,019 | |
| Mortgage loans held for sale at fair value | 927 | | | 893 | |
| Property and equipment, net of accumulated depreciation of $141 and $122, respectively | 53 | | | 65 | |
| Deferred tax assets, net | 472 | | | 703 | |
| Other assets | 1,918 | | | 2,740 | |
| Total assets | $ | 14,196 | | | $ | 12,776 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Unsecured senior notes, net | $ | 3,151 | | | $ | 2,673 | |
| Advance, warehouse and MSR facilities, net | 4,302 | | | 2,885 | |
| Payables and other liabilities | 1,995 | | | 2,633 | |
| MSR related liabilities - nonrecourse at fair value | 466 | | | 528 | |
| Total liabilities | 9,914 | | | 8,719 | |
| Commitments and contingencies (Note 20) | | | |
| Common stock at $0.01 par value - 300 million shares authorized, 93.2 million shares issued | 1 | | | 1 | |
| Additional paid-in-capital | 1,087 | | | 1,104 | |
| Retained earnings | 4,302 | | | 3,802 | |
| Treasury shares at cost - 28.6 million and 24.0 million shares, respectively | (1,108) | | | (850) | |
| Total stockholders’ equity | 4,282 | | | 4,057 | |
| Total liabilities and stockholders’ equity | $ | 14,196 | | | $ | 12,776 | |
See accompanying Notes to Consolidated Financial Statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 66
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenues: | | | | | |
| Service related, net | $ | 1,440 | | | $ | 1,865 | | | $ | 1,067 | |
| Net gain on mortgage loans held for sale | 354 | | | 599 | | | 2,251 | |
| Total revenues | 1,794 | | | 2,464 | | | 3,318 | |
| Expenses: | | | | | |
| Salaries, wages and benefits | 634 | | | 789 | | | 1,036 | |
| General and administrative | 538 | | | 485 | | | 626 | |
| Total expenses | 1,172 | | | 1,274 | | | 1,662 | |
| Interest income | 528 | | | 261 | | | 231 | |
| Interest expense | (537) | | | (424) | | | (478) | |
| Other income (expense), net | 41 | | | 187 | | | 528 | |
| Total other income (expenses), net | 32 | | | 24 | | | 281 | |
| Income from continuing operations before income tax expense | 654 | | | 1,214 | | | 1,937 | |
| Less: Income tax expense | 154 | | | 291 | | | 471 | |
| Net income from continuing operations | 500 | | | 923 | | | 1,466 | |
| Net loss from discontinued operations | — | | | — | | | (12) | |
| Net income | 500 | | | 923 | | | 1,454 | |
| Less: Undistributed earnings attributable to participating stockholders | — | | | — | | | 8 | |
| Less: Premium on retirement of preferred stock | — | | | — | | | 28 | |
| Net income attributable to common stockholders | $ | 500 | | | $ | 923 | | | $ | 1,418 | |
| | | | | |
| Earnings from continuing operations per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | 7.46 | | | $ | 12.84 | | | $ | 17.39 | |
| Diluted | $ | 7.30 | | | $ | 12.50 | | | $ | 16.67 | |
| | | | | |
| Earnings from discontinuing operations per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | — | | | $ | — | | | $ | (0.15) | |
| Diluted | $ | — | | | $ | — | | | $ | (0.14) | |
| | | | | |
| Earnings per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | 7.46 | | | $ | 12.84 | | | $ | 17.24 | |
| Diluted | $ | 7.30 | | | $ | 12.50 | | | $ | 16.53 | |
See accompanying Notes to Consolidated Financial Statements.
67 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | | | | | | | | | |
| Shares (in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Shares Amount | | Total Mr. Cooper Stockholders’ Equity | | Non-controlling Interests | | Total Stockholders’ Equity |
| Balance at January 1, 2021 | 1,000 | | | $ | — | | | 89,457 | | | $ | 1 | | | $ | 1,126 | | | $ | 1,434 | | | $ | (58) | | | $ | 2,503 | | | $ | 1 | | | $ | 2,504 | |
| Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 1,244 | | | — | | | (20) | | | — | | | — | | | (20) | | | — | | | (20) | |
| Share-based compensation | — | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 29 | | | — | | | 29 | |
| Repurchase of common stock | — | | | — | | | (16,924) | | | — | | | — | | | — | | | (572) | | | (572) | | | — | | | (572) | |
| Retirement of preferred stock | (1,000) | | | — | | | — | | | — | | | (19) | | | (9) | | | — | | | (28) | | | — | | | (28) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 1,454 | | | — | | | 1,454 | | | — | | | 1,454 | |
| Balance at December 31, 2021 | — | | | — | | | 73,777 | | | 1 | | | 1,116 | | | 2,879 | | | (630) | | | 3,366 | | | 1 | | | 3,367 | |
| Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 906 | | | — | | | (41) | | | — | | | 19 | | | (22) | | | — | | | (22) | |
| Share-based compensation | — | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 29 | | | — | | | 29 | |
| Dividends paid to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Repurchase of common stock | — | | | — | | | (5,417) | | | — | | | — | | | — | | | (239) | | | (239) | | | — | | | (239) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 923 | | | — | | | 923 | | | — | | | 923 | |
| Balance at December 31, 2022 | — | | | — | | | 69,266 | | | 1 | | | 1,104 | | | 3,802 | | | (850) | | | 4,057 | | | — | | | 4,057 | |
| Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 910 | | | — | | | (45) | | | — | | | 20 | | | (25) | | | — | | | (25) | |
| Share-based compensation | — | | | — | | | — | | | — | | | 28 | | | — | | | — | | | 28 | | | — | | | 28 | |
| Repurchase of common stock, including excise tax | — | | | — | | | (5,577) | | | — | | | — | | | — | | | (278) | | | (278) | | | — | | | (278) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 500 | | | — | | | 500 | | | — | | | 500 | |
| Balance at December 31, 2023 | — | | | $ | — | | | 64,599 | | | $ | 1 | | | $ | 1,087 | | | $ | 4,302 | | | $ | (1,108) | | | $ | 4,282 | | | $ | — | | | $ | 4,282 | |
See accompanying Notes to Consolidated Financial Statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 68
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Operating Activities | | | | | |
| Net income | $ | 500 | | | $ | 923 | | | $ | 1,454 | |
| Less: Net loss from discontinued operations | — | | | — | | | (12) | |
| Net income from continuing operations | 500 | | | 923 | | | 1,466 | |
| Adjustments to reconcile net income to net cash attributable to operating activities: | | | | | |
| Deferred tax expense | 135 | | | 289 | | | 351 | |
| Net gain on mortgage loans held for sale | (354) | | | (599) | | | (2,251) | |
| Provision for servicing and non-servicing reserves | 40 | | | 30 | | | 34 | |
| Fair value changes in mortgage servicing rights | 483 | | | (549) | | | 506 | |
| Fair value changes in MSR related liabilities | 18 | | | 142 | | | (33) | |
| Depreciation and amortization for property and equipment and intangible assets | 38 | | | 37 | | | 57 | |
| Bargain purchase gain | (96) | | | — | | | — | |
| Loss on MSR hedging activities | 68 | | | 332 | | | 86 | |
| (Gain) loss on MSR sales | (23) | | | 3 | | | (7) | |
| Gain on disposition of assets | — | | | (223) | | | — | |
| Gain on sale of business | — | | | — | | | (528) | |
| Other operating activities | 105 | | | 96 | | | 58 | |
| Repurchases of loan assets out of Ginnie Mae securitizations | (1,234) | | | (3,067) | | | (10,156) | |
| Mortgage loans originated and purchased for sale, net of fees | (12,805) | | | (28,309) | | | (84,684) | |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale | 14,130 | | | 34,461 | | | 97,461 | |
| Changes in assets and liabilities: | | | | | |
| Advances and other receivables | 28 | | | 153 | | | (380) | |
| Other assets | (6) | | | 278 | | | 286 | |
| Payables and other liabilities | (131) | | | (230) | | | (259) | |
| Net cash attributable to operating activities - continuing operations | 896 | | | 3,767 | | | 2,007 | |
| Net cash attributable to operating activities - discontinued operations | — | | | — | | | 625 | |
| Net cash attributable to operating activities | 896 | | | 3,767 | | | 2,632 | |
| | | | | |
| Investing Activities | | | | | |
| Acquisitions of business, net of cash acquired | (522) | | | — | | | — | |
| Acquisition of assets | (34) | | | — | | | — | |
| Purchase of mortgage servicing rights | (1,850) | | | (1,595) | | | (922) | |
| Proceeds on sale of mortgage servicing rights and excess yield | 603 | | | 290 | | | 61 | |
| Property and equipment additions, net of disposals | (18) | | | (17) | | | (41) | |
| Sale of business, net of cash divested | — | | | — | | | 465 | |
| Other investing activities | (15) | | | — | | | 2 | |
| Net cash attributable to investing activities - continuing operations | (1,836) | | | (1,322) | | | (435) | |
| Net cash attributable to investing activities - discontinued operations | — | | | — | | | 1,627 | |
| Net cash attributable to investing activities | (1,836) | | | (1,322) | | | 1,192 | |
| | | | | |
| Financing Activities | | | | | |
| Increase (decrease) in advance, warehouse and MSR facilities | 1,375 | | | (2,113) | | | (1,272) | |
| Settlements and repayment of excess spread financing | (80) | | | (392) | | | (156) | |
| Repurchase of common stock | (276) | | | (239) | | | (572) | |
| Issuance of unsecured senior debt | — | | | — | | | 600 | |
| Retirement of preferred stock | — | | | — | | | (28) | |
| Other financing activities | (41) | | | (40) | | | (42) | |
69 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Net cash attributable to financing activities - continuing operations | 978 | | | (2,784) | | | (1,470) | |
| Net cash attributable to financing activities - discontinued operations | — | | | — | | | (2,226) | |
| Net cash attributable to financing activities | 978 | | | (2,784) | | | (3,696) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 38 | | | (339) | | | 128 | |
| Cash, cash equivalents and restricted cash - beginning of year | 702 | | | 1,041 | | | 913 | |
Cash, cash equivalents and restricted cash - end of year(1) | $ | 740 | | | $ | 702 | | | $ | 1,041 | |
| | | | | |
| Supplemental Disclosures of Cash Activities | | | | | |
| Cash paid for interest expense from unsecured senior notes, excess spread financing, and advance, warehouse and MSR facilities | $ | 441 | | | $ | 303 | | | $ | 347 | |
| Net cash paid for income taxes | 26 | | | 17 | | | 159 | |
| | | | | |
| Supplemental Disclosures of Non-cash Investing and Financing Activities | | | | | |
| Purchase of mortgage servicing rights holdback | $ | 149 | | | $ | 11 | | | $ | 6 | |
| Sale of mortgage servicing rights holdback | 16 | | | 15 | | | 2 | |
| Excise tax from repurchase of common stock | 2 | | | — | | | — | |
| Equity consideration received from disposition of assets | — | | | 250 | | | — | |
| Equity consideration received from sale of business | — | | | — | | | 58 | |
(1)The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheets.
| | | | | | | | | | | | | | | | | |
| December 31,
2023 | | December 31,
2022 | | December 31,
2021 |
| Cash and cash equivalents | $ | 571 | | | $ | 527 | | | $ | 895 | |
| Restricted cash | 169 | | | 175 | | | 146 | |
| Total cash, cash equivalents and restricted cash | $ | 740 | | | $ | 702 | | | $ | 1,041 | |
See accompanying Notes to Consolidated Financial Statements.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 70
MR. COOPER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(millions of dollars, unless otherwise stated)
1. Nature of Business and Basis of Presentation
Nature of Business
Mr. Cooper Group Inc. collectively with its consolidated subsidiaries, (“Mr. Cooper,” the “Company,” “we,” “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan servicers and originators in the country focused on delivering a variety of servicing and lending products, services and technologies. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The significant accounting policies described below, together with the other notes that follow, are an integral part of the consolidated financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, other entities in which the Company has a controlling financial interest, and those variable interest entities (“VIE”) where the Company’s wholly owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are recorded at fair value, or at cost upon election of measurement alternative, at the end of each reporting period. Intercompany balances and transactions on consolidated entities have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates, and such differences could be material, due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers.
Reclassifications
Certain reclassifications have been made in the 2022 and 2021 consolidated statements of cash flows to conform to 2023 presentation. Such reclassifications were not material and did not affect total revenues, net income or cash attributable to operating activities.
Recent Accounting Guidance Adopted
Accounting Standards Update (“ASU”) 2020-04, 2021-01 and 2022-06, collectively implemented as Accounting Standards Codification Topic 848 (“ASC 848”), Reference Rate Reform provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedge accounting and other transactions affected by the transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and the London Inter-Bank Offered Rate (“LIBOR”). This guidance became effective on March 12, 2020, and can be adopted no later than December 31, 2024, with early adoption permitted. All of the Company’s facilities have transitioned away from LIBOR to alternative reference rates in 2023. In addition, the Company’s derivative financial instruments are not tied to LIBOR rates. The Company adopted ASU 2020-04, as amended by ASU 2021-01 and ASU 2022-06, in the fourth quarter of 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
71 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted cash on hand and other interest-bearing investments with original maturity dates of 90 days or less.
Restricted Cash
Restricted cash includes collected funds pledged to certain advance and warehouse facilities, collected fees payable to third parties, and certain contractual escrow funds.
Mortgage Servicing Rights (“MSR”)
The Company recognizes the rights to service mortgage loans for others, or MSRs, whether acquired or as a result of the sale of loans the Company originates with servicing retained, as assets. The Company initially records all MSRs at fair value. The Company has elected to subsequently measure MSRs at fair value.
The fair value of the MSRs is based upon the present value of the expected future net cash flows related to servicing the underlying loans. The Company determines the fair value of the MSRs using a discounted cash flow model which incorporates prepayment speeds, option adjusted spread, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread instead of a static discount rate.
The key assumptions to determine fair value include prepayment speeds, option adjusted spread and cost to service. The credit quality and stated interest rates of the loans underlying the MSRs affect the assumptions used in the cash flow models. The Company obtains third-party valuations quarterly to assess the reasonableness of the fair value calculated by the cash flow model. Fair value adjustments are recorded within “revenues - service related, net” in the consolidated statements of operations.
Advances and Other Receivables, Net
The Company advances funds to or on behalf of the investors when the borrower fails to meet contractual payments (e.g., loan principal and interest, property taxes, insurance) in accordance with terms of its servicing agreements. Other receivables consist of advances funded to maintain and market underlying loan collateral through foreclosure and ultimate liquidation on behalf of the investors. Advances are recovered from borrowers for performing loans and from the investors and loan proceeds for non-performing loans.
The Company may also acquire servicer advances in connection with the acquisition of MSRs through asset acquisitions or business combinations. These advances are recorded at their relative fair value amounts upon acquisition, which may result in a purchase discount or premium. The Company records receivables upon determining that collection of amounts due from loan proceeds, investors, mortgage insurers, or prior servicers is probable. Reserves related to recoverability of advances and other receivables are discussed below in Reserves for Servicing Activity.
Mortgage Loans Held for Sale
The Company originates prime residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held for sale and the Company has elected to measure these loans held for sale at fair value. The Company estimates fair value of mortgage loans held for sale using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, the Company records the loan origination fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees and underwriting fees are recorded in “revenues - service related, net” in the consolidated statements of operations. Gains or losses recognized upon sale of loans and fair value adjustments are recorded in “revenues - net gain on mortgage loans held for sale” in the consolidated statements of operations.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 72
Repurchased Loans
From time to time the Company is required to repurchase loans from various investors related to originations or servicing defects. Such defects include, but are not limited to, breaches in seller representations and warranties made upon sale or demands for servicing repurchase due certain situations (such as modification). Such loans are repurchased by the Company as required with the intent of resale in the secondary market. If the defect is something that can be cured, the Company may seek to cure the issue and re-sell the loan to the investor and retain servicing. However, the nature of the defect may preclude the Company from curing in which case the Company may elect to sell such loans, servicing released, through a whole loan (or “scratch and dent sale"). Due to the Company’s intent to sell these loans, these repurchases are appropriately classified as mortgage loans held for sale, with any gains or losses recorded in “revenues - net gain on mortgage loans held for sale” in the consolidated statements of operations.
Loans Subject to Repurchase from Ginnie Mae
For certain loans originated and sold into GNMA mortgage-backed securities, the Company, as servicer/transferor, has the unilateral right to repurchase, without GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payment not being received from the borrower for greater than 90 days (“delinquent status”). For loans in delinquent status, the Company must recognize in its consolidated balance sheets the right to repurchase the loan and a corresponding repurchase liability, regardless of whether the Company intends to repurchase the loan. The Company records these rights to repurchase in “other assets” at the unpaid principal balance and a corresponding liability in “payables and other liabilities” in its consolidated balance sheets.
From time to time, the Company exercises this right to repurchase individual delinquent loans in GNMA securitization pools to minimize interest spread losses, re-pool into new GNMA securitizations or otherwise sell to third-party investors. The majority of GNMA repurchased loans are repurchased in connection with loan modifications and loan resolution activity with the intent to re-pool into new GNMA securitizations upon re-performance of the loan or otherwise sell to third-party investors. Therefore, the Company classifies such loans as loans held for sale and has elected to measure these repurchased loans at fair value.
MSR Related Liabilities - Nonrecourse
Excess Spread Financing
In conjunction with the acquisition of certain MSRs on various pools of residential mortgage loans (the “Portfolios”), the Company entered into sale and assignment agreements related to its right to servicing fees, under which the Company sells to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. The excess cash flow payments to third parties are considered counterparty payments, which are recorded as an adjustment to “revenues - service related, net” in the consolidated statements of operations. The agreements consist of two components - current excess spread, or remittance of a percentage of excess spread on currently serviced loans, and future excess spread, or the obligation to transfer currently serviced loans that have been refinanced into current excess spread or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. The sale of these rights is accounted for as a secured borrowing under Accounting Standards Codification (“ASC”) 860, with the total proceeds received being recorded as a component of “MSR related liabilities - nonrecourse at fair value” in the consolidated balance sheets. The Company determines the effective interest rate on these liabilities and allocates total repayments between interest expense and the outstanding liability.
The Company has elected to measure the outstanding financings related to the excess spread financing agreements at fair value with all changes in fair value recorded to “revenues - service related, net” in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and option adjusted spread.
Changes to excess spread financing other than payments and fair value measurements include accretion, which results from changes in the portfolio. Changes related to accretion are recorded to “revenues - service related, net” with an offset to excess spread financing liability on the consolidated balance sheet.
73 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Mortgage Servicing Rights Financing
The Company has historically entered into transactions with third parties to sell a contractually specified base fee component of certain MSRs and servicer advances under specified terms. The Company evaluates these transactions to determine if they were sales or secured borrowings. When a transaction qualifies for sale treatment, the Company derecognizes the transferred assets in its consolidated balance sheets. If the Company determines that the related MSRs sales are contingent on the receipt of consents from various third parties, for accounting purposes, legal ownership of the MSRs continues to reside with the Company. The Company continues to account for the MSRs in its consolidated balance sheets. In addition, the Company records an MSR financing liability associated with this financing transaction. The Company continues to account for the sold specified base fee cash flows within MSRs in its consolidated balance sheets. Counterparty payments related to this financing arrangement are recorded as an adjustment to the Company’s “revenues - service related, net” in the consolidated statements of operations.
The Company has elected to measure the mortgage servicing rights financing liabilities at fair value with all changes in fair value recorded to “revenues - service related, net” in the consolidated statements of operations. The fair value on mortgage servicing right financings is based on the present value of future expected discounted cash flows. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates.
Property and Equipment, Net
Property and equipment is comprised of furniture, fixtures, leasehold improvements, computer software, and computer hardware. These assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in “expenses - general and administrative” in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on finance leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or losses are recognized at such time through a charge or credit to “expenses - general and administrative.” Costs to internally developed computer software are capitalized during the development stage and include internal and external costs incurred to develop software.
Long-lived assets shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. The Company performs a quarterly evaluation to determine whether such events have occurred. If events and circumstances indicate the carrying values exceed the fair value of the fixed assets, the Company will proceed with impairment testing. Impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Leases
If the Company determines an arrangement contains a lease or lease components, then the lease will be accounted for under ASC 842 and classified as either a finance or operating lease. At the lease commencement date, the Company recognizes a leased right-of-use (“ROU”) asset and corresponding lease liability based on the present value of the lease payments over the lease term. Leased ROU assets are tested for impairment in accordance with ASC 360, Property, Plant, and Equipment. The Company did not have material finance leases for the periods presented.
ASC 842 provides for two policy elections. The first refers to leases with a term of 12 months or less and the second relates to separating lease components from non-lease components. The Company elected not to recognize lease assets and lease liabilities for leases with a term of 12 months or less and not to separate lease components from non-lease components.
Leases primarily consist of various corporate and other office facilities. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, which are included in “other assets” and “payables and other liabilities,” respectively, on the consolidated balance sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date, as most of the Company’s leases do not provide an implicit rate. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in “expenses - general and administrative” in the consolidated statements of operations. Operating lease activity is included in operating activities within the consolidated statements of cash flows.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 74
Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rate risks related to Pipeline (including mortgage loans held for sale and interest rate lock commitments (“IRLCs”)) and the MSR portfolio. The Company recognizes all derivatives at fair value on a recurring basis in “other assets” and “payables and other liabilities” on its consolidated balance sheets. The Company treats all of its derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges.
Derivative instruments utilized by the Company primarily include IRLCs, loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”), Treasury futures, interest rate swap agreements and interest rate caps. IRLCs and LPCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, respectively, whereby the interest rate and loan amount is set prior to funding. The Company has the ability and intent to fund the loan for purpose of selling in the secondary market, accordingly, upon funding these IRLCs or LPCs will be mortgage loans held for sale for which the Company has selected the fair value option. Similar to the fair values of mortgage loans held for sale; held in inventory awaiting sale into the secondary market. IRLCs and LPCs are subject to changes in mortgage interest rates from the date of the commitment through the date of funding and ultimately through sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception inclusive of the inherent value of servicing. Loan commitments generally range between 30 days and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, inherent value of servicing of the loan (future MSR value), and adjustments for the estimated pull-through rate. Any changes in fair value are recorded in earnings as a component of “revenues - net gain on mortgage loans held for sale” on the consolidated statements of operations and consolidated statements of cash flows.
The Company uses other derivative financial instruments (mentioned above), primarily forward MBS purchase and sales commitments (also referred to as TBA securities), to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale (both in Originations and Servicing) and MSRs. These commitments are recorded at fair value based on pricing of similar instruments in the secondary market based upon the investor/Agency, coupon, and estimated sale or delivery month. The forward MBS commitments fix the forward price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company’s expectation of the amount of its IRLCs that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The changes in value of all derivative instruments related to the Pipeline are recorded as “revenues - net gain on mortgage loans held for sale.” The changes in the value of forward MBS for the MSR portfolio are recorded in “revenues - service related, net.”
The Company may elect to purchase other derivative instruments, such as interest rate swaps and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.
Business Combinations and Asset Acquisitions
The Company evaluates whether a transaction meets the definition of a business. The Company first applies a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test is met, the transaction is accounted for as an asset acquisition. If the screen test is not met, the Company further considers whether the set of assets or acquired entities have at a minimum, inputs and processes that have the ability to create outputs in the form of revenue. If the assets or acquired entities meet this criteria, the transaction is accounted for as a business combination.
Acquisitions that qualify as a business combination are accounted for using the acquisition method of accounting. The fair value of consideration transferred for an acquisition is allocated to the assets acquired and liabilities assumed based on their fair value as of the acquisition date. The excess of the consideration transferred over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Conversely, in the event the fair value of assets acquired and liabilities assumed is greater than the consideration transferred, a bargain purchase gain is recognized.
Determining the fair value of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions. The Company estimates the fair value of the intangible assets acquired generally by using a discounted cash flow analysis (the income approach). For the income approach, the Company uses inputs and assumptions to develop these estimates on a market participant perspective which include estimates of projected revenues, discount rates, economic lives and income tax rates, among others, all of which require significant management judgment. The Company engages third-party valuation firms when appropriate to assist in the fair value determination of assets acquired and liabilities assumed. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
75 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The Company may adjust the amounts recognized in an acquisition during a measurement period not to exceed one year from the date of acquisition, as a result of subsequently obtaining additional information that existed at the acquisition date.
Goodwill
Goodwill is not amortized but is instead subject to impairment testing. The Company evaluates its goodwill for impairment annually as of October 1 of each year or more frequently if impairment indicators arise in accordance with ASC 350, Intangibles - Goodwill and Other. When testing goodwill for impairment, the Company may elect to perform either a qualitative test or a quantitative test to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value.
During a qualitative analysis, the Company considers the impact of any changes to the following factors: macroeconomic, industry and market factors, cost factors, and changes in overall financial performance, as well as any other relevant events and uncertainties impacting a reporting unit. If the qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, the Company performs a quantitative analysis. In a quantitative test, the carrying value of the reporting unit is compared to its estimated fair value.
In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires the Company to make various assumptions, including companiesassumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s long-term projections by reporting unit. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in the Company’s impairment testing are consistent with consumer finance, commercial finance, specialty finance, leasingits internal forecasts and operating plans. The discount rate is based on the Company’s debt and equity balances, adjusted for current market conditions and investor expectations of return on the Company’s equity. If the fair value of a reporting unit exceeds its carrying amount, there is no impairment. If not, the Company compares the fair value of the reporting unit with its carrying amount. To the extent the carrying amount of the reporting unit exceeds its fair value, a write-down of the reporting unit’s goodwill would be necessary.
Intangible Assets
Intangible assets primarily consist of customer relationships and technology acquired through business combinations. Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships). Intangible assets are recorded at their estimated fair value at the date of acquisition.
Intangible assets with finite useful lives are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable by comparing the carrying value of the assets to the estimated future undiscounted cash flows to be generated by the asset. If an impairment is determined to exist for intangible assets, the carrying value of the asset is reduced to the estimated fair value.
Investment in Unconsolidated Entities
The Company accounts for investments in unconsolidated entities using the equity method when the Company holds a significant, but less than controlling, ownership interest and has the ability to exercise significant influence over operating and financial decisions of the investee. These investments include our investment in Sagent M&C, LLC (“Sagent”). Under the equity method of accounting, investments are initially recorded at cost and thereafter adjusted for additional investments, distributions and the proportionate share of earnings or losses of the investee. The Company evaluates the equity method investments for impairment when events or changes in circumstances indicate that an other-than-temporary decline in value may have occurred. See Note 4, Dispositions, for more information on our investment in Sagent.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers as performance obligations are satisfied in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. The majority of the Company’s revenue-generating transactions in the Servicing and Originations segments, including revenue generated from financial instruments, such as the Company’s loans and derivatives, as well as revenue related to the Company’s mortgage servicing activities, are not within the scope of ASC 606 as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Generally, revenues from Xome fall within the scope of ASC 606.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 76
The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers as performance obligations are satisfied in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.
Revenues from Servicing Activities
•“Revenues, service related, net” primarily include contractually specified servicing fees, late charges, prepayment penalties, fair value adjustments, and other ancillary revenues. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned during the life of the loan. Corresponding loan servicing costs are charged to expense as incurred. The Company recognizes ancillary revenues and earnings on float as they are earned.
In addition, the Company receives various fees in the course of providing servicing on its various portfolios. These fees include modification fees for modifications performed outside of government programs, modification fees for modifications pursuant to various government programs, co-issue transaction fees charged to sellers from boarding MSRs, deboarding fees for transferring MSRs off the servicing platform, and incentive fees for servicing performance on specific government-sponsored entities (“GSE”) portfolios. Fees recorded on modifications of mortgage loans serviced by the Company for others are recognized on collection and are recorded as a component of “revenues - service related, net.” Fees recorded on modifications pursuant to various government programs are recognized based upon completion of all necessary steps by the Company and the minimum loan performance time frame to establish eligibility for the fee. Revenue earned on modifications pursuant to various government programs is included as a component of “revenues - service related, net.” Incentive fees for servicing performance on specific GSE portfolios are recognized as various incentive standards are achieved and are recorded as a component of “revenues - service related, net.”
Fair value adjustments related to MSRs, excess spread financing and MSRs financing are recorded as component of “revenues - service related, net.”
The Company also acts as a subservicer for certain parties that own the underlying servicing rights and receives subservicing fees, which are typically a stated monthly fee per loan that varies based on types of loans. Fees related to the subserviced portfolio are accrued in the period the services are performed.
•“Revenues - net gain on mortgage loans held for sale” within the Servicing segment is comprised of the realized and unrealized gains and losses on sales of mortgage loans held for sale, including loans that are repurchased out of GNMA securities and subsequently modified and re-securitized, and any other repurchased loans.
•Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates on owned MSRs within the servicing segment. The Company recognizes all derivatives on its consolidated balance sheets at fair value on a recurring basis. The Company treats all derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges. The changes in value of derivative instruments are recorded within “revenues - service related, net.” See accounting policy “Derivative Financial Instruments” for more details.
Revenues from Origination Activities
•“Revenues - servicing related, net” within the Originations segment is comprised of loan origination and other loan fees which generally represent flat, per-loan fee amounts and are recognized as revenue at the time the loans are funded.
•“Revenues - net gain on mortgage loans held for sale” includes the realized and unrealized gains and losses on sales of newly originated mortgage loans, as well as the changes in fair value of all pipeline-related derivatives, including IRLCs.
77 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been legally isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets. Loan securitizations structured as sales, as well as whole loan sales and the resulting gains on such sales, net of any accrual for recourse obligations, are reported in operating results during the period in which the securitization closes or the sale occurs.
•Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives on its consolidated balance sheets at fair value on a recurring basis. The Company treats all derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges. The changes in value on originations derivative instruments are recorded within revenue in the as “revenues - net gain on mortgage loans held for sale.” See accounting policy “Derivative Financial Instruments” for more details.
Revenue from Xome Activities
•Xome revenues primarily consists of real estate exchange, which is a proprietary digital exchange for selling foreclosed, REO, and seller-owned property. Xome also has revenues from the sale of data and data-related services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those products. Xome’s business is included in Corporate/Other.
Repurchase Reserves for Origination Activity
The Company accrues reserves for the repurchase of loans from GSEs, GNMA, and third-party investors primarily due to origination defect and are initially recorded upon sale of the loan to a third party with subsequent reserves recorded based on repurchase demands. The repurchase reserves are included within “payables and accrued liabilities” in the consolidated balance sheets and the provision for repurchase reserves is a component of “revenues - net gain on mortgage loans held for sale” in the consolidated statements of operations.
During each reporting period, the Company utilizes an internal model to estimate repurchase reserves for loan origination activities based upon its expectation of future defects and historical loss rates. The estimate for the repurchase reserve is based on judgments and historical inputs which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) the quality of Company’s underwriting procedures; (iv) borrower delinquency and default patterns; and (v) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Servicing Activity
In connection with loan servicing activities, the Company records reserves primarily for the recoverability of advances, interest claims, and mortgage insurance
claims. Reserves for advances and other receivables associated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in “revenues - service related, net” in the consolidated statements of operations.
On February 12, 2018, WMIH, NationstarSuch valuation considers the expected cash outflows and inflows for advances and other receivables in accordance with the fair value framework. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within “advances and other receivables, net.” As loans serviced transfer out of the MSR portfolio, any negative MSR value or any GNMA loan fallout value associated with the loans transferred is reclassified from the MSR to the reserve within “advances and other receivables, net” to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period and any additional reserve requirements are recorded as a provision in “expenses - general and administrative” as needed.
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the models include but are not limited to expected recovery rates by loan types, which are derived from historical recovery rates, and aging of the receivable. Recovery of advances and other receivables is subject to judgment and estimates based on the Company’s assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Management reviews recorded advances and other receivables, and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written off against the reserve.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 78
Credit Loss Reserves
ASC 326, Financial Instruments – Credit Losses requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss, or CECL, methodology. The new standard reflects management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life to determine the current expected credit loss required.
The Company determined that “advances and other receivables, net” and certain financial instruments included in “other assets” are within the scope of ASC 326.
For “advances and other receivables, net,” the Company determined that the majority of estimated losses are due to servicing operational errors, and credit-related losses are not significant because of the contractual relationships with the government and government sponsored agencies. The Company determined that the credit-related risk associated with certain applicable financial instruments can increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
For “other assets,” primarily trade receivables and service fees earned but not received, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. The Company monitors the financial status of customers to determine if any specific loss considerations are required.
Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. The Company will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables.
The Company evaluates its interests in each SPE for classification as a Variable Interest Entity (“VIE”). When an SPE meets the definition of a VIE and the Company determines that the Company is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.
The Company consolidates certain SPEs connected with mortgage activities. See Note 14, Securitizations and Financings, for more information on Company SPEs, and Note 13, Indebtedness, for certain debt activity connected with SPEs.
Securitizations and Asset-Backed Financing Arrangements
The Company and its subsidiaries have been a transferor in connection with a number of securitizations and asset-backed financing arrangements. The Company has continuing involvement with the financial assets of the securitizations and the asset-backed financing arrangements. The Company has aggregated these transactions into two groups: (1) securitizations of residential mortgage loans accounted for as sales and (2) financings of advances on loans serviced for others accounted for as secured borrowings.
79 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Securitizations Treated as Sales
The Company’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The Company’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of securitization. These securitizations generally do not result in consolidation of the VIE as the beneficial interests that are held in the unconsolidated securitization trusts have no value and no potential for significant cash flows in the future. In addition, as of December 31, 2023, the Company had no other significant assets in its consolidated financial statements related to these trusts. The Company has no obligation to provide financial support to unconsolidated securitization trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt issued by the trusts and have no recourse against the assets of the Company. The general creditors of the Company have no claim on the assets of the trusts. The Company’s exposure to loss as a result of its continuing involvement with the trusts is limited to the carrying values, if any, of its investments in the residual and subordinate securities of the trusts, the MSRs that are related to the trusts and the advances to the trusts. The Company considers the probability of loss arising from its advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Note 5, Mortgage HoldingsServicing Rights and Related Liabilities, andNote 6, Advances and Other Receivables, for additional information regarding MSRs and advances.
Financings Accounted as Secured Borrowing
The Company transfers advances on loans serviced for others to SPEs in exchange for cash. The Company consolidates these SPEs because the Company is the primary beneficiary of the VIE.
These VIEs issue debt supported by collections on the transferred advances. The Company made these transfers under the terms of its advance facility agreements. The Company classifies the transferred advances on its consolidated balance sheets as advances and classifies the related liabilities as advance facilities and other nonrecourse debt. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against the Company.
Interest Income
Interest income primarily includes interest earned on custodial cash deposits associated with the servicing portfolio. Interest income is also recognized on mortgage loans held for sale for the period from loan funding to sale, which is typically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is greater than 90 days past due. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. For individual loans that have been modified, a period of six timely payments is required before the loan is returned to an accrual basis.
Interest Expense
Interest expense primarily includes interest incurred on advance, warehouse and MSR facilities, unsecured senior notes, excess spread financing and compensating bank balances, as well as bank fees. The Company incurred interest expense related to advance, warehouse and MSR facilities, unsecured senior notes and excess spread financing of $485, $361 and $370 for the years ended December 31, 2023, 2022 and 2021, respectively.
Share-Based Compensation
Equity based awards include restricted stock units (“RSUs”) granted to employees of the Company and non-employee directors and performance-based stock awards (“PSUs”) granted to certain executive officers. The RSUs are valued at the fair market value of the Company’s common stock on the grant date and recognized as an expense over the requisite employee service period on a straight-line basis using an accelerated attribution model. The PSUs feature a combination of service, market and/or performance conditions. Market conditions are valued using a model that incorporates the market condition of the grants while performance conditions are assessed for the probability of achievement. The PSUs are expensed on a straight-line basis over the requisite employee service period. The Company applies a dynamic forfeiture rate and records share-based compensation in “expenses - salaries, wages and benefits” within the consolidated statements of operations.
Advertising Costs
Advertising costs are expensed as incurred and are included as part of “expenses - general and administrative” within the consolidated statements of operations. The Company incurred advertising costs of $23, $37 and $40 for the years ended December 31, 2023, 2022 and 2021, respectively.
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Income Taxes
The Company is subject to the income tax laws of the U.S. and its states and municipalities. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.
Deferred income taxes are determined using the balance sheet method. Deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a Delaware corporationchange in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance is established. Consideration is given to various positive and negative evidence that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, length of statutory carryforward periods, experience with operating tax loss and tax credit carryforwards which may expire unused, the use of tax planning strategies and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
The Company initially recognizes tax positions in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is currently listedgreater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming the tax authority has full knowledge of the position and all relevant facts. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes interest and penalties related to uncertain tax positions as a component of provisions for income taxes in accordance with ASC 740.
Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares. In 2021, the Company retired its preferred shares. As of December 31, 2023 and 2022, the Company had 10 million preferred shares authorized at $0.00001, with zero shares issued and outstanding and aggregate liquidation preference of zero dollars.
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding and any dilutive securities for the period.
Share Repurchases
The Company has a stock repurchase program which allows the Company to repurchase its common stock using open market stock purchases or privately negotiated transactions. Repurchased common stock is stated at cost and presented as a separate component of stockholders’ equity in treasury stock. The share repurchase cost will be determined based on the New York Stock Exchange undertotal dollar amount paid for share repurchases for a single day divided by the ticker “NSM”total volume of shares repurchased. The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. As a result, the Company recorded the applicable excise tax of $2 during the year ended December 31, 2023 as an incremental cost of the shares repurchased in “treasury shares at cost” within the consolidated balance sheets.
81 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
3. Acquisitions
Acquisition of Assets
During the second quarter of 2023, the Company acquired certain assets and liabilities of Rushmore Loan Management Services, LLC (“Nationstar”Rushmore”) for a total purchase price of $34 (the “Rushmore Transaction”). Assets acquired were recorded in the Servicing segment and primarily included subservicing contracts and related servicing advances and receivables. The Company accounted for the transaction as an asset acquisition in accordance with Accounting Standard Codification Topic 805, Business Combinations (“ASC 805”), whereby the purchase price represents relative fair value of assets and liabilities acquired.
Acquisition of Roosevelt Management Company and Affiliated Companies
In July 2023, the Company acquired all the equity interests of Roosevelt Management Company, LLC (“Roosevelt”), an investment management firm, and Wand Merger Corporation,its affiliated subsidiaries including Rushmore Loan Management Services, LLC and other entities, for a Delaware corporationtotal purchase price of $28 (“Roosevelt Transaction”). The Company accounted for the transaction as a business combination in accordance with ASC 805 using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and a wholly-owned subsidiaryliabilities assumed based on their estimated fair values as of WMIH (“Merger Sub”),the acquisition date, with the excess of the purchase price over those fair values allocated to goodwill. The Company recorded $4 of intangible assets and $21 of goodwill based on the purchase price allocation. $5 and $16 of the goodwill is assigned to Servicing segment and Corporate/Other segment, respectively. The goodwill will be deductible for tax purposes. During the year ended December 31, 2023, the Company incurred $13 of acquisition costs related to the Roosevelt Transaction. The financial results of Rushmore and Roosevelt were included in Servicing segment and Corporate/Other segment, respectively. The Company finalized its allocation of fair value of consideration transferred during the three months ended December 31, 2023.
Acquisition of Home Point Capital Inc.
In May 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”)
and a mortgage servicing rights purchase and sale agreement (“Purchase Agreement”) with Home Point Capital Inc.(“Home Point”),
pursuanta Delaware corporation. Per the Merger Agreement, the Company agreed to
which, subjectcommence a tender offer to
the satisfaction or waiveracquire all of the
conditions set forth therein, Merger Sub will merge with and into Nationstar (the “Nationstar Transaction” oroutstanding shares of common stock of Home Point, other than certain excluded shares. The Home Point transactions closed in the
“Merger”), with Nationstar continuing as the surviving corporation andthird quarter of 2023 for total consideration of approximately $658. The Purchase Agreement was a
wholly-owned subsidiarybulk purchase of
WMIH.a portion of Home Point’s mortgage servicing rights (“MSR”) portfolio for $335. The Merger
has been unanimously approved byAgreement was the
boardstender offer to acquire outstanding shares of
directorscommon stock of
WMIH and Nationstar. The Merger is expected to closeHome Point, which included the benefit of the cash paid in the
second halfbulk purchase of
2018.With respect to our current operations,Home Point’s MSR portfolio. The net consideration paid for the two transactions was $323, or $2.33 per share.
The Company accounted for the two transactions as one business combination (“Home Point Acquisition”) in accordance with ASC 805 using the acquisition method of accounting. Under the acquisition method of accounting, the Company operatesallocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The Company acquired $1.2 billion MSR and assumed a single business through its subsidiary, WMMRC, whose sole activity issenior note with a principal balance of $500, among other acquired net assets. The Company recorded a preliminary bargain purchase gain of $96 in “other income (expense), net” within the reinsuranceconsolidated statements of mortgage insurance policies. WMMRC has been operated in runoff mode since September 26, 2008. Since that date, WMMRC has not underwritten any new policies (and by extension any new risk). WMMRC, through predecessor companies, began reinsuring risks in 1997operations and continued reinsuring risks through September 25, 2008.27
All of WMMRC’s reinsurance agreements are on an excess of loss basis, except for a certain reinsurance treaty with Genworth Mortgage Insurance Corporation entered into during 2007,reported under Corporate/Other segment, which is reinsured on a 50% quota share basis. Pursuant torepresents the excess of loss reinsurance treaties, WMMRC reinsures a second loss layer which rangesthe estimated fair value of net assets acquired over the consideration transferred. The purchase price allocation is subject to change as the Company obtains additional information and finalizes its review during the measurement period (up to one year from 5% to 10%the acquisition date). The primary area of the riskpreliminary allocation of fair value of consideration transferred that is not yet finalized is related to potential tax adjustments. The Company believes it was able to negotiate a bargain purchase price due to seller’s operational challenges from significant market volatility, as well as the seller’s desire to exit the business in force in excess ofan expedited manner. During the primary mortgage insurer’s first loss percentages which range from 4% to 5%. Each calendar year or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25% to 40%.
WMMRC commuted three reinsurance agreements in 2009, 2012, and 2014, respectively, and the related trust assets were distributed in accordance with the commutation agreements. On October 23, 2017, WMMRC’s reinsurance agreement with Radian Guaranty Incorporated was commuted and the related trust assets were released to WMMRC. As ofended December 31, 2017, WMMRC had three remaining reinsurance agreements. On February 2, 2018,2023, the reinsurance agreement between WMMRC and Republic Mortgage Insurance Company was terminated in accordance with its terms. See Note 15: Subsequent Eventsincurred $7 of acquisition costs related to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. We also may seek opportunities to commute one or more of WMMRC’s remaining reinsurance agreements, with a view toward accelerating the distribution of capital in excess of the amounts needed to pay claims.
Our Financial Information
The financial information in thisHome Point Acquisition.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K has been derived from our consolidated financial statements.Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in
82
4. Dispositions
Sale of Mortgage Servicing Platform
On March 31, 2022, the United States (“GAAP”), which requires management to make estimates and assumptions that affect reported and disclosed amountsCompany completed the sale of certain assets and liabilities of its servicing and subservicing technology platform for performing and non-performing mortgage loans (the “Mortgage Servicing Platform”) to Sagent, in exchange for Class A-1 Common Units equal to 19.9% ownership of Sagent, and the reported amountssale of revenues and expenses duringcertain tangible personal property of the reporting period. We believe that the critical accounting policies set forth in the accompanying consolidated financial statements describe the more significant judgments and estimatesCompany used in the preparation of our consolidated financial statements. These accounting policies pertain to premium revenues and risk transfer, valuation of investments, loss and loss adjustment expense reserves, our values under fresh start accounting, the resulting loss contract reserve and the valuationconduct of the derivative instrument relating toMortgage Servicing Platform in exchange for $9.9 in cash, for total consideration of $260 (the “Sagent Transaction”). In connection with the embedded conversion featureSagent Transaction, the Company recorded a gain of $223, which was included in “other income, net” within the Series B Preferred Stock. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our resultsconsolidated statements of operations under Corporate/Other, and financial condition.Recently issued accounting standards and their impact on the Company have been presented under “New Accounting Pronouncements” within Note 2: Significant Accounting Policies to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.
Segments
The Company manages its business on the basis of one operating segment, mortgage reinsurance, in accordance with GAAP. Within the mortgage reinsurance segment, our current risks arise solely from the reinsurance of mortgage insurance policies that were placed on certain residential mortgage loans prior to bankruptcy of WMI. The majority of these policies were required by mortgage lenders as a stipulation to approve the mortgage loans. The mortgage insurance policies protect the beneficiaries of the policy from all or a portion of default-related losses.
28
Overview of Revenues and Expenses
Because WMIH has no current significant operations of its own, its cash flow is derived almost entirely from earnings on its investment portfolio, and payments it receives from, and dividends paid by, WMMRC. All dividends received by WMIH from WMMRC that constitute Runoff Proceeds, historically, were required to be paid to holders of WMIH’s Second Lien Notes in accordance with the terms of the Second Lien Indenture as described below in this Item 7 under “Redeemed Notes.” As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company and the Second Lien Indenture was satisfied and discharged. As a result, all funds that were formerly deemed to be Runoff Proceeds under the Second Lien Indenture and therefore required to be used for payment on the Runoff Notes will now be available for general corporate purposes upon distribution by WMMRC to WMIH.
WMMRC’s revenues consist primarily of the following:
net premiums earned on reinsurance contracts;
positive changes to (and corresponding releases from) loss reserves; and
net investment income on WMMRC’s investment portfolio.
WMMRC’s expenses consist primarily of the following:
underwriting expenses; and
general and administrative expenses.
29
Results of Operations for the years ended December 31, 2017, 2016 and 2015
For the year ended December 31, 2017, we reported a net operating loss of $2.5 million. This result compares to net operating income of $0.1 million and a net operating loss of $15.1 million for the years ended December 31, 2016 and December 31, 2015, respectively.
For the year ended December 31, 2017 we reported net income attributable to common and participating stockholders of $7.8 million. This result compares to net income attributable to common and participating stockholders of $183.7 million for the year ended December 31, 2016, and to net loss attributable to common and participating stockholders of $79.6 million for the year ended December 31, 2015. This $175.9 million negative change and $263.3 million positive change in financial results when comparing the year ended 2017 to 2016, and the year ended 2016 to 2015, respectively, is primarily due to the change in fair market value of an embedded derivative. The embedded derivative was recorded as a result of the variable conversion feature in our Original Series B Preferred Stock and the change in fair market value is reflected as the other income or expense item “change in fair value of derivative embedded conversion feature” which resulted in $28.2 million of other income, $201.5 million of other income and $54.6 million of other expense for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively. The net impact on the financial results from the change in fair value of the embedded derivative over the three years ended December 31, 2017 it has existed was net other income of $175.1 million which also increased equity through retained earnings. The fair market value of the embedded derivative was determined to be $108.9 million at December 31, 2017, however, as a result of the amendment of the Original Series B Preferred Stock, the embedded derivative was determined, due to modification, to no longer exist and the December 31, 2017 fair market value of $108.9 million was reclassified as a reduction of equity. The net impact to equity between 2015 and 2017 from the embedded derivative is therefore an increase of $66.2 million which was the original fair market value recorded in 2015 at the time of issuance of the Original Series B Preferred Stock. The embedded derivative impact was solely attributable to changes in fair value of the derivative embedded conversion feature and were non-cash items. Fluctuations in the price of WMIH’s common stock directly impacted the fair value of the derivative instrument. The fair value of this derivative instrument was analyzed in each reporting period. Any change in fair value of the embedded conversion feature impacted other income or expense, as the case may be, in the applicable reporting period. In the future, as a result of the Series B Amendment, there will be no change to the fair value of this derivative instrument as, due to modification, it was determined to no longer exist and was reclassified to equity. For additional details on the derivative embedded conversion feature, see Note 9: Capital Stock and Derivative Instruments, Note 13: Fair Value Measurement and Note 15: Subsequent Events to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. The dividends related to the Original Series B Preferred Stock totaled $18.1 million, $18.0 million and $17.7 million for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively.
Over the last three years, WMMRC has experienced decreased revenues due to various factors, including operating in runoff mode, commutations of certain reinsurance agreements, and general economic conditions, which has been partially offset by increases in investment income. We expect this trend to continue. The primary changes that gave rise to a net operating loss in the year ended December 31, 2017, net operating income in the year ended December 31, 2016 and a net operating loss in the year ended December 31, 2015, included a significant increase in the benefit from changes in the value of our loss contract reserve and a significant decrease in general and administrative$4 transaction costs during the year ended December 31, 2016, when compared2022. The net carrying amount of assets and liabilities transferred in connection with the Sagent Transaction was $31 and reported under Corporate/Other.
The Company accounts for the equity interest under the equity method of accounting, as the Company has the ability to exercise significant influence over Sagent’s operating and financial decisions but does not own a majority equity interest or otherwise control the respective entity. Under the equity method of accounting, the investment is initially stated at cost and subsequently adjusted for additional investments, distributions, and the Company’s proportionate share of Sagent’s earnings or losses. The initial cost of the equity interest recorded was $250, which represented the fair value as of March 31, 2022. During the fourth quarter of 2023, the Company acquired additional Class A-1 Common Units for $12. The Company recorded a $17 and $13 loss related to the years ended December 31, 2017 and December 31, 2015, as described below. In addition, interest expense has decreased when comparing the years ended December 31, 2017 and December 31, 2016 as compared to the year ended December 31, 2015 due to the payoffCompany's proportionate share of our First Lien Notes and Second Lien Notes. As a resultnet loss of fresh start accounting we recorded reserves for loss contracts and premium deficiency reserves relative to WMMRC. The impact of the release of the loss contract reserve provided a significant portion of the improvement in our operating resultsSagent during the years ended December 31, 20172023 and 2022, respectively. The Company’s investment in Sagent was $232 as of December 31, 2023.
5. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s MSRs and the related liabilities. In estimating the fair value of all mortgage servicing rights and related liabilities, the impact of the current environment was considered in the determination of key assumptions.
| | | | | | | | | | | |
| MSRs and Related Liabilities | December 31, 2023 | | December 31, 2022 |
| MSRs at fair value | $ | 9,090 | | | $ | 6,654 | |
| | | |
| Excess spread financing at fair value | $ | 437 | | | $ | 509 | |
| Mortgage servicing rights financing at fair value | 29 | | | 19 | |
| MSR related liabilities - nonrecourse at fair value | $ | 466 | | | $ | 528 | |
Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights of both agency and non-agency loans.
83 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The following table sets forth the activities of MSRs:
| | | | | | | | | | | |
| Year Ended December 31, |
| MSRs at Fair Value | 2023 | | 2022 |
| Fair value - beginning of year | $ | 6,654 | | | $ | 4,223 | |
| Additions: | | | |
| Servicing retained from mortgage loans sold | 273 | | | 554 | |
| Purchases and acquisitions of servicing rights | 3,189 | | | 1,595 | |
| Dispositions: | | | |
| Sales of servicing assets and excess yield | (573) | | | (294) | |
| Changes in fair value: | | | |
| Changes in valuation inputs or assumptions used in the valuation model (MSR MTM) | 121 | | | 1,328 | |
| Changes in valuation due to amortization | (604) | | | (779) | |
Other changes(1) | 30 | | | 27 | |
| Fair value - end of year | $ | 9,090 | | | $ | 6,654 | |
(1)Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the years ended December 31, 2023 and 2022, the Company sold $25,239 and $20,902 in unpaid principal balance of MSRs, of which $23,218 and $19,817 was retained by the Company as subservicer, respectively.
During the year ended December 31, 2023, certain agencies entered into agreements with the Company to purchase excess servicing cash flows (“excess yield”) on certain agency loans with a total UPB of $41,958 for total proceeds of $294. The Company recorded a gain of $33 through the mark-to-market adjustments within “revenues - service related, net” in the consolidated statements of operations.
MSRs are segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. Agency investors consist of Government National Mortgage Association (“Ginnie Mae” or “GNMA”) and the GSEs, Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of UPB and fair value for the Company’s MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| MSRs - UPB and Fair Value Breakdown by Investor Pools | UPB | | Fair Value | | UPB | | Fair Value |
| Agency | $ | 561,656 | | | $ | 8,774 | | | $ | 380,502 | | | $ | 6,322 | |
| Non-agency | 26,286 | | | 316 | | | 30,880 | | | 332 | |
| Total | $ | 587,942 | | | $ | 9,090 | | | $ | 411,382 | | | $ | 6,654 | |
Refer to Note 18, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of MSRs.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 84
The following table shows the hypothetical effect on the fair value of the Company’s MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Option Adjusted Spread(1) | | Total Prepayment Speeds | | Cost to Service per Loan |
| MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| December 31, 2023 | | | | | | | | | | | |
| Mortgage servicing rights | $ | (368) | | | $ | (706) | | | $ | (219) | | | $ | (425) | | | $ | (89) | | | $ | (178) | |
| | | | | | | | | | | |
| Discount Rate | | Total Prepayment Speeds | | Cost to Service per Loan |
| 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| December 31, 2022 | | | | | | | | | | | |
| Mortgage servicing rights | $ | (266) | | | $ | (511) | | | $ | (136) | | | $ | (264) | | | $ | (61) | | | $ | (122) | |
(1)Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread (“OAS”) instead of a static discount rate. Refer to Note 14, Fair Value Measurements, for further discussion.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Excess Spread Financing
In order to finance the acquisition of certain MSRs on various portfolios, the Company previously entered into sale and assignment agreements with third parties and sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fees, ancillary income and interest float earnings on principal along with interest payments and escrow, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.
In connection with the above transactions, the Company entered into refinanced loan obligations with third parties that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.
The Company had excess spread financing liability of $437 and $509, with UPB of $74,219 and $83,706 as of December 31, 2023 and 2022, respectively. Refer to Note 18, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of excess spread financing liability.
85 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Option Adjusted Spread(1) | | Prepayment Speeds |
| Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| December 31, 2023 | | | | | | | |
| Excess spread financing | $ | 16 | | | $ | 32 | | | $ | 10 | | | $ | 20 | |
| | | | | | | |
| Discount Rate | | Prepayment Speeds |
| 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| December 31, 2022 | | | | | | | |
| Excess spread financing | $ | 19 | | | $ | 40 | | | $ | 11 | | | $ | 22 | |
(1)Beginning in the second quarter of 2023, the Company valued excess spread financing using a stochastic OAS instead of a static discount rate. Refer to Note 14, Fair Value Measurements, for further discussion.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing
The Company had MSR financing liability of $29 and $19 as of December 31, 2023 and 2022, respectively. Refer to Note 2, Significant Accounting Policies, for further discussion on MSR financing, and Note 18, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of the MSR financing liability.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 86
Revenues - Service Related, net
The following table sets forth the items comprising total “revenues - service related, net”:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Revenues - Service Related, net | 2023 | | 2022 | | 2021 |
Contractually specified servicing fees(1) | $ | 1,700 | | | $ | 1,458 | | | $ | 1,122 | |
Other service-related income(1) | 72 | | | 105 | | | 72 | |
Incentive and modification income(1) | 43 | | | 29 | | | 51 | |
Servicing late fees(1) | 89 | | | 76 | | | 71 | |
| Mark-to-market adjustments - Servicing | | | | | |
| MSR MTM | 121 | | | 1,328 | | | 502 | |
| Loss on MSR hedging activities | (68) | | | (332) | | | (86) | |
| Gain (loss) on MSR sales | 23 | | | (3) | | | 7 | |
Reclassifications(2) | (33) | | | (30) | | | (35) | |
| Excess spread / MSR financing MTM | (18) | | | (142) | | | 33 | |
| Total mark-to-market adjustments - Servicing | 25 | | | 821 | | | 421 | |
| Amortization, net of accretion | | | | | |
| MSR amortization | (604) | | | (779) | | | (1,008) | |
| Excess spread accretion | 41 | | | 86 | | | 255 | |
| Total amortization, net of accretion | (563) | | | (693) | | | (753) | |
Originations service fees(3) | 61 | | | 98 | | | 176 | |
| Corporate/Xome related service fees | 84 | | | 76 | | | 186 | |
Other(4) | (71) | | | (105) | | | (279) | |
| Total revenues - Service Related, net | $ | 1,440 | | | $ | 1,865 | | | $ | 1,067 | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues. Amounts also include servicing fees from loans sold with servicing retained of $708, $661 and $495 for the years ended December 31, 2023, 2022 and 2021, respectively.
(2)Reclassifications include the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio.
(3)Amounts include fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting, and other similar fees.
(4)Other represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements, portfolio runoff and the payments made associated with MSR financing arrangements.
6. Advances and Other Receivables
Advances and other receivables, net consists of the following:
| | | | | | | | | | | |
| Advances and Other Receivables, Net | December 31, 2023 | | December 31, 2022 |
| Servicing advances, net of $13 and $12 purchase discount, respectively | $ | 1,065 | | | $ | 1,053 | |
Receivables from agencies, investors and prior servicers, net of $6 and $7 purchase discount | 101 | | | 103 | |
| Reserves | (170) | | | (137) | |
| Total advances and other receivables, net | $ | 996 | | | $ | 1,019 | |
87 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| | | | | | | | | | | |
| Year Ended December 31, |
| Reserves for Advances and Other Receivables | 2023 | | 2022 |
| Balance - beginning of year | $ | 137 | | | $ | 167 | |
| Provision | 40 | | | 30 | |
Reclassifications(1) | 27 | | | 36 | |
| Write-offs | (34) | | | (96) | |
| Balance - end of year | $ | 170 | | | $ | 137 | |
(1)Reclassifications represent required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
Purchase Discount for Advances and Other Receivables
The following table sets forth the activities of the purchase discount for advances and other receivables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 | | Year Ended December 31, 2022 |
| Purchase Discount for Advances and Other Receivables | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
| Balance - beginning of year | $ | 12 | | | $ | 7 | | | $ | 19 | | | $ | 12 | |
Addition from acquisition(1) | 5 | | | — | | | — | | | — | |
| Utilization of purchase discounts | (4) | | | (1) | | | (7) | | | (5) | |
| Balance - end of year | $ | 13 | | | $ | 6 | | | $ | 12 | | | $ | 7 | |
(1)In connection with the acquisition of Home Point in 2023, the Company recorded the acquired advances and other receivables at estimate fair value as of the acquisition date, which resulted in a purchase discount of $5. Refer to Note 3, Acquisitions, for discussion of the Home Point acquisition.
Credit Loss for Advances and Other Receivables
The following table sets forth the activities of the CECL allowance for advances and other receivables:
| | | | | | | | | | | |
| Year Ended December 31, |
| CECL Allowance for Advances and Other Receivables | 2023 | | 2022 |
| Balance - beginning of year | $ | 36 | | | $ | 31 | |
| Provision | 1 | | | 10 | |
| Write-offs | (2) | | | (5) | |
Balance - end of year(1) | $ | 35 | | | $ | 36 | |
(1)As of December 31, 2023, $29 and $6 were included in reserves and purchase discount, respectively. As of December 31, 2022, $29 and $7 were included in reserves and purchase discount, respectively.
The Company determined that the credit-related risk associated with applicable financial instruments typically increases with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
7. Mortgage Loans Held for Sale
Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to GSEs or other third-party investors in the secondary market on a servicing-retained basis. The Company purchases originated loans through its correspondent channel and assists customers currently in the Company’s servicing portfolio with refinancing of loans or new home purchases through its direct-to-consumer channel. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 88
Mortgage loans held for sale are recorded at fair value as set forth below:
| | | | | | | | | | | |
| Year Ended December 31, |
| Mortgage Loans Held for Sale | 2023 | | 2022 |
| Mortgage loans held for sale - UPB | $ | 924 | | | $ | 921 | |
Mark-to-market adjustment(1) | 3 | | | (28) | |
| Total mortgage loans held for sale | $ | 927 | | | $ | 893 | |
(1)The mark-to-market adjustment includes net change in unrealized gain/loss, premium on correspondent loans and fees on direct-to-consumer loans. The mark-to-market adjustment is recorded in “revenues - net gain on mortgage loans held for sale” in the consolidated statements of operations.
The following table sets forth the activities of mortgage loans held for sale:
| | | | | | | | | | | |
| Year Ended December 31, |
| Mortgage Loans Held for Sale | 2023 | | 2022 |
| Balance - beginning of year | $ | 893 | | | $ | 4,381 | |
| Loans sold and loan payments received | (14,097) | | | (34,731) | |
| Mortgage loans originated and purchased, net of fees | 12,856 | | | 28,309 | |
Repurchase of loans out of Ginnie Mae securitizations(1) | 1,234 | | | 3,067 | |
| Net change in unrealized gain (loss) on retained loans held for sale | 44 | | | (132) | |
Net transfers of mortgage loans held for sale(2) | (3) | | | (1) | |
| Balance - end of year | $ | 927 | | | $ | 893 | |
(1)The Company has the optional right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased in connection with loan modifications and loan resolution activity, with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale.
(2)Amount reflects transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net, for claims made on certain government insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing.
For the years ended December 31, 2023 and 2022, the Company recorded a total realized gain of $33 and a loss of $267 from total sales proceeds of $13,877 and $34,464, respectively, on the sale of mortgage loans held for sale.
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as “interest income” in the consolidated statements of operations.
The total UPB of mortgage loans held for sale on non-accrual status was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Mortgage Loans Held for Sale | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 42 | | | $ | 36 | | | $ | 102 | | | $ | 87 | |
(1)Non-accrual UPB includes $35 and $90 of UPB related to Ginnie Mae repurchased loans as of December 31, 2023 and 2022, respectively.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $30 and $65 as of December 31, 2023 and 2022, respectively.
89 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
8. Property and Equipment
The composition of property and equipment, net, and the corresponding ranges of estimated useful lives were as follows:
| | | | | | | | | | | | | | | | | |
| Property and Equipment, Net | December 31, 2023 | | December 31, 2022 | | Estimated Useful Life |
| Furniture, fixtures, and equipment | $ | 57 | | | $ | 55 | | | 5 years |
| Capitalized software costs | 94 | | | 87 | | | 3 - 5 years |
| Software in development and other | 8 | | | 12 | | | |
| Leasehold improvements | 30 | | | 27 | | | Lesser of 10 years or remaining lease term |
| Long-term finance leases - computer equipment | 5 | | | 6 | | | 3 - 5 years |
| Property and equipment | 194 | | | 187 | | | |
| Less: Accumulated depreciation | (141) | | | (122) | | | |
| Property and equipment, net | $ | 53 | | | $ | 65 | | | |
The Company recorded depreciation expense on property and equipment of $31 for the years ended December 31, 2023 and 2022, respectively. The Company has entered into various lease agreements for computer equipment, which are classified as finance leases. See Note 9, Leases, for more information.
The Company recorded no impairment charges during the years ended December 31, 2023 and 2022.
9. Leases
The Company’s leases primarily relate to office space and equipment, with remaining lease terms of generally less than 1 year to 7 years. Certain lease arrangements contain extension options, which typically range from 1 to 7 years, at the then fair market rental rates. As of December 31, 2023 and 2022, operating lease ROU assets were $72 and $96, respectively, and corresponding lease liabilities were $91 and $111, respectively, which were included in “other assets,” and “payables and other liabilities,” respectively, on the consolidated balance sheets. The Company does not currently have any significant finance leases in which it is the lessee.
The table below summarizes the Company’s net lease cost:
| | | | | | | | | | | |
| Year Ended December 31, |
| Net Lease Cost | 2023 | | 2022 |
| Operating lease cost | $ | 21 | | | $ | 26 | |
| Sublease income | (3) | | | (3) | |
| Total net lease cost | $ | 18 | | | $ | 23 | |
The table below summarizes other information related to the Company’s operating leases:
| | | | | | | | | | | |
| Year Ended December 31, |
| Operating Leases - Other Information | 2023 | | 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 19 | | | $ | 23 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 8 | | | $ | 15 | |
| Weighted average remaining lease term - operating leases, in years | 5.0 | | 6.0 |
| Weighted average discount rate - operating leases | 4.6 | % | | 3.8 | % |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 90
Maturities of operating lease liabilities as of December 31, 2023 are as follows:
| | | | | | | | |
| Year Ending December 31, | | Operating Leases |
| 2024 | | $ | 23 | |
| 2025 | | 20 | |
| 2026 | | 18 | |
| 2027 | | 16 | |
| 2028 | | 13 | |
| Thereafter | | 12 | |
| Total future minimum lease payments | | 102 | |
| Less: imputed interest | | 11 | |
| Total operating lease liabilities | | $ | 91 | |
10. Loans Subject to Repurchase from Ginnie Mae
Loans are sold to Ginnie Mae in conjunction with the issuance of mortgage-backed securities. The Company, as the issuer of the mortgage-backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including payments not being received from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The Company had loans subject to repurchase from Ginnie Mae of $966 and $1,865 as of December 31, 2023 and 2022, respectively, which are included in both “other assets” and “payables and other liabilities” in the consolidated balance sheets.
11. Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2023. There were no changes in goodwill in 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| Servicing | | Originations | | Corporate/Other(2) | | Total |
| Balance - beginning of year | $ | 80 | | | $ | 28 | | | $ | 12 | | | $ | 120 | |
Addition from acquisitions(1) | 5 | | | — | | | 16 | | | 21 | |
| Balance - end of year | $ | 85 | | | $ | 28 | | | $ | 28 | | | $ | 141 | |
(1)As discussed in Note 3, Acquisitions, the Company recorded goodwill in connection with the Roosevelt Transaction.
(2)The goodwill associated with Xome and Roosevelt is included in Corporate/Other.
During the years ended December 31, 2023 and 2022, the Company performed a quantitative assessment of its reporting units and determined that no impairment of goodwill existed. Goodwill is recorded in “other assets” within the consolidated balance sheets.
91 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Intangible Assets
The following tables present the composition of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Intangible Assets | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years |
| Customer relationships | $ | 96 | | | $ | (73) | | | $ | 23 | | | 4.7 |
| Trade name | 9 | | | (7) | | | 2 | | | 4.5 |
Other(1) | 3 | | | — | | | 3 | | | 2.8 |
| Total intangible assets | $ | 108 | | | $ | (80) | | | $ | 28 | | | 4.5 |
(1)Other intangible assets primarily include licenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Intangible Assets | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years |
| Customer relationships | $ | 74 | | | $ | (67) | | | $ | 7 | | | 5.6 |
| Technology | 25 | | | (25) | | | — | | | 0.0 |
| Trade name | 7 | | | (6) | | | 1 | | | 0.6 |
| Total intangible assets | $ | 106 | | | $ | (98) | | | $ | 8 | | | 4.9 |
Intangible assets are recorded in “other assets” within the consolidated balance sheets. In 2023, the Company recorded intangible assets of $23 and $4 in connection with the Rushmore Transaction and Roosevelt Transaction, respectively. See further discussion in Note 3, Acquisitions. The Company recognized $7 and $6 of amortization expense related to intangible assets during the years ended December 31, 2023 and 2022, respectively. The Company expects to record amortization expense for existing amortizable intangible assets of $7, $7, $6, $5, and $3 for each of the years ending December 31, 2024 to 2028. No impairment on intangible assets was recorded during the years ended December 31, 2023 and December 31, 2016. The impact2022.
12. Derivative Financial Instruments
Derivative instruments are used as part of the releaseoverall strategy to manage exposure to interest rate risks related to mortgage loans held for sale and IRLCs (“the pipeline”) and the MSR portfolio. The Company economically hedges the pipeline separately from the MSR portfolio primarily using third-party derivative instruments. Such derivative instruments utilized by the Company include IRLCs, LPCs, forward MBS and Treasury futures. The changes in value on the derivative instruments associated with pipeline hedging are recorded in earnings as a component of “revenues - net gain on mortgage loans held for sale” on the consolidated statements of operations and consolidated statements of cash flows, while changes in the value of derivative instruments associated with the MSR portfolio fair value are recorded in “revenues - service related, net” on the consolidated statements of operations and in “loss (gain) on MSR hedging activities” on the consolidated statements of cash flows.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 92
The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments. Gains/(losses) include both realized and unrealized gains/(losses) of each derivative financial instrument.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 | | Year Ended December 31, 2023 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Gains/(Losses) |
| Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | |
| Loan sale commitments | 2024 | | $ | 337 | | | $ | 11 | | | $ | 1 | |
| Derivative financial instruments | | | | | | | |
| Treasury futures | 2024 | | 2,634 | | | 113 | | | 113 | |
| Forward MBS trades | 2024 | | 2,365 | | | 22 | | | 155 | |
| IRLCs | 2024 | | 584 | | | 21 | | | (1) | |
| LPCs | 2024 | | 361 | | | 3 | | | 2 | |
| Total derivative financial instruments - assets | | | $ | 5,944 | | | $ | 159 | | | $ | 269 | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | 2024 | | 1,049 | | | 9 | | | (126) | |
| Treasury futures | 2024 | | 80 | | | — | | | (196) | |
| LPCs | 2024 | | 41 | | | — | | | 1 | |
| IRLCs | 2024 | | 1 | | | — | | | — | |
| Total derivative financial instruments - liabilities | | | $ | 1,171 | | | $ | 9 | | | $ | (321) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | Year Ended December 31, 2022 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Gains/(Losses) |
| Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | |
| Loan sale commitments | 2023 | | $ | 354 | | | $ | 10 | | | $ | (15) | |
| Derivative financial instruments | | | | | | | |
| Treasury futures | 2023 | | — | | | — | | | 4 | |
| Forward MBS trades | 2023 | | 1,143 | | | 8 | | | 569 | |
| IRLCs | 2023 | | 755 | | | 22 | | | (112) | |
| LPCs | 2023 | | 145 | | | 1 | | | (2) | |
| Total derivative financial instruments - assets | | | $ | 2,043 | | | $ | 31 | | | $ | 459 | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | 2023 | | 681 | | | 9 | | | (56) | |
| Treasury futures | 2023 | | 892 | | | 14 | | | (277) | |
| LPCs | 2023 | | 209 | | | 1 | | | 1 | |
| IRLCs | 2023 | | 15 | | | — | | | — | |
| Total derivative financial instruments - liabilities | | | $ | 1,797 | | | $ | 24 | | | $ | (332) | |
93 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
As of December 31, 2023 the Company held $8 and $56 in collateral deposits and collateral obligations on derivative instruments, respectively. As of December 31, 2022, the Company held $49 and $1 in collateral deposits and collateral obligations on derivative instruments, respectively. Collateral deposits and collateral obligations are recorded in “other assets” and “payables and other liabilities,” respectively, on the Company’s consolidated balance sheets, and are included in “net cash attributable to operating activities” within the consolidated statements of cash flows. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the consolidated balance sheets.
13. Indebtedness
Advance, Warehouse and MSR Facilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | December 31, 2023 | | December 31, 2022 |
| | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral Pledged |
| Advance Facilities | | | | | | | | | | | | | | |
| $350 advance facility | | October 2024 | | Servicing advance receivables | | $ | 350 | | | $ | 132 | | | $ | 169 | | | $ | 150 | | | $ | 189 | |
$300 advance facility(1) | | November 2024 | | Servicing advance receivables | | 300 | | | 273 | | | 364 | | | 308 | | | 410 | |
| $250 advance facility | | September 2025 | | Servicing advance receivables | | 250 | | | 250 | | | 326 | | | 171 | | | 209 | |
| $50 advance facility | | December 2024 | | Servicing advance receivables | | 50 | | | 27 | | | 49 | | | 40 | | | 45 | |
| Advance facilities principal amount | | | | | | 682 | | | 908 | | | 669 | | | 853 | |
| | | | | | | | | | | | | | |
| Warehouse Facilities | | | | | | | | | | | | | | |
| $1,500 Warehouse Facility | | June 2024 | | Mortgage loans or MBS | | 1,500 | | | 107 | | | 104 | | | 206 | | | 272 | |
| $750 Warehouse Facility | | June 2024 | | Mortgage loans or MBS | | 750 | | | 137 | | | 176 | | | 135 | | | 133 | |
| $750 Warehouse Facility | | October 2024 | | Mortgage loans or MBS | | 750 | | | 155 | | | 166 | | | 202 | | | 209 | |
| $500 Warehouse Facility | | June 2024 | | Mortgage loans or MBS | | 500 | | | 72 | | | 78 | | | 76 | | | 80 | |
| $350 Warehouse Facility | | August 2024 | | Mortgage loans or MBS | | 350 | | | 73 | | | 75 | | | 31 | | | 32 | |
$300 Warehouse Facility(2) | | February 2024 | | Mortgage loans or MBS | | 300 | | | — | | | — | | | 115 | | | 117 | |
$250 Warehouse Facility(3) | | September 2025 | | Mortgage loans or MBS | | 250 | | | 158 | | | 177 | | | 14 | | | 17 | |
| $200 Warehouse Facility | | December 2024 | | Mortgage loans or MBS | | 200 | | | 82 | | | 84 | | | 18 | | | 21 | |
| $200 Warehouse Facility | | January 2025 | | Mortgage loans or MBS | | 200 | | | 12 | | | 21 | | | — | | | — | |
| $100 Warehouse Facility | | April 2024 | | Mortgage loans or MBS | | 100 | | | 25 | | | 33 | | | 19 | | | 28 | |
| $100 Warehouse Facility | | April 2024 | | Mortgage loans or MBS | | 100 | | | — | | — | | — | | — |
| $100 Warehouse Facility | | December 2024 | | Mortgage loans or MBS | | 100 | | | 1 | | 1 | | 1 | | 1 |
| $1 Warehouse Facility | | December 2024 | | Mortgage loans or MBS | | 1 | | | — | | | — | | | — | | | — | |
| Warehouse facilities principal amount | | 822 | | | 915 | | | 817 | | | 910 | |
| | | | | | | | | | | | | | |
| MSR Facilities | | | | | | | | | | | | | | |
| $1,500 Warehouse Facility | | April 2025 | | MSR | | 1,500 | | | 980 | | | 1,455 | | | 260 | | | 2,284 | |
$1,450 Warehouse Facility(1) | | November 2024 | | MSR | | 1,450 | | | 300 | | | 2,164 | | | 380 | | | 927 | |
$750 Warehouse Facility(3) | | September 2025 | | MSR | | 750 | | | 545 | | | 1,306 | | | 380 | | | 1,482 | |
| $500 Warehouse Facility | | June 2025 | | MSR | | 500 | | | 405 | | | 655 | | | 365 | | | 732 | |
| $500 Warehouse Facility | | April 2025 | | MSR | | 500 | | | 305 | | | 634 | | | — | | | — | |
| $500 Warehouse Facility | | June 2025 | | MSR | | 500 | | | 250 | | | 677 | | | — | | | — | |
| $50 Warehouse Facility | | November 2024 | | MSR | | 50 | | | 29 | | | 67 | | | 25 | | | 74 | |
| MSR facilities principal amount | | 2,814 | | | 6,958 | | | 1,410 | | | 5,499 | |
| | | | | | | | | | | | | | |
| Advance, warehouse and MSR facilities principal amount | | 4,318 | | | $ | 8,781 | | | 2,896 | | | $ | 7,262 | |
| Unamortized debt issuance costs | | (16) | | | | | (11) | | | |
| Total advance, warehouse and MSR facilities, net | | $ | 4,302 | | | | | $ | 2,885 | | | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 94
(1)Total capacity for this facility is $1,750, of which $300 and $1,450 are internally allocated for advance financing and MSR financing, respectively; capacity is fully fungible and is not restricted by these allocations.
(2)This facility was terminated in February 2024.
(3)The capacity amount for this facility is $1,000, of which $750 is a sublimit for MSR financing.
The weighted average interest rate for advance facilities was 7.6% and 4.1% for the years ended December 31, 2023 and 2022, respectively. The weighted average interest rate for warehouse and MSR facilities was 7.6% and 4.0% for the years ended December 31, 2023 and 2022, respectively.
Unsecured Senior Notes
Unsecured senior notes consist of the premium deficiency reserves is significantfollowing:
| | | | | | | | | | | |
| Unsecured Senior Notes | December 31, 2023 | | December 31, 2022 |
| $850 face value, 5.500% interest rate payable semi-annually, due August 2028 | $ | 850 | | | $ | 850 | |
| $650 face value, 5.125% interest rate payable semi-annually, due December 2030 | 650 | | | 650 | |
| $600 face value, 6.000% interest rate payable semi-annually, due January 2027 | 600 | | | 600 | |
| $600 face value, 5.750% interest rate payable semi-annually, due November 2031 | 600 | | | 600 | |
$550 face value, 5.000% interest rate payable semi-annually, due January 2026(1) | 500 | | | — | |
| Unsecured senior notes principal amount | 3,200 | | | 2,700 | |
Purchase discount(1) and unamortized debt issuance costs | (49) | | | (27) | |
| Unsecured senior notes, net | $ | 3,151 | | | $ | 2,673 | |
(1)In connection with the Home Point Acquisition in that it results in reduced underwriting expenses. Such reduction in underwriting expenses is primarily2023, the Company assumed an unsecured senior note with a resultprincipal balance of improvements in general economic conditions$500 and specifically, improvements inrecorded a purchase discount of $32 on the overall real estate market. These improvements resulted in lower than expected incurred losses by WMMRC. The components that gave rise to a net operating lossacquisition date, of which $5 has been accreted in the year ended December 31, 2017, net operating income2023. See Note 2, Acquisitions, for further details.
The ratios included in the year ended December 31, 2016indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio. The incurrence-based covenants limit the issuer(s) and restricted subsidiaries ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the applicable indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.
The indentures provide that on or before certain fixed dates, the Company may redeem up to 40% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a net operating lossportion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the year ended December 31, 2015, are described inindentures plus accrued and unpaid interest, to the tables below under the Net Income (Loss) section.Total revenue for the year ended December 31, 2017 was $7.9 million compared to $5.4 million and $6.0 million for the years ended December 31, 2016 and 2015, respectively. The change in revenues, including the $2.5 million increase between 2017 and 2016 and the $0.6 million revenue decrease between 2016 and 2015, are largely attributable to managing the operations of WMMRC in runoff mode offset by increased investment income. The premium revenue reduction has been offset by an increase in investment income of $4.4 million and $1.4 millionredemption dates. No notes were repurchased or redeemed during the years ended
December 31, 20172023 and 2022.
As of December 31,
2016, respectively. In addition, because WMMRC is operating in runoff mode, we expect premiums earned revenue to continue to decrease, as no new business is being undertaken.30
WMIH received other income in2023, the amount of $0.1 million, $0.1 million and $7.8 million, respectively, in the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively, as a resultexpected maturities of the settlement by the Trust of the D&O Litigation and distribution, by the Trust, of litigation proceeds to WMIH, which is further described in Note 6: Service Agreements and Related Party Transactions, to the consolidated financial information in Part II, Item 8 of thisCompany’s unsecured senior notes based on contractual maturities are as follows:
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2024 through 2025 | | $ | — | |
| 2026 | | 500 | |
| 2027 | | 600 | |
| 2028 | | 850 | |
| Thereafter | | 1,250 | |
| Total unsecured senior notes principal amount | | $ | 3,200 | |
95 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Financial Covenants
The Company’s credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and
profitability requirements, which are measured at the Company’s operating subsidiary, Nationstar Mortgage LLC. The Company was in
this Item 7 under “Contractual Obligations, Commitments and Contingencies.” Due to the contingent nature of any further distribution of litigation proceeds by the Trust, there can be no assurance that WMIH will receive any distributions on account of litigation proceeds from the Trust in the future, as described further below in this Item 7 under “Contractual Obligations, Commitments and Contingencies.”Underwriting expenses (defined as losses, loss adjustment expenses and ceding commission expenses) totaled $0.2 million for the year ended December 31, 2017, resulting in a negative change of $0.6 million and $0.9 million, respectively, compared to underwriting recoveries of $0.4 million and $0.7 million, respectively, for the years ended December 31, 2016 and 2015. These changes in recoveries and expense are related to the operation of WMMRC in runoff mode and the corresponding decrease in premium earned revenue and change in premium deficiency reserves. The premium deficiency reserve remained unchanged during the year ended December 31, 2017 and decreased by $0.5 million and $1.5 million during the years ended December 31, 2016 and December 31, 2015. The premium deficiency reserve was approximately $2.3 millioncompliance with its required financial covenants as of December 31, 2014 compared to approximately $0.3 million, $0.3 million2023.
14. Securitizations and $0.8 million asFinancings
Variable Interest Entities
In the normal course of
December 31, 2017, December 31, 2016business, the Company enters into various types of on- and
December 31, 2015, respectively. As more fully described in Note 2: Significant Accounting Policies to our consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K, due to the current condition of the mortgage insurance market, WMMRC has recorded reserves based on ceded case reserves and incurred but not recorded (“IBNR”) loss levels reported by the primary mortgage guaranty carriers as of each reporting period. Management believes that its aggregate liability for unpaid losses and loss adjustment expenses at period end represents its best estimate, based upon the available data, of the amount necessary to cover the current cost of losses.As of December 31, 2017, the loss contract reserve was analyzed andoff-balance sheet transactions with SPEs determined to havebe VIEs, which primarily consist of securitization trusts established for a value of zero compared to $5.6 million and $9.6 million at December 31, 2016 and December 31, 2015, respectively. The loss contract reserve was established at a value of $63.1 million on March 19, 2012 as a result of our reorganization. The decrease in the loss contract reserve during the years ended December 31, 2017, 2016 and 2015 totaled $5.6 million, $4.0 million and $2.9 million, respectively, and resulted in a corresponding decrease in expense of the same amount during the respective periods. The loss contract reserve is expected to remain at zero due to the runoff nature of WMMRC and the earlier than projected timing of assets being released from trust accounts held at WMMRC.
For the year ended December 31, 2017, our investment portfolio reported net investment income of $6.7 million, as compared to net investment income of $2.2 million and $0.9 millionlimited purpose. Generally, these SPEs are formed for the years ended December 31, 2016 and 2015, respectively. purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.
The
components ofCompany has determined that the
investment income are more fully described below in the Net Investment Income section. The primary variances occurred due to changes in the interest rate environment, including improved short-term returns.General and Administrative Expenses
For the year ended December 31, 2017, our general and administrative expenses totaled $14.5 million, compared to $7.0 million and $20.9 million during the same periods in 2016 and 2015, respectively. We experienced elevated amounts of general and administrative expenses in 2017 and 2015, as compared to the same periods in 2016. The 2017 increased costs were primarily due to fees and expenses incurredSPEs created in connection with our effortscertain advance facilities trusts should be consolidated as the Company is the primary beneficiary of each of these entities.
A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s consolidated financial statements is presented below:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Consolidated Transactions with VIEs | Transfers
Accounted for as
Secured
Borrowings | | Transfers
Accounted for as
Secured
Borrowings |
| Assets | | | |
| Restricted cash | $ | 111 | | | $ | 78 | |
| Advances and other receivables, net | 495 | | | 398 | |
| Total assets | $ | 606 | | | $ | 476 | |
| | | |
| Liabilities | | | |
Advance facilities(1) | $ | 382 | | | $ | 321 | |
| Payables and other liabilities | 1 | | | 1 | |
| Total liabilities | $ | 383 | | | $ | 322 | |
(1)Refer to amend the Original Series B Preferred Stock and the evaluationadvance facilities in Note 13, Indebtedness, for additional information.
The following table shows a summary of
several potential acquisition opportunities. The 2015 increase was primarily the result of our efforts to evaluate, structure, negotiate and finance an acquisition which was not completed, satisfy the Original Series B Preferred Stock post-closing covenants, including our reincorporation from Washington to Delaware, make effective a resale registration statement on Form S-3 and list WMIH’s shares of common stock on The Nasdaq Capital Market.Interest Expense
For the years ended December 31, 2017, December 31, 2016 and December 31, 2015, we incurred $1.8 million, $2.6 million and $3.7 million of total interest expense, respectively, all of which was payable on the outstanding principal amount ofcollateral and certificate balances for securitization trusts for which the Runoff Notes. The amount of runoff interest expense continued to decrease each year, as expected, due toCompany was the facttransferor, including any retained beneficial interests and MSRs, that were not consolidated by the outstanding Runoff Notes were reduced each year. The First Lien Notes were fully redeemed on April 15, 2015, and the Second Lien Notes were fully redeemed on September 29, 2017. The Indentures pertaining to these Notes were satisfied and discharged.
31
Gain (Loss) on Change in Fair Value of Derivative
The fair value of the derivative embedded conversion feature was revalued each reportable balance sheet date with the decrease or increase, as the case may be, in fair value being reported in the consolidated statements of operations as gain or (loss) on change in fair value of derivative embedded conversion feature. The primary factors affecting the fair value of the embedded conversion feature were the probability of a Qualified Acquisition occurring and the timing related thereto; our stock price; and our stock price volatility. As of and for the year ended December 31, 2017, the fair value of the derivative asset decreased by a total of $80.7 million due to a reclassification of the final December 31, 2017 fair market value of $108.9 million to equity, due to its modification, and the fair market value change of $28.2 million being recorded as other income. The fair market value of the embedded derivative on January 5, 2015, the date the Original Series B Preferred Stock was issued, totaled $66.2 million. This amount reduced the carrying value of the Original Series B Preferred Stock and continues to reduce the recorded value. During the year ended December 31, 2016, the fair value increased by $201.5 million resulting in a gain and the derivate liability becoming a derivative asset. During the year ended December 31, 2015, the fair value of the derivative liability increased by $54.6 million resulting in the recognition of a loss of the same amount.
Net Income (Loss)
Net operating loss for the year ended December 31, 2017 totaled $2.5 million compared to net operating income of $0.1 million for the year ended December 31, 2016 and a net operating loss of $15.1 million for the year ended December 31, 2015.
For the year ended December 31, 2017, we reported net income attributable to common and participating stockholders of $7.8 million. This result compares to $183.7 million of net income attributable to common and participating stockholders for the year ended December 31, 2016 and to net loss attributable to common and participating stockholders of $79.6 million for the year ended December 31, 2015.
The primary factors impacting the change in net operating (loss) income and net income (loss) attributable to common and participating stockholders for the year ended December 31, 2017 compared to the results of operations for the year ended December 31, 2016, and for the year ended December 31, 2016 compared to the results of operations for the year ended December 31, 2015, are summarized in the tables below.
Year ended December 31, 2017 versus year ended December 31, 2016 summary of change in net operating (loss) income and net income (loss) attributable to common and participating stockholders (in thousands):
Company: | | | | | | | | | | |
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Percentage change favorable (unfavorable) | | | Dollar value change favorable (unfavorable) | |
Net revenues | $ | 7,890 | | | $ | 5,396 | | | | 46 | % | | $ | 2,494 | |
Underwriting expense (benefit) (net) | | 156 | | | | (363 | ) | | | (143 | %) | | | (519 | ) |
General and administrative expenses | | 14,457 | | | | 7,043 | | | | (105 | %) | | | (7,414 | ) |
Loss contract reserve reduction | | (5,645 | ) | | | (3,978 | ) | | | 42 | % | | | 1,667 | |
Gain from contract termination | | (383 | ) | | | — | | | N/A | | | | 383 | |
Interest expense | | 1,788 | | | | 2,616 | | | | 32 | % | | | 828 | |
Net operating (loss) income | | (2,483 | ) | | | 78 | | | | (3,283 | %) | | | (2,561 | ) |
Other income | | 123 | | | | 123 | | | | 0 | % | | | — | |
Gain on change in value of derivative embedded conversion feature | | 28,242 | | | | 201,499 | | | | (86 | %) | | | (173,257 | ) |
Redeemable convertible series B preferred stock dividends | | (18,050 | ) | | | (18,000 | ) | | | (0 | %) | | | (50 | ) |
Net income (loss) attributable to common and participating stockholders | $ | 7,832 | | | $ | 183,700 | | | | (96 | %) | | $ | (175,868 | ) |
| | | | | | | | | | | |
| Unconsolidated Securitization Trusts | December 31, 2023 | | December 31, 2022 |
| Total collateral balances - UPB | $ | 881 | | | $ | 976 | |
| Total certificate balances | $ | 849 | | | $ | 949 | |
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Year ended December 31, 2016 versus year ended December 31, 2015 summary of change in net operating income (loss) and net income (loss) attributable to common and participating stockholders (in thousands):
| Year ended | | | | | | | | | |
| December 31, 2016 | | | December 31, 2015 | | | Percentage change favorable (unfavorable) | | | Dollar value change favorable (unfavorable) | |
Net revenues | $ | 5,396 | | | $ | 6,000 | | | | (10 | %) | | $ | (604 | ) |
Underwriting (benefit) (net) | | (363 | ) | | | (659 | ) | | | (45 | %) | | | (296 | ) |
General and administrative expenses | | 7,043 | | | | 20,940 | | | | 66 | % | | | 13,897 | |
Loss contract reserve reduction | | (3,978 | ) | | | (2,926 | ) | | | 36 | % | | | 1,052 | |
Interest expense | | 2,616 | | | | 3,702 | | | | 29 | % | | | 1,086 | |
Net operating income (loss) | $ | 78 | | | $ | (15,057 | ) | | | 101 | % | | $ | 15,135 | |
Other income | | 123 | | | | 7,845 | | | | (98 | %) | | | (7,722 | ) |
Gain (loss) on change in value of derivative embedded conversion feature | | 201,499 | | | | (54,621 | ) | | | 469 | % | | | 256,120 | |
Redeemable convertible series B preferred stock dividends | | (18,000 | ) | | | (17,748 | ) | | | (1 | %) | | | (252 | ) |
Net income (loss) attributable to common and participating stockholders | $ | 183,700 | | | $ | (79,581 | ) | | | 331 | % | | $ | 263,281 | |
Comprehensive Income (Loss)
The Company has
no comprehensive income (loss) other than the net income (loss) disclosednot retained any variable interests in the
consolidated statements of operations.Net Premiums Earned
The majority of WMMRC’s reinsurance contracts require premiums to be written and earned monthly. In a few cases, the premiums earned reflect the pro rata inclusion into income of premiums written over the life of the reinsurance contracts. Details of premiums earned are provided in the following table:
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Premiums assumed | $ | 989 | | | $ | 2,656 | | | $ | 4,788 | |
Change in unearned premiums | | 231 | | | | 491 | | | | 333 | |
Premiums earned | $ | 1,220 | | | $ | 3,147 | | | $ | 5,121 | |
For the year ended December 31, 2017, premiums earned totaled $1.2 million, a decrease of $1.9 million and $3.9 million when compared to premiums earned of $3.1 million and $5.1 million during the years ended December 31, 2016 and December 31, 2015, respectively. The primary factors contributing to these decreased premiums relate to WMMRC continuing to operate in runoff mode. The Company’s premiums earned are expected to continue to decrease due to WMMRC operating in runoff mode. To the extent WMMRC effects a commutation of one or more of its remaining reinsurance agreements, it would no longer earn net premiums on commuted reinsurance agreements.
Losses or Benefits Incurred and Losses and Loss Adjustment Expenses
Losses incurred include losses paid and changes in loss reserves, including reserves for IBNR, premium deficiency reserves net of actual and estimated loss recoverable amounts. Details of net losses or benefits incurred for the years ended December 31, 2017, 2016 and 2015, are provided in the following table:
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Losses and loss adjustment expense (benefit) | $ | 19 | | | $ | (669 | ) | | $ | (1,115 | ) |
We establish reserves for each contract based on estimates of the ultimate cost of all losses including losses incurred but not reported. These estimated ultimate reserves are based on reports received from ceding companies, industry data and historical experience as well as our own actuarial estimates. Quarterly, we review these estimates on a contract by contract basis and adjust as we deem necessary based on updated information and our internal actuarial estimates.
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For the years ended December 31, 2017, 2016 and 2015, the loss or benefit ratios for our business were a loss ratio of 2% and benefit ratios of 21% and 22%, respectively. The loss or benefit ratio is calculated by dividing incurred benefit or losses for the period by earned premiums. The ratio provides a measure of underwriting profit or loss. Loss reinsurance contracts (which represent the significant majority of our loss exposure) are generally structured with limits set on the aggregate amount of lossesunconsolidated securitization trusts that can be incurred over the life of such contract. Upon reaching such limits, no additional losses may be realized under the terms of the contract. Nevertheless, even when applicable contract limits are reached, revenues from premiums collected continue to be ceded for the remaining life of the contract. Beginning in 2013, a majority of WMMRC’s reinsurance arrangements for the 2006 through 2008 book years reached their respective loss limits. As a result, WMMRC does not expect to incur any additional losses for those book years; however, WMMRC may continue to realize revenues from those book years, to the extent premiums are ceded therefrom.
The components of the liability for losses and loss adjustment reserves are as follows at December 31, 2017 and 2016, respectively:
| | | | | | | |
| December 31, 2017 | | | December 31, 2016 | |
Case-basis reserves | $ | 151 | | | $ | 553 | |
IBNR reserves | | 1 | | | | — | |
Premium deficiency reserves | | 322 | | | | 258 | |
Total losses and loss adjustment reserves | $ | 474 | | | $ | 811 | |
Losses and loss adjustment reserve activity are as follows for the periods ended December 31, 2017 and 2016, respectively:
| | | | | | | |
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | |
Balance at beginning of period | $ | 811 | | | $ | 5,063 | |
Incurred (released) - prior periods | | 19 | | | | (669 | ) |
Paid or terminated - prior periods | | (356 | ) | | | (3,583 | ) |
Total losses and loss adjustment reserves | $ | 474 | | | $ | 811 | |
Net Investment Income
A summary of our net investment income for the years ended December 31, 2017, 2016 and 2015, respectively, is as follows:
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Investment income: | | | | | | | | | | | |
Amortization of premium or discount on fixed-maturity securities | $ | (116 | ) | | $ | (227 | ) | | $ | (574 | ) |
Investment income on fixed-maturity securities | | 428 | | | | 921 | | | | 1,324 | |
Interest income on cash and cash equivalents | | 6,481 | | | | 1,572 | | | | 268 | |
Realized net (loss) gain from sale of investments | | (68 | ) | | | 24 | | | | 324 | |
Unrealized (loss) on cash equivalents held at period end | | (116 | ) | | | — | | | | — | |
Unrealized gain (loss) on trading securities held at period end | | 61 | | | | (41 | ) | | | (463 | ) |
Net investment income | $ | 6,670 | | | $ | 2,249 | | | $ | 879 | |
Federal Income Taxes
The Company has no current tax liability due as a result of its tax loss position for the years ended December 31, 2017, 2016, and 2015. More detailed information regarding the Company’s tax position including net operating loss (“NOL”) carry forwards is provided in Note 5: Income Taxes, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.
The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying the current tax rate to taxable income, in accordance with the provisions of the Internal Revenue Code (the “Code”) that apply to mortgage insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIH during the periods ending December 31, 2017, 2016, and 2015 associated with the Company’s tax liability from the preceding years.
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Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, recognition of unearned premiums, changes in the value of loss contract reserves and embedded derivatives, net operating losses, and unrealized gains and losses on investments.
We believe WMIH experienced an ownership change under Section 382 of the Code in connection with the bankruptcy plan becoming effective. Prior to emergence from bankruptcy, WMI abandoned the stock of Washington Mutual Bank, thereby generating a worthless stock deduction of approximately $8.4 billion, which gives rise to a NOL carry forward for the year ended December 31, 2012. We believe that the total available and utilizable NOL carry forward at December 31, 2017 was approximately $6.0 billion, and at December 31, 2017, we believe that there was no limit under Section 382 of the Code on the use of these NOLs. As of December 31, 2017 and 2016, the Company recorded a valuation allowance equal to 100% of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act which reforms U.S. Tax legislation and related laws. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21%. Our deferred tax assets, although fully reserved, have been revalued at the lower rate as of December 31, 2017, resulting in a reduction of the deferred tax asset of $842.9 million and a corresponding change in the related valuation allowance. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.
Investments
General
We hold investments at both WMIH and WMMRC and the two portfolios consist entirely of fixed income instruments, excluding funds in overnight money market instruments, totaling $3.7 million and $76.8 million at December 31, 2017 and December 31, 2016, respectively. In addition, at December 31, 2017 and December 31, 2016, the Company held zero and $0.4 million of restricted cash, respectively, in the Collateral Account established by the Company as required under the Indentures for the benefit of holders of Runoff Notes. The Company held $578.9 million and $572.9 million of restricted cash from the Series B Preferred Stock Financing in its escrow account at December 31, 2017 and December 31, 2016, respectively.
The value of the consolidated Company’s total cash and investments decreased during the past year. Cash and investments, which excludes restricted cash of $578.9 million and $573.3 million at December 31, 2017 and December 31, 2016, respectively, totaled $34.6 million and $81.5 million at December 31, 2017 and December 31, 2016, respectively. The primary factors that contributed to this decrease in investments were (i) the payment of a total of $18.0 million in Original Series B Preferred Stock cash dividends during the 2017 fiscal year; and (ii) the payment of $18.8 million to fully redeem the Second Lien Runoff Notes.
We work with investment broker dealers and, in the case of WMMRC, collateral trustees, in determining whether a market for a financial instrument is active or inactive. We regularly obtain indicative pricing from market makers and from multiple dealers and compare the level of pricing variances as a way to observe market liquidity for certain investment securities. We also obtain trade history and live market quotations from publicly quoted sources, such as Bloomberg, for trade volume and frequency observation. While we obtain market pricing information from broker dealers, the ultimate fair value of our investments is based on portfolio statements provided by financial institutions that hold our accounts.
During the years ended December 31, 2017 and 2016, we transferred $2.4 million and $11.0 million, respectively, of corporate securities that mature within 12 months from Level 2 to Level 1, due to improved liquidity in capital markets for those securities. Please refer to Note 4: Investment Securities, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our investment securities.
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WMIH
WMIH’s investments are valued at fair value and any unrealized gains or losses are reflected in net investment income in the consolidated statements of operations. At December 31, 2017 and December 31, 2016, WMIH had zero and $45.0 million, respectively, of investments in obligations of U.S. government sponsored enterprises. WMIH also had $21.2 million and $2.1 million cash and cash equivalents at December 31, 2017 and December 31, 2016, respectively.
WMMRC
WMMRC’s investments are valued at fair value and any unrealized gains or losses are reflected in net investment income (loss) in the consolidated statements of operations. At December 31, 2017, 42.9% of WMMRC’s cash and investments were held in three trusts for the benefit of primary mortgage insurers with whom WMMRC established agreements to reinsure private mortgage insurance risk. The total portfolio, excluding funds in overnight money market instruments, was valued at approximately $3.7 million and $31.9 million at December 31, 2017 and 2016, respectively. At December 31, 2017, 100% of the portfolio consisted of securities that will mature within the next 12 months. WMMRC also had $9.7 million of cash and cash equivalents at December 31, 2017.
Liquidity and Capital Resources
General
WMIH is organized as a holding company and has limited operations of its own. With respect to its own operations, WMIH’s primary cash needs in 2017 consisted of $18.0 million of cash dividends on the Original Series B Preferred Stock and general and administrative expenses and costs related to possible acquisitions and payments of principal and interest on the Runoff Notes totaling $18.8 million. The amendment of the Original Series B Preferred Stock, effective January 5, 2018, eliminated the requirement to pay cash dividends on the Series B Preferred Stock. Additionally, principal and interest payments on the “Runoff Notes” described below in this Item 7 under “Redeemed Notes” will not be an ongoing use of cash as the Runoff Notes have been paid in full.
In addition, our significant business operations are conducted through our wholly-owned reinsurance subsidiary, WMMRC, which formerly underwrote risks associated with our mortgage reinsurance programs, but is being operated in runoff and has not written any new business since September 26, 2008. There are restrictions on WMMRC’s ability to pay dividends which are described in more detail below. WMIH does not currently expect to pay dividends on its common stock.
WMMRC may seek opportunities to commute one or more of its remaining reinsurance agreements, with a view toward accelerating the distribution of trust assets in excess of the amount needed to pay claims. There can be no assurance that any such commutations will be consummated, or if so, on what terms.
Subsequent to January 5, 2018, we are required (if and when declared by our Board) to pay cumulative regular dividends on the outstanding Series B Preferred Stock in common stock, at an annual rate of 5% of the liquidation preference of $1,000 per share. WMIH has declared and paid $18.0 million of cash dividends on its Original Series B Preferred Stock for each of the years ended December 31, 2017 and 2016 and paid $17.7 million for the year ended December 31, 2015 based on the dividend rate of 3%. Accrued dividends of approximately $0.8 million, $0.7 million and $0.7 million were outstanding as of December 31, 2017, 20162023, and 2015, respectively.
On February 12, 2018, WMIH, Nationstar2022, and Merger Sub entered into the Merger Agreement, pursuanttherefore does not have a significant maximum exposure to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Nationstar, with Nationstar continuing as the surviving corporation and a wholly-owned subsidiary of WMIH. Subject to the terms and conditions of the Merger Agreement, at the Effective Time of the Merger and as a result of the Merger, each share of Nationstar’s common stock issued and outstanding immediately prior to the Effective Time (other than shares owned, directly or indirectly, by Nationstar, WMIH or Merger Sub or by any Nationstar stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law) will be converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, subject in each case to pro rata cutbacks to the extent cash or stock is oversubscribed (the “Merger Consideration”). The aggregate amount of cash to be paid as Merger Consideration in the Merger is approximately $1.2 billion. The Merger is expected to close in the second half of 2018, subject to regulatory approvals and customary closing conditions.
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WMIH currently plans to fund the cash component of the Merger Consideration, the repayment of approximately $1.9 billion of outstanding senior unsecured notes of Nationstar and its subsidiaries, and the payment of fees and expensesloss related to the Merger through a combinationthese unconsolidated VIEs.
A summary of
escrowed funds, cash on hand, proceeds from the issuance of debt securities, and borrowings under credit facilities. WMIH has obtained $2.75 billion in debt commitments from certain lenders in connection with its financing plan, which commitment is subject to customary terms and conditions. Although the debt commitment letter for the financing specifies a number of terms for the different facilities, WMIH retains some exposure to changes in pricing and other terms based on market conditions at the time the financing is consummated, which could result in less favorable terms for the financing than expected (although subject to committed terms). Upon the closing of the Nationstar Transaction, all of the outstanding Series B Preferred Stock will be mandatorily converted into WMIH Common Stock at a price of $1.35 per share, and holders of Series B Preferred Stock will be entitled to a special, one-time distribution of WMIH Common Stock and accrued and unpaid dividends payable in WMIH Common Stock.If we do not consummate the Nationstar Transaction or another Qualified Acquisition, or take other actions to extend the redemption date applicable to, or to refinance or modify the terms of, the Series B Preferred Stock, then we are obligated to redeem any outstanding Series B Preferred Stock on the Series B Redemption Date provided, if prior to the Series B Redemption Date we have publicly announced that WMIH has entered into a definitive agreement for an Acquisition, the Series B Redemption Date will be extended to the earlier of April 5, 2020 and the day immediately following the date such definitive agreement is terminated or the date such Acquisition is closed. All or a portion of the Series B Preferred Stock automatically converts into WMIH Common Stock upon consummation of a Qualified Acquisition or an Acquisition, as the case may be. If an Acquisition occurs but a Qualified Acquisition does not occur, we are obligated to redeem any shares of the Series B Preferred Stock that have not converted into WMIH Common Stock and remain outstanding on the Series B Redemption Date. The execution and public announcementmortgage loans transferred by WMIH of the Merger Agreement has extended the Series B Redemption Date to the earlier of April 5, 2020 and the day immediately following the date the Merger Agreement is terminated or the date the Merger is closed. The aggregate redemption price that is payable in cash, assuming all 600,000 shares remain outstanding, of all of the Series B Preferred Stock is $600.0 million.
In addition, we are required to offer to repurchase (if not previously converted) the Series B Preferred Stock upon a Change of Control (as such term is defined in Article VI of the Amended Charter).
In the event we are unable to consummate the Nationstar Transaction or another Qualified Acquisition prior to the Series B Redemption Date, the redemption or repurchase of the Series B Preferred Stock would substantially deplete our available cash for acquisitions and business operations and could have a material adverse effect on our financial condition and ability to continue business operations. There can be no assurance that we will complete the Nationstar Transaction or an alternative Qualified Acquisition prior to the Series B Redemption Date.
Other than the debt to be incurred under our financing plan relating to the Nationstar Transaction, we have no current plans to seek additional debt or equity financing prior to the closing of the Merger. If the Nationstar Transaction is not consummated, we may in the future explore various financing alternatives to fund our external growth strategy, including improving our capital structure, which may include increasing, reducing and/or refinancing debt, amending the terms of outstanding preferred stock, pursuing capital raising activities, such as the issuance of new preferred or common equity and/or a rights offering to our existing stockholders, launching an exchange offer, and pursuing other transactions involving our outstanding securities. There can be no assurance that any such future transaction will occur or, if so, on what terms.
Liquidity Management
The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flowsunconsolidated securitization trusts that are adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. The Company establishes and maintains liquidity guidelines for WMIH as well as for WMMRC, its principal operating subsidiary. Funds held by WMMRC60 days or more past due are not available to WMIH to satisfy its liquidity needs until any proposed dividend payment is approved by the Insurance Division of the State of Hawaii. In light of the restrictions on dividends applicable to WMMRC, WMIH’s principal sources of liquidity are its unrestricted investments, income derived from these investments, and fees paid to WMIH by WMMRC with respect to services provided pursuant to the two services agreements previously approved by the Insurance Division of the State of Hawaii. WMIH has approximately $578.9 million of restricted cash held in escrow, which was received by WMIH in connection with the Series B Preferred Stock Financing. These funds are only available for Acquisitions and Qualified Acquisitions, including reasonable attorney fees and expenses, accounting expenses, due diligence, contractual payments such as termination fees and financial advisor fees and expenses. Because of the runoff nature of WMMRC’s business, as discussed above, all cash available to WMMRC is primarily used to pay reinsurance losses and loss adjustment expenses, ceding commissions and general and administrative expenses. Excess cash, if any, is distributed to WMIH as a dividend upon approval of the WMMRC board of directors and the Insurance Division of the State of Hawaii.
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The Company monitors operating activities, forecasts liquidity needs and adjusts the composition of its investment securities in order to address liquidity needs. The Company historically had negative monthly cash flows primarily due to loss expenses at WMMRC, general and administrative costs, interest payable on Second Lien Notes and dividend payments on the Original Series B Preferred Stock. As a result, the Company maintains a very high quality and short duration investment portfolio in order to match its expense and liability profile at both levels of the consolidated organization. Now that we are no longer required to pay cash dividends on the Series B Preferred Stock and instead pay dividends in our common stock, our liquidity needs have been reduced.
WMMRC has net assets totaling $13.1 million and $33.8 million as of December 31, 2017 and 2016, respectively. These net assets are not immediately available for distribution to WMIH due to restrictions imposed by the trust arrangements referenced above, and the requirement that the Insurance Division of the State of Hawaii must approve all dividends from WMMRC to WMIH.
Capital Structure and Management
WMIH’s capital structure consists of stockholders’ equity and Original Series B Preferred Stock proceeds held in escrow and classified as mezzanine, (non-permanent equity), as of December 31, 2017. We issued term debt of $130.0 million represented by the Runoff Notes on the Effective Date. The First Lien Notes were redeemed in their entirety on April 15, 2015 and the First Lien Indenture was satisfied and discharged on April 27, 2015. The Second Lien Notes were redeemed in their entirety on September 29, 2017 and the Second Lien Indenture was satisfied and discharged on October 2, 2017.
On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. Upon reincorporation in Delaware, which is more fully described in Note 1: The Company and its Subsidiaries, to the consolidated financial information in Part II, Item 8 of thispresented below:
| | | | | | | | | | | |
| Principal Amount of Transferred Loans 60 Days or More Past Due | December 31, 2023 | | December 31, 2022 |
| Unconsolidated securitization trusts | $ | 91 | | | $ | 119 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 96
15. Stockholders' Equity and pursuantEmployee Benefit Plans
Share-based awards under the 2019 Omnibus Incentive Plan (the “2019 Plan”) include (i) restricted stock units (“RSUs”) granted to
employees of the
Amended Charter, WMIH is authorized to issue up to 3,500,000,000 shares of common stockCompany, consultants, and
up to 10,000,000 shares of preferred stock, each with a par value of $0.00001 per share. As of December 31, 2017, 206,714,132 shares of WMIH’s common stock were issued and outstanding, 1,000,000 shares of WMIH’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) were issued and outstanding and 600,000 shares of WMIH’s Series B Preferred Stock were issued and outstanding.On January 30, 2014, pursuant to an Investment Agreement, WMIH issued 1,000,000 shares of Series A Preferred Stock for a purchase price of $11.1 million and warrants to purchase 61,400,000 shares of WMIH’s common stock, 30,700,000 of which have an exercise price of $1.32 per share and 30,700,000 of which have an exercise price of $1.43 per share. The Series A Preferred Stock has rights substantially similar to those associated with WMIH’s common stock, with the exception of a liquidation preference, conversion rights and customary anti-dilution protections. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $10.00 per one million shares of Series A Preferred Stock plus declared but unpaid dividends on such sharesnon-employee directors and (ii) the amount that the holder would be entitledperformance stock units (“PSUs”) granted to in a relevant transaction had the Series A Preferredcertain executive officers.
Restricted Stock been converted to common stock of WMIH. Units
The Series A Preferred Stock is convertible at a conversion price of $1.10 per share into shares of common stock of WMIH, eitherRSUs are valued at the option of the holder or automatically upon transfer by KKR Fund to a non-affiliated party. As a result of the calculation of a beneficial conversion feature as required by Accounting Standards Codification (“ASC”) 470 - Debt, a preferred deemed dividend of $9.5 million was recorded in conjunction with the issuance of the Series A Preferred Stock. This preferred deemed dividend resulted in an increase to our accumulated deficit, and an increase in additional paid in capital. Further, KKR Fund, as the holder of the Series A Preferred Stock and the warrants, has received other rights pursuant to the Investor Rights Agreement as more fully described in Note 9: Capital Stock and Derivative Instruments, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.On January 5, 2015, WMIH announced that it had completed the Series B Preferred Stock Financing of 600,000 shares of Original Series B Preferred Stock for aggregate gross proceeds of $600.0 million, pursuant to the Purchase Agreement with Citi and KCM (together the “Initial Purchasers”). In connection with the Series B Preferred Stock Financing, WMIH entered into an Escrow Agreement (as amended the “Escrow Agreement”) with Citibank, N.A., as Escrow Agent, pursuant to which WMIH caused to be deposited with the Escrow Agent the amount of $598.5 million representing the net proceeds of the Series B Preferred Stock Financing less offering fees payable on January 5, 2015, but before payment of other offering fees and expenses (including fees contingent upon future events). These net proceeds have been and will be released from escrow from time to time to WMIH as instructed by WMIH in amounts necessary to, among other things, explore and/or fund, in whole or in part, acquisitions, whether completed or not. The net proceeds in the escrow account will be released from escrow as instructed by WMIH as needed to consummate an Acquisition or Qualified Acquisition, including reasonable attorney fees and expenses, accounting expenses, due diligence, contractual payments such as termination fees and financial advisor fees and expenses.
38
In connection with the Series B Preferred Stock Financing, WMIH filed with the Secretary of State of Washington Articles of Amendment of Articles of Incorporation (the “Articles of Amendment”) containing the Certificate of Designation creating the Original Series B Preferred Stock and designating the rights and preferences of the Original Series B Preferred Stock. Holders of shares of the Original Series B Preferred Stock were (prior to the Series B Amendment) entitled to receive, when, as and if declared, cumulative regular dividends at an annual rate of 3% per share of the liquidation preference of $1,000 per share of Original Series B Preferred Stock, payable in cash. Subsequent to the Series B Amendment, the holders of shares of the Series B Preferred Stock are entitled to receive, when, as and if declared, cumulative regular dividends at an annual rate of 5% per share of the liquidation preference of $1,000 per share of Series B Preferred Stock, payable in shares of common stock of WMIH. The number of shares issued will be calculated using the higher offair market price of WMIH’s common shares on the date the dividend is declared, or the minimum dividend share price of $1.05. The Series B Amendment, in addition to providing for the regular stock dividends, also: (i) extended the Series B Redemption Date (as defined in the Existing Charter) from January 5, 2018 to October 5, 2019 (subject to a six-month extension in accordance with the terms of the Series B Amendment); (ii) amended the Conversion Price (as defined in the Existing Charter) relating to a Mandatory Conversion (as defined in the Existing Charter) of the Original Series B Preferred Stock to $1.35 per sharevalue of the Company’s common stock par value $0.00001 per share; (iii) provided for a special distribution of 19.04762 shares of common stock per share of Series B Preferred Stock uponon the closing of any Acquisition (asgrant date as defined in the Amended Charter); and (iv)2019 Plan.
The stock awards for employees generally vest in equal installments on each of the first three anniversaries of the awards, provided that the participant remains continuously employed with the Company during that time. If the participant’s employment has terminated by reason of retirement, or upon death or disability, the unvested shares of an award will vest. The stock awards for non-employee directors generally vest the earlier of (a) the first anniversary of the grant date or (b) the date of the next annual stockholders meeting following the grant date. Any forfeiture of restricted stock awards before vesting has been achieved, results in a special stub dividend which was declared and paid byreduction in the Boardbalance of Directors in cash for dividends accruingoutstanding common shares.
Performance Stock Units
The PSUs are valued at the fair market value of the Company’s common stock on the Original Series B Preferred Stock payablegrant date as defined in arrears for the period December 15, 2017 to January 4, 2018.On each date that WMIH closes any Acquisition, outstanding shares of Series B Preferred Stock having an aggregate liquidation preference equal to the net proceeds2019 Plan. In March 2023 and November 2023, certain executives of the offering utilizedCompany were granted 0.1 million and 0.2 million PSUs (the “2023 PSUs”), respectively. 50% of the 2023 PSUs are eligible to vest in such Acquisition,an amount between 0% to 200% of a target award based on achievement of relative total shareholder return and the remaining 50% are eligible to vest in an amount between 0% to 200% of a pro rata basis, will automatically converttarget award based on achievement of annualized tangible book value growth. The 2023 PSUs vest over a period of three to five years and are settled into shares of WMIH’sthe Company’s common stock.
In addition, on the date WMIH closes a Qualified Acquisition, all outstanding shares of Series B Preferred Stock will automatically convert into shares of WMIH’s common stock. Each date that WMIH closes an Acquisition (including a Qualified Acquisition) will be a “Mandatory Conversion Date.” The amount of Series B Preferred Stock to be converted at any Mandatory Conversions Date for an Acquisition which totals less than $450.0 million will be determined by converting the number of shares using the liquidation preference amount of $1,000 per share in an amount equal to the cash used in the acquisition for the purchase priceMarch 2020, March 2021, and the costs related to the acquisition. A Qualified Acquisition would result in allMarch 2022, certain executives of the outstanding Series B Preferred Stock being converted to common stock. Unless the Series B Preferred Stock has been previously repurchased at the option of a holder upon the occurrence of certain put events or mandatorily converted, WMIH will be required to redeem all outstanding shares of Series B Preferred Stock, if any, on the Series B Redemption Date which is October 5, 2019 (subject to a six-month extension in accordance with the terms of the Series B Amendment)Company were granted 0.5 million PSUs (the “2020 PSUs”), 0.3 million PSUs (the “2021 PSUs”), and 0.1 million PSUs (the “2022 PSUs”), respectively. The reincorporation of WMIH from the State of Washington2020, 2021 and 2022 PSUs are eligible to the State of Delaware resulted in the potential to increase in size of WMIH’s Board of Directors from 7 to up to 11 directorsvest and increased WMIH’s authorized number ofbe settled into shares of common stock in an amount sufficient to permit the conversionbetween 0% and 200% of all sharesa target award based on achievement of Series B Preferred Stock (collectively, the “Reincorporation”).The foregoing transactions pertaining to the Series A Preferred Stocktotal shareholder return performance vesting criteria over a period of three years beginning March 1, 2020, 2021 and Series B Preferred Stock are more fully described in Note 9: Capital Stock and Derivative Instruments, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.
WMIH may, subject to market conditions, determine to incur indebtedness or raise additional equity capital in connection2022, respectively, with undertaking one or more acquisitions.
While WMIH is not subject to regulatory capital requirements, WMMRC is required to comply with various solvency and liquidity requirements pursuant to the insurance lawsone-third of the Stateunits also eligible to vest based on performance through March 1, 2021, 2022 and 2023, respectively.
Share-Based Award Activities
The following table summarizes the Company’s share-based awards:
| | | | | | | | | | | |
| Share-based Awards | Shares (or Units)
(in thousands) | | Weighted-Average Grant Date Fair Value, per Share (or Unit) |
| Share-based awards outstanding as of December 31, 2022 | 2,348 | | | $ | 25.91 | |
| Granted | 1,319 | | | 41.08 | |
| Vested | (1,426) | | | 15.09 | |
| Forfeited | (128) | | | 40.95 | |
| Share-based awards outstanding as of December 31, 2023 | 2,113 | | | 41.73 | |
The Company recorded $28, $29 and $29 of Hawaii. WMMRC is requiredexpenses related to maintain minimum capital and surplus requirements of an amount established under applicable Hawaii law and deemed appropriate by the Insurance Division of the State of Hawaii. As of December 31, 2017, management believes that WMMRC is compliant with applicable statutory solvency, liquidity and minimum capital and surplus requirements. The payment of dividends by WMMRC is subject to statutory restrictions imposed by Hawaii insurance laws and regulations and requires approval from the Insurance Division of the State of Hawaii. In addition, the Second Lien Indenture prior to discharge and satisfaction on October 5, 2017, imposed restrictions on WMMRC business activities. Duringshare-based awards during the years ended December 31, 2017 2023, 2022 and 2016, WMMRC paid $20.8 million and $5.7 million, respectively, in distributions to WMIH which, prior to discharge and satisfaction of the Second Lien Indenture on October 5, 2017, were deposited into the Collateral Account (as defined below) and were distributed in accordance with the Second Lien Indenture. Subsequent to October 5, 2017, distributions from WMMRC to WMIH, were deposited directly into WMIH’s general cash accounts and are available for general corporate purposes.39
In connection with our emergence from bankruptcy on the Effective Date, a “Disputed Equity Escrow” was created for the benefit of certain holders of disputed equity interests. Such Disputed Equity Escrow was created to hold shares of WMIH’s common stock (as well as any dividends, gains or income attributable in respect of such common stock) allocable, on a pro rata basis, to each holder of such disputed equity interest if and when such interest becomes an allowed equity interest in the bankruptcy. The liquidating trustee of the Trust, William Kosturos (the “Liquidating Trustee”)2021
, acts as escrow agent with respect to the Disputed Equity Escrow.respectively. As of December 31, 2017, 1,546,294 shares2023, unrecognized compensation expense totaled $48 related to non-vested stock award payments that are expected to be recognized over a weighted average period of WMIH’s common stock were held1.0 years.
The Company is eligible to receive a tax benefit when the vesting date fair value of an award exceeds the value used to recognize compensation expense at the date of grant. The excess tax benefit resulting from tax deductions in excess of the Disputed Equity Escrow. Until such time as all of WMIH’s common stock has been distributed from the Disputed Equity Escrow as a result of all disputed equity claims becoming allowed equity interests or all disputed equity claims being disallowed in the bankruptcy, the Liquidating Trustee is vested with the authority to exercise voting or consent rights with respect to such stock; provided, however, that the Liquidating Trustee is obligated to vote or consent, as the case may be, as to such stock in the same proportion as all other holders of WMIH’s common stock have voted or consented, in each case on an issue-by-issue basis. The Trust has no right to or entitlement in any shares of WMIH’s common stock held in the Disputed Equity Escrow. Additionally, WMIH does not have any right to, or interest in, any shares of its common stock heldcompensation cost recognized by the Disputed Equity Escrow.Redeemed Notes
On the Effective Date, WMIH issued $110.0 million aggregate principal amount of its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an indenture, dated as of March 19, 2012 (the “First Lien Indenture”)Company was
$12, between WMIH$11 and Wilmington Trust, National Association, as Trustee. In addition, WMIH issued $20.0 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and, together with the First Lien Notes, the “Runoff Notes”) under an indenture, dated as of March 19, 2012, (the “Second Lien Indenture” and, together with the First Lien Indenture, the “Indentures”), between WMIH and The Law Debenture Trust Company of New York, as Trustee. On January 5, 2017, we were notified by The Law Debenture Company of New York that it had completed the transfer of substantially all of its corporate trust business to Delaware Trust Company, and that Delaware Trust Company had become the successor trustee under the Second Lien Indenture. The Runoff Notes were scheduled to mature on March 19, 2030 and accrued interest quarterly. The First Lien Notes were redeemed in their entirety on April 15, 2015, and the First Lien Indenture was satisfied and discharged on April 27, 2015. The Second Lien Notes were redeemed in their entirety on September 29, 2017, and the Second Lien Indenture was satisfied and discharged on October 2, 2017.Contractual Obligations, Commitments and Contingencies
WMMRC has engaged a Hawaii-based service provider, Marsh Management Services Inc., to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.
On March 19, 2012, WMIH entered into an Investment Management Agreement with WMMRC. Under the terms of this agreement, WMIH receives a fee from WMMRC equal to the product of (x) the ending dollar amount of assets under management during the calendar month in question and (y) .002 divided by 12. WMIH is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulations to which WMMRC is subject. The Investment Management Agreement has been approved by the Insurance Division of the State of Hawaii.
On March 19, 2012, WMIH entered into an Administrative Services Agreement with WMMRC. Under the terms of this agreement, WMIH receives from WMMRC a fee of $110 thousand per month. WMIH is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management, and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business. The Administrative Services Agreement has been approved by the Insurance Division of the State of Hawaii.
Total amounts incurred under the Investment Management Agreement and Administration Services Agreement totaled $1.4 million for each of the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively. The expense and related income eliminate on consolidation.
On March 22, 2012, WMIH and the Trust entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, the Trust makes available certain services and employees to the Company, including the services of our Chief Legal Officer and Secretary and our Controller. The TSA provides basic infrastructure and support services to facilitate the Company’s operations. The TSA, as amended, extends the term of the agreement through June 30, 2018, with automatic renewals thereafter for successive additional three-month terms, subject to non-renewal at the end of any additional term upon written notice by either party at least 30 days prior to the expiration of the additional term. For additional information on the amendment to the TSA, see Note 15: Subsequent Events, to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.
40
On or about October 14, 2014, the Trust filed a lawsuit in King County Superior Court in the State of Washington against 16 former directors and officers of WMI (the “D&O Litigation”). The Trust’s complaint alleged, among other things, that the defendants named therein breached their fiduciary duties to WMI and committed corporate waste and fraud by squandering WMI’s financial resources. In connection with the settlement of the D&O Litigation, during the year ended December 31, 2015, among the Trust, certain former directors and officers of WMI and certain insurance carriers that underwrote director and officer liability insurance policies for the benefit of WMI and its affiliates (including such former directors and officers), such insurance carriers agreed to pay the Trust $37.0 million, of which $3.0 million was placed into a segregated reserve account (the “RSA Reserve”) to be administered by a third party pursuant to the terms of a Reserve Settlement Agreement (the “RSA”).
Based on elections of certain holders of claims in connection with our bankruptcy prior to the Effective Date, WMIH retained an economic interest in certain litigation proceeds, if any, recovered by the Trust, including those related to the D&O Litigation. During the years ended December 31, 2017, 2016 and 2015, WMIH had other income of $123 thousand, $123 thousand and $7.8 million, respectively, as a result of its receipt of its share of net litigation proceeds related to the D&O Litigation. As of December 31, 2017, $1.5 million remained in the RSA Reserve. Under the RSA, funds are released from the RSA Reserve to the Trust if and when certain designated conditions are satisfied. If and when these funds are released to the Trust, and to the extent WMIH is entitled to receive such funds, it is anticipated the Trust will make payments to WMIH in an amount equal to WMIH’s share of the litigation proceeds. Due to the contingent nature of future distributions from the RSA Reserve, there can be no assurance that WMIH will receive any distributions from the remaining balance in the RSA Reserve in the future.
As a member of the Litigation Subcommittee of the Trust, Mr. Willingham, who serves as a WMIH Board member and Chairman of the WMIH Audit Committee, participates in overseeing the prosecution of recovery claims by the Trust.
As a result of the Company’s reorganization in bankruptcy an intangible asset was identified related to reinsurance contracts which were held by WMMRC. The contracts were evaluated to determine whether the value attributable to such contracts was either above market or in a loss contract position. After taking such evaluation into consideration, a loss contract reserve totaling $63.1 million was recorded on the Effective Date. The reserve has been evaluated at each reporting date for changes to its value. As of December 31, 2017 and 2016, the loss contract reserve was analyzed and determined to be zero and $5.6 million, respectively. This decrease in the value of the loss contract reserve of $5.6 million, $4.0 million and $2.9 million$9 for the years ended December 31, 2017, 20162023, 2022 and 2015, respectively, resulted in corresponding decreases in expenses
2021, respectively.
Employee Benefit Plans
The Company sponsors a defined contribution plan (401(k) plan) that covers all full-time employees. The Company matches 100% of participant contributions up to 2% of their total eligible annual base compensation and matches 50% of contributions for the same amount. The fair market valuenext 4% of this reserve has been reduced to zeroeach participant’s total eligible annual base compensation. Matching contributions by the Company totaled $11 and is expected to remain zero in future periods. For additional information see Note 2: Significant Accounting Policies, to$18 for the consolidated financial information in Part II, Item 8 of thisyears ended December 31, 2023 and 2022, respectively.
97 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K.As of January 30, 2014, pursuant10-K
16. Earnings per Share
The Company computes earnings per share using the termstwo-class method, which is an earnings allocation formula that determines earnings per share for common stock and conditions of the Investment Agreement, WMIH soldany participating securities according to KKR Fund 1,000,000 shares ofdividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock having the terms,is considered participating securities because it has dividend rights obligations and preferences containeddetermined on an as-converted basis in the Amended Charter,event of Company’s declaration of a dividend or distribution for common shares. In 2021, the Company repurchased a purchase price equal to $11.1 million and issued to KKR Fund warrants to purchase, in the aggregate, 61.4total of 14.8 million shares of WMIH’sits common stock 30.7from affiliates of Kohlberg Kravis Roberts & Co. L.P., (“KKR”) a related party of the Company. In addition, in August 2021, the Company repurchased 1.0 million shares of which have an exercise price of $1.32 per share and 30.7 million of which have an exercise price of $1.43 per share (together, the “Warrants”). KKR Fund’s rights as a holder of theits Series A Preferred Stock from affiliates of KKR. After giving effect to the transaction, KKR no longer held any equity interests in the Company.
The following table sets forth the computation of basic and diluted net income (loss) per common share (amounts in millions, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Computation of Earnings Per Share | 2023 | | 2022 | | 2021 |
| Net income from continuing operations | $ | 500 | | | $ | 923 | | | $ | 1,466 | |
| Less: Undistributed earnings from continuing operations attributable to participating stockholders | — | | | — | | | 8 | |
| Less: Premium on retirement of preferred stock | — | | | — | | | 28 | |
| Net income from continuing operations attributable to Mr. Cooper common stockholders | $ | 500 | | | $ | 923 | | | $ | 1,430 | |
| | | | | |
| Net loss from discontinued operations | $ | — | | | $ | — | | | $ | (12) | |
| Less: Undistributed earnings from discontinued operations attributable to participating stockholders | — | | | — | | | — | |
| Net loss from discontinued operations attributable to Mr. Cooper common stockholders | $ | — | | | $ | — | | | $ | (12) | |
| | | | | |
| Net income | $ | 500 | | | $ | 923 | | | $ | 1,454 | |
| Less: Undistributed earnings attributable to participating stockholders | — | | | — | | | 8 | |
| Less: Premium on retirement of preferred stock | — | | | — | | | 28 | |
| Net income attributable to common stockholders | $ | 500 | | | $ | 923 | | | $ | 1,418 | |
| | | | | |
| Earnings from continuing operations per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | 7.46 | | | $ | 12.84 | | | $ | 17.39 | |
| Diluted | $ | 7.30 | | | $ | 12.50 | | | $ | 16.67 | |
| | | | | |
| Earnings from discontinued operations per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | — | | | $ | — | | | $ | (0.15) | |
| Diluted | $ | — | | | $ | — | | | $ | (0.14) | |
| | | | | |
| Earnings per common share attributable to Mr. Cooper: | | | | | |
| Basic | $ | 7.46 | | | $ | 12.84 | | | $ | 17.24 | |
| Diluted | $ | 7.30 | | | $ | 12.50 | | | $ | 16.53 | |
| | | | | |
| Weighted average shares of common stock outstanding (in thousands): | | | | | |
| Basic | 67,070 | | | 71,885 | | | 82,247 | |
| Dilutive effect of stock awards | 1,479 | | | 1,933 | | | 3,067 | |
| Dilutive effect of participating securities | — | | | — | | | 492 | |
| Diluted | 68,549 | | | 73,818 | | | 85,806 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 98
17. Income Taxes
The components of income tax expense for continuing operations were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Total Income Tax Expense on continuing operations | 2023 | | 2022 | | 2021(1) |
| Current Income Taxes | | | | | |
| Federal | $ | 3 | | | $ | (6) | | | $ | 7 | |
| State | 16 | | | 8 | | | 113 | |
| Total current income taxes | 19 | | | 2 | | | 120 | |
| | | | | |
| Deferred Income Taxes | | | | | |
| Federal | 110 | | | 245 | | | 376 | |
| State | 25 | | | 44 | | | (25) | |
| Total deferred income taxes | 135 | | | 289 | | | 351 | |
| Total income tax expense | $ | 154 | | | $ | 291 | | | $ | 471 | |
(1)The provision for income taxes for 2021 does not reflect the Warrants, and the rights of any subsequent holder that is an affiliate of KKR Fund (together with KKR Fund, the “Holders”) are governed by the Investor Rights Agreement. The Investor Rights Agreement provides the Holders with registration rights, including three long form demand registration rights, unlimited short form demand registration rights and customary piggyback registration rights with respect to WMIH’s common stock (and WMIH’s common stock underlying the Series A Preferred Stock and the Warrants), subject to certain minimum thresholds, customary blackout periods and lockups of 180 days. On July 1, 2015, WMIH filed a shelf registration statement (the “Initial Registration Statement”) covering resales of Original Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversiontax effects of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversionsale of the Series A Preferred Stock and sharesCompany’s reverse servicing portfolio reported as discontinued operations.
The following table presents a reconciliation of WMIH’s common stock issuable upon exercise of warrants issuedthe income tax provision computed at the U.S. federal statutory tax rate to the actual effective tax rate:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Reconciliation of the Income Tax Provision | 2023 | | 2022 | | 2021 |
| Tax Expense at Federal Statutory Rate | $ | 137 | | | $ | 255 | | | $ | 407 | |
| Effect of: | | | | | |
| State taxes, net of federal benefit | 32 | | | 39 | | | 70 | |
Bargain purchase gain(1) | (20) | | | — | | | — | |
| Nondeductible executive compensation | 11 | | | 8 | | | 9 | |
| Share based compensation | (9) | | | (9) | | | (8) | |
| Other, net | 3 | | | (2) | | | (7) | |
| Total income tax expense | $ | 154 | | | $ | 291 | | | $ | 471 | |
(1)Amount is related to preliminary bargain purchase gain recorded in connection with the issuance of our Series A Preferred Stock currently outstanding (as amended, the “Registration Statement”). The Registration Statement was declared effective under the Securities Act on November 25, 2015. On January 26, 2018, WMIH amended the Registration Statement, by means of a post-effective amendment,Home Point Acquisition. Refer to deregister the Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock, and such post-effective amendment to the Registration Statement was declared effective under the Securities Act on January 29, 2018.For as long as the Holders beneficially own any shares of common stock of WMIH or Series A Preferred Stock or any of the Warrants, WMIH has agreed to provide customary Rule 144A information rights, to provide the Holders with regular audited and unaudited financial statements and to allow the Holders or their representatives to inspect WMIH’s books and records. For
Note 3, Acquisitions, for further information on the Investment Agreement and the Investor Rights Agreement, see Note 8: Financing Arrangements and Note 9: Capital Stock and Derivative Instruments, to the consolidated financial information in Part II, Item 8 of thisdetails. 99 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K.41
10-K
Temporary differences and carryforwards that give rise to deferred tax assets and liabilities are comprised of the following:
| | | | | | | | | | | |
| Deferred Tax Assets and Liabilities | December 31, 2023 | | December 31, 2022 |
| Deferred Tax Assets | | | |
| Effect of: | | | |
| Goodwill and intangible assets | $ | 585 | | | $ | 827 | |
| Loss reserves | 101 | | | 84 | |
| Loss carryforwards (federal, state & capital) | 85 | | | 104 | |
| Lease liability | 22 | | | 28 | |
| Accruals | 20 | | | 11 | |
| Depreciation and amortization, net | 8 | | | — | |
| Other, net | 12 | | | 19 | |
| Total deferred tax assets | 833 | | | 1,073 | |
| | | |
| Deferred Tax Liabilities | | | |
| MSR amortization and mark-to-market, net | (282) | | | (269) | |
| Other investment assets | (53) | | | (67) | |
| Right-of-use assets | (18) | | | (24) | |
| Depreciation and amortization, net | — | | | (2) | |
| Prepaid assets | (1) | | | (1) | |
| Total deferred tax liabilities | (354) | | | (363) | |
| Valuation allowance | (7) | | | (7) | |
Deferred tax assets, net(1) | $ | 472 | | | $ | 703 | |
(1)The Company elected to account for the Global Intangible Low-Taxed Income (“GILTI”) tax expense in the period in which it is incurred. As a result, no deferred tax impact of GILTI has been provided in the consolidated financial statements.
The Company has federal NOL carryforwards (pre-tax) of $354 and $484 as of December 31, 2023 and 2022, respectively. The Company believes it is more likely than not that its deferred tax assets will be realized except for certain federal Code Section 382 limited NOLs that begin to expire with the Series B Preferred Stock Financing,2026 tax year, if unused, and immaterial state NOL carryforwards that begin to expire with the 2023 tax year, if unused. Accordingly, the Company has recorded a federal valuation allowance of $7 as of December 31, 2023 and 2022 related to these NOL carryforwards. The state valuation allowance was immaterial as of December 31, 2023 and 2022. The Company does not expect any future tax loss limitations under Sections 382 and 384 that would impact its utilization of remaining federal NOL carryforwards.
The Company files income tax returns in the U.S. federal jurisdiction and numerous U.S. state jurisdictions. As of December 31, 2023, the Company is contractually committedcurrently under examination by the Internal Revenue Service for tax years 2018, 2019, and 2020. The years open to make certain fee paymentsexamination by federal, state and local government authorities vary by jurisdiction.
Below is a reconciliation of the changes in the federal and state uncertain tax position balances, exclusive of interest and penalties, for the year ended December 31, 2023.
| | | | | |
| Unrecognized Tax Benefits (exclusive of interest and penalties) | December 31, 2023 |
| Balance - beginning of year | $ | — | |
| Additions for tax positions taken in prior years | 6 | |
| Balance - end of year | $ | 6 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 100
The total amount of uncertain tax positions that, if future events occur. These fees arerecognized, would impact the effective income tax rate were $7 as of December 31, 2023 and zero as of December 31, 2022 and 2021. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense in the accompanying consolidated statement of operations. As of December 31, 2023, the Company recorded $7 of unrecognized tax benefits related to uncertain tax positions, including $1 in interest and presentedpenalties. The Company does not anticipate that any adjustments relating to federal or state tax examinations will result in material changes to the financial statements. As of December 31, 2022 and 2021, the Company had no unrecognized tax benefits related to uncertain tax positions.
18. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on ourthe assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
The following describes the methods and assumptions used by the Company in estimating fair values:
Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value.
Mortgage Loans Held for Sale (Level 2 and Level 3) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac, and Ginnie Mae (collectively, the “Agencies”) MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.
Newly originated mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. Those loans are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other liabilities. At December 31, 2017,individual loan characteristics. As these prices are primarily derived from market observable inputs, the total balanceCompany classifies these valuations as Level 2 in the fair value disclosures.
The Company may also purchase loans out of $16.3 milliona Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value on a recurring basis. These loans are valued on a recurring basis using a market approach similar to newly originated loans as mentioned above, with adjustments for assumptions including fail rate, partial claim rate and modification status. As these prices are primarily derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may also repurchase loans that are unable to be securitized and sold, and fair value is based upon recent market trades for similar loans adjusted for delinquency rates or broker pricing. These loans are valued on a recurring basis and as the prices used are not primarily derived from market observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures.
From time to time, the Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of other liabilitiesvarious clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at fair value on a recurring basis and classifies these valuations as Level 3 in the fair value disclosures.
See Note 7, Mortgage Loans Held for Sale, for more information.
101 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread (OAS) instead of a static discount rate. OAS is comprised of $10.8 million of accrued fees relatingthe incremental spread added to the Series B Preferred Stock Financing, an accrual for professional feesrisk-free rate to reflect embedded (prepayment) optionality and recurring business expenses currently payableother risk inherent in the MSRs to discount cash flows. The cash flow assumptions used in the discounted cash flow model incorporate prepayment speeds, OAS, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions, with the key assumptions being mortgage prepayment speeds, OAS, and cost to service. The cash flow assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of approximately $4.7 millionjudgment by the Company and $0.8 million of accrued dividends relating to the Original Series B Preferred Stock. At December 31, 2016, the total balance of $14.1 million of other liabilities is comprised of $12.3 million of accrued fees relating to the Series B Preferred Stock Financing, an accrual for professional fees and recurring business expenses currently payable of approximately $1.1 million and $0.7 million of accrued dividends relating to the Original Series B Preferred Stock.Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Item 7A.
| Quantitative and Qualitative Disclosures About Market Risk.
|
We are principally exposed to three types of market risk:
Interest Rate Risk: The Company’s fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest ratescan have a directsignificant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See
Note 5, Mortgage Servicing Rights and Related Liabilities, for more information.
Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 6, Advances and Other Receivables, for more information.
Equity Investments (Level 1 and Level 3) – The fair value of the common stock received from the previous sale of the title and field services businesses is measured quarterly based on the minimum exit value, which was established at the time of the transaction, and observable market indicators. Because of the nature of the unobservable inputs, the Company classifies these securities as Level 3 in the fair value disclosures.
The fair value of the common stock received from the previous sale of the valuation business is measured using the closing price reported on an active market in which the securities are traded. As the fair value is based on market observable inputs, the Company classifies these securities as Level 1 in the fair value disclosures.
Derivative Financial Instruments (Level 2 and Level 3) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. These derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, the Company enters into IRLCs and LPCs with prospective borrowers and other loan originators. IRLCs and LPCs are carried at fair value primarily based on secondary market prices for underlying mortgage loans, which is observable data, with adjustments made to such observable data for the inherent value of servicing, which is an unobservable input. The fair value is also subject to adjustments for the estimated pull-through rate. The impact of the unobservable input to the overall valuation of IRLCs and LPCs is significant and results in a classification of Level 3 in the fair value hierarchy. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised, and the loan will be funded. The Company has entered into Treasury futures and swap futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. Derivative financial instruments are recorded in “other assets” and “payables and other liabilities” within the consolidated balance sheets. See Note 12, Derivative Financial Instruments, for more information.
Loans Subject to Repurchase from Ginnie Mae (Level 2) – As the Company has the unilateral right to repurchase these investments.loans at the unpaid principal balance, the carrying amount, which is based on the unpaid principal balance, approximates fair value. See Note 10, Loans Subject to Repurchase from Ginnie Mae, for more information.
Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported on the consolidated balance sheets approximates fair value. See Note 13, Indebtedness, for more information.
Unsecured Senior Notes (Level 2) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices in a market with limited trading activity. See Note 13, Indebtedness, for more information.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 102
Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. Beginning in the second quarter of 2023, the Company valued excess spread financing using a stochastic OAS instead of a static discount rate. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and OAS. Quarterly, management obtains a third-party valuation to assess the reasonableness of the fair value calculations provided by the internal cash flow model. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 5, Mortgage Servicing Rights and Related Liabilities, for more information.
Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates rise,and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the marketvalue of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 5, Mortgage Servicing Rights and Related Liabilities, for more information.
The following table presents the estimated carrying amount and fair value of the Company’s fixed maturity portfolio fallsfinancial instruments and other assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Total Fair Value | | Recurring Fair Value Measurements |
| Fair Value - Recurring Basis | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 927 | | | $ | — | | | $ | 846 | | | $ | 81 | |
| Mortgage servicing rights | 9,090 | | | — | | | — | | | 9,090 | |
| Equity investments | 9 | | | 1 | | | — | | | 8 | |
| Derivative financial instruments: | | | | | | | |
| Treasury futures | 113 | | | — | | | 113 | | | — | |
| Forward MBS trades | 22 | | | — | | | 22 | | | — | |
| IRLCs | 21 | | | — | | | — | | | 21 | |
| LPCs | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments: | | | | | | | |
| Forward MBS trades | 9 | | | — | | | 9 | | | — | |
| Mortgage servicing rights financing | 29 | | | — | | | — | | | 29 | |
| Excess spread financing | 437 | | | — | | | — | | | 437 | |
103 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total Fair Value | | Recurring Fair Value Measurements |
| Fair Value - Recurring Basis | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 893 | | | $ | — | | | $ | 819 | | | $ | 74 | |
| Mortgage servicing rights | 6,654 | | | — | | | — | | | 6,654 | |
| Equity investments | 47 | | | 2 | | | — | | | 45 | |
| Derivative financial instruments: | | | | | | | |
| Forward MBS trades | 8 | | | — | | | 8 | | | — | |
| IRLCs | 22 | | | — | | | — | | | 22 | |
| LPCs | 1 | | | — | | | — | | | 1 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments: | | | | | | | |
| Forward MBS trades | 9 | | | — | | | 9 | | | — | |
| LPCs | 1 | | | — | | | — | | | 1 | |
| Treasury futures | 14 | | | — | | | 14 | | | — | |
| Mortgage servicing rights financing | 19 | | | — | | | — | | | 19 | |
| Excess spread financing | 509 | | | — | | | — | | | 509 | |
The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| Assets | Liabilities |
| Fair Value - Level 3 Assets and Liabilities | Mortgage servicing rights | | Mortgage loans held for sale | | Equity investments | | IRLCs | | Excess spread
financing | | Mortgage servicing rights financing |
| Balance - beginning of year | $ | 6,654 | | | $ | 74 | | | $ | 45 | | | $ | 22 | | | $ | 509 | | | $ | 19 | |
| Changes in fair value included in earnings | (483) | | | 18 | | | (37) | | | (1) | | | 8 | | | 10 | |
Purchases/additions(1) | 3,189 | | | 180 | | | — | | | — | | | — | | | — | |
| Issuances | 273 | | | — | | | — | | | — | | | — | | | — | |
Sales/dispositions(1) | (573) | | | (189) | | | — | | | — | | | — | | | — | |
| Repayments | — | | | (6) | | | — | | | — | | | (9) | | | — | |
| Settlements | — | | | — | | | — | | | — | | | (71) | | | — | |
| Other changes | 30 | | | 4 | | | — | | | — | | | — | | | — | |
| Balance - end of year | $ | 9,090 | | | $ | 81 | | | $ | 8 | | | $ | 21 | | | $ | 437 | | | $ | 29 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 104
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Assets | | Liabilities |
| Fair Value - Level 3 Assets and Liabilities | Mortgage servicing rights | | Mortgage loans held for sale | | Equity investments | | IRLCs | | Excess spread
financing | | Mortgage servicing rights financing |
| Balance - beginning of year | $ | 4,223 | | | $ | 76 | | | $ | 54 | | | $ | 134 | | | $ | 768 | | | $ | 10 | |
| Changes in fair value included in earnings | 549 | | | (3) | | | (9) | | | (112) | | | 133 | | | 9 | |
Purchases/additions(1) | 1,595 | | | 130 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Issuances | 554 | | | — | | | — | | | — | | | — | | | — | |
Sales/dispositions(1) | (294) | | | (124) | | | — | | | — | | | — | | | — | |
| Repayments | — | | | (2) | | | — | | | — | | | (293) | | | — | |
| Settlements | — | | | — | | | — | | | — | | | (99) | | | — | |
| Other changes | 27 | | | (3) | | | — | | | — | | | — | | | — | |
| Balance - end of year | $ | 6,654 | | | $ | 74 | | | $ | 45 | | | $ | 22 | | | $ | 509 | | | $ | 19 | |
(1)Additions for mortgages loans held for sale include loans that are purchased or transferred in. Dispositions for mortgage loans held for sales include loans that are sold or transferred out.
The Company had immaterial LPCs assets and liabilities as of December 31, 2023 and 2022. No transfers were made in or out of Level 3 fair value assets for the Company hasduring the risk that cash outflows will haveyears ended December 31, 2023 and 2022.
105 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
The tables below present the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Level 3 Inputs | Min | | Max | | | Min | | Max | |
MSR(1) | | | | | | | | | | | |
Option adjusted spread(2) | 6.9 | % | | 12.3 | % | | 8.0 | % | | N/A | | N/A | | N/A |
| Discount rate | N/A | | N/A | | N/A | | 10.4 | % | | 13.7 | % | | 11.4 | % |
| Prepayment speed | 6.8 | % | | 9.3 | % | | 7.5 | % | | 6.3 | % | | 12.2 | % | | 7.2 | % |
Cost to service per loan(3) | $ | 56 | | | $ | 160 | | | $ | 80 | | | $ | 54 | | | $ | 155 | | | $ | 80 | |
Average life(4) | | | | | 7.9 years | | | | | | 8.1 years |
| | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | | | |
| Market pricing | 45.0 | % | | 103.4 | % | | 81.1 | % | | 37.3 | % | | 114.7 | % | | 77.4 | % |
| | | | | | | | | | | |
| IRLCs | | | | | | | | | | | |
| Value of servicing (reflected as a percentage of loan commitment) | 1.1 | % | | 3.5 | % | | 1.9 | % | | (0.6) | % | | 3.9 | % | | 2.3 | % |
| | | | | | | | | | | |
| Excess spread financing | | | | | | | | | | | |
Option adjusted spread(2) | 7.0 | % | | 12.3 | % | | 8.8 | % | | N/A | | N/A | | N/A |
| Discount rate | N/A | | N/A | | N/A | | 10.0 | % | | 13.8 | % | | 11.3 | % |
| Prepayment speed | 7.7 | % | | 9.1 | % | | 8.4 | % | | 6.9 | % | | 13.3 | % | | 9.2 | % |
Average life(4) | | | | | 6.7 years | | | | | | 6.6 years |
| | | | | | | | | | | |
| Mortgage servicing rights financing | | | | | | | | | | | |
| Advance financing and counterparty fee rates | 6.6 | % | | 9.2 | % | | 7.6 | % | | 5.2 | % | | 8.6 | % | | 7.1 | % |
| Annual advance recovery rates | 12.2 | % | | 14.8 | % | | 13.0 | % | | 15.9 | % | | 20.6 | % | | 17.3 | % |
(1)The inputs are weighted by selling assets,investor.
(2)OAS represents incremental spread above a risk-free rate (one-month SOFR), which will be trading at depreciated values. As interest rates decline,is an observable input. See discussion on methodology above.
(3)Presented in whole dollar amounts.
(4)Average life is included for informational purposes.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 106
The tables below present a summary of the marketcarrying amount and estimated fair value of the Company’s fixed income portfolio increasesfinancial instruments not carried at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 571 | | | $ | 571 | | | $ | — | | | $ | — | |
| Restricted cash | 169 | | | 169 | | | — | | | — | |
| Advances and other receivables, net | 996 | | | — | | | | | 996 | |
| Loans subject to repurchase from Ginnie Mae | 966 | | | — | | | 966 | | | — | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 3,151 | | | — | | | 3,056 | | | — | |
| Advance, warehouse and MSR facilities, net | 4,302 | | | — | | | 4,318 | | | — | |
| Liability for loans subject to repurchase from Ginnie Mae | 966 | | | — | | | 966 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 527 | | | $ | 527 | | | $ | — | | | $ | — | |
| Restricted cash | 175 | | | 175 | | | — | | | — | |
| Advances and other receivables, net | 1,019 | | | — | | | — | | | 1,019 | |
| Loans subject to repurchase from Ginnie Mae | 1,865 | | | — | | | 1,865 | | | — | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 2,673 | | | — | | | 2,209 | | | — | |
| Advance, warehouse and MSR facilities, net | 2,885 | | | — | | | 2,896 | | | — | |
| Liability for loans subject to repurchase from Ginnie Mae | 1,865 | | | — | | | 1,865 | | | — | |
19. Capital Requirements
Fannie Mae, Freddie Mac, Ginnie Mae and
certain private label mortgage investors require the Company
has reinvestment risk,to maintain minimum net worth (“capital”) requirements, as
funds reinvested will earn less than is necessaryspecified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to
match anticipated liabilities. We manage interest rate risk primarily by selecting investments with characteristics such as duration,approve large servicing transfers. To the extent that these requirements are not met, the Company’s secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company’s selling and
liquidity tailoredservicing agreements, which would prohibit the Company from further originating or securitizing these specific types of mortgage loans or being an approved servicer. The Company’s various capital requirements related to
the anticipated cash outflow characteristics of our liabilities. In the case of WMMRC, the investment portfolio duration is currently under two years because a significant portion of WMMRC’s lossesits outstanding selling and servicing agreements are
expected to be paid out over the next two years.At December 31, 2017, the impactmeasured based on the Company’s fixed maturity and short-term investments, including fundsoperating subsidiary, Nationstar Mortgage LLC, as well as Rushmore Loan Management Services, LLC, which was acquired during the third quarter of 2023 in overnight money market instruments, from an immediate 100 basis point increase in market interest rates (based on United States Treasury yield) would have resulted in an estimated decrease in market value of 0.11% or approximately $36 thousand. At December 31, 2016,connection with the impact on the Company’s fixed maturity and short-term investments from an immediate 100 basis point increase in market interest rates (based on United States Treasury yield) would have resulted in an estimated decrease in market value of 0.59% or approximately $0.5 million.
| | Impact of Interest Rate Shift in Basis Points | |
| | At December 31, 2017 | | | At December 31, 2016 | |
| | 0 | | | +100 | | | 0 | | | +100 | |
Total Market/Fair Value | | $ | 34,440 | | | $ | 34,404 | | | $ | 81,379 | | | $ | 80,895 | |
Market/Fair Value dollar value change | | $ | — | | | $ | (36 | ) | | $ | — | | | $ | (484 | ) |
Market/Fair Value percentage change | | | 0.00 | % | | | -0.11 | % | | | 0.00 | % | | | -0.59 | % |
Credit Risk: The Company’s primary credit risks result from investments in corporate bonds. We limit our credit exposure by purchasing high quality fixed income investments to maintain an average credit quality of AA- or higher for the overall investments. A1/P1 is the minimum rating at purchase for all of our short-term commercial paper positions. In addition, we have limited our exposure to any single issuer to 7.0% or less of total investments, excluding commercial paper, treasury and agency securities. Our minimum rating for investment at purchase is A3/A-. Where investments are downgraded below the minimum rating at purchase, we permit our investment managers to continue holding such securities subject to additional credit research and monitoring. At December 31, 2017, none of the portfolio was rated below A3/A-, compared to 1.9% at December 31, 2016. At December 31, 2017, we did not have any exposure to non-investment grade securities; and we did not have an aggregate exposure to any single issuer of more than 7.0% of total investments, other than with respect to government securities and commercial paper.
Liquidity Risk: Certain of the Company’s investments may become illiquid. Disruption in the credit markets may materially affect the liquidity of the Company’s investments. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements in a period of market illiquidity, it may be difficult to sell the investments in a timely manner and they may have to be disposed of for less than what may otherwise have been possible under other conditions.Roosevelt Transaction. As of December 31, 2017,2023, the Company had $3.7 millionwas in compliance with its selling and servicing capital requirements.
107 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
20. Commitments and Contingencies
Litigation and Regulatory
The Company and its subsidiaries are routinely and currently involved in a significant number of liquid investmentlegal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. The legal proceedings are at varying stages of adjudication, arbitration or investigation and are generally based on alleged violations of consumer protection, securities, definedemployment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the “Bankruptcy Code”), False Claims Act, the CARES Act and Making Home Affordable loan modification programs.
In addition, along with others in its industry, the Company is subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company is also subject to legal actions or proceedings related to loss sharing and indemnification provisions of its various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/ or statutory damages or claims for an indeterminate amount of damages.
On November 3, 2023, a putative class action lawsuit was filed against the Company, captioned Cabezas v. Mr. Cooper Group, Inc., No. 23-cv-02453 (“Cabezas”), in the United States District Court for the Northern District of Texas, by plaintiff Jennifer Cabezas purportedly on behalf of a class consisting of those persons impacted by the cybersecurity incident that occurred on October 31, 2023. The class action complaint alleges claims for negligence, negligence per se, breach of express contract, breach of implied contract, invasion of privacy, unjust enrichment, breach of confidence, and breach of fiduciary duty based upon allegations that the Company did not employ reasonable and adequate security measures to protect customer personal information accessed in the cybersecurity incident. The Cabezas complaint seeks damages, declaratory and injunctive relief, and an award of costs, attorney fees and expenses, among other relief. Between November 2023 and January 9, 2024, 19 additional putative class actions have been filed against the Company asserting substantially similar claims and allegations as corporate obligationsthose asserted in the Cabezas action. On January 9, 2024, the Cabezas Court ordered that matureall 19 then-pending actions be consolidated with the Cabezas action. Following the issuance of the consolidation order, six additional, related putative class actions were filed in the Northern District of Texas, which we expect will also be consolidated with the Cabezas action.
The Company operates within 12 months, US treasury securitieshighly regulated industries on a federal, state and obligations issuedlocal level. In the normal and ordinary course of its business, the Company is routinely subject to extensive examinations, investigations, subpoenas, inquiries and reviews by US government sponsored enterprises. $1.5 millionvarious federal, state and local governmental, regulatory and enforcement agencies, including the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, various State mortgage banking regulators and various State Attorneys General, related to the Company’s residential loan servicing and origination practices, its financial reporting and other aspects of its businesses. Any pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements, and possibly result in remedies including fines, penalties, restitution, or alterations in the Company’s business practices, and additional expenses and collateral costs. The Company is cooperating fully in these matters. Responding to these matters requires the Company to devote substantial resources, resulting in higher costs and lower net cash flows. Adverse results in any of these securities were heldmatters could further increase the Company’s operating expenses and reduce its revenues, require it to change business practices and limit its ability to grow and otherwise materially and adversely affect its business, reputation, financial condition and results of operation.
The Company seeks to resolve all legal proceedings and other matters in
trust. Please referthe manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. The Company has entered into agreements with a number of entities and regulatory agencies that toll applicable limitations periods with respect to
Item 7.42
Management’s Discussiontheir claims.
On at least a quarterly basis, the Company assesses its liabilities and Analysiscontingencies in connection with outstanding legal and regulatory and governmental proceedings utilizing the latest information available. Where available information indicates that it is probable a liability has been incurred, and the Company can reasonably estimate the amount of the loss, an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 108
As a legal matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and Resultsestimable. If, at the time of Operations-Liquidityevaluation, the loss contingency is not both probable and Capital Resourcesreasonably estimable, the matter will continue to be monitored for additionalfurther developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to legal-related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. The Company incurred legal-related expense, which includes legal settlements and the fees paid to external legal service providers, of $39 and $23 for the years ended December 31, 2023 and 2022, respectively, and was included in “expenses - general and administrative” on the consolidated statements of operations.
For matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its material legal matters on an ongoing basis, in conjunction with any outside counsel handling the matter. Management currently believes the aggregate range of reasonably possible loss is $1 to $3 in excess of the accrued liability (if any) related to those matters as of December 31, 2023. This estimated range of possible loss is based upon currently available information regarding our liquidity sources and management.Item 8.
| Financial Statements and Supplementary Data.
|
is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The information required bymatters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this Item 8estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, the Company’s exposure and ultimate losses may be higher, possibly significantly so, than the amounts accrued or this aggregate amount.
In the Company’s experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is incorporated by referencein its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; the Company has not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; predicting possible outcomes depends on making assumptions about future decisions of courts or governmental or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for the Company to estimate losses or ranges of losses that is reasonably possible the Company could incur.
Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability within payables and accrued liabilities, is appropriate, and the amount of any incremental liability arising from ourthese matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending, on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s consolidated financial statements.
Other Loss Contingencies
As part of the Company’s ongoing operations, it acquires servicing rights of mortgage loans that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. The Company believes all balances sought from sellers recorded in “advances and other receivables, net” represent valid claims. However, the Company acknowledges that the claims process can be prolonged due to the required time to perfect claims at the loan level. Because of the required time to perfect or remediate these claims, management relies on the sufficiency of documentation supporting the claim, current negotiations with the counterparty and other evidence to evaluate whether a reserve is required for non-recoverable balances. In the absence of successful negotiations with the seller, all amounts claimed may not be recovered. Balances may be written-off and charged against earnings when management identifies amounts where recoverability from the seller is not likely. As of December 31, 2023, the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no evidence suggests additional reserves are warranted.
109 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
As a seller of mortgage loans to Agencies and other third parties, the Company may be required to indemnify or repurchase mortgage loans that fail to meet certain customary representations and warranties made in conjunction with sales of mortgage loans. The repurchase reserve liability related to such customary representations and warranties was $79 and $22 as of December 31, 2023 and 2022, respectively, which are included in “payables and other liabilities” within the consolidated balance sheets. The repurchase reserve liability increased during the third quarter of 2023 due to the assumption of repurchase risk for any mortgages previously sold by Home Point in connection with the Home Point Acquisition. Refer to Note 3, Acquisitions, for discussion of the Home Point Acquisition.
Loan and Other Commitments
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. The Company also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See Note 12, Derivative Financial Instruments, for more information.
21. Segment Information
The Company’s segments reflect the internal reporting we use to evaluate operating performance and are based upon the Company’s organizational structure, which focuses primarily on the services offered. A brief description of our current business segments is as follows:
Servicing: This segment performs operational activities on behalf of investors or owners of the underlying mortgages and mortgage servicing rights, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO. In 2023, we expanded our special servicing product offering with the acquisition of Rushmore Loan Management Services.
During the third quarter of 2023, the Company collapsed a securitization with a bond balance of $82, secured by mortgage loans with an approximate UPB of $207. The loans were sold to a third party. A net gain on sale of $67 was recorded on the transaction, which was included in “net gain on mortgage loans held for sale” within the consolidated statements of operations and reported under Servicing.
Originations: This segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent channel, which purchases or originates loans from mortgage bankers.
Corporate/Other: Functional expenses are allocated to individual segments based on the actual cost of services performed, direct resource utilization, or headcount percentage for shared services. During the fourth quarter of 2022, the Company began allocating shared services based on headcount instead of estimate of percentage use as it changed its segment measures provided to and used by the chief operating decision maker. As a result, all costs for shared services are allocated to individual segments based on headcount. The Company restated segment information for the historical periods presented herein to reflect the allocation method change and to conform to the current presentation. The change affects total expenses for Servicing and Originations segments and Corporate/Other but had no effect on consolidated statements of operations. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to the Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties. Eliminations are included in Corporate/Other.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 110
The following tables present financial information by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| Financial Information by Segment | Servicing | | Originations | | Corporate/ Other | | Consolidated |
| Revenues | | | | | | | |
| Service related, net | $ | 1,295 | | | $ | 61 | | | $ | 84 | | | $ | 1,440 | |
| Net gain (loss) on mortgage loans held for sale | 84 | | | 271 | | | (1) | | | 354 | |
| Total revenues | 1,379 | | | 332 | | | 83 | | | 1,794 | |
| Total expenses | 664 | | | 232 | | | 276 | | | 1,172 | |
| Interest income | 491 | | | 36 | | | 1 | | | 528 | |
| Interest expense | (324) | | | (37) | | | (176) | | | (537) | |
| Other income, net | — | | | — | | | 41 | | | 41 | |
| Total other income (expenses), net | 167 | | | (1) | | | (134) | | | 32 | |
| Income (loss) from continuing operations before income tax expense (benefit) | $ | 882 | | | $ | 99 | | | $ | (327) | | | $ | 654 | |
| Depreciation and amortization for property and equipment and intangible assets from continuing operations | $ | 12 | | | $ | 8 | | | $ | 18 | | | $ | 38 | |
| Total assets | $ | 11,740 | | | $ | 782 | | | $ | 1,674 | | | $ | 14,196 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Financial Information by Segment | Servicing | | Originations | | Corporate/ Other | | Consolidated |
| Revenues | | | | | | | |
| Service related, net | $ | 1,691 | | | $ | 98 | | | $ | 76 | | | $ | 1,865 | |
| Net gain on mortgage loans held for sale | (33) | | | 632 | | | — | | | 599 | |
| Total revenues | 1,658 | | | 730 | | | 76 | | | 2,464 | |
| Total expenses | 559 | | | 491 | | | 224 | | | 1,274 | |
| Interest income | 208 | | | 53 | | | — | | | 261 | |
| Interest expense | (221) | | | (43) | | | (160) | | | (424) | |
| Other income, net | — | | | — | | | 187 | | | 187 | |
| Total other (expenses) income, net | (13) | | | 10 | | | 27 | | | 24 | |
| Income (loss) from continuing operations before income tax expense (benefit) | $ | 1,086 | | | $ | 249 | | | $ | (121) | | | $ | 1,214 | |
| Depreciation and amortization for property and equipment and intangible assets from continuing operations | $ | 18 | | | $ | 16 | | | $ | 3 | | | $ | 37 | |
| Total assets | $ | 10,152 | | | $ | 749 | | | $ | 1,875 | | | $ | 12,776 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Financial Information by Segment | Servicing | | Originations | | Corporate/ Other | | Consolidated |
| Revenues | | | | | | | |
| Service related, net | $ | 705 | | | $ | 176 | | | $ | 186 | | | $ | 1,067 | |
| Net gain on mortgage loans held for sale | 568 | | | 1,683 | | | — | | | 2,251 | |
| Total revenues | 1,273 | | | 1,859 | | | 186 | | | 3,318 | |
| Total expenses | 502 | | | 849 | | | 311 | | | 1,662 | |
| Interest income | 129 | | | 102 | | | — | | | 231 | |
| Interest expense | (262) | | | (88) | | | (128) | | | (478) | |
| Other income, net | — | | | — | | | 528 | | | 528 | |
| Total other (expenses) income, net | (133) | | | 14 | | | 400 | | | 281 | |
| Income from continuing operations before income tax expense | $ | 638 | | | $ | 1,024 | | | $ | 275 | | | $ | 1,937 | |
| Depreciation and amortization for property and equipment and intangible assets from continuing operations | $ | 32 | | | $ | 24 | | | $ | 1 | | | $ | 57 | |
| Total assets | $ | 8,733 | | | $ | 3,143 | | | $ | 2,328 | | | $ | 14,204 | |
111 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
22. Subsequent Events
On February 1, 2024, the Company completed an offering by Nationstar Mortgage Holdings Inc., a direct wholly-owned subsidiary of the Company (“Nationstar”), of $1,000 7.125% unsecured senior notes due 2032 (the “Notes”). The Notes will bear interest at 7.125% per annum and will mature on February 1, 2032. Interest on the Notes will be payable semi-annually on February 1 and August 1 of each year, beginning on
page F-1.Item 9.
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None
Item 9A.
| Controls and Procedures.
|
Conclusion RegardingAugust 1, 2024. The net proceeds of the Effectivenessoffering were used to repay a portion of the amounts outstanding under the Company’s MSR facilities.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 112
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, has evaluated, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of theour disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of the Company1934, as amended (“Exchange Act”), as of December 31, 2017. 2023.
Based on
thatthis evaluation, our Chief Executive Officer and
Interim Chief Financial Officer
have concluded that, as of December 31,
2017, the2023, our disclosure controls and procedures
(as definedare effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in
Rules 13a-15(e) and 15d-15(e)reports that we file or submit under the Exchange
Act) were effective in ensuring that information required to be disclosed by the Company in reports the Company files or submits under the Exchange Act:(1)Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange CommissionSEC’s rules and forms, and
(2) that such information is accumulated and communicated to the Company’sour management, including the Company’s principal executiveour Chief Executive Officer and principal financial officers, or persons performing similar functions,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) in Internal Control-Integrated 2013 Framework. A control system, no matter how well conceived, implemented and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of such inherent limitations, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Based on our assessment and those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Our independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting as of December 31, 2023 as stated in their report, dated February 28, 2024, which appears herein.
Changes in Internal Control over Financial Reporting
There
have beenwere no changes in
our internal control over financial reporting
that occurred during the
yearfourth quarter ended December 31,
20172023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
113 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mr. Cooper Group Inc.
Opinion on Internal Control
overOver Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our
We have audited Mr. Cooper Group Inc.’s internal control over financial reporting as of December 31,
2017, has been audited by BPM LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, as stated in their attestation report, which is included below.43
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of WMIH Corp.:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of WMIH Corp. and its subsidiaries (the “Company”) as of December 31, 2017,2023, based on criteria established in Internal Control—IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(2013 framework) (the COSO criteria). In our opinion, the CompanyMr. Cooper Group Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB), the
accompanying consolidated balance sheets
of the Company as of December 31, 2023 and
2022, the related consolidated statements of operations,
changes in redeemable convertible preferred stock and stockholders’stockholders' equity and cash flows
for each of the
Company,three years in the period ended December 31, 2023 and the related notes and our report dated
March 2, 2018,February 28, 2024 expressed an unqualified
opinion.opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control
overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
BPMErnst & Young LLP
San Francisco, California
March 2, 2018
44
Dallas, Texas
February 28, 2024
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 114
Item 9B.
| Other Information.
|
None
45
Item 9B.Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART IIIIII.
Item 10.
| Directors, Executive Officers and Corporate Governance.
|
The information
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item regarding our executive officers is provided in Item 1. Business—Executive Officerswill be incorporated by reference from the Company’s definitive proxy statement for the 2024 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days of the Registrant in this Annual Report on Form 10-K. The informationCompany’s fiscal year-end (the “2024 Proxy Statement”).
Item 11. Executive Compensation
Information required by this item concerning our directors, compliance with Section 16 of the Exchange Act, our code of ethics and other corporate governance information iswill be incorporated by reference tofrom the information set forth in the sections entitled “WMIH Proposals—Director Election,” and the sections entitled “Committees and Meetings of the Board,” “Code of Ethics,” “Security2024 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance”Management and “WMIH Annual MeetingRelated Stockholder Proposals” under the heading “Other Matters Relating to the WMIH Annual Meeting” in our Proxy Statement for our 2018 annual meeting of stockholders to be filed with the SEC not later than 120 days after the fiscal year ended December 31, 2017 (the “2018 Proxy Statement”).Matters.
Item 11.
| Executive Compensation.
|
The information
Information required by this item iswill be incorporated by reference tofrom the information set forth in the sections entitled “Executive Compensation,” “Director Compensation for Fiscal Year 2017,”2024 Proxy Statement.
Item 13. Certain Relationships and “Report of the Compensation Committee” under the heading “Other Matters Relating to the WMIH Annual Meeting” in the 2018 Proxy Statement.Item 12.
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
The following table contains information as of December 31, 2017, about equity securities authorized for issuance under our 2012 Plan as amended:
Plan category (1)
| | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
| | | Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
| | | Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(c)
| |
Equity compensation plans approved by security holders
| | | —
| | | | —
| | | | 5,285,868
| |
Equity compensation plans not approved by security holders
| | | —
| | | | —
| | | | —
| |
Total
| | | —
| | | | —
| | | | 5,285,868
| |
(1)
| On the Effective Date, pursuant to the Plan and related confirmation order, all equity interests in WMI, including common stock and any options, warrants, calls, subscriptions or other similar rights or other agreements, commitments or outstanding securities obligations, were cancelled and extinguished.
|
The 2012 Plan took effect on May 22, 2012,Related Transactions, and will terminate on May 22, 2022. Upon termination, we will stop issuing awards under the 2012 Plan; however, the termination of the plan will not affect any outstanding awards. The adoption of the 2012 Plan did not require stockholder approval. The 2012 Plan is administered concurrently by our Compensation Committee and Board, and awards under the 2012 Plan may consist of restricted stock, restricted stock units, performance stock, performance stock units, performance cash awards, stock grants, stock units, dividend equivalents, stock options, stock appreciation rights or performance-based awards. Effective February 10, 2014, the number of shares of WMIH’s common stock available for awards pursuant to the 2012 Plan and reserved for issuance was increased from 2.0 million to 3.0 million shares. Effective February 25, 2015, we increased the number of shares authorized and available for awards under the 2012 Plan from 3.0 million to 12.0 million shares of WMIH’s common stock, subject to approval of stockholders of WMIH, which approval was subsequently received on April 28, 2015 at our annual meeting. On June 1, 2017, 333,332 restricted shares of WMIH’s common stock were issued under the 2012 Plan to outside directors. As of December 31, 2017, 5,285,868 shares of WMIH’s common stock remain available for future issuance under the 2012 Plan.
46
In the event any award granted under the 2012 Plan is forfeited, terminates or is canceled or expires, the number of shares of WMIH’s common stock subject to such award, to the extent of any such forfeiture, termination, cancellation or expiration, will thereafter be available for grant under the plan. At the discretion of the Compensation Committee or the Board, awards may be granted to WMIH’s (or WMIH’s affiliates’) employees, officers, directors, consultants and other service providers of WMIH or its affiliates. Each award must be evidenced by a written agreement between WMIH and the grantee. Restricted stock grants are subject to such restrictions on transferability and other restrictions as the Compensation Committee or the Board may impose. These restrictions may lapse separately or in combination at such times, in such circumstances, in such installments, or otherwise, as the Compensation Committee or the Board determines; however, no more than 5% in the aggregate of the shares available for award may be subject to restricted stock grants with respect to which the restrictions lapse solely based on the passage of time and which vest in less than three years. Restricted stock may not be sold, pledged, assigned, hypothecated, transferred or disposed of, except in limited circumstances. Subject to override by the Board, in the event of a change in control of WMIH, any time based or other restrictions imposed on restricted stock grants will lapse. For further information on our 2012 Plan, see Note 9: Capital Stock and Derivative Instruments to the consolidated financial information in Part II, Item 8 of this Annual Report on Form 10-K.
The informationDirector Independence.
Information required by this item concerning security ownership of certain beneficial owners and management iswill be incorporated by reference tofrom the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners2024 Proxy Statement.
Item 14. Principal Accountant Fees and Management—Stock Ownership Table” in the 2018 Proxy Statement.Services.
Item 13.
| Certain Relationships and Related Transactions and Director Independence.
|
The information
Information required by this item iswill be incorporated by reference tofrom the information set forth in the sections entitled “WMIH Proposals—Director Election,” “Other Matters Relating to the WMIH Annual Meeting—Committees2024 Proxy Statement.
Item 15. Exhibits and Meetings of the Board” and “Other Matters Relating to the WMIH Annual Meeting—Certain Relationships and Related Party Transactions” in the 2018 Proxy Statement.Financial Statement Schedules
Item 14.
| Principal Accounting Fees and Services.
|
The information required by this item is incorporated by reference to the information set forth in the section entitled “Other Matters Relating to the WMIH Annual Meeting— Matters Relating to WMIH’s Auditors” in the 2018 Proxy Statement.
47
PART IV
Item 15.
| Exhibits and Financial Statement Schedules.
|
Documents filed as part of this Annual Report on Form 10-K10-K:
1.Financial Statements:
Our consolidated financial statements as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021, and the notes thereto, together with the report of the independent registered public accounting firm on those consolidated financial statements are
filed within Item 8 in Part II as
follows:1. Financial Statements:
part of this Annual Report on Form 10-K. | | Page
|
Report of Independent Registered Public Accounting Firm
| | F-2
|
| |
WMIH Corp. and Subsidiaries Consolidated Balance Sheets—as of December 31, 2017 and December 31, 2016
| | F-3
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Operations—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-4
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-5
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Cash Flows—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-6
|
| |
Notes to Consolidated Financial Statements
| | F-7
|
2.Financial Statement Schedules:
All
No financial statement schedules
for which provision is made in the applicable accounting regulations of the SEC are
omitted because they either are not required under the related instructions, are inapplicable, orpresented since the required information is
shownnot present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the
consolidated financial statements
or notes thereto.and accompanying notes.
The exhibits
required to
be filed by Item 601 of Regulation S-Kthis report are listed in the
Exhibit Index which follows. An asterisk (*) beside the exhibit number indicates theindex to exhibits
containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.EXHIBIT below.
115 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 2.1+ | | 8-K | 001-14667 | 2.1 | 03/15/2021 | |
| 2.2+ | | 8-K | 001-14667 | 2.1 | 02/11/2022 | |
| 2.2+ | | 8-K | 001-14667 | 2.1 | 05/11/2023 | |
| 3.1 | | 8-K | 001-14667 | 3.1 | 10/10/2018 | |
| 3.2 | | 10-Q | 001-14667 | 3.2 | 11/09/2018 | |
| 4.1 | | 10-Q | 001-14667 | 4.1 | 11/01/2019 | |
| 4.2 | | | | | | X |
| 4.3 | | 10-K | 001-14667 | 4.14 | 02/28/2020 | |
| 4.4 | First Supplemental Indenture, dated as of August 1, 2023 to Indenture dated January 16, 2020, among Nationstar Mortgage Holdings Inc. as issuer, the Company, as Parent Guarantor, the guarantors thereto and Computershare Trust Company, N.A. (f/k/a Wells Fargo Bank, National Association), as trustee | 8-K | 001-14667 | 4.3 | 08/01/2023 | |
| 4.5 | | 8-K | 001-14667 | 4.1 | 08/06/2020 | |
| 4.6 | First Supplemental Indenture, dated as of August 1, 2023 to Indenture dated August 6, 2020, among Nationstar Mortgage Holdings Inc. as issuer, the Company, as Parent Guarantor, the guarantors thereto and Computershare Trust Company, N.A. (f/k/a Wells Fargo Bank, National Association), as trustee | 8-K | 001-14667 | 4.4 | 08/01/2023 | |
| 4.7 | | 8-K | 001-14667 | 4.1 | 12/04/2020 | |
48
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 116
| | | | Incorporated by reference | | | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | |
4.2 | | Form of Tranche A Warrant. | | 8-K | | 4.3 | | 1/31/14 | | |
| | | | | |
4.3 | | Form of Tranche B Warrant. | | 8-K | | 4.4 | | 1/31/14 | | |
| | | | | |
4.4 | | Form of Series A Convertible Preferred Stock Certificate. | | 8-K | | 4.6 | | 1/31/14 | | |
| | | | | |
| | | | | |
10.1* | | Employment Agreement between William C. Gallagher and WMIH Corp. | | 8-K12G3 | | 10.2 | | 5/13/15 | | |
10.2* | | Restricted Stock Agreement between William C. Gallagher and WMIH Corp. | | 8-K12G3 | | 10.3 | | 5/13/15 | | |
10.3* | | Employment Agreement between Thomas L. Fairfield and WMIH Corp. | | 8-K12G3 | | 10.4 | | 5/13/15 | | |
10.4* | | Restricted Stock Agreement between Thomas L. Fairfield and WMIH Corp. | | 8-K12G3 | | 10.5 | | 5/13/15 | | |
10.5* | | Employment Agreement, dated March 22, 2012, between WMIH Corp. and Weijia “Vicky” Wu. | | 8-K | | 10.5 | | 3/26/12 | | |
| | | | | |
10.6* | | Employment Agreement, dated March 22, 2012, between WMIH Corp. and Peter Struck. | | 8-K | | 10.6 | | 3/26/12 | | |
| | | | | |
10.7* | | Transition Services Agreement, dated March 22, 2012, between WMIH Corp. and the WMI Liquidating Trust. | | 8-K | | 10.7 | | 3/26/12 | | |
| | | | | |
10.8* | | Amendment No. 1 To Transition Services Agreement, dated September 18, 2012, between WMIH Corp. and the WMI Liquidating Trust. | | 8-K | | 10.1 | | 9/27/12 | | |
| | | | | |
10.9* | | Amendment No. 2 To Transition Services Agreement, dated December 11, 2014, between WMIH Corp. and the WMI Liquidating Trust. | | 8-K | | 10.1 | | 12/17/14 | | |
| | | | | |
10.10* | | Amendment No. 3 To Transition Services Agreement, dated November 18, 2016, between WMIH Corp. and the WMI Liquidating Trust. | | 8-K | | 10.1 | | 11/23/16 | | |
10.11* | | Amendment No. 4 To Transition Services Agreement, dated January 31, 2018, between WMIH Corp. and the WMI Liquidating Trust. | | 8-K | | 10.1 | | 2/1/18 | | |
10.12* | | Form of Indemnification Agreement. | | 8-K | | 10.8 | | 3/26/12 | | |
| | | | | |
10.13*
| | Form of Indemnification Agreement between WMIH Corp. and each of its current directors and executive officers. | | 8-K12G3 | | 10.1 | | 5/13/15 | | |
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 4.8 | First Supplemental Indenture, dated as of August 1, 2023 to Indenture dated December 4, 2020, among Nationstar Mortgage Holdings Inc. as issuer, the Company, as Parent Guarantor, the guarantors thereto and Computershare Trust Company, N.A. (f/k/a Wells Fargo Bank, National Association), as trustee | 8-K | 001-14667 | 4.5 | 08/01/2023 | |
| 4.9 | | 8-K | 001-14667 | 4.1 | 08/01/2023 | |
| 4.10 | | 8-K | 001-14667 | 4.2 | 08/01/2023 | |
| 4.11 | | 8-K | 001-14667 | 4.1 | 11/04/2021 | |
| 4.12 | First Supplemental Indenture, dated as of August 1, 2023 to Indenture dated November 4, 2021, among Nationstar Mortgage Holdings Inc. as issuer, the Company, as Parent Guarantor, the guarantors thereto and Computershare Trust Company, N.A. (f/k/a Wells Fargo Bank, National Association), as trustee | 8-K | 001-14667 | 4.6 | 08/01/2023 | |
| 4.13 | | 8-K | 001-14667 | 4.1 | 02/01/2024 | |
| 10.1 | | 10-K | 001-35449 | 10.18 | 03/15/2013 | |
| 10.2 | | 10-K | 001-35449 | 10.19 | 03/15/2013 | |
| 10.3 | | 10-K | 001-35449 | 10.20 | 03/15/2013 | |
49
117 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | Incorporated by reference | | | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | |
10.14* | | Engagement Agreement, dated May 28, 2012, between WMIH Corp. and CXO Consulting Group, LLC. | | 8-K | | 99.2 | | 6/4/12 | | |
| | | | | |
10.15* | | Amendment to Engagement Agreement, dated October 23, 2012, between WMIH Corp. and CXO Consulting Group, LLC. | | 8-K | | 99.1 | | 10/25/12 | | |
10.16* | | Summary of Compensation Arrangements for Non-Employee Directors. | | 10-K | | 10.16 | | 3/15/13 | | |
| | | | | |
10.17* | | 2012 Long-Term Incentive Plan. | | 10-K | | 10.17 | | 3/15/13 | | |
| | | | | |
10.18* | | First Amendment to 2012 Long-Term Incentive Plan. | | 8-K | | 99.1 | | 2/13/14 | | |
| | | | | |
10.19* | | Second Amendment to 2012 Long-Term Incentive Plan. | | 10-K | | 10.15 | | 2/27/15 | | |
10.20 | | Registration Rights Agreement, dated January 5, 2015, among WMIH Corp., Citigroup Global Markets Inc., and KKR Capital Markets LLC. | | 8-K | | 10.1 | | 1/5/15 | | |
| | | | | |
10.21 | | First Amendment dated January 5, 2018 to Registration Rights Agreement, dated January 5, 2015, among WMIH Corp., Citigroup Global Market, Inc., and KKR Capital Markets LLC. | | 8-K | | 10.1 | | 1/5/18 | | |
10.22 | | Escrow Agreement, dated January 5, 2015, between WMIH Corp. and Citibank, N.A., as escrow agent. | | 8-K | | 10.2 | | 1/5/15 | | |
| | | | | |
10.23 | | Amendment No. 1 to Escrow Agreement, dated January 5, 2015, between WMIH Corp. and Citibank, N.A., as escrow agent. | | | | | | | | X |
10.24 | | Amendment No. 2 to Escrow Agreement, dated January 5, 2015, between WMIH Corp. and Citibank, N.A., as escrow agent. | | 8-K | | 10.2 | | 12/11/17 | | |
10.25 | | Amendment No. 3 to Escrow Agreement, dated January 5, 2015, between WMIH Corp. and Citibank, N.A., as escrow agent. | | | | | | | | X |
10.26 | | Letter Agreement, dated December 8, 2017, by and among WMIH Corp., KKR Fund Holdings L.P. and KKR Wand Investors L.P. | | 8-K | | 10.3 | | 12/11/17 | | |
10.27 | | Amendment to Letter Agreement, dated February 12, 2018, by and among WMIH Corp., KKR Fund Holdings L.P., KKR Wand Investors L.P. | | | | | | | | X |
50
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.4 | | 10-K | 001-35449 | 10.21 | 03/15/2013 | |
| 10.5 | | 10-Q | 001-35449 | 10.11 | 11/14/2013 | |
| 10.6 | | 10-Q | 001-35449 | 10.12 | 11/14/2013 | |
| 10.7 | | 10-Q | 001-35449 | 10.13 | 11/14/2013 | |
| 10.8 | | 10-Q | 001-35449 | 10.3 | 11/07/2014 | |
| 10.9 | | 10-Q | 001-35449 | 10.4 | 11/07/2014 | |
| 10.10 | | 10-K | 001-35449 | 10.28 | 03/01/2016 | |
| 10.11 | | 10-K | 001-35449 | 10.17 | 03/09/2017 | |
| 10.12 | | 10-K | 001-35449 | 10.18 | 03/09/2017 | |
| 10.13 | | 10-K | 001-35449 | 10.18 | 03/02/2018 | |
| 10.14 | | 10-Q | 001-35449 | 10.1 | 05/10/2018 | |
| 10.15 | | 10-K | 001-14667 | 10.17 | 03/11/2019 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 118
| | | | Incorporated by reference | | | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | |
10.28 | | Voting and Support Agreement, dated as of February 12, 2018, between WMIH Corp. and FIF HE Holdings LLC. | | 8-K | | 10.1 | | 2/14/18 | | |
10.29 | | Letter Agreement, dated as of February 12, 2018 between WMIH Corp. and FIF HE Holdings LLC. | | 8-K | | 10.2 | | 2/14/18 | | |
10.30 | | Registration Rights Agreement, dated as of February 12, 2018 among WMIH Corp. and FIF HE Holdings LLC and the other stockholders party from time to time thereto. | | 8-K | | 10.3 | | 2/14/18 | | |
10.31 | | Warrant Exchange Agreement, dated as of February 12, 2018 between WMIH Corp. and KKR Wand Holdings Corporation. | | 8-K | | 10.4 | | 2/14/18 | | |
10.32 | | Commitment Letter, dated as of February 12, 2018, among Wand Merger Corporation and Credit Suisse AG, Credit Suisse Securities (USA) LLC, Jefferies Finance LLC, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., HSBC Bank USA, National Association and HSBC Securities (USA) Inc. | | 8-K | | 10.5 | | 2/14/18 | | |
10.33* | | Form of Participant Restricted Stock Agreement | | | | | | | | X |
12.1 | | Statement regarding computation of ratio of earnings to combined fixed charges and preferred dividends. | | | | | | | | X |
14 | | Code of Ethics. | | | | | | | | X |
| | | | | |
21 | | List of Subsidiaries of Registrant. | | | | | | | | X |
| | | | | |
23.1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | X |
24 | | Power of Attorney (included on signature page of this Annual Report on Form 10-K). | | | | | | | | X |
| | | | | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | |
32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | |
32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | |
51
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.16 | | 10-K | 001-14667 | 10.18 | 03/11/2019 | |
| 10.17 | | 10-Q | 001-14667 | 10.1 | 05/08/2019 | |
| 10.18 | | 10-Q | 001-14667 | 10.2 | 05/08/2019 | |
| 10.19 | | 10-Q | 001-14667 | 10.1 | 08/02/2019 | |
| 10.20 | | 10-K | 001-14667 | 10.22 | 02/23/2021 | |
| 10.21 | | 10-Q | 001-14667 | 10.2 | 10/29/2020 | |
| 10.22 | | 10-K | 001-14667 | 10.24 | 02/23/2021 | |
| 10.23 | | 8-K | 001-35449 | 10.5 | 02/06/2013 | |
| 10.24 | | 8-K | 001-35449 | 10.6 | 02/06/2013 | |
| 10.25 | | 10-Q | 001-35449 | 10.1 | 05/05/2016 | |
| 10.26 | | 10-Q | 001-35449 | 10.2 | 08/09/2016 | |
119 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.27 | | 10-K | 001-35449 | 10.21 | 03/09/2017 | |
| 10.28 | | 10-K | 001-35449 | 10.22 | 03/09/2017 | |
| 10.29 | | 10-K | 001-35449 | 10.23 | 03/02/2018 | |
| 10.30 | | 10-Q | 001-35449 | 10.2 | 05/10/2018 | |
| 10.31 | | 10-Q | 001-35449 | 10.1 | 08/03/2018 | |
| 10.32 | | 10-K | 001-14667 | 10.26 | 03/11/2019 | |
| 10.33 | | 10-K | 001-14667 | 10.27 | 03/11/2019 | |
| 10.34 | | 10-Q | 001-14667 | 10.3 | 05/08/2019 | |
| 10.35 | | 10-Q | 001-14667 | 10.4 | 05/08/2019 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 120
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.36 | | 10-Q | 001-14667 | 10.2 | 08/02/2019 | |
| 10.37 | | 10-K | 001-14667 | 10.34 | 02/28/2020 | |
| 10.38 | | 10-Q | 001-14667 | 10.3 | 04/30/2020 | |
| 10.39 | | 10-Q | 001-14667 | 10.1 | 10/29/2020 | |
| 10.40 | | 10-K | 001-14667 | 10.40 | 02/23/2021 | |
| 10.41 | | 10-K | 001-14667 | 10.41 | 02/23/2021 | |
| 10.42 | | 10-Q | 001-14667 | 10.1 | 10/28/2021 | |
| 10.43 | | 10-Q | 001-14667 | 10.2 | 10/28/2021 | |
| 10.44 | | 10-Q | 001-14667 | 10.7 | 07/27/2022 | |
| 10.45 | | 10-Q | 001-14667 | 10.1 | 10/26/2022 | |
121 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.46 | | | | | | X |
| 10.47 | | 10-Q | 001-14667 | 10.1 | 07/27/2022 | |
| 10.48 | | 10-Q | 001-14667 | 10.2 | 07/27/2022 | |
| 10.49 | | 10-Q | 001-14667 | 10.6 | 07/26/2023 | |
| 10.50 | | 10-Q | 001-14667 | 10.3 | 07/27/2022 | |
| 10.51 | | 10-Q | 001-14667 | 10.7 | 07/26/2023 | |
| 10.52 | | 10-Q | 001-14667 | 10.4 | 07/27/2022 | |
| 10.53 | | 10-Q | 001-14667 | 10.5 | 07/27/2022 | |
| 10.54 | | 10-Q | 001-14667 | 10.2 | 10/26/2022 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 122
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.55 | | 10-Q | 001-14667 | 10.6 | 04/26/2023 | |
| 10.56 | | 10-Q | 001-14667 | 10.6 | 07/27/2022 | |
| 10.57 | Conformed Amendments through Amendment Number 3, dated August 12, 2022, to Third Amended and Restated Master Repurchase Agreement, entered into as of August 31, 2020 by and between Bank of America, N.A., as buyer and Nationstar Participation Sub 1BM LLC, as seller, and acknowledged, guaranteed and agreed to by Nationstar Mortgage LLC, as guarantor or pledgor | 10-Q | 001-14667 | 10.3 | 10/26/2022 | |
| 10.54 | Amendment Number 4, dated October 21, 2022, to Third Amended and Restated Master Repurchase Agreement, entered into as of August 31, 2020 by and between Bank of America, N.A., as buyer and Nationstar Participation Sub 1BM LLC, as seller, and acknowledged, guaranteed and agreed to by Nationstar Mortgage LLC, as guarantor or pledgor | 10-K | 001-14667 | 10.54 | 02/16/2023 | |
| 10.55 | Amendment Number 5, dated October 20, 2023, to Third Amended and Restated Master Repurchase Agreement, entered into as of August 31, 2020 by and between Bank of America, N.A., as buyer and Nationstar Participation Sub 1BM LLC, as seller, and acknowledged, guaranteed and agreed to by Nationstar Mortgage LLC, as guarantor or pledgor | | | | | X |
| 10.56 | | 10-Q | 001-14667 | 10.1 | 07/26/2023 | |
| 10.57 | | 10-Q | 001-14667 | 10.2 | 07/26/2023 | |
| 10.58 | | 10-Q | 001-14667 | 10.3 | 07/26/2023 | |
123 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | Filed or Furnished Herewith |
| Form | File No. | Exhibit | Filing Date |
| | | | | | |
| 10.59 | | | | | | X |
| 10.60 | | 10-Q | 001-14667 | 10.4 | 07/26/2023 | |
| 10.61 | | 10-Q | 001-14667 | 10.5 | 07/26/2023 | |
| 10.62 | | 10-Q | 001-14667 | 10.1 | 10/25/2023 | |
| 10.63** | | 8-K | 001-14667 | 10.1 | 12/12/2018 | |
| 10.64** | | 10-Q | 001-14667 | 10.3 | 10/29/2020 | |
| 10.65** | | 10-K | 001-14667 | 10.57 | 02/16/2023 | |
| 10.66** | | 10-Q | 001-14667 | 10.2 | 04/26/2023 | |
| 10.67** | | 8-K | 001-14667 | 10.1 | 03/06/2023 | |
| 10.68** | | 10-Q | 001-14667 | 10.2 | 10/25/2023 | |
| 10.69** | | 10-Q | 001-14667 | 10.3 | 10/25/2023 | |
| 10.70** | | 8-K | 001-14667 | 10.1 | 01/09/2024 | |
| 10.71** | | 8-K | 001-35449 | 10.1 | 05/12/2016 | |
| 10.72** | | 8-K | 001-14667 | 10.2 | 08/01/2018 | |
| 10.73** | | 10-Q | 001-35449 | 10.5 | 05/07/2015 | |
| 10.74** | | S-8 | 333-231552 | 99.1 | 05/16/2019 | |
| 10.75** | | 8-K | 001-14667 | 10.2 | 05/17/2019 | |
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 124
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | | | Incorporated by reference Reference | | | | Filed or Furnished Herewith |
Exhibit
Number
Form | File No. | Exhibit Description | | Form
| | Exhibit
| | Filing Date | | Filed Herewith
|
| | | | | | |
| 10.76** | | | | | | | | | | X |
101.INS
10.77** | | 10-Q | 001-14667 | 10.3 | 04/26/2023 | |
| 10.78** | | 10-Q | 001-14667 | 10.1 | 04/28/2022 | |
| 10.79** | | 10-Q | 001-14667 | 10.2 | 04/28/2022 | |
| 10.80** | | 10-Q | 001-14667 | 10.3 | 04/28/2022 | |
| 10.81** | | 8-K | 001-14667 | 10.3 | 05/17/2019 | |
| 10.82** | | 10-Q | 001-14667 | 10.1 | 04/29/2021 | |
| 10.83** | | 10-Q | 001-14667 | 10.2 | 04/29/2021 | |
| 10.84** | | 10-Q | 001-14667 | 10.4 | 10/25/2023 | |
| 10.85** | | 8-K | 001-14667 | 10.1 | 05/13/2015 | |
| 21.1 | | | | | | X |
| 23.1 | | | | | | X |
| 31.1 | | | | | | X |
| 31.2 | | | | | | X |
| 32.1 | | | | | | X |
| 32.2 | | | | | | X |
| 97 | | | | | | X |
| 101.INS | Inline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | X |
| 101.SCH | | | | | |
101.SCH
| | Inline XBRL Taxonomy Extension Schema Document. Document | | | | | | | | X |
| 101.CAL | | | | | |
101.CAL
| | Inline XBRL Taxonomy Extension Calculation Linkbase Document. Document | | | | | X |
125 Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K
| | | | | | | | | | | | | | | | | | | | |
Exhibit Number | Description | Incorporated by Reference | | | | | X
Filed or Furnished Herewith |
| Form | File No. | Exhibit | | | Filing Date |
| | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. Document | | | | | | | | X |
| 101.LAB | | | | | |
101.LAB
| | Inline XBRL Taxonomy Extension Label Linkbase Document. Document | | | | | | | | X |
| 101.PRE | | | | | |
101.PRE
| | Inline XBRL Taxonomy Extension Presentation Linkbase Document. Document | | | | | X |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | | | | | | X |
*
| Management Contract or Compensatory Plan or Arrangement.
|
+ Certain The schedules toand other attachments referenced in this agreementexhibit have been omitted pursuant toin accordance with Item 601(b)(2) of Regulation S-K and the registrant agrees to furnish supplementallyS-K. A copy of any omitted schedule or attachment will be furnished supplementary to the Securities and Exchange Commission a copyupon request.
** Management contract, compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any omitted schedule upon request.representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.
Item 16.
| Form 10-K Summary.
|
None
52
Item 16. Form 10-K Summary
None.
Mr. Cooper Group Inc. - 2023 Annual Report on Form 10-K 126
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 2, 2018
| | WMIH CORP.
|
| | |
| | By:
| | /s/ WILLIAM C. GALLAGHER
|
| | William C. Gallagher
|
| | Chief Executive Officer
|
Mr. Cooper Group Inc.POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Charles Edward Smith and William C. Gallagher, and each of them, his or her lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granted unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
By: /s/ Jay Bray
Jay Bray
Chief Executive Officer
February 28, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature
| | | | |
| |
| /s/ Jay Bray | | Title
| | Date
February 28, 2024 |
/s/ WILLIAM C. GALLAGHER
William C. Gallagher
| | Jay Bray, Chief Executive Officer and Director (Principal (Principal Executive Officer)
| |
| |
| /s/ Kurt Johnson | March 2, 2018
February 28, 2024 |
| | |
/s/ TIMOTHY F. JAEGER
Timothy F. Jaeger
| | InterimKurt Johnson, Executive Vice President and Chief Financial Officer
(Principal (Principal Financial Officer and Principal Accounting Officer)
| |
| |
| /s/ Elizabeth Burr | March 2, 2018
February 28, 2024 |
| Elizabeth Burr, Director | |
| |
| /s/ Roy A. Guthrie | February 28, 2024 |
Roy A. Guthrie, Director | |
| |
/s/ STEVENDaniela Jorge | February 28, 2024 |
| Daniela Jorge, Director | |
| |
/s/ Michael D. SCHEIWEMalone | February 28, 2024 |
| Michael D. Malone, Director | |
| |
| /s/ Shveta Mujumdar | February 28, 2024 |
| Shveta Mujumdar, Director | |
| |
| /s/ Tagar C. Olson | February 28, 2024 |
| Tagar C. Olson, Director | |
| |
| /s/ Steven D. Scheiwe | | Director
Chairman of the Board
| | March 2, 2018
February 28, 2024 |
| Steven D. Scheiwe, Director | | |
/s/ DIANE B. GLOSSMAN
Diane B. Glossman
| | Director
| | March 2, 2018
|
| | |
/s/ CHRISTOPHER J. HARRINGTON
| | Director
| | March 2, 2018
|
Christopher J. Harrington
| | | | |
| | |
/s/ TAGAR C. OLSON
Tagar C. Olson
| | Director
| | March 2, 2018
|
| | |
/s/ MICHAEL J. RENOFF
Michael J. Renoff
| | Director
| | March 2, 2018
|
| | |
/s/ MICHAEL L. WILLINGHAM
Michael L. Willingham
| | Director
| | March 2, 2018
|
| | |
53
WMIH CORP.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
| | F-2
|
| |
WMIH Corp. and Subsidiaries Consolidated Balance Sheets—as of December 31, 2017 and December 31, 2016
| | F-3
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Operations—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-4
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-5
|
| |
WMIH Corp. and Subsidiaries Consolidated Statements of Cash Flows—for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
| | F-6
|
| |
Notes to Consolidated Financial Statements
| | F-7
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of WMIH Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WMIH Corp. and its subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2018, expressed an unqualified opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BPM LLP
We have served as the Company’s auditor since 2012.
San Francisco, California
March 2, 2018
F-2
WMIH CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| December 31, 2017 | | | December 31, 2016 | |
ASSETS: | | | | | | | |
Investments held in trust: | | | | | | | |
Fixed-maturity securities | $ | 1,518 | | | $ | 29,206 | |
Cash equivalents held in trust | | 4,199 | | | | 2,176 | |
Total investments held in trust | | 5,717 | | | | 31,382 | |
Cash and cash equivalents | | 26,709 | | | | 2,491 | |
Fixed-maturity securities | | 2,142 | | | | 47,625 | |
Restricted cash | | 578,936 | | | | 573,347 | |
Derivative asset - embedded conversion feature | | — | | | | 80,651 | |
Accrued investment income | | 59 | | | | 187 | |
Other assets | | 558 | | | | 507 | |
Total assets | $ | 614,121 | | | $ | 736,190 | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | | | | | | | |
Liabilities: | | | | | | | |
Notes payable - principal | $ | — | | | $ | 18,774 | |
Notes payable - interest | | — | | | | 203 | |
Losses and loss adjustment reserves | | 474 | | | | 811 | |
Losses payable | | — | | | | 53 | |
Unearned premiums | | 39 | | | | 270 | |
Accrued ceding commissions | | — | | | | 22 | |
Loss contract reserve | | — | | | | 5,645 | |
Other liabilities | | 16,303 | | | | 14,063 | |
Total liabilities | | 16,816 | | | | 39,841 | |
Commitments and contingencies | | | | | | | |
Redeemable convertible series B preferred stock, $0.00001 par value; 600,000 shares issued and outstanding as of December 31, 2017 and December 31, 2016; aggregate liquidation preference of $600,000,000 as of December 31, 2017 and December 31, 2016 | | 503,713 | | | | 502,213 | |
Stockholders’ equity: | | | | | | | |
Convertible series A preferred stock, $0.00001 par value; 1,000,000 shares issued and outstanding as of December 31, 2017 and December 31, 2016; aggregate liquidation preference of $10 as of December 31, 2017 and December 31, 2016 | | — | | | | — | |
Common stock, $0.00001 par value; 3,500,000,000 authorized; 206,714,132 and 206,380,800 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively | | 2 | | | | 2 | |
Additional paid-in capital | | 39 | | | | 108,415 | |
Retained earnings | | 93,551 | | | | 85,719 | |
Total stockholders’ equity | | 93,592 | | | | 194,136 | |
Total liabilities, redeemable convertible preferred stock and stockholders’ equity | $ | 614,121 | | | $ | 736,190 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
WMIH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Revenues: | | | | | | | | | | | |
Premiums earned | $ | 1,220 | | | $ | 3,147 | | | $ | 5,121 | |
Net investment income | | 6,670 | | | | 2,249 | | | | 879 | |
Total revenues | | 7,890 | | | | 5,396 | | | | 6,000 | |
Operating expenses: | | | | | | | | | | | |
Losses and loss adjustment expense (benefit) | | 19 | | | | (669 | ) | | | (1,115 | ) |
Ceding commission expense | | 137 | | | | 306 | | | | 456 | |
General and administrative expense | | 14,457 | | | | 7,043 | | | | 20,940 | |
Loss contract reserve reduction | | (5,645 | ) | | | (3,978 | ) | | | (2,926 | ) |
Gain from contract termination | | (383 | ) | | | — | | | | — | |
Interest expense | | 1,788 | | | | 2,616 | | | | 3,702 | |
Total operating expenses | | 10,373 | | | | 5,318 | | | | 21,057 | |
Net operating (loss) income | | (2,483 | ) | | | 78 | | | | (15,057 | ) |
Other (income) expense: | | | | | | | | | | | |
Other income | | (123 | ) | | | (123 | ) | | | (7,845 | ) |
(Gain) loss on change in fair value of derivative embedded conversion feature | | (28,242 | ) | | | (201,499 | ) | | | 54,621 | |
Total other (income) expense | | (28,365 | ) | | | (201,622 | ) | | | 46,776 | |
Income (loss) before income taxes | | 25,882 | | | | 201,700 | | | | (61,833 | ) |
Income tax expense (benefit) | | — | | | | — | | | | — | |
Net income (loss) | | 25,882 | | | | 201,700 | | | | (61,833 | ) |
Redeemable convertible series B preferred stock dividends | | (18,050 | ) | | | (18,000 | ) | | | (17,748 | ) |
Net income (loss) attributable to common and participating stockholders | $ | 7,832 | | | $ | 183,700 | | | $ | (79,581 | ) |
Basic net income (loss) per share attributable to common stockholders (Note 12) | $ | 0.01 | | | $ | 0.33 | | | $ | (0.39 | ) |
Shares used in computing basic net income (loss) per share | | 202,595,288 | | | | 202,270,887 | | | | 201,746,613 | |
Diluted net income (loss) per share attributable to common stockholders (Note 12) | $ | 0.01 | | | $ | 0.30 | | | $ | (0.39 | ) |
Shares used in computing diluted net income (loss) per share | | 212,660,917 | | | | 235,406,360 | | | | 201,746,613 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
WMIH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| Series B Redeemable Convertible Preferred Stock | | | | Series A Convertible Preferred Stock | | | | Common Stock | | | | | | | | | | | | | |
| Shares | | | Amount | | | | Shares | | | Amount | | | | Shares | | | Amount | | | Additional paid-in capital | | | (Accumulated deficit) retained earnings | | | Total stockholders’ equity | |
Balance at January 1, 2015 | | — | | | $ | — | | | | | 1,000,000 | | | $ | — | | | | | 202,343,245 | | | $ | 2 | | | $ | 106,628 | | | $ | (18,400 | ) | | $ | 88,230 | |
Net loss | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | (61,833 | ) | | | (61,833 | ) |
Issuance of redeemable convertible series B preferred stock, net of offering costs | | 600,000 | | | | 502,213 | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | — | |
Issuance of common stock under restricted share compensation arrangement | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Redeemable convertible series B preferred stock dividends | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | (17,748 | ) | | | (17,748 | ) |
Issuance of common stock under restricted stock compensation arrangement | | — | | | | — | | | | | — | | | | — | | | | | 3,824,790 | | | | — | | | | — | | | | — | | | | — | |
Equity-based compensation | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | 1,129 | | | | — | | | | 1,129 | |
Balance at December 31, 2015 | | 600,000 | | | | 502,213 | | | | | 1,000,000 | | | | — | | | | | 206,168,035 | | | | 2 | | | | 107,757 | | | | (97,981 | ) | | | 9,778 | |
Net income | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | 201,700 | | | | 201,700 | |
Redeemable convertible series B preferred stock dividends | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | (18,000 | ) | | | (18,000 | ) |
Issuance of common stock under restricted stock compensation arrangement | | — | | | | — | | | | | — | | | | — | | | | | 212,765 | | | | — | | | | — | | | | — | | | | — | |
Equity-based compensation | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | 658 | | | | — | | | | 658 | |
Balance at December 31, 2016 | | 600,000 | | | | 502,213 | | | | | 1,000,000 | | | | — | | | | | 206,380,800 | | | | 2 | | | | 108,415 | | | | 85,719 | | | | 194,136 | |
Net income | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | 25,882 | | | | 25,882 | |
Redeemable convertible Series B preferred stock dividends | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | (18,050 | ) | | | (18,050 | ) |
Reduction of accrued fees incurred relating to Series B preferred stock issuance | | — | | | | 1,500 | | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | — | |
Reclassification of derivative asset | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | (108,893 | ) | | | — | | | | (108,893 | ) |
Issuance of common stock under restricted stock compensation arrangement | | — | | | | — | | | | | — | | | | — | | | | | 333,332 | | | | — | | | | — | | | | — | | | | — | |
Equity-based compensation | | — | | | | — | | | | | — | | | | — | | | | | — | | | | — | | | | 517 | | | | — | | | | 517 | |
Balance at December 31, 2017 | | 600,000 | | | $ | 503,713 | | | | | 1,000,000 | | | $ | — | | | | | 206,714,132 | | | $ | 2 | | | $ | 39 | | | $ | 93,551 | | | $ | 93,592 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
WMIH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended December 31, 2017 | | Year ended December 31, 2016 | | Year ended December 31, 2015 | |
Cash flows from operating activities: | | | | | | | | | |
Net income (loss) | $ | 25,882 | | $ | 201,700 | | $ | (61,833 | ) |
Adjustments to reconcile net income (loss) to net cash (used in) operating activities: | | | | | | | | | |
Amortization of premium or discount on fixed maturity securities | | 116 | | | 227 | | | 574 | |
Net realized loss (gain) on sale of investments | | 68 | | | (24 | ) | | (324 | ) |
Unrealized (gain) on trading securities | | (61 | ) | | 41 | | | 463 | |
(Gain) loss on derivative embedded conversion feature | | (28,242 | ) | | (201,499 | ) | | 54,621 | |
Equity-based compensation | | 517 | | | 658 | | | 1,129 | |
Changes in assets and liabilities: | | | | | | | | | |
Accrued investment income | | 128 | | | 48 | | | 241 | |
Other assets | | (51 | ) | | 212 | | | 157 | |
Cash equivalents held in trust | | (2,023 | ) | | 1,511 | | | 7,435 | |
Losses and loss adjustment reserves | | (337 | ) | | (4,252 | ) | | (13,884 | ) |
Losses payable | | (53 | ) | | (352 | ) | | (291 | ) |
Unearned premiums | | (231 | ) | | (491 | ) | | (333 | ) |
Accrued ceding commission expense | | (22 | ) | | (11 | ) | | (11 | ) |
Accrued interest on notes payable | | (203 | ) | | (33 | ) | | (102 | ) |
Loss contract reserve | | (5,645 | ) | | (3,978 | ) | | (2,926 | ) |
Other liabilities | | 3,740 | | | (294 | ) | | 904 | |
Total adjustments | | (32,299 | ) | | (208,237 | ) | | 47,653 | |
Net cash used in operating activities | | (6,417 | ) | | (6,537 | ) | | (14,180 | ) |
Cash flows from investing activities: | | | | | | | | | |
Purchase of investments | | (19,974 | ) | | (180,439 | ) | | (269,694 | ) |
Proceeds from sales and maturities of investments | | 93,022 | | | 202,419 | | | 230,567 | |
Net cash provided by (used in) investing activities | | 73,048 | | | 21,980 | | | (39,127 | ) |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from issuance of preferred stock | | — | | | — | | | 600,000 | |
Fees incurred and paid relating to preferred stock issuance | | — | | | — | | | (19,310 | ) |
Redeemable convertible series B preferred stock dividends | | (18,050 | ) | | (18,000 | ) | | (16,998 | ) |
Notes payable – principal repayments | | (18,774 | ) | | (2,969 | ) | | (10,395 | ) |
Notes payable – principal issued | | — | | | — | | | 918 | |
Net cash (used in) provided by financing activities | | (36,824 | ) | | (20,969 | ) | | 554,215 | |
Increase (decrease) in cash and cash equivalents | | 29,807 | | | (5,526 | ) | | 500,908 | |
Cash, cash equivalents and restricted cash, beginning of period | | 575,838 | | | 581,364 | | | 80,456 | |
Cash, cash equivalents and restricted cash, end of period | $ | 605,645 | | $ | 575,838 | | $ | 581,364 | |
Supplementary disclosure of cash flow information: | | | | | | | | | |
Cash paid during the period: | | | | | | | | | |
Interest | $ | 1,991 | | $ | 2,647 | | $ | 2,887 | |
Supplementary disclosure of non-cash investing and financing activities: | | | | | | | | | |
Reclassification of derivative asset | $ | 108,893 | | $ | — | | $ | 66,227 | |
Notes payable issued in lieu of cash interest payments | $ | — | | $ | — | | $ | 918 | |
Redeemable convertible series B preferred stock dividends accrued | $ | — | | $ | — | | $ | 750 | |
Accrued fees relating to series B preferred stock issuance | $ | (1,500 | ) | $ | — | | $ | 12,250 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
WMIH CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless otherwise indicated, financial information, including dollar values stated in the text of the notes to financial statements, is expressed in thousands.
References herein, unless the context requires otherwise, to (i) the terms “Company,” “we,” “us,” or “our” generally are intended to refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis;(ii) “WMIH” refers only to WMIH Corp. without regard to its subsidiaries; (iii)”WMIHC” refers only to WMI Holdings Corp. without regard to its subsidiaries; (iv) “WMMRC” means WM Mortgage Reinsurance Company,127 Mr. Cooper Group Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” means WMI Investment Corp. (a wholly-owned subsidiary of WMIH).
Note 1: The Company and its Subsidiaries
WMIH Corp.
WMIH Corp. (“WMIH”) is a corporation duly organized and existing under the laws of the State of Delaware. On May 11, 2015, WMIH merged with its parent corporation, WMI Holdings Corp., a Washington corporation (“WMIHC”), with WMIH as the surviving corporation in the merger. This transaction occurred as part of the reincorporation of WMIHC from the State of Washington to the State of Delaware effective May 11, 2015 (the “Reincorporation Date”).
WMIH, formerly known as WMIHC and Washington Mutual, Inc. (“WMI”), is the direct parent of WM Mortgage Reinsurance Company, Inc., a Hawaii corporation (“WMMRC”), and, until its dissolution on January 18, 2018, WMI Investment Corp., a Delaware corporation (“WMIIC”). Since emergence from bankruptcy on March 19, 2012, our business activities consist of operating WMMRC’s legacy reinsurance business in runoff mode. In addition, we are actively seeking acquisition opportunities across a broad array of industries with a specific focus in the financial services industry, including targets with consumer finance, specialty finance, leasing or insurance operations.
As of December 31, 2017, WMIH was authorized to issue up to 3,500,000,000 shares of common stock, and up to 10,000,000 shares of preferred stock (in one or more series), in each case with a par value of $0.00001 per share. As of December 31, 2017 and December 31, 2016, 206,714,132 and 206,380,800 shares, respectively, of WMIH’s common stock were issued and outstanding. As of December 31, 2017 and December 31, 2016, 1,000,000 shares of WMIH’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) were issued and outstanding. As of December 31, 2017 and December 31, 2016, 600,000 shares of WMIH’s 3% Series B Convertible Preferred Stock (the “Original Series B Preferred Stock”) were issued and outstanding. On December 11, 2017, we announced an amendment of the Original Series B Preferred Stock (the “Series B Amendment”), which amendment became automatically effective at 12:00 a.m., New York City time, on January 5, 2018, and effected an exchange of the previously outstanding Original Series B Preferred Stock for shares of WMIH’s 5.00% Series B Convertible Preferred Stock (the “Series B Preferred Stock”).
While we remain committed to consummating an acquisition, we also are mindful that the Company’s Series B Preferred Stock is redeemable on October 5, 2019, if we have not consummated a Qualified Acquisition, as more fully described in Note 6: Service Agreements and Related Party Transactions, on or prior to October 5, 2019 (the “Series B Redemption Date”); provided, if prior to the Series B Redemption Date we have publicly announced that WMIH has entered into a definitive agreement for an Acquisition (as defined below), the Series B Redemption Date will be extended to the earlier of April 5, 2020 and the day immediately following the date such definitive agreement is terminated or the date such Acquisition is closed. There can be no assurance that any transaction will occur or if so on what terms.
WMMRC
WMMRC is a wholly-owned subsidiary of WMIH. Prior to August 2008 (at which time WMMRC became a direct subsidiary of WMI), WMMRC was a wholly-owned subsidiary of FA Out-of-State Holdings, Inc., a second-tier subsidiary of Washington Mutual Bank (“WMB”) and third-tier subsidiary of WMI. WMMRC is a pure captive insurance company domiciled in the State of Hawaii. WMMRC was incorporated on February 25, 2000, and received a Certificate of Authority, dated March 2, 2000, from the Insurance Division of the State of Hawaii.
F-7
WMMRC was originally organized to reinsure private mortgage insurance risk for seven primary mortgage insurers then offering private mortgage insurance on loans originated or purchased by former subsidiaries of WMI. The seven primary mortgage insurers are United Guaranty Residential Insurance Company (“UGRIC”), Genworth Mortgage Insurance Corporation (“GMIC”), Mortgage Guaranty Insurance Corporation (“MGIC”), PMI Mortgage Insurance Company (“PMI”), Radian Guaranty Incorporated (“Radian”), Republic Mortgage Insurance Company (“RMIC”) and Triad Guaranty Insurance Company (“Triad”).
Due to the then deteriorating performance in the mortgage guarantee markets and the closure and receivership of WMB, the reinsurance agreements with each of the primary mortgage insurers were terminated or placed into runoff during 2008. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. As a result, effective September 26, 2008, WMMRC’s continuing operations consisted solely of the runoff of coverage associated with mortgages placed with the primary mortgage carriers prior to September 26, 2008. In runoff, an insurer generally writes no new business but continues to service its obligations under in force policies and otherwise continues as a licensed insurer. The reinsurance agreements with Triad, PMI, UGRIC and Radian were commuted on August 31, 2009, October 2, 2012, April 3, 2014 and October 23, 2017, respectively, and the related trust assets were distributed in accordance with the commutation agreements. As a result, WMMRC’s continuing operations as of December 31, 2017 consist solely of the runoff of coverage associated with mortgages placed with three remaining carriers: GMIC, MGIC and RMIC. On February 2, 2018 the reinsurance agreement with RMIC was terminated and the assets of the trust distributed in accordance with the terms of the trust. On February 13, 2018, the aggregate excess of loss reinsurance agreement between WMMRC and GMIC was terminated in accordance with the provisions of the agreement. See Note 15: Subsequent Events.
WMIIC
WMIIC was dissolved on January 18, 2018. As of December 31, 2017 and the date of its dissolution, WMIIC did not have any operations and was fully eliminated upon consolidation. For more information on the dissolution of WMIIC see Note 15: Subsequent Events.
Note 2: Significant Accounting Policies
Basis of Presentation
WMIH resumed timely filing of all periodic reports for a reporting company under the Securities Exchange Act of 1934, as amended, for all periods after emergence from bankruptcy on March 19, 2012 (the “Effective Date”).
All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Management has made significant estimates in certain areas, including valuing certain financial instruments, other assets and liabilities, the determination of the contingent risk liabilities, and in determining appropriate insurance reserves. Actual results could differ substantially from those estimates.
Fair Value of Certain Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally, for assets that are reported at fair value, the Company uses quoted market prices or valuation models to estimate their fair value. These models incorporate inputs such as forward yield curves, market volatilities and pricing spreads, utilizing market-based inputs where readily available. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation.
The Company classifies fixed-maturity investments as trading securities, which are recorded at fair value. As such, changes in unrealized gains and losses on investments held at the balance sheet date are recognized and reported as a component of net investment income on the consolidated statements of operations. The Company believes fair value provides better matching of investment earnings to potential cash flow generated from the investment portfolio and reduces subjectivity related to evaluating other-than-temporary impairment on the Company’s investment portfolio.
F-8
The carrying value of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their respective fair values due to their short-term nature.
The carrying value of the loss contract reserve, in periods during which such reserve exists, approximates its fair value and is based on valuation methodologies using discounted cash flows at interest rates which approximate the Company’s weighted-average cost of capital.
The carrying value of the derivative embedded conversion feature of the Original Series B Preferred Stock, in periods during which such derivative exists, is adjusted to its fair value as determined using Level 3 inputs described below under fair value measurement.
The carrying value of notes payable approximates fair value based on time to maturity, underlying collateral, and prevailing interest rates.
Fair Value Measurement
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the Financial Accounting Standards Board (“FASB”) Fair Value Measurements and Disclosures accounting guidance. The framework is based on the inputs used in valuation and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.
The three levels of the hierarchy are as follows:
Level 1—Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3—Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.
Fair values are based on quoted prices in active markets when available (Level 1). The Company receives the quoted prices from a third party, nationally recognized pricing service. When quoted prices are not available, the Company utilizes a pricing service to determine an estimate of fair value. The fair value is generally estimated using current market inputs for similar financial instruments with comparable terms and credit quality, commonly referred to as matrix pricing (Level 2). These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels in the fair value hierarchy at the end of the reporting period.
Fixed-Maturity Securities
Fixed-maturity securities consist of U.S. Treasury securities, obligations of U.S. government sponsored agencies, and domestic and foreign corporate debt securities. Fixed-maturity securities held in trust are for the benefit of the primary insurers as more fully described in Note 3: Insurance Activity. Investments in fixed-maturity securities are reported at their estimated fair values and are classified as trading securities in accordance with applicable accounting guidance. Realized gains and losses on the sale of fixed-maturity securities are determined using the specific identification method and are reported as a component of net investment income within the consolidated statements of operations.
Investments Held in Trust
Investments held in trust consist of cash equivalents, which include highly liquid overnight money market instruments, and fixed-maturity securities which are held in trust for the benefit of the primary insurers as more fully described in Note 3: Insurance Activity and Note 4: Investment Securities, and are subject to the restrictions on distribution of net assets of subsidiaries as described below.
F-9
Third Party Restrictions on Distribution of Net Assets of Wholly-Owned Subsidiaries
The net assets of WMMRC are subject to restrictions on distribution from multiple sources including the primary insurers who have approval control of distributions from the trust, and the Insurance Division of the State of Hawaii who has approval authority over distributions or intercompany advances.
Premium Recognition
Premiums assumed are earned on a daily pro-rata basis over the underlying policy terms. Premiums assumed relating to the unexpired portion of policies in force at the balance sheet date are recorded as unearned premiums. Unearned premiums also include a reserve for post default premium reserves. Post default premium reserves occur when a loan is in a default position and the servicer continues to advance the premiums. If the loan ultimately goes to claim, the premiums advanced during the period of default are subject to recapture. The Company records a post default premium reserve based on information provided by the underlying mortgage insurers when they provide information on the post default premium reserve separately from other reserves. The change in the post default premium reserve is reflected as a reduction or increase, as the case may be, in premiums assumed. The Company has recorded unearned premiums totaling $39 thousand and $0.3 million as of December 31, 2017 and December 31, 2016, respectively.
The Company recognizes premium deficiencies when there is a probable loss on an insurance contract. Premium deficiencies are recognized if the sum of the present value of expected losses and loss adjustment expenses, unamortized deferred acquisition costs, and maintenance costs, excluding intercompany charges, exceed expected future unearned premiums and anticipated investment income. Premium deficiency reserves have been recorded totaling $0.3 million and $0.3 million as of December 31, 2017 and December 31, 2016, respectively. Intercompany administrative costs are excluded from the computation of premium deficiencies.
The Company’s premium deficiency analysis was performed on a single book basis and includes all book years and reinsurance treaties aggregated together using assumptions based on the actuarial best estimates at the balance sheet date. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, claims, loss adjustment expenses and investment income as of the balance sheet date. To the extent ultimate losses are higher or premiums are lower than estimated, additional premium deficiency reserves may be required in the future.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills and overnight investments. Except as described above in Investments Held in Trust, the Company considers all amounts that are invested in highly liquid overnight money market instruments to be cash equivalents. The Federal Deposit Insurance Corporation (“FDIC”) insures amounts on deposit with each financial institution up to limits as prescribed by law. The Company may hold funds with financial institutions in excess of the FDIC insured amount, however, the Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash
Restricted cash includes proceeds of the Original Series B Preferred Stock offering held in escrow and included, through the termination of the Indentures (as defined in Note 7: Notes Payable) on October 2, 2017, amounts held for the express purposes of paying principal, interest and related fees on the Runoff Notes (as defined in Note 7: Notes Payable) pursuant to the terms of the Indentures.
Ceding Commission Expense
The Company is required to pay a ceding commission to certain primary insurers pursuant to certain reinsurance agreements.
Losses and Loss Adjustment Reserves
The losses and loss adjustment reserve include case basis estimates of reported losses and supplemental amounts for incurred but not reported (“IBNR”) losses. A default is considered the incident (e.g., the failure to make timely payment of mortgage payments) that may give rise to a claim for mortgage insurance. In establishing the losses and loss adjustment reserve, the Company based its estimates primarily on the ceded loss and loss adjustment reserves as provided by the primary mortgage guaranty carriers.
F-10
WMMRC has recorded reserves at the ceded case reserves and IBNR levels established and reported by the primary mortgage guaranty carriers as of December 31, 2017 and December 31, 2016, respectively. Management believes that the recorded aggregate liability for unpaid losses and loss adjustment expenses at period end represents the Company’s best estimate, based upon the available data, of the amount necessary to cover the current cost of losses. However, due to the inherent uncertainty arising from fluctuations in the persistency rate of mortgage insurance claims, the Company’s size and lack of prior operating history, external factors such as future changes in regional or national economic conditions, judicial decisions, federal and state legislation related to mortgage restructuring and foreclosure restrictions, claims denials and coverage rescissions by primary carriers and other factors beyond the Company’s control, it is not presently possible to determine whether actual loss experience will conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly higher or lower, as the case may be, than the amount indicated in the financial statements and there can be no assurance that the reserve amounts recorded will be sufficient. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.
Loss Contract Reserves
A loss contract reserve relating to contractual obligations of WMMRC was established at March 19, 2012 as a result of applying fresh start accounting and in compliance with Accounting Standards Codification (“ASC”) 805-10-55-21- Broad Transactions, which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The value of this reserve is analyzed quarterly and is adjusted accordingly. This adjustment (if any) to the reserve produces an expense or contra-expense in the consolidated statements of operations.
Derivatives
We evaluate our convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted. This accounting treatment requires that the carrying amount of embedded derivatives be marked-to-market at each balance sheet date and carried at fair value. In the event that the fair value is recorded as a liability, the change in fair value during the period is recorded in the Statement of Operations as either income or expense. If an embedded derivative is no longer required to be separately accounted for due to conversion, exercise or modification to the terms of an instrument, the derivative is marked to fair value at the conversion, exercise or modification date and then the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of financial instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Management must determine whether an instrument (or an embedded feature) is indexed to our stock. An entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The application of this exercise could affect the accounting for (i) certain freestanding warrants that contain exercise price adjustment features or contain contingently puttable cash settlement options, if any, and (ii) convertible notes containing anti-dilution protections and/or exercise price adjustment features.
The Company had recorded a derivative embedded conversion feature as a result of the issuance of the Original Series B Preferred Stock which was adjusted to its fair value as determined using Level 3 inputs described above under Fair Value Measurement. The change in fair value of the derivative embedded conversion feature was calculated at each reporting date and recorded as other income or other expense on the statement of operations. As a result of the Series B Amendment, the embedded conversion feature was modified, and the derivative was marked to fair value at December 31, 2017 and then the related fair value was reclassified to equity in accordance with ASC 815-15-35-4 - Embedded Conversion Option that No Longer Meets Bifurcation Criteria, as more fully described in Note 9: Capital Stock and Derivative Instruments.
Other Liabilities
At December 31, 2017, the total balance of $16.3 million of other liabilities is comprised of $10.8 million of accrued fees relating to the Original Series B Preferred Stock offering, an accrual for professional fees and recurring business expenses currently payable of approximately $4.7 million and $0.8 million of accrued dividends relating to the Original Series B Preferred Stock. At December 31, 2016, the total balance of $14.1 million of other liabilities is comprised of $12.3 million of accrued fees relating to the Series B Preferred Stock Financing, an accrual for professional fees and recurring business expenses currently payable of approximately $1.1 million and $0.7 million of accrued dividends relating to the Original Series B Preferred Stock.
F-11
Comprehensive Income (Loss)
The Company has no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statements of operations.
Net Income (Loss) Per Common Share
In calculating earnings per share, the Company follows the two-class method, which distinguishes between the classes of securities based on the proportionate participation rights of each security type in the Company's undistributed income. The Series A Preferred Stock and the Series B Preferred Stock are treated as one class for purposes of applying the two-class method, because they have substantially equal rights and share equally on an as converted basis with respect to income available to WMIH common stockholders.
Basic net income (loss) per WMIH common share is computed by dividing net income (loss) applicable to WMIH’s common stockholders by the weighted-average number of common shares outstanding for the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase. Basic net income (loss) attributable to common stockholders is computed by deducting preferred dividends and the basic calculation of undistributed earnings attributable to participating securities from net income.
Diluted net income per WMIH common share is computed by dividing net income applicable to WMIH’s common stockholders by the weighted-average number of common shares outstanding during the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase and adding any potentially dilutive WMIH common stock equivalents outstanding during the period. Diluted net income attributable to common stockholders is computed by deducting preferred dividends and the diluted calculation of undistributed earnings attributable to participating securities from net income.
If common stock equivalents exist, in periods where there is a net loss, diluted loss per common share would be equal to or less than basic net loss per common share, since the effect of including any common stock equivalents would be antidilutive.
Equity-Based Compensation
On May 22, 2012, WMIH’s Board of Directors (the “Board” or “Board of Directors”) approved the Company’s 2012 Long-Term Incentive Plan (the “2012 Plan”) so that awards of restricted stock could be made to its non-employee directors and to have a plan in place for awards of equity based compensation to executives and others in connection with the Company’s operations and future strategic plans. A total of 2.0 million shares of WMIH’s common stock were initially reserved for future issuance under the 2012 Plan, which became effective upon the Board approval on May 22, 2012. On February 10, 2014, the Board approved and adopted a First Amendment to the 2012 Plan, pursuant to which the number of shares of WMIH’s common stock reserved and available for grants under the 2012 Plan was increased from 2.0 million shares to 3.0 million shares, and the terms of the 2012 Plan were modified to permit such an increase through action of the Board, except when stockholder approval is necessary to comply with any applicable law, regulation or rule of any stock exchange on which WMIH’s shares are listed, quoted or traded. On February 25, 2015, the number of shares authorized and available for awards under the 2012 Plan was increased from 3.0 million to 12.0 million shares of WMIH’s common stock, subject to approval of stockholders of WMIH. This approval was received at WMIH’s2023 Annual Meeting of Stockholders on April 28, 2015. The 2012 Plan provides for the granting of restricted shares and other cash and share based awards. The value of restricted stock is generally determined using the fair market value determined to be the trading price at the close of business on the respective date the awards were granted.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss (“NOL”) carry-forwards available to be utilized currently.
F-12
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act which reforms U.S. Tax legislation and related laws. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21%. Our deferred tax assets, although fully reserved, have been revalued at the lower rate beginning in 2017. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.
Dividend Policy
WMIH has paid no dividends on its common stock on or after the Effective Date and currently has no plans to pay a dividend on its common stock.
WMIH has declared and paid $18.0 million, $18.0 million and $17.0 million of dividends on its Original Series B Preferred Stock during the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively. An additional $0.8 million, $0.7 million and $0.7 million of dividends were accrued as of December 31, 2017, December 31, 2016 and December 31, 2015, respectively, based on the Original Series B Preferred Stock dividends that accrued cash dividends at a rate of 3% per year. The Original Series B Preferred Stock was issued on January 5, 2015; therefore, no dividends were due or paid for any prior period. The Original Series B Preferred Stock was amended effective January 5, 2018 as further described in Note 15: Subsequent Events.
Accounting Standards Recently Adopted
In November 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.
New Accounting Pronouncements
The Company has reviewed new accounting pronouncements issued between November 9, 2017, the filing date of our most recent prior Form 10-Q, and the filing date of this Form 10-K and has determined that no pronouncements issued are relevant to the Company, and/or have a material impact on the Company’s consolidated financial position, results of operations or disclosure requirements.
Note 3: Insurance Activity
The Company, through WMMRC, reinsures mortgage guaranty risks of mortgage loans originated by affiliates of the Company during the period from 1997 through 2008. WMMRC is (or was) a party to reinsurance agreements with UGRIC, GMIC, MGIC, PMI, Radian, RMIC and Triad. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. The reinsurance agreements with Triad, PMI, UGRIC and Radian were commuted on August 31, 2009, October 2, 2012, April 3, 2014 and October 23, 2017, respectively.
All agreements between WMMRC and the primary mortgage insurers are on an excess of loss basis, except for a certain reinsurance treaty with GMIC during 2008, which is reinsured on a 50% quota share basis. Pursuant to the excess of loss reinsurance agreements, WMMRC reinsures a second loss layer which ranges from 5% to 10% of the risk in force in excess of the primary mortgage insurer’s first loss percentages which range from 4% to 5%. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25% to 40%.
As security for the ceding insurers, WMMRC has entered into separate trust agreements with each of the primary mortgage insurance companies whereby a portion of the funds from premiums assumed are held in trust accounts for the benefit of each separate insurer. Pursuant to the terms of the reinsurance agreements, WMMRC is required to keep such assets in trust for a minimum of five years and is subject to claims for up to ten years from termination of obligations arising from the last year in which insurance business was written prior to runoff. Release of funds from the trust by WMMRC requires approval from the primary mortgage guaranty companies.
F-13
Premiums assumed and earned are as follows for the periods ended December 31, 2017, 2016 and 2015, respectively:
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | | |
Premiums assumed | $ | 989 | | | $ | 2,656 | | | $ | 4,788 | | |
Change in unearned premiums | | 231 | | | | 491 | | | | 333 | | |
Premiums earned | $ | 1,220 | | | $ | 3,147 | | | $ | 5,121 | | |
The components of the liability for losses and loss adjustment reserves are as follows as of December 31, 2017 and 2016, respectively:
| December 31, 2017 | | | December 31, 2016 | |
Case-basis reserves | $ | 151 | | | $ | 553 | |
IBNR reserves | | 1 | | | | — | |
Premium deficiency reserves | | 322 | | | | 258 | |
Total losses and loss adjustment reserves | $ | 474 | | | $ | 811 | |
Losses and loss adjustment reserve activity are as follows for the years ended December 31, 2017 and 2016, respectively:
| | | | | | | |
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | |
Balance at beginning of period | $ | 811 | | | $ | 5,063 | |
Incurred (released) - prior periods | | 19 | | | | (669 | ) |
Paid or terminated - prior periods | | (356 | ) | | | (3,583 | ) |
Total losses and loss adjustment reserves | $ | 474 | | | $ | 811 | |
The loss contract reserve balance is analyzed and adjusted quarterly. The balances in the reserve were zero and $5.6 million at December 31, 2017 and December 31, 2016, respectively. The loss contract reserve was established on March 19, 2012 at $63.1 million. The reserve was decreased by $5.6 million, $4.0 million and $2.9 million during the years ended December 31, 2017, 2016 and 2015, respectively. In periods during which a reduction in loss contract reserve occurs, a corresponding decrease in expense is reflected in the consolidated statement of operations for the respective period. The loss contract reserve is zero at December 31, 2017 and is not expected to change or have an impact on future periods.
Note 4: Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of total fixed-maturity securities and total fixed-maturity securities held in trust at December 31, 2017, are as follows:
| December 31, 2017 | |
Class of securities: | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
Obligations of U.S. government sponsored enterprises | $ | 2,249 | | | $ | — | | | $ | (10 | ) | | $ | 2,239 | |
Corporate debt securities | | 1,425 | | | | — | | | | (4 | ) | | | 1,421 | |
Total fixed-maturity securities | | 3,674 | | | | — | | | | (14 | ) | | | 3,660 | |
Less total unrestricted fixed-maturity securities | | 2,151 | | | | — | | | | (9 | ) | | | 2,142 | |
Total fixed-maturity securities held in trust | $ | 1,523 | | | $ | — | | | $ | (5 | ) | | $ | 1,518 | |
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of total fixed-maturity securities and total fixed-maturity securities held in trust at December 31, 2016, are as follows:
| December 31, 2016 | |
Class of securities: | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
U.S. government treasury securities | $ | 249 | | | $ | — | | | $ | — | | | $ | 249 | |
Obligations of U.S. government sponsored enterprises | | 59,450 | | | | 1 | | | | (80 | ) | | | 59,371 | |
Corporate debt securities | | 11,415 | | | | 9 | | | | (9 | ) | | | 11,415 | |
Foreign corporate debt securities | | 5,798 | | | | 5 | | | | (7 | ) | | | 5,796 | |
Total fixed-maturity securities | | 76,912 | | | | 15 | | | | (96 | ) | | | 76,831 | |
Less total unrestricted fixed-maturity securities | | 47,635 | | | | — | | | | (10 | ) | | | 47,625 | |
Total fixed-maturity securities held in trust | $ | 29,277 | | | $ | 15 | | | $ | (86 | ) | | $ | 29,206 | |
F-14
Amortized cost and estimated fair value of fixed-maturity securities at December 31, 2017 by contractual maturity are as follows:
| Amortized Cost | | | Estimated Fair Value | |
Maturity in: | | | | | | | |
2018 | $ | 3,674 | | | $ | 3,660 | |
Total fixed-maturity securities | $ | 3,674 | | | $ | 3,660 | |
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Net investment income for the years ended December 31, 2017, 2016 and 2015, respectively, is summarized as follows:
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Investment income: | | | | | | | | | | | |
Amortization of premium or discount on fixed-maturity securities | $ | (116 | ) | | $ | (227 | ) | | $ | (574 | ) |
Investment income on fixed-maturity securities | | 428 | | | | 921 | | | | 1,324 | |
Interest income on cash and cash equivalents | | 6,481 | | | | 1,572 | | | | 268 | |
Realized net (loss) gain from sale of investments | | (68 | ) | | | 24 | | | | 324 | |
Unrealized (loss) on cash equivalents held at period end | | (116 | ) | | | — | | | | — | |
Unrealized gain (loss) on trading securities held at period end | | 61 | | | | (41 | ) | | | (463 | ) |
Net investment income | $ | 6,670 | | | $ | 2,249 | | | $ | 879 | |
The following tables show how the Company’s investments are categorized in accordance with fair value measurement, as of December 31, 2017 and 2016, respectively:
| December 31, 2017 | |
| Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Class of securities: | | | | | | | | | | | | | | | |
U.S. government treasury securities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Obligations of U.S. government sponsored enterprises | | 995 | | | | 1,244 | | | | — | | | | 2,239 | |
Corporate debt securities | | 1,421 | | | | — | | | | — | | | | 1,421 | |
Foreign corporate debt securities | | — | | | | — | | | | — | | | | — | |
Total fixed-maturity securities | | 2,416 | | | | 1,244 | | | | — | | | | 3,660 | |
Money market funds | | 30,780 | | | | — | | | | — | | | | 30,780 | |
Total | $ | 33,196 | | | $ | 1,244 | | | $ | — | | | $ | 34,440 | |
| December 31, 2016 | |
| Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Class of securities: | | | | | | | | | | | | | | | |
U.S. government treasury securities | $ | 249 | | | $ | — | | | $ | — | | | $ | 249 | |
Obligations of U.S. government sponsored enterprises | | 47,489 | | | | 11,882 | | | | — | | | | 59,371 | |
Corporate debt securities | | 7,033 | | | | 4,382 | | | | — | | | | 11,415 | |
Foreign corporate debt securities | | 5,796 | | | | — | | | | — | | | | 5,796 | |
Total fixed-maturity securities | | 60,567 | | | | 16,264 | | | | — | | | | 76,831 | |
Money market funds | | 4,548 | | | | — | | | | — | | | | 4,548 | |
Total | $ | 65,115 | | | $ | 16,264 | | | $ | — | | | $ | 81,379 | |
F-15
A review of the fair value hierarchy classifications of the Company’s investments is conducted quarterly. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications are reported as transfers in or transfers out of the applicable Level at end of the calendar quarter in which the reclassifications occur. During the years ended December 31, 2017 and 2016, $2.4 million and $11.0 million, respectively, of investments were transferred from Level 2 to Level 1 as a result of improving market conditions for short-term and investment grade corporate securities.
| 2017 | | | 2016 | |
| Transfers from Level 1 to Level 2 | | | Transfers from Level 2 to Level 1 | | | Transfers from Level 1 to Level 2 | | | Transfers from Level 2 to Level 1 | |
Class of securities: | | | | | | | | | | | | | | | |
Obligations of U.S. government sponsored enterprises | $ | — | | | $ | 995 | | | $ | — | | | $ | — | |
Corporate securities | | — | | | | 1,421 | | | | — | | | | 5,737 | |
Foreign corporate debt securities | | — | | | | — | | | | — | | | | 5,295 | |
Total transfers | $ | — | | | $ | 2,416 | | | $ | — | | | $ | 11,032 | |
Note 5: Income Taxes
For the year ended December 31, 2017, the Company recorded net income of approximately $25.9 million compared to net income of $201.7 million for the year ended December 31, 2016 and a net loss of approximately $61.8 million for the year ended December 31, 2015. The Company has not recorded an income tax expense or benefit for the years ended December 31, 2017, 2016, or 2015.
| | 2017 | | | 2016 | | | 2015 | |
Current federal income tax expense | | $ | — | | | $ | — | | | $ | — | |
Provision for doubtful federal income tax receivable | | | — | | | | — | | | | — | |
Deferred federal income tax expense | | | — | | | | — | | | | — | |
Federal income tax expense | | $ | — | | | $ | — | | | $ | — | |
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
| Year Ended | | | Year Ended | | | Year Ended | |
| December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
Income tax at the federal statutory rate | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
Effect of: | | | | | | | | | | | |
Dividends on preferred securities | | 80.7 | | | | 3.4 | | | | (8.0 | ) |
True-up of deferred assets | | 13.7 | | | | (0.5 | ) | | — | |
Adjustments to NOL due to change in tax rate | | 10,766.6 | | | — | | | — | |
Adjustments to capital loss carryforward due to expiration | | 662.9 | | | — | | | — | |
Stock Based Compensation | | (13.7 | ) | | — | | | — | |
Change in valuation allowance | | (11,545.2 | ) | | | (37.9 | ) | | | (27.0 | ) |
Effective rate | — % | | | —% | | | —% | |
The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying the applicable percentage 35% prior to the 2017 tax reform and 21% for future years to taxable income, in accordance with the provisions of the United States Internal Revenue Code of 1986, as amended (the “Code”), that apply to property and casualty insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIH during the years ended December 31, 2017, 2016, or 2015 associated with the Company’s tax liability from the preceding year.
F-16
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act which reforms U.S. Tax legislation and related laws. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21% resulting in a reduction of the deferred tax asset of $842.9 million and a corresponding change in the related valuation allowance. Our deferred tax assets, although fully reserved, have been revalued at the lower rate as of December 31, 2017. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.
Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, accruals, derivate liabilities, net operating losses, and unrealized gains and losses on investments. As of December 31, 2017, 2016, and 2015, the Company recorded a valuation allowance equal to 100% of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future.
The components of the net deferred tax asset as of December 31, 2017, 2016 and 2015, respectively, are as follows:
| Year Ended | | | Year Ended | | | Year Ended | |
| December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
Deferred federal income tax asset: | | | | | | | | | | | |
Net operating loss carryforward | $ | 2,107,353 | | | $ | 2,104,944 | | | $ | 2,102,482 | |
Change in net operating loss due to change in tax rates | | (842,941 | ) | | | — | | | | — | |
Accruals and reserves | | 309 | | | | 2,177 | | | | 3,481 | |
Derivative liability | | — | | | | — | | | | 19,117 | |
Restricted stock grants | | 138 | | | | 157 | | | | 160 | |
Net unrealized loss on investments | | 4 | | | | 23 | | | | 16 | |
Capital loss carryforward | | 344 | | | | 52,475 | | | | 52,490 | |
Total deferred federal income tax asset | | 1,265,207 | | | | 2,159,776 | | | | 2,177,746 | |
Deferred federal income tax liabilities: | | | | | | | | | | | |
Losses and loss adjustments expense | | 304 | | | | 500 | | | | 411 | |
Derivative asset | | — | | | | 51,407 | | | | — | |
Total deferred federal income tax liabilities | | 304 | | | | 51,907 | | | | 411 | |
Less: Valuation allowance | | 1,264,903 | | | | 2,107,869 | | | | 2,177,335 | |
Net deferred federal income tax asset | $ | — | | | $ | — | | | $ | — | |
On March 19, 2012, WMIH emerged from bankruptcy. Prior to emergence, WMI abandoned the stock of WMB, thereby generating a worthless stock deduction of approximately $8.4 billion which gives rise to an NOL for the year ended December 31, 2012. Under Section 382 of the Code (“Section 382”), and based on the Company’s analysis, we believe that the Company experienced an “ownership change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three-year period) on March 19, 2012, and our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believe that the total available and utilizable NOL carry forward at December 31, 2017 is approximately $6.0 billion. At December 31, 2017, there was no limitation on the use of these NOLs. These NOLs will begin to expire in 2031. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks.
As of December 31, 2017, WMIH has a capital loss carryforward of $1.6 million, most of which is subject to expiration in 2018. At December 31, 2016, the Company had $150 million of capital loss carryforward, $148.3 million of which expired in 2017.
In 2017, WMIH, adopted ASU 2016-09, which requires all excess tax benefits and tax deficiencies arising from share-based payments during the period to be recognized in income (rather than in equity) on a prospective basis. Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against income tax expenses rather than additional paid-in capital of $2.9 million for the year ended December 31, 2017. This adoption had no impact on income because the company is in a net operating loss position with a full valuation allowance.
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The following table provides a summary of NOLs including the year they were incurred and the year they would currently be scheduled to expire if unused:
(in thousands)
Originated During Year Ended | | Operating Loss (Taxable) | | | Limitations | | | Net Operating Loss (Taxable) | | | Expiration (if unused) Year Ended |
December 31, 2011 | | $ | (14,201 | ) | | $ | — | | | $ | (14,201 | ) | | December 31, 2031 |
December 31, 2012 | | | (7,535,083 | ) | | | (1,589,798 | ) | | | (5,945,285 | ) | | December 31, 2032 |
December 31, 2013 | | | (5,019 | ) | | | — | | | | (5,019 | ) | | December 31, 2033 |
December 31, 2014 | | | (32,389 | ) | | | — | | | | (32,389 | ) | | December 31, 2034 |
December 31, 2015 | | | (12,347 | ) | | | — | | | | (12,347 | ) | | December 31, 2035 |
December 31, 2016 | | | (4,617 | ) | | | — | | | | (4,617 | ) | | December 31, 2036 |
December 31, 2017 | | | (7,152 | ) | | | — | | | | (7,152 | ) | | December 31, 2037 |
Total | | $ | (7,610,808 | ) | | $ | (1,589,798 | ) | | $ | (6,021,010 | ) | | |
| | | | | | | | | | | | | | |
The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company has analyzed filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2011 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the years ended December 31, 2017, 2016, and 2015.
Note 6: Service Agreements and Related Party Transactions
WMMRC has engaged a Hawaii-based service provider, Marsh Management Services, Inc., to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.
WMIH entered into an Investment Management Agreement and an Administrative Services Agreement with WMMRC on March 19, 2012. Each of these agreements was approved by WMMRC’s primary regulator, the Insurance Division of the State of Hawaii. Total amounts incurred under these agreements totaled $1.4 million for each of the years ended December 31, 2017, 2016 and 2015. The expense and related income eliminate on consolidation. These agreements are described below.
Under the terms of such Investment Management Agreement, WMIH receives from WMMRC a fee equal to the product of (x) the ending dollar amount of assets under management during the calendar month in question and (y) .002 divided by 12. WMIH is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulations to which WMMRC is subject.
Under the terms of such Administrative Services Agreement, WMIH receives from WMMRC a fee of $110 thousand per month. WMIH is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management, and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business.
On March 22, 2012, WMIH and the WMI Liquidating Trust (the “Trust”) entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, the Trust makes available certain services and employees, including the services of our Chief Legal Officer and Secretary and our Controller. The TSA provides the Company with basic infrastructure and support services to facilitate the Company’s operations. The TSA, as amended, extends the term of the agreement through June 30, 2018, with automatic renewals thereafter for successive additional three-month terms, subject to non-renewal at the end of any additional term upon written notice by either party at least 30 days prior to the expiration of the additional term.
On or about October 14, 2014, the Trust filed a lawsuit in King County Superior Court in the State of Washington against 16 former directors and officers of WMI (the “D&O Litigation”). The Trust’s complaint alleged, among other things, that the defendants named therein breached their fiduciary duties to WMI and committed corporate waste and fraud by squandering WMI’s financial resources. In connection with the settlement of the D&O Litigation, during the year ended December 31, 2015, among the Trust, certain former directors and officers of WMI and certain insurance carriers that underwrote director and officer liability insurance policies for the benefit of WMI and its affiliates (including such former directors and officers), such insurance carriers agreed to pay the Trust $37.0
F-18
million, of which $3.0 million was placed into a segregated reserve account (the “RSA Reserve”) to be administered by a third party pursuant to the terms of a Reserve Settlement Agreement (the “RSA”).
Based on elections of certain holders of claims in connection with our bankruptcy prior to the Effective Date, WMIH retained an economic interest in certain litigation proceeds, if any, recovered by the Trust, including those related to the D&O Litigation. During the year ended December 31, 2017, 2016 and 2015, WMIH had other income of $123 thousand, $123 thousand and $7.8 million, respectively, as a result of its receipt of its share of net litigation proceeds related to the D&O Litigation. As of December 31, 2017, $1.5 million remained in the RSA Reserve. Under the RSA, funds are released from the RSA Reserve to the Trust if and when certain designated conditions are satisfied. If and when these funds are released to the Trust, and to the extent WMIH is entitled to receive such funds, it is anticipated the Trust will make payments to WMIH in an amount equal to WMIH’s share of litigation proceeds. Due to the contingent nature of future distributions from the RSA Reserve, there can be no assurance that WMIH will receive any distributions from the remaining balance in the RSA Reserve in the future.
In preparation for the offering of the Original Series B Preferred Stock, WMIH engaged KKR Capital Markets LLC (“KCM”), an affiliate of KKR & Co. L.P., to act as a joint book-running manager for the Series B Preferred Stock offering. KCM also acted as an initial purchaser of the Original Series B Preferred Stock. During the year ended December 31, 2015, as a result of satisfying a post-closing covenant to reincorporate in the State of Delaware within 180 days following the closing of the Original Series B Preferred Stock offering, we paid $8.25 million to KCM. Upon consummation of a “Qualified Acquisition” (as such term is defined in Article VI of WMIH’s 2nd Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”)), we will pay KCM an additional fee (the “KCM Deferred Fee”) of $8.25 million. We have recorded the KCM Deferred Fee in “other liabilities” on our consolidated balance sheet and this amount is included in “accrued fees relating to Series B Preferred Stock issuance” on our consolidated statements of cash flows.
Note 7: Notes Payable
On the Effective Date, WMIH issued $110.0 million aggregate principal amount of its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an indenture, dated as of March 19, 2012, (the “First Lien Indenture”), between WMIH and Wilmington Trust, National Association, as Trustee. Additionally, WMIH issued $20.0 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and, together with the First Lien Notes, the “Runoff Notes”) under an indenture, dated as of March 19, 2012, (the “Second Lien Indenture” and, together with the First Lien Indenture, the “Indentures”), between WMIH and The Law Debenture Trust Company of New York, as Trustee. On January 5, 2017, The Law Debenture Trust Company of New York notified WMIH that it had completed the transfer of substantially all of its corporate trust business to Delaware Trust Company, and that Delaware Trust Company had become the successor trustee under the Second Lien Indenture. The Runoff Notes were scheduled to mature on March 19, 2030 and pay interest quarterly.
The Runoff Notes were secured by, and had a specified priority in right of payment in, a securities or deposit account into which WMIH was required to deposit distributions it received of Runoff Proceeds (as defined in the Indentures) (the “Collateral Account”). WMIH agreed to cause WMMRC, while the Runoff Notes were outstanding, to deposit all distributions, dividends or other receipts in respect of Runoff Proceeds Distributions (as defined in the Indentures) on the date paid to WMIH in the Collateral Account established in accordance with the terms of the Indentures. On any interest payment date, payments were made from the Collateral Account and from any other Runoff Proceeds Distributions in the priority set forth in the Indentures. In connection with certain interest payments due and payable in respect of the First and Second Lien Notes, WMIH elected, consistent with the terms of the Indentures, to issue payment-in-kind notes in lieu of making such interest payments in cash when no cash was available.
As of April 15, 2015, the First Lien Notes were fully redeemed by the Company, and on April 27, 2015, the First Lien Indenture was satisfied and discharged. As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company, and on October 2, 2017, the Second Lien Indenture was satisfied and discharged. As a result of the satisfaction and discharge of the Second Lien Indenture the Collateral Account was subsequently closed and the remaining funds transferred to cash and cash equivalents to be used for general corporate purposes. As of December 31, 2016, the Collateral Account contained $0.4 million of cash received from WMMRC which was ultimately used for future administrative expenses, interest and principal payments on the Runoff Notes.
Second Lien Note principal outstanding totaled zero and approximately $18.8 million as of December 31, 2017 and 2016, respectively. Approximately $18.8 million and $2.9 million of Runoff Notes principal was paid during the years ended December 31, 2017 and 2016, respectively. Interest on First Lien Notes and Second Lien Notes paid in cash totaled approximately $2.0 million, $2.6 million and $2.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Note 8: Financing Arrangements
As of December 31, 2017, the Company had no debt financing arrangements in place. As of December 31, 2016, the Company had no debt financing arrangements in place other than the Second Lien Notes which are described in Note 7: Notes Payable.
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Note 9: Capital Stock and Derivative Instruments
On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. As of the Effective Date, and pursuant to WMIHC’s Amended and Restated Articles of Incorporation (the “Articles”), WMIHC was authorized to issue up to 500,000,000 shares of common stock and up to 5,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share. 200,000,000 shares of common stock were issued by WMIH in reliance on Section 1145 of the United States Bankruptcy Code on the Effective Date.
On the Reincorporation Date, all shares of common and preferred equity securities previously issued by WMIHC automatically were converted into one share of the substantially similar common stock, Series A Preferred Stock or Series B Preferred Stock, as applicable, of WMIH. At the same time, each outstanding option, right or warrant to acquire shares of WMIHC’s common stock was converted into an option, right or warrant to acquire an equal number of shares of WMIH’s common stock under the same terms and conditions as the original options, rights or warrants. As of the Reincorporation Date, and pursuant to WMIH’s Certificate of Incorporation, WMIH is authorized to issue up to 3,500,000,000 shares of common stock and up to 10,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share.
All of the terms of the agreements described below and attributed to WMIH are also attributable to WMIHC relative to the various agreements and instruments prior to the Reincorporation Date. The references to WMIH are based on the date this Form 10-K has been filed. The references would have been to WMIHC prior to the Reincorporation Date.
On January 30, 2014, WMIH entered into (i) an investment agreement, dated as of January 30, 2014 (the “Investment Agreement”), with KKR Fund Holdings L.P. (“KKR Fund”) and, for limited purposes, KKR Management Holdings L.P., and (ii) an investor rights agreement, dated as of January 30, 2014 (the “Investor Rights Agreement”), with KKR Fund. On January 30, 2014, pursuant to the Investment Agreement, WMIHC issued 1,000,000 shares of Series A Preferred Stock having the terms, rights, obligations and preferences contained in the Articles of Amendment of WMIH dated January 30, 2014 for a purchase price equal to $11.1 million and has issued to KKR Fund warrants to purchase, in the aggregate, 61.4 million shares of WMIH’s common stock, 30.7 million of which have an exercise price of $1.32 per share and 30.7 million of which have an exercise price of $1.43 per share (together, the “Warrants”).
The Series A Preferred Stock has rights substantially similar to those associated with WMIH’s common stock, with the exception of a liquidation preference, conversion rights and customary anti-dilution protections. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $10.00 per one million shares of Series A Preferred Stock plus declared but unpaid dividends on such shares and (ii) the amount that the holder would be entitled to in a relevant transaction had the Series A Preferred Stock been converted to common stock of WMIH. The Series A Preferred Stock is convertible at a conversion price of $1.10 per share into shares of common stock of WMIH either at the option of the holder or automatically upon transfer by KKR Fund to a non-affiliated party. As a result of the calculation of a beneficial conversion feature as required by ASC topic 470 - Debt, a preferred deemed dividend of $9.5 million was recorded in conjunction with the issuance of the Series A Preferred Stock. This preferred deemed dividend resulted in an increase to our accumulated deficit, and an increase in additional paid in capital. Further, KKR Fund, as the holder of the Series A Preferred Stock and the Warrants, has received other rights pursuant to the Investor Rights Agreement as described below.
The Warrants have a five-year term from the date of issuance and are subject to customary structural adjustment provisions for stock splits, combinations, recapitalizations and other similar transactions. KKR Fund’s rights as a holder of the Series A Preferred Stock and the Warrants, and the rights of any subsequent holder that is an affiliate of KKR Fund (together with KKR Fund, the “Series A Holders”) are governed by the Investor Rights Agreement.
In accordance with the Investor Rights Agreement, except for the issuance of WMIH’s common stock in respect of the Warrants and the Series A Preferred Stock, KKR Fund and its affiliates shall not purchase or acquire any equity securities of WMIH or its subsidiaries without WMIH’s prior written consent, subject to certain exceptions.
In accordance with the Investor Rights Agreement, except for the issuance of WMIH’s common stock in respect of the Warrants and the Series A Preferred Stock, KKR Fund and its affiliates shall not purchase or acquire any equity securities of WMIH or its subsidiaries without WMIH’s prior written consent, subject to certain exceptions.
F-20
The Investor Rights Agreement also provides the Series A Holders with registration rights, including three long form demand registration rights, unlimited short form demand registration rights and customary piggyback registration rights with respect to WMIH’s common stock (and WMIH’s common stock underlying the Series A Preferred Stock and the Warrants), subject to certain minimum thresholds, customary blackout periods and lockups of 180 days. On July 1, 2015, WMIH filed a shelf registration statement (the “Initial Registration Statement”) covering resales of Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding (as amended, the “Registration Statement”). The Registration Statement was declared effective under the Securities Act of 1933, as amended (the “Securities Act”) on November 25, 2015. On January 26, 2018, WMIH amended the Registration Statement, by means of a post-effective amendment, to deregister the Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock, and such post-effective amendment to the Registration Statement was declared effective under the Securities Act on January 29, 2018.
For as long as the Series A Holders beneficially own any shares of common stock of WMIH or Series A Preferred Stock or any of the Warrants, WMIH has agreed to provide customary Rule 144A information rights, to provide the Series A Holders with regular audited and unaudited financial statements and to allow the Series A Holders or their representatives to inspect WMIH’s books and records.
For the period commencing on December 8, 2017, (the “Amendment Date”), and ending on the date that is eighteen (18) months following January 5, 2018, (the “Amendment Effective Time,” for so long as (1) KKR Fund has not Transferred any, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) all, of the Series A Preferred Stock it owns as of the Amendment Date, (2) KKR Fund has not Transferred any, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) all, Warrants it owns as of the Amendment Date or any of the Common Stock issuable upon the exercise thereof, and (3) KKR Wand has not transferred, in the aggregate, more than, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) at least, 50% of the Series B Preferred Stock it owns as of the date hereof, the Company shall not enter into a definitive agreement with respect to any target acquisition without the prior written consent of KKR Fund; provided, however, that if KKR Fund does not give written notice to the Company of its approval of, or objection to, a proposed target acquisition within five (5) business days of having received notice of the material definitive terms of such target acquisition, KKR Fund shall be deemed to have approved such target acquisition and the Company may pursue such target acquisition, including by entering into a definitive material agreement in respect thereof, without the prior written consent of KKR Fund hereunder. For the avoidance of doubt, after the date that is eighteen (18) months following the Amendment Effective Time, KKR Fund shall have no consent rights hereunder with respect to any target acquisition.
The foregoing description of (i) the Investor Rights Agreement is qualified in its entirety by reference to the Investor Rights Agreement, which was filed with the Securities and Exchange Commission (the “SEC”) as Exhibit 4.2Report on Form 8-K on January 31, 2014, and incorporated by reference, (ii) the Warrants are qualified in their entirety by reference to the Form of Tranche A Warrant and Form of Tranche B Warrant, which were filed with the SEC as Exhibits 4.3 and 4.4, respectively, on Form 8-K on January 31, 2014, and incorporated by reference, (iii) the Series A Preferred Stock is qualified in its entirety by reference to the Articles of Amendment of WMIH dated January 30, 2014, which were filed with the SEC as Exhibit 4.5 on Form 8-K on January 31, 2014, and incorporated by reference, the Form of Series A Convertible Preferred Stock Certificate, which was filed with the SEC as Exhibit 4.6 on Form 8-K on January 31, 2014, and incorporated by reference, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference, (iv) the Investment Agreement is qualified in its entirety by reference to the Investment Agreement, which was filed with the SEC as Exhibit 10.1 on Form 8-K on January 31, 2014, and incorporated by reference, and (v) the Investment Agreement is qualified in its entirety by reference to the Letter Agreement
dated December 8, 2017, by and among the Company, KKR Fund Holdings L.P. and KKR Wand Investors L.P., which was filed with the SEC as Exhibit 10.3 on Form 8-K on December 11, 2017, and incorporated by reference.
On January 5, 2015, WMIH, in connection with an offering of 600,000 shares of its Series B Preferred Stock, filed with the Secretary of State of Washington Articles of Amendment of Articles of Incorporation (the “Articles of Amendment”) containing the Designation of Rights and Preferences of the 3% Series B Convertible Preferred Stock (the “Certificate of Designation”) creating the Series B Preferred Stock and designating the rights and preferences of the Series B Preferred Stock.
The foregoing descriptions of the Articles of Amendment and the Certificate of Designation are qualified in their entirety by the provisions of the Articles of Amendment and the Certificate of Designation, filed as Exhibits 3.1 and 4.1 to a Form 8-K on January 5, 2015, respectively, and incorporated by reference herein, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference.
F-21
On January 5, 2015, in connection with the offering and pursuant to that certain Purchase Agreement, dated December 19, 2014 (the “Purchase Agreement”), by and among WMIH, Citigroup Global Markets Inc. (“Citi”) and KCM (KCM and Citi together, the “Initial Purchasers”), WMIH entered into a Registration Rights Agreement with the Initial Purchasers (the “Registration Rights Agreement”), pursuant to which WMIH has agreed that, subject to certain conditions, WMIH will use its reasonable efforts to (i) file a shelf registration statement covering resales of WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock no later than six months after January 5, 2015 (the “Issue Date”); (ii) file a shelf registration statement covering resales of the Original Series B Preferred Stock no later than one year after the Issue Date; and (iii) cause each of these shelf registration statements to be declared effective under the Securities Act. On July 1, 2015, WMIH filed the Initial Registration Statement covering resales of Series B Preferred Stock and shares of WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding. The Registration Statement was declared effective under the Securities Act on November 25, 2015. On January 26, 2018, WMIH amended the Registration Statement, by means of a post-effective amendment, to deregister the Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock, and such post-effective amendment to the Registration Statement was declared effective under the Securities Act on January 29, 2018.
The foregoing description of the Registration Rights Agreement is qualified in its entirety by the provisions of the Registration Rights Agreement, filed on Form 8-K on January 5, 2015, as Exhibit 10.1 and incorporated by reference herein.
On January 5, 2015, in connection with the offering and pursuant to the Purchase Agreement, WMIH entered into an Escrow Agreement (the “Escrow Agreement”) with Citibank, N.A., as Escrow Agent (the “Escrow Agent”), pursuant to which WMIH caused to be deposited with the Escrow Agent the amount of $598.5 million, representing the proceeds of the offering of Original Series B Preferred Stock less offering fees payable on the Issue Date but before payment of other offering fees and expenses (including fees contingent upon future events). These net proceeds have been, and will be released from escrow from time to time to WMIH as instructed by WMIH in amounts necessary to (i) pay certain fees related to the offering that may become payable to the Initial Purchasers, (ii) finance WMIH’s efforts to explore and/or fund, in whole or in part, acquisitions, whether completed or not, including reasonable attorney fees and expenses related thereto, accounting expenses, due diligence and financial advisor fees and expenses, (iii) pay certain amounts that may become payable to the holders of the Series B Preferred Stock upon the occurrence of certain put events, (iv) pay certain amounts that would become payable to the holders of the Series B Preferred Stock upon a mandatory redemption of the Series B Preferred Stock, and (v) pay certain expenses related to the offering. The entire net proceeds will be released from escrow as instructed by WMIH upon consummation of a Qualified Acquisition (as defined below). If we have not consummated a Qualified Acquisition on or prior to October 5, 2019, we will be required to redeem all of the outstanding Series B Preferred Stock on October 5, 2019, the Series B Redemption Date; provided, if prior to the Series B Redemption Date we have publicly announced that WMIH has entered into a definitive agreement for an Acquisition, the Series B Redemption Date will be extended to the earlier of April 5, 2020 and the day immediately following the date such definitive agreement is terminated or the date such Acquisition is closed. “Acquisition” means any acquisition by the Company (or any of its direct or indirect wholly-owned subsidiaries), in a single transaction or a series of transactions, whether by purchase, merger or otherwise, of all or substantially all of the assets of, or of 80% or more of the equity interests in, or a business line, unit or division of, any person. A “Qualified Acquisition” means an Acquisition that, taken together with prior Acquisitions (if any), collectively utilizes aggregate net proceeds of the Series B Preferred Stock financing of $450 million. The aggregate redemption costs, assuming all 600,000 shares remain outstanding, of all of the Series B Preferred Stock is $600.0 million, plus shares of WMIH’s common stock equal to the pro rata portion of the Regular Dividend (as defined in the Certificate of Incorporation) for the partial Regular Dividend Period (as defined in the Certificate of Incorporation) ended immediately following October 5, 2019, plus shares of WMIH’s common stock in respect of any other accrued and unpaid dividends, if any, whether or not declared. As of December 31, 2017 and 2016, the balance remaining in the escrow account totaled approximately $578.9 million and $572.9 million, respectively. The foregoing description of the Escrow Agreement is qualified in its entirety by the provisions of the Escrow Agreement, filed on Form 8-K on January 5, 2015, as Exhibit 10.2 and incorporated by reference herein.
If the Series B Preferred Stock is redeemed or determined likely to be redeemed, the Company would be required to record a charge to earnings of approximately $96.3 million to accrete the value of the Series B Preferred Stock to the $600.0 million redemption value. The Company continues to pursue its business strategy of consummating an acquisition, and to explore potential financing and refinancing alternatives, and as of December 31, 2017, the Company has determined that recording for accretion to the Series B Preferred Stock’s redemption value is not required.
The Series B Preferred Stock are hybrid financial instruments that blend characteristics of both equity and debt securities. The terms of the Series B Preferred Stock provided for either redemption of the principal and interest for cash at maturity or in the event of certain predetermined circumstances or mandatory conversion into WMIH’s common stock. The Original Series B Preferred Stock also embodied contingent equity-linked share price protections, an embedded conversion feature, in the form of a variable conversion price based on a 20 trading day average of volume weighted-average price. The Series B Preferred Stock has no variable conversion feature and the fair market value at December 31, 2017 of the embedded conversion feature was reclassed to equity.
F-22
The Series B Preferred Stock was amended on December 8, 2017 and this amendment became effective on January 5, 2018 (the “Amendment Date”). The amendment was determined to be a modification for accounting purposes based on qualitative and quantitative factors including cash flow analysis. Prior to the Amendment Date, upon any conversion of Original Series B Preferred Stock in accordance with its terms, the Original Series B Preferred Stock would have converted based on the outstanding principal and accrued interest, subject to a floor of $1.75 per share of WMIH’s common stock and a ceiling of $2.25 per share. Subsequent to the Amendment Date, the Series B Preferred Stock shall convert based on $1.35 per share of WMIH’s common stock. As a result, of the variability of the mandatory conversion provisions, prior to the Amendment Date, the Company determined that the Original Series B Preferred Stock contained certain embedded derivative features. Management’s evaluation resulted in the conclusion that, prior to the Amendment Date, the compound derivative financial instrument required bifurcation and separately accounted for the embedded conversion feature as a derivative. A derivative liability results primarily when the Company average stock price (as defined in the Certificate of Incorporation) exceeds the conversion price, including the ceiling conversion price of $2.25, as defined by the Certificate of Incorporation. A derivative asset results when the Company’s average stock price is less than the conversion price, including the floor price of $1.75. The aggregate fair value of the embedded conversion feature was a liability of $66.2 million on the date of issuance of the Original Series B Preferred Stock. At December 31, 2017, the fair value of the embedded conversion feature was reclassed to equity due to its modification and at December 31, 2016 was an asset of $80.7 million, respectively. A change in the fair value of the embedded conversion feature constituted other income or expense, as the case may be, in the applicable reporting period. Upon conversion or redemption of the Original Series B Preferred Stock, any asset or liability related to the embedded conversion feature would have been eliminated.Upon modification of the Original Series B Preferred Stock, specifically as a result of the elimination of the variable conversion feature, the embedded conversion feature is no longer required to be separately accounted for. At December 31, 2017, the fair market value of the embedded conversion feature was determined to be $108.9 million, and this amount was reclassed to equity. During the years ended December 31, 2017 and 2016, the fair market value of the asset decreased by $80.7 million and increased by $201.5 million, respectively, resulting in other expense in 2017 of $28.2 million (the total change in fair market value less the reclass to equity) and other income equal to the 2016 increase, respectively. Between January 5, 2015 and December 31, 2015, the fair market value of the liability increased by $54.6 million resulting in a corresponding other expense item. The Original Series B Preferred Stock was not issued until January 5, 2015, therefore there was no embedded conversion feature outstanding or any change in embedded conversion feature for any quarterly or annual period prior to 2015.
In connection with the amendment to the Original Series B Preferred Stock, Citibank, the Company’s escrow agent and an underwriter for the Original Series B Preferred Stock offering, amended its agreement with the Company whereby it waived a contingent fee of $4.0 million and extended the escrow agreement in exchange for a fee of $2.5 million with no contingency. The Company paid the $2.5 million in January 2018. At December 31, 2017, the difference of $1.5 million has been added to the Series B Preferred Stock mezzanine liability and other liabilities has been reduced by $1.5 million in accordance with ASC 470-50-40-17 - Fees Between Debtor and Creditor.
WMIH issued restricted stock grants to members of the Board totaling $0.4 million, $0.5 million and $0.7 million of aggregate intrinsic value during the years ended December 31, 2017, 2016 and 2015, respectively. The restricted shares noted above vest over a three year period.
On May 15, 2015, WMIH issued restricted stock grants to our Chief Executive Officer, William C. Gallagher and our President and Chief Operating Officer, Thomas L. Fairfield, in conjunction with employment agreements totaling $9.8 million of aggregate fair value (the “Exec Grants”) based on the $2.76 trading price of WMIH shares at the close of business on the date issued. WMIH may be required to issue additional shares if the conversion price applicable to the Series B Preferred Stock is less than $2.25 per share. The Exec Grants will vest in full and will be recognized as compensation expense upon the consummation of a Qualified Acquisition, subject to the executives’ continued employment with the Company until such time. The foregoing description of the restricted stock agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Gallagher Restricted Stock Agreement and the Fairfield Restricted Stock Agreement (collectively, the “Executive Agreements”), which were filed as Exhibit 10.3 and Exhibit 10.5, respectively, of Form 8-K12G3 filed on May 13, 2015 and incorporated herein by reference. The fair market value of the Exec Grants as of December 31, 2017, approximates $3.9 million as a result of the terms of the Executive Agreements which would result in additional share issuances if the value is below $2.25 per share limited to a maximum of shares based on a minimum conversion price of $1.75 per share. The stock price was $0.85 per share at the close of the market on December 31, 2017 and if the Exec Grants had vested then the minimum conversion price of $1.75 per share would have been utilized, therefore, a total of 1,015,872 additional shares would have been required to be issued, 507,936 additional shares each to both Mr. Gallagher and Mr. Fairfield.
The total unamortized value related to the unvested restricted share grant totals $3.5 million, $7.7 million and $10.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
F-23
The unamortized value of $3.5 million at December 31, 2017, if all are ultimately vested will be amortized according to the following schedule.
Amortization Schedule (in thousands) | | December 31, 2017 unamortized dollar value | |
1st quarter 2018 | | $ | 98 | |
2nd quarter 2018 | | | 71 | |
3rd quarter 2018 | | | 71 | |
4th quarter 2018 | | | 71 | |
1st quarter 2019 | | | 66 | |
2nd quarter 2019 | | | 36 | |
3rd quarter 2019 | | | 36 | |
4th quarter 2019 | | | 36 | |
1st quarter 2020 | | | 31 | |
Unamortized fair-value - subject to vesting schedule | | | 516 | |
Unamortized fair-value - event dependent | | | 3,022 | |
Total unamortized dollar value | | $ | 3,538 | |
| | | | |
Net equity-based compensation totaled $0.5 million, $0.7 million and $1.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. The restricted stock awards were issued at the fair market value determined to be the trading price at the close of business the respective date the awards were granted.
A summary of WMIH’s restricted share award activity for the years ended December 2017, December 31, 2016 and December 31, 2015 is presented below.
| | Number of restricted stock awards outstanding | | | Weighted-average grant date fair value | | | Aggregate fair value (in thousands) | |
Outstanding—January 1, 2015 | | | 2,343,245 | | | $ | 1.1023 | | | $ | 2,582 | |
Restricted stock awards granted during 2015 | | | 3,824,790 | | | | 2.7486 | | | | 10,513 | |
Outstanding—December 31, 2015 | | | 6,168,035 | | | | 2.1230 | | | | 13,095 | |
Restricted stock awards granted during 2016 | | | 212,765 | | | | 2.3500 | | | | 500 | |
Outstanding—December 31, 2016 | | | 6,380,800 | | | | 2.1306 | | | | 13,595 | |
Restricted stock awards granted during 2017 | | | 333,332 | | | | 1.2000 | | | | 400 | |
Outstanding—December 31, 2017 | | | 6,714,132 | | | $ | 2.0844 | | | $ | 13,995 | |
WMIH has issued the total number of shares subject to the restricted stock grants, however, until vested they are subject to repurchase. Shares subject to repurchase totaled 4,053,640 on December 31, 2017 and 4,039,591 on December 31, 2016. The Exec Grants vest upon future events, and are not time specific, and for this reason we have used 4th quarter 2019 as the vesting date in the following table as this date corresponds with the Series B Redemption Date. The shares subject to repurchase at December 31, 2017 will vest according to the following schedule:
Vesting schedule of shares subject to repurchase
| | December 31, 2017 unvested shares
| |
1st quarter 2018
| | | 219,128
| |
2nd quarter 2018
| | | —
| |
3rd quarter 2018
| | | —
| |
4th quarter 2018
| | | —
| |
1st quarter 2019
| | | 167,848
| |
2nd quarter 2019
| | | —
| |
3rd quarter 2019
| | | —
| |
4th quarter 2019
| | | 3,555,556
| |
1st quarter 2020
| | | 111,108
| |
Total unvested shares
| | | 4,053,640
| |
| | | | |
F-24
Pursuant to a restricted stock agreement, WMIH has the right, but not the obligation, to repurchase any unvested (but issued) shares of WMIH’s common stock at $0.0001 per share upon the termination of service in the case of a director, or in the case of the Exec Grants, on October 5, 2019 if the Series B Preferred Stock are redeemed or as a result of certain circumstances as defined by the terms of the Exec Grants.
A summary of WMIH’s restricted shares issued and subject to repurchase as of the years ended December 31, 2017, December 31, 2016 and December 31, 2015 is presented below.
Vesting schedule of shares subject to repurchase
| | Unvested shares
| |
Shares subject to repurchase—January 1, 2015
| | | 1,343,764
| |
Shares issued subject to vesting during 2015
| | | 3,824,790
| |
Shares vested during 2015
| | | (971,158
| )
|
Shares subject to repurchase—January 1, 2016
| | | 4,197,396
| |
Shares issued subject to vesting during 2016
| | | 212,765
| |
Shares vested during 2016
| | | (370,570
| )
|
Shares subject to repurchase—December 31, 2016
| | | 4,039,591
| |
Shares issued subject to vesting during 2017
| | | 333,332
| |
Shares vested during 2017
| | | (319,283
| )
|
Shares subject to repurchase—December 31, 2017
| | | 4,053,640
| |
On June 1, 2017 and June 1, 2016, WMIH issued 333,332 and 212,765 restricted stock grants, respectively, to members of the Board totaling $0.4 million and $0.5 million, respectively, of aggregate fair value. The share price was determined based on the closing sales price of $1.20 and $2.35 on the respective dates of the awards.
As of December 31, 2017, December 31, 2016 and December 31, 2015, 206,714,132, 206,380,800 and 206,168,035 shares of WMIH’s common stock were issued and outstanding, respectively. As of December 31, 2017, December 31, 2016 and December 31, 2015, 1,000,000 shares of the Series A Preferred Stock were issued and outstanding. As of December 31, 2017, December 31, 2016 and December 31, 2015, 600,000 shares of the Original Series B Preferred Stock were issued and outstanding. As of December 31, 2017, December 31, 2016 and December 31, 2015, 61,400,000 warrants to purchase WMIH’s common stock were issued and outstanding. See Note 12: Net Income (Loss) Per Common Share for further information on shares used for EPS calculations.
Note 10: Pending Litigation
As of December 31, 2017, the Company was not a party to, or aware of, any pending legal proceedings or investigations requiring disclosure at this time.
Note 11: Restriction on Distribution of Net Assets from Subsidiary
WMMRC had net assets totaling $13.1 million and $33.8 million, as of December 31, 2017 and 2016, respectively. These net assets are not immediately available for distribution to WMIH due to restrictions imposed by trust agreements, and the requirement that the Insurance Division of the State of Hawaii must approve dividends from WMMRC.
Note 12: Net Income (Loss) Per Common Share
In calculating earnings per share, the Company follows the two-class method, which distinguishes between the classes of securities based on the proportionate participation rights of each security type in the Company's undistributed income. The Series A Preferred Stock and the Series B Preferred Stock are treated as one class for purposes of applying the two-class method, because they have substantially equal rights and share equally on an as converted basis with respect to income available to WMIH common stockholders.
Basic net income per WMIH share attributable to common stockholders is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding for the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these shares are subject to repurchase. Basic net income attributable to common stockholders is computed by deducting preferred dividends and the basic calculation of undistributed earnings attributable to participating securities from net income.
F-25
Diluted net income per WMIH share would be computed by dividing net income attributable to WMIH’s common stockholders for the period by the weighted-average number of common shares outstanding after subtracting the weighted-average of any incremental unvested restricted shares outstanding and adding any potentially dilutive common equivalent shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are composed of the incremental common shares issuable upon the exercise of warrants for WMIH’s common stock and the potential conversion of preferred shares to common shares and the dilutive effect of unvested restricted stock. Diluted net income attributable to common stockholders is computed by deducting preferred dividends and the diluted calculation of undistributed earnings attributable to participating securities from net income.
The dilutive effect of outstanding warrants and restricted stock subject to repurchase is reflected in diluted earnings per share by application of the treasury stock method. There would be no dilutive effects from any equity instruments for periods presented reflecting a net loss, therefore diluted net loss per share would be the same as basic net loss for periods that reflect a net loss attributable to common stockholders. Certain unvested restricted shares and convertible preferred stock are excluded from the calculation of diluted earnings per share until the non-market based contingency occurs.
The following table presents the calculation of basic net income (loss) per share attributable to common stockholders for the periods presented:
(in thousands, except share and per share data)
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Numerator for basic net income (loss) per share: | | | | | | | | | | | |
Net income (loss) | $ | 25,882 | | | $ | 201,700 | | | $ | (61,833 | ) |
Less: Series B preferred stock dividends | | (18,050 | ) | | | (18,000 | ) | | | (17,748 | ) |
Less: undistributed earnings attributed to participating securities (basic calculation) | | (5,417 | ) | | | (116,774 | ) | | | — | |
Basic net income (loss) attributable to common stockholders | $ | 2,415 | | | $ | 66,926 | | | $ | (79,581 | ) |
Denominator for basic net income (loss) per share: | | | | | | | | | | | |
Weighted-average shares outstanding | | 206,576,233 | | | | 206,291,857 | | | | 204,776,405 | |
Weighted-average unvested restricted shares outstanding | | (3,980,945 | ) | | | (4,020,970 | ) | | | (3,029,792 | ) |
Denominator for basic net income (loss) per share | | 202,595,288 | | | | 202,270,887 | | | | 201,746,613 | |
Basic net income (loss) per share attributable to common stockholders | $ | 0.01 | | | $ | 0.33 | | | $ | (0.39 | ) |
The following table presents the calculation of diluted net income (loss) per share attributable to common stockholders for the periods presented:
(in thousands, except share and per share data)
| Year ended December 31, 2017 | | | Year ended December 31, 2016 | | | Year ended December 31, 2015 | |
Numerator for diluted net income (loss) per share: | | | | | | | | | | | |
Net income (loss) | $ | 25,882 | | | $ | 201,700 | | | $ | (61,833 | ) |
Less: Series B preferred stock dividends | | (18,050 | ) | | | (18,000 | ) | | | (17,748 | ) |
Less: undistributed earnings attributed to participating securities (diluted calculation) | | (5,417 | ) | | | (112,115 | ) | | | — | |
Diluted net income (loss) attributable to common stockholders | $ | 2,415 | | | $ | 71,585 | | | $ | (79,581 | ) |
Denominator for diluted net income (loss) per share: | | | | | | | | | | | |
Weighted-average shares outstanding | | 206,576,233 | | | | 206,291,857 | | | | 204,776,405 | |
Weighted-average unvested restricted shares outstanding | | (3,980,945 | ) | | | (4,020,970 | ) | | | (3,029,792 | ) |
Effect of dilutive potential shares | | 10,065,629 | | | | 33,135,473 | | | | — | |
Denominator for diluted net income (loss) per share | | 212,660,917 | | | | 235,406,360 | | | | 201,746,613 | |
Diluted net income (loss) per share attributable to common stockholders | $ | 0.01 | | | $ | 0.30 | | | $ | (0.39 | ) |
*There were no dilutive effects from any equity instruments for periods presented which did not have net income, therefore diluted net (loss) per share was the same as basic net (loss) for periods presented which reflect a net loss.
F-26
The following table summarizes shares subject to exercise or vesting conditions as more fully described in Note 9: Capital Stock and Derivative Instruments. These shares could potentially be dilutive in future periods if we realize net income attributable to common and participating stockholders and the contingent or unvested stock is converted to WMIH common stock. The cash payment of $84.4 million, which would be received upon exercise of the warrants, has not been considered as an offset to the dilutive shares under warrants outstanding below.
| Potential dilution to common | |
| Minimum shares | | | Maximum shares | |
Restricted shares subject to vesting | | 4,053,640 | | | | 4,053,640 | |
Series A Preferred Stock | | 10,065,629 | | | | 10,065,629 | |
Warrants outstanding | | 61,400,000 | | | | 61,400,000 | |
Maximum number of restricted shares to be issued if Series B conversion is below $2.25 | | — | | | | 1,015,874 | |
Series B Preferred Stock ($1.35 conversion) | | 444,444,444 | | | | 444,444,444 | |
Potential common shares issued to satisfy Series B Preferred Stock dividends (full term) | | — | | | | 64,285,714 | |
Potential common shares issued to satisfy Series B Preferred Stock acquisition conversion payment | | — | | | | 11,428,572 | |
Potential dilutive shares if converted to common | | 519,963,713 | | | | 596,693,873 | |
Note 13: Fair Value Measurement
We use a fair-value approach to value certain liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
•
| Level 1 — Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets;
|
•
| Level 2 — Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs; and
|
•
| Level 3 — Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.
|
Determining which category an asset or liability falls within the fair value accounting guidance hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter. Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
The financial instrument that is measured at fair value on a recurring basis is summarized as follows as of December 31, 2017:
| | (in thousands)
| |
Assets
| | Level 1
| | | Level 2
| | | Level 3
| | | December 31, 2017
| |
Derivative embedded conversion feature
| | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| |
The financial instrument that is measured at fair value on a recurring basis is summarized as follows as of December 31, 2016:
| | (in thousands) | |
Assets | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2016 | |
Derivative embedded conversion feature | | $ | — | | | $ | — | | | $ | 80,651 | | | $ | 80,651 | |
F-27
The following table shows the change in Level 3 financial instrument measured at fair value on a recurring basis for the period ended December 31, 2017:
| | Derivative asset (liability) embedded conversion feature
(in thousands)
| |
Balance, January 1, 2015
| | $
| —
| |
Issuance during 2015
| | | (66,227
| )
|
Loss on change in fair value
| | | (54,621
| )
|
Balance, December 31, 2015
| | | (120,848
| )
|
Gain on change in fair value
| | | 201,499
| |
Balance, December 31, 2016
| | | 80,651
| |
Gain on change in fair value
| | | 28,242
| |
Reclassification of derivative asset
| | | (108,893
| )
|
Balance, December 31, 2017
| | $
| —
| |
On January 5, 2015, WMIH raised $600.0 million of capital (less transaction costs) through the issuance of 600,000 shares of Original Series B Preferred Stock. The shares carry a liquidation preference of $1,000 per share, equal to their initial purchase price. In addition, they have a mandatory redemption right three years from the issuance date at a price equal to the initial investment amount, and initially accrued dividends at 3% per annum. The Original Series B Preferred Stock was amended on December 8, 2017 and this amendment became effective on January 5, 2018. As a result of this amendment which is detailed in Note 15: Subsequent Events, dividends earned subsequent to the Amendment Date are payable in common stock accrued at the rate of 5% per annum.
The purpose of the capital raise was principally to pursue strategic acquisitions of operating companies that fit the Company’s desired business model. Management intends to pursue such an acquisition or acquisitions with the proceeds of the capital raise, and should it occur during the term of the Series B Preferred Stock, there is a mandatory conversion of these shares into common stock of WMIH. Mandatory conversion (prior to the Amendment Date) occurred at a price that was the lesser of:
| i)
| $2.25 per share of WMIH’s common stock; and
|
| ii)
| the arithmetic average of daily volume weighted-average prices of WMIH’s common stock during the 20 trading day period ending on the trading day immediately preceding the public announcement by WMIH of its entry into a definitive agreement for such acquisition, subject to a floor of $1.75 per share of WMIH’s common stock.
|
Subsequent to the Amendment Date, if there is a mandatory conversion of these shares into common stock of WMIH, the shares convert at a rate of $1.35 per share of WMIH’s common stock.
We used a binomial lattice option pricing model to value the embedded conversion feature that is subject to fair value liability accounting. The key inputs which we utilized in the determination of the fair value as of the reporting date include our stock price as well as assumptions regarding a number of complex and subjective variables. These variables included, but were not limited to, expected stock price volatility over the term of the convertible preferred securities, which we estimated at 60% as of December 31, 2017, and 40% as of December 31, 2016, and risk-free interest rate, which was estimated at 1.6% as of December 31, 2017, and 0.6% as of December 31, 2016. In addition, the model requires the input of an expected probability of occurrence, which we estimated at 95% as of December 31, 2017 and 90% as of December 31, 2016, and the timing of a Qualified Acquisition which initiates the mandatory conversion, which we estimated at 9 months from December 31, 2017 and 6 months from December 31, 2016. The fair value of the embedded conversion feature liability was revalued each reportable balance sheet date utilizing our model computations with the decrease or increase in fair value being reported in the consolidated statements of operations as gain or (loss) on change in fair value of derivative embedded conversion feature, respectively. The primary factors affecting the fair value of the embedded conversion feature liability were the probability of occurrence and timing of a Qualified Acquisition, our stock price and our stock price volatility. In addition, the use of a model requires the input of subjective assumptions, and changes to these assumptions could provide differing results. As a result of the amendment of the terms of the Series B Preferred Stock’s conversion price the derivative embedded conversion feature was adjusted to its fair value at December 31, 2017. The variance from the fair value at December 31, 2016, $28.2 million was recorded as other income and the fair market value as of December 31, 2017, $108.9 million was transferred to equity. The embedded conversion feature, subsequent to the Amendment Date, will not be considered a derivative, primarily due to the elimination of the variance in the conversion price and the determination that the conversion feature is indexed to WMIH’s common stock, and therefore, will not be revalued in future periods.
F-28
Note 14: Quarterly Financial Information (Unaudited)
Following is a summary of the unaudited interim results of operations for the years ended December 31, 2017, 2016 and 2015, respectively:
(in thousands, except per share amounts)
| Total revenue | | | Net income (loss) attributable to common and participating stockholders | | | Earnings per share - basic | | | Earnings per share - diluted | |
Year Ended December 31, 2017 | | | | | | | | | | | | | | | |
First Quarter | $ | 1,610 | | | $ | 13,289 | | | $ | 0.02 | | | $ | 0.02 | |
Second Quarter | | 2,032 | | | | (25,824 | ) | | | (0.13 | ) | | | (0.13 | ) |
Third Quarter | | 2,287 | | | | 33,911 | | | | 0.06 | | | | 0.06 | |
Fourth Quarter | | 1,961 | | | | (13,544 | ) | | | (0.07 | ) | | | (0.07 | ) |
For the Year Ended December 31, 2017 | $ | 7,890 | | | $ | 7,832 | | | $ | 0.01 | | | $ | 0.01 | |
Year Ended December 31, 2016 | | | | | | | | | | | | | | | |
First Quarter | $ | 1,500 | | | $ | 51,050 | | | $ | 0.11 | | | $ | 0.10 | |
Second Quarter | | 1,389 | | | | 17,909 | | | | 0.04 | | | | 0.03 | |
Third Quarter | | 1,284 | | | | (21,145 | ) | | | (0.10 | ) | | | (0.10 | ) |
Fourth Quarter | | 1,223 | | | | 135,886 | | | | 0.24 | | | | 0.23 | |
For the Year Ended December 31, 2016 | $ | 5,396 | | | $ | 183,700 | | | $ | 0.33 | | | $ | 0.30 | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | |
First Quarter | $ | 1,750 | | | $ | 1,253 | | | $ | 0.00 | | | $ | 0.00 | |
Second Quarter | | 1,470 | | | | (77,983 | ) | | | (0.39 | ) | | | (0.39 | ) |
Third Quarter | | 1,488 | | | | (8,419 | ) | | | (0.04 | ) | | | (0.04 | ) |
Fourth Quarter | | 1,292 | | | | 5,568 | | | | 0.01 | | | | 0.01 | |
For the Year Ended December 31, 2015 | $ | 6,000 | | | $ | (79,581 | ) | | $ | (0.39 | ) | | $ | (0.39 | ) |
Note 15: Subsequent Events
On December 8, 2017, WMIH filed a certificate of amendment, the Series B Amendment, to its Amended and Restated Certificate of Incorporation (the “Existing Charter” and, as amended by the Series B Amendment, the “Amended Charter”). The Series B Amendment became effective at 12:00 a.m., New York City time, on January 5, 2018.
The Series B Amendment, which was approved by the holders of 308,731, or approximately 51%, of the 600,000 issued and outstanding shares of Series B Preferred Stock, amended certain terms of WMIH’s issued and outstanding 3.00% Series B Convertible Preferred Stock, par value $0.00001 per share, to, among other things:
| •
| | extend the Series B Redemption Date (as defined in the Existing Charter) from January 5, 2018 to October 5, 2019 (subject to a six-month extension in accordance with the terms of the Series B Amendment);
|
| •
| | amend the Conversion Price (as defined in the Existing Charter) relating to a Mandatory Conversion (as defined in the Existing Charter) of the Series B Preferred Stock to $1.35 per share of WMIH’s common stock, par value $0.00001 per share;
|
| •
| | change the quarterly 3.00% dividend payable in cash to a semi-annual 5.00% dividend payable in Common Stock (the “Regular Dividend”) if, as and when declared by WMIH’s Board of Directors;
|
| •
| | provide for a special distribution of 19.04762 shares of common stock per share of Series B Preferred Stock upon the closing of any Acquisition (as defined in the Amended Charter); and
|
| •
| | provided for a special stub dividend payable which was declared and paid by WMIH’s Board of Directors in cash for dividends accruing on the Series B Preferred Stock payable in arrears for the period December 15, 2017 to January 4, 2018.
|
The foregoing description of the Series B Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Series B Amendment, which is included as Exhibit 3.1 of Form 8-K filed December 11, 2017 and which is incorporated herein by reference.
F-29
On January 18, 2018, WMIH filed a certificate of dissolution of WMIIC with the office of the Delaware secretary of state. The dissolution of WMIIC was effective immediately upon the filing of such certificate.
On January 31, 2018, WMIH and the WMI Liquidating Trust entered into Amendment No. 4 to the Transition Services Agreement which is included as Exhibit 10.1 of Form 8-K filed February 1, 2018 and which is incorporated herein by reference. This amendment updates the services provided by the Trust to WMIH and the rates charged for these services.
On February 2, 2018, the reinsurance agreement between WMMRC and RMIC was terminated in accordance with the provisions of the agreement and the remaining balance in the related trust account, approximately $230 thousand, was transferred to WMMRC on February 5, 2018.
On February 12, 2018, WMIH, Nationstar Mortgage Holdings Inc., a Delaware corporation that is currently listed on the New York Stock Exchange under the ticker “NSM” (“Nationstar”), and Wand Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of WMIH (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Nationstar (the “Nationstar Transaction” or the “Merger”), with Nationstar continuing as the surviving corporation and a wholly-owned subsidiary of WMIH. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) and as a result of the Merger, each share of Nationstar’s common stock issued and outstanding immediately prior to the Effective Time (other than shares owned, directly or indirectly, by Nationstar, WMIH or Merger Sub or by any Nationstar stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law) will be converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, par value $0.00001 per share (“WMIH Common Stock”), subject in each case to pro rata cutbacks to the extent cash or stock is oversubscribed (the “Merger Consideration”). The aggregate amount of cash to be paid as Merger Consideration in the Merger is approximately $1.2 billion. WMIH currently plans to fund the cash component of the Merger Consideration, the repayment of approximately $1.9 billion of outstanding senior unsecured notes of Nationstar and its subsidiaries, and the payment of fees and expenses related to the Merger through a combination of escrowed funds, cash on hand, proceeds from the issuance of debt securities, and borrowings under credit facilities. WMIH has obtained $2.75 billion in debt commitments from certain lenders in connection with its financing plan, which commitment is subject to customary terms and conditions. Upon the closing of the Nationstar Transaction, all of the outstanding Series B Preferred Stock will be mandatorily converted into WMIH Common Stock at a price of $1.35 per share, and holders of Series B Preferred Stock will be entitled to a special, one-time distribution of WMIH Common Stock and accrued and unpaid dividends payable in WMIH Common Stock. For more information on the terms of the transaction, including fees to be paid to related parties, please see the Form 8-K filed with the SEC on February 14, 2018.
On February 13, 2018, the aggregate excess of loss reinsurance agreement between WMMRC and GMIC was terminated in accordance with the provisions of the agreement. The underlying trust and the related quota share agreement remains in place. In connection with this event, on February 16, 2018, WMMRC received approval from the Hawaii Insurance Division to request the transfer of $4.2 million from the GMIC trust account to WMMRC. As of the date of this report this transfer of assets has not occurred.
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