UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
or
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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 number: 001-14667
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 incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| 8950 Cypress Waters Blvd, Coppell, TX | | 75019 |
| (Address of principal executive offices) | | (Zip Code) |
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| (469) 549-2000 | | |
| Registrant’s telephone number, including area code | | |
| | |
Securities registered pursuant to Section 12(b) of the Act:
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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 |
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
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”,filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
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| Large Accelerated Filer | ¨x | Accelerated Filer | x☐ |
| Non-Accelerated Filer | ¨ | Smaller reporting company | ☐ |
| | 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Number of shares of common stock, $0.01 par value, outstanding as of July 24, 2020 was 92,021,981.April 22, 2021 was 86,135,281.
MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| PART I | | |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| PART II | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
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PART I. Financial Information
Item 1. Financial Statements
MR. COOPER GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
| | | June 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | | (unaudited) | | | | (unaudited) | | |
| Assets | Assets | | Assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,041 | | | $ | 329 | | Cash and cash equivalents | $ | 674 | | | $ | 695 | |
| Restricted cash | Restricted cash | 260 | | | 283 | | Restricted cash | 261 | | | 218 | |
| Mortgage servicing rights, $2,757 and $3,496 at fair value, respectively | 2,763 | | | 3,502 | | |
| Advances and other receivables, net of reserves of $216 and $175, respectively | 668 | | | 988 | | |
| Reverse mortgage interests, net of purchase discount of $127 and $114, respectively | 5,709 | | | 6,279 | | |
| Mortgage servicing rights, $3,354 and $2,703 at fair value, respectively | | Mortgage servicing rights, $3,354 and $2,703 at fair value, respectively | 3,359 | | | 2,708 | |
| Advances and other receivables, net of reserves of $206 and $208, respectively | | Advances and other receivables, net of reserves of $206 and $208, respectively | 838 | | | 940 | |
| Reverse mortgage interests, net of purchase discount of $93 and $127, respectively | | Reverse mortgage interests, net of purchase discount of $93 and $127, respectively | 5,091 | | | 5,253 | |
| Mortgage loans held for sale at fair value | Mortgage loans held for sale at fair value | 3,179 | | | 4,077 | | Mortgage loans held for sale at fair value | 6,351 | | | 5,720 | |
| Property and equipment, net of accumulated depreciation of $75 and $55, respectively | 115 | | | 112 | | |
| Property and equipment, net of accumulated depreciation of $107 and $96, respectively | | Property and equipment, net of accumulated depreciation of $107 and $96, respectively | 118 | | | 116 | |
| Deferred tax assets, net | Deferred tax assets, net | 1,391 | | | 1,345 | | Deferred tax assets, net | 1,228 | | | 1,340 | |
| Other assets | Other assets | 2,174 | | | 1,390 | | Other assets | 6,793 | | | 7,175 | |
| Total assets | Total assets | $ | 17,300 | | | $ | 18,305 | | Total assets | $ | 24,713 | | | $ | 24,165 | |
| | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
| Unsecured senior notes, net | Unsecured senior notes, net | $ | 2,261 | | | $ | 2,366 | | Unsecured senior notes, net | $ | 2,074 | | | $ | 2,074 | |
| Advance facilities, net | 475 | | | 422 | | |
| Warehouse facilities, net | 4,031 | | | 4,575 | | |
| Advance and warehouse facilities, net | | Advance and warehouse facilities, net | 7,379 | | | 6,763 | |
| Payables and other liabilities | Payables and other liabilities | 2,460 | | | 2,016 | | Payables and other liabilities | 7,140 | | | 7,392 | |
| MSR related liabilities - nonrecourse at fair value | MSR related liabilities - nonrecourse at fair value | 1,173 | | | 1,348 | | MSR related liabilities - nonrecourse at fair value | 957 | | | 967 | |
| Mortgage servicing liabilities | Mortgage servicing liabilities | 48 | | | 61 | | Mortgage servicing liabilities | 38 | | | 41 | |
| Other nonrecourse debt, net | Other nonrecourse debt, net | 4,707 | | | 5,286 | | Other nonrecourse debt, net | 4,221 | | | 4,424 | |
| Total liabilities | Total liabilities | 15,155 | | | 16,074 | | Total liabilities | 21,809 | | | 21,661 | |
| Commitments and contingencies (Note 16) | | | | |
| Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of 10 dollars, respectively | — | | | — | | |
| Common stock at $0.01 par value - 300 million shares authorized, 92.0 million and 91.1 million shares issued, respectively | 1 | | | 1 | | |
| Commitments and contingencies (Note 15) | | Commitments and contingencies (Note 15) | 0 | | 0 |
| Preferred stock at $0.00001 - 10 million shares authorized, 1.0 million shares issued and outstanding, respectively; aggregate liquidation preference of 10 dollars, respectively | | Preferred stock at $0.00001 - 10 million shares authorized, 1.0 million shares issued and outstanding, respectively; aggregate liquidation preference of 10 dollars, respectively | 0 | | | 0 | |
| Common stock at $0.01 par value - 300 million shares authorized, 93.2 million and 92.0 million shares issued, respectively | | Common stock at $0.01 par value - 300 million shares authorized, 93.2 million and 92.0 million shares issued, respectively | 1 | | | 1 | |
| Additional paid-in-capital | Additional paid-in-capital | 1,114 | | | 1,109 | | Additional paid-in-capital | 1,113 | | | 1,126 | |
| Retained earnings | Retained earnings | 1,034 | | | 1,122 | | Retained earnings | 1,995 | | | 1,434 | |
| Treasury shares at cost - 7.1 million and 2.6 million shares, respectively | | Treasury shares at cost - 7.1 million and 2.6 million shares, respectively | (206) | | | (58) | |
| Total Mr. Cooper stockholders’ equity | Total Mr. Cooper stockholders’ equity | 2,149 | | | 2,232 | | Total Mr. Cooper stockholders’ equity | 2,903 | | | 2,503 | |
| Non-controlling interests | Non-controlling interests | (4) | | | (1) | | Non-controlling interests | 1 | | | 1 | |
| Total stockholders’ equity | Total stockholders’ equity | 2,145 | | | 2,231 | | Total stockholders’ equity | 2,904 | | | 2,504 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 17,300 | | | $ | 18,305 | | Total liabilities and stockholders’ equity | $ | 24,713 | | | $ | 24,165 | |
See accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | |
| Service related, net | Service related, net | $ | 12 | | | $ | 137 | | | $ | (41) | | | $ | 221 | | Service related, net | $ | 588 | | | $ | (53) | | |
| Net gain on mortgage loans held for sale | Net gain on mortgage loans held for sale | 618 | | | 262 | | | 949 | | | 428 | | Net gain on mortgage loans held for sale | 679 | | | 331 | | |
| Total revenues | Total revenues | 630 | | | 399 | | | 908 | | | 649 | | Total revenues | 1,267 | | | 278 | | |
| Expenses: | Expenses: | | | | | | | | Expenses: | | | | |
| Salaries, wages and benefits | Salaries, wages and benefits | 248 | | | 238 | | | 494 | | | 453 | | Salaries, wages and benefits | 285 | | | 246 | | |
| General and administrative | General and administrative | 171 | | | 254 | | | 369 | | | 482 | | General and administrative | 184 | | | 198 | | |
| Total expenses | Total expenses | 419 | | | 492 | | | 863 | | | 935 | | Total expenses | 469 | | | 444 | | |
| | Interest income | Interest income | 76 | | | 162 | | | 194 | | | 296 | | Interest income | 89 | | | 118 | | |
| Interest expense | Interest expense | (177) | | | (187) | | | (369) | | | (376) | | Interest expense | (159) | | | (192) | | |
| Other income, net | Other income, net | — | | | 1 | | | 1 | | | 16 | | Other income, net | 0 | | | 1 | | |
| Total other expenses, net | Total other expenses, net | (101) | | | (24) | | | (174) | | | (64) | | Total other expenses, net | (70) | | | (73) | | |
| Income (loss) before income tax expense (benefit) | Income (loss) before income tax expense (benefit) | 110 | | | (117) | | | (129) | | | (350) | | Income (loss) before income tax expense (benefit) | 728 | | | (239) | | |
| Less: Income tax expense (benefit) | Less: Income tax expense (benefit) | 37 | | | (29) | | | (31) | | | (76) | | Less: Income tax expense (benefit) | 167 | | | (68) | | |
| Net income (loss) | Net income (loss) | 73 | | | (88) | | | (98) | | | (274) | | Net income (loss) | 561 | | | (171) | | |
| Less: Net loss attributable to non-controlling interests | Less: Net loss attributable to non-controlling interests | — | | | (1) | | | (3) | | | (1) | | Less: Net loss attributable to non-controlling interests | 0 | | | (3) | | |
| Net income (loss) attributable to Mr. Cooper | Net income (loss) attributable to Mr. Cooper | 73 | | | (87) | | | (95) | | | (273) | | Net income (loss) attributable to Mr. Cooper | 561 | | | (168) | | |
| Less: Undistributed earnings attributable to participating stockholders | Less: Undistributed earnings attributable to participating stockholders | 1 | | | — | | | — | | | — | | Less: Undistributed earnings attributable to participating stockholders | 5 | | | 0 | | |
| Net income (loss) attributable to common stockholders | Net income (loss) attributable to common stockholders | $ | 72 | | | $ | (87) | | | $ | (95) | | | $ | (273) | | Net income (loss) attributable to common stockholders | $ | 556 | | | $ | (168) | | |
| | Net income (loss) per common share attributable to Mr. Cooper: | Net income (loss) per common share attributable to Mr. Cooper: | | Net income (loss) per common share attributable to Mr. Cooper: | | |
| Basic | Basic | $ | 0.78 | | | $ | (0.96) | | | $ | (1.04) | | | $ | (3.00) | | Basic | $ | 6.22 | | | $ | (1.84) | | |
| Diluted | Diluted | $ | 0.77 | | | $ | (0.96) | | | $ | (1.04) | | | $ | (3.00) | | Diluted | $ | 5.92 | | | $ | (1.84) | | |
See accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
| | | Preferred Stock | | | Common Stock | | | | | | Preferred Stock | | Common Stock | |
| | Shares
(in thousands) | | Amount | | Shares
(in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | | Total Mr. Cooper Stockholders’ Equity | | Non-controlling Interests | | Total
Equity | | Shares
(in thousands) | | Amount | | Shares
(in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Share Amount | | Total Mr. Cooper Stockholders’ Equity | | Non-controlling Interests | | Total Stockholders’
Equity |
| Balance at March 31, 2019 | | 1,000 | | | $ | — | | | 91,042 | | | $ | 1 | | | $ | 1,095 | | | $ | 662 | | | | $ | 1,758 | | | $ | 3 | | | $ | 1,761 | | |
| Shares issued under incentive compensation plan | | — | | | — | | | 19 | | | — | | | — | | | — | | | | — | | | — | | | — | | |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | | 1,000 | | | $ | 0 | | | 91,118 | | | $ | 1 | | | $ | 1,109 | | | $ | 1,122 | | | $ | 0 | | | $ | 2,232 | | | $ | (1) | | | $ | 2,231 | |
| Shares issued / (surrendered) under incentive compensation plan | | Shares issued / (surrendered) under incentive compensation plan | | — | | | — | | | 852 | | | — | | | (5) | | | — | | | — | | | (5) | | | — | | | (5) | |
| Share-based compensation | Share-based compensation | | — | | | — | | | — | | | — | | | 5 | | | — | | | | 5 | | | — | | | 5 | | Share-based compensation | | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | | | — | | | 4 | |
Cumulative effect adjustments pursuant to the
adoption of CECL-related accounting guidance | | Cumulative effect adjustments pursuant to the
adoption of CECL-related accounting guidance | | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | | | — | | | 7 | |
| Net loss | Net loss | | — | | | — | | | — | | | — | | | — | | | (87) | | | | (87) | | | (1) | | | (88) | | Net loss | | — | | | — | | | — | | | — | | | — | | | (168) | | | — | | | (168) | | | (3) | | | (171) | |
| Balance at June 30, 2019 | | 1,000 | | | $ | — | | | 91,061 | | | $ | 1 | | | $ | 1,100 | | | $ | 575 | | | | $ | 1,676 | | | $ | 2 | | | $ | 1,678 | | |
| Balance at March 31, 2020 | | Balance at March 31, 2020 | | 1,000 | | | $ | 0 | | | 91,970 | | | $ | 1 | | | $ | 1,108 | | | $ | 961 | | | $ | 0 | | | $ | 2,070 | | | $ | (4) | | | $ | 2,066 | |
| | Balance at March 31, 2020 | | 1,000 | | | $ | — | | | 91,970 | | | $ | 1 | | | $ | 1,108 | | | $ | 961 | | | | $ | 2,070 | | | $ | (4) | | | $ | 2,066 | | |
| Shares issued under incentive compensation plan | | — | | | — | | | 52 | | | — | | | — | | | — | | | | — | | | — | | | — | | |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | | 1,000 | | | $ | 0 | | | 89,457 | | | $ | 1 | | | $ | 1,126 | | | $ | 1,434 | | | $ | (58) | | | $ | 2,503 | | | $ | 1 | | | $ | 2,504 | |
| Shares issued / (surrendered) under incentive compensation plan | | Shares issued / (surrendered) under incentive compensation plan | | — | | | — | | | 1,183 | | | — | | | (19) | | | — | | | — | | | (19) | | | — | | | (19) | |
| Share-based compensation | Share-based compensation | | — | | | — | | | — | | | — | | | 6 | | | — | | | | 6 | | | — | | | 6 | | Share-based compensation | | — | | | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 | | | — | | | 6 | |
| Repurchase of common stock | | Repurchase of common stock | | — | | | — | | | (4,505) | | | — | | | — | | | — | | | (148) | | | (148) | | | — | | | (148) | |
| Net income | Net income | | — | | | — | | | — | | | — | | | — | | | 73 | | | | 73 | | | — | | | 73 | | Net income | | — | | | — | | | — | | | — | | | — | | | 561 | | | — | | | 561 | | | 0 | | | 561 | |
| Balance at June 30, 2020 | | 1,000 | | | $ | — | | | 92,022 | | | $ | 1 | | | $ | 1,114 | | | $ | 1,034 | | | | $ | 2,149 | | | $ | (4) | | | $ | 2,145 | | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | | 1,000 | | | $ | 0 | | | 86,135 | | | $ | 1 | | | $ | 1,113 | | | $ | 1,995 | | | $ | (206) | | | $ | 2,903 | | | $ | 1 | | | $ | 2,904 | |
See accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED 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 | | | | Total Mr. Cooper Stockholders’ Equity | | Non-controlling Interests | | Total
Equity |
| Balance at January 1, 2019 | | 1,000 | | | $ | — | | | 90,821 | | | $ | 1 | | | $ | 1,093 | | | $ | 848 | | | | | $ | 1,942 | | | $ | 3 | | | $ | 1,945 | |
| Shares issued / (surrendered) under incentive compensation plan | | — | | | — | | | 240 | | | — | | | (2) | | | — | | | | | (2) | | | — | | | (2) | |
| Share-based compensation | | — | | | — | | | — | | | — | | | 9 | | | — | | | | | 9 | | | — | | | 9 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (273) | | | | | (273) | | | (1) | | | (274) | |
| Balance at June 30, 2019 | | 1,000 | | | $ | — | | | 91,061 | | | $ | 1 | | | $ | 1,100 | | | $ | 575 | | | | | $ | 1,676 | | | $ | 2 | | | $ | 1,678 | |
| | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | | 1,000 | | | $ | — | | | 91,118 | | | $ | 1 | | | $ | 1,109 | | | $ | 1,122 | | | | | $ | 2,232 | | | $ | (1) | | | $ | 2,231 | |
| Shares issued / (surrendered) under incentive compensation plan | | — | | | — | | | 904 | | | — | | | (5) | | | — | | | | | (5) | | | — | | | (5) | |
| Share-based compensation | | — | | | — | | | — | | | — | | | 10 | | | — | | | | | 10 | | | — | | | 10 | |
| Cumulative effect adjustments pursuant to the adoption of ASU 2016-13 | | — | | | — | | | — | | | — | | | — | | | 7 | | | | | 7 | | | — | | | 7 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (95) | | | | | (95) | | | (3) | | | (98) | |
| Balance at June 30, 2020 | | 1,000 | | | $ | — | | | 92,022 | | | $ | 1 | | | $ | 1,114 | | | $ | 1,034 | | | | | $ | 2,149 | | | $ | (4) | | | $ | 2,145 | |
See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| | 2020 | | 2019 |
| Operating Activities | | | |
| Net loss | $ | (98) | | | $ | (274) | |
| Adjustments to reconcile net loss to net cash attributable to operating activities: | | | |
| Deferred tax benefit | (49) | | | (76) | |
| Net gain on mortgage loans held for sale | (949) | | | (428) | |
| Interest income on reverse mortgage loans | (117) | | | (167) | |
| Provision for servicing and non-servicing reserves | 11 | | | 30 | |
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | 999 | | | 695 | |
| Fair value changes in excess spread financing | (101) | | | (74) | |
| Fair value changes in mortgage servicing rights financing liability | 12 | | | 11 | |
| Fair value changes in mortgage loans held for investment | — | | | (3) | |
| Amortization of premiums, net of discount accretion | 34 | | | (25) | |
| Depreciation and amortization for property and equipment and intangible assets | 37 | | | 45 | |
| Share-based compensation | 10 | | | 9 | |
| Other loss | 8 | | | — | |
| Repurchases of forward loan assets out of Ginnie Mae securitizations | (2,092) | | | (715) | |
| Mortgage loans originated and purchased for sale, net of fees | (23,110) | | | (15,727) | |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | 26,606 | | | 15,429 | |
| Changes in assets and liabilities: | | | |
| Advances and other receivables | 313 | | | 249 | |
| Reverse mortgage interests | 751 | | | 1,056 | |
| Other assets | (616) | | | (118) | |
| Payables and other liabilities | 417 | | | 31 | |
| Net cash attributable to operating activities | 2,066 | | | (52) | |
| | | |
| Investing Activities | | | |
| Acquisitions, net of cash acquired | — | | | (85) | |
| Property and equipment additions, net of disposals | (26) | | | (27) | |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | (31) | | | (409) | |
| Proceeds on sale of forward and reverse mortgage servicing rights | 43 | | | 279 | |
| Net cash attributable to investing activities | (14) | | | (242) | |
Continued on following page. See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| | 2020 | | 2019 |
| Financing Activities | | | |
| (Decrease) increase in warehouse facilities | (544) | | | 1,173 | |
| Increase (decrease) in advance facilities | 58 | | | (40) | |
| Repayment of notes payable | — | | | (294) | |
| Proceeds from HECM securitizations | — | | | 398 | |
| Proceeds from sale of HECM securitizations | — | | | 20 | |
| Repayment of HECM securitizations | (168) | | | (434) | |
| Proceeds from issuance of participating interest financing in reverse mortgage interests | 99 | | | 156 | |
| Repayment of participating interest financing in reverse mortgage interests | (598) | | | (1,004) | |
| Proceeds from the issuance of excess spread financing | 24 | | | 437 | |
| Settlements and repayments of excess spread financing | (110) | | | (119) | |
| Issuance of unsecured senior debt | 600 | | | — | |
| Repayment of nonrecourse debt – legacy assets | — | | | (6) | |
| Redemption and repayment of unsecured senior notes | (698) | | | — | |
| Repayment of finance lease liability | (1) | | | (2) | |
| Surrender of shares relating to stock vesting | (5) | | | (2) | |
| Debt financing costs | (20) | | | (1) | |
| Net cash attributable to financing activities | (1,363) | | | 282 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 689 | | | (12) | |
| Cash, cash equivalents, and restricted cash - beginning of period | 612 | | | 561 | |
Cash, cash equivalents, and restricted cash - end of period(1) | $ | 1,301 | | | $ | 549 | |
| | | |
| Supplemental Disclosures of Cash Activities | | | |
| Cash paid for interest expense | $ | 89 | | | $ | 74 | |
| Net cash paid (refunded) for income taxes | $ | 3 | | | $ | (1) | |
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2021 | | 2020 | | |
| Operating Activities | | | | | |
| Net income (loss) | $ | 561 | | | $ | (171) | | | |
| Adjustments to reconcile net income (loss) to net cash attributable to operating activities: | | | | | |
| Deferred tax expense (benefit) | 112 | | | (68) | | | |
| Net gain on mortgage loans held for sale | (679) | | | (331) | | | |
| Interest income on participating interests in reverse mortgages | (40) | | | (62) | | | |
| Provision for servicing and non-servicing reserves | 13 | | | 8 | | | |
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | (301) | | | 526 | | | |
| Fair value changes in MSR related liabilities | 31 | | | (29) | | | |
| | | | | |
| | | | | |
| Depreciation and amortization for property and equipment and intangible assets | 16 | | | 19 | | | |
| | | | | |
| | | | | |
| Other operating activities | 13 | | | 34 | | | |
| Repurchases of forward loan assets out of Ginnie Mae securitizations | (2,255) | | | (919) | | | |
| Mortgage loans originated and purchased for sale, net of fees | (25,214) | | | (12,375) | | | |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale | 27,152 | | | 13,724 | | | |
| Changes in assets and liabilities: | | | | | |
| Advances and other receivables | 91 | | | 300 | | | |
| Reverse mortgage interests | 220 | | | 400 | | | |
| Other assets | 70 | | | 111 | | | |
| Payables and other liabilities | 134 | | | (457) | | | |
| Net cash attributable to operating activities | (76) | | | 710 | | | |
| | | | | |
| Investing Activities | | | | | |
| | | | | |
| Property and equipment additions, net of disposals | (14) | | | (12) | | | |
| Purchase of forward mortgage servicing rights | (69) | | | (27) | | | |
| Proceeds on sale of forward mortgage servicing rights | 1 | | | 43 | | | |
| Net cash attributable to investing activities | (82) | | | 4 | | | |
| | | | | |
| Financing Activities | | | | | |
| Increase in advance and warehouse facilities | 613 | | | 43 | | | |
| Repayment of HECM securitizations | (37) | | | (99) | | | |
| Proceeds from issuance of participating interest financing in reverse mortgage interests | 34 | | | 55 | | | |
| Repayment of participating interest financing in reverse mortgage interests | (219) | | | (330) | | | |
| Proceeds from the issuance of excess spread financing | 0 | | | 24 | | | |
| Settlements and repayments of excess spread financing | (41) | | | (58) | | | |
| Issuance of unsecured senior notes | 0 | | | 600 | | | |
| Redemption and repayment of unsecured senior notes | 0 | | | (698) | | | |
| Repurchase of common stock | (148) | | | 0 | | | |
| | | | | |
| Other financing activities | (22) | | | (18) | | | |
| Net cash attributable to financing activities | 180 | | | (481) | | | |
| Net increase in cash, cash equivalents, and restricted cash | 22 | | | 233 | | | |
| Cash, cash equivalents, and restricted cash - beginning of period | 913 | | | 612 | | | |
Cash, cash equivalents, and restricted cash - end of period(1) | $ | 935 | | | $ | 845 | | | |
(1)The following table provides a reconciliation of cash, cash equivalents and restricted cash to amountamounts reported within the condensed consolidated balance sheets.
| | | | | | | | | | | |
| June 30, 2020 | | June 30, 2019 |
| Cash and cash equivalents | $ | 1,041 | | | $ | 245 | |
| Restricted cash | 260 | | | 304 | |
| Total cash, cash equivalents, and restricted cash | $ | 1,301 | | | $ | 549 | |
| | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 |
| Cash and cash equivalents | $ | 674 | | | $ | 579 | |
| Restricted cash | 261 | | | 266 | |
| Total cash, cash equivalents, and restricted cash | $ | 935 | | | $ | 845 | |
See accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements (unaudited).
MR COOPER GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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”,Cooper,” the “Company”, “we”,“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 originators and servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides technology and data enhanced solutions to homebuyers, home sellers, real estate services including real estate brokerage, title, closing, valuationagents and field services to lenders, investors and consumers.mortgage companies. The Company’s corporate website is located at www.mrcoopergroup.com. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in the MD&A sectionItem 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-Q.
Mr. Cooper,On March 12, 2021, the Company entered into a Stock Purchase Agreement with Blend Labs, Inc. (“Blend Labs”), a Delaware corporation, pursuant to which was previously known as WMIH Corp. (“WMIH”Blend Labs will acquire the title business of the Company for a purchase price of $500, consisting of $450 in cash, subject to certain adjustments specified therein, and a retained interest of 9.9% for the Company (the “Title Transaction”),. Pursuant the Stock Purchase Agreement, all cash generated, subject to certain adjustments, between March 13, 2021 and the closing date of the Title Transaction will be held for the benefit of Blend Labs. No gain or loss on the Title Transaction has been or will be recorded until the closing date, which is a corporation duly organizedanticipated to be in the second quarter of 2021. The carrying amounts of assets and existingliabilities associated with the title business are not material to the condensed consolidated balance sheets and are reported under the laws of the state of Delaware since May 11, 2015. On July 31, 2018, Wand Merger Corporation (“Merger Sub”), a wholly-owned subsidiary of WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), with Nationstar continuing as a wholly-owned subsidiary of WMIH (the “Merger”). Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode. As a result of the Merger, shares of Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined company traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.Xome segment.
Basis of Presentation
The consolidated interim financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC.Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2019.2020.
The interim condensed consolidated financial statements are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of the results of the interim periods have been included. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
The Company evaluated subsequent events through the date these interim consolidated financial statements were issued.
Basis of Consolidation
The condensed 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 accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated. Business combinations are included in the consolidated financial statements from their respective dates of acquisition.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates 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, uncertainties in the economy from the COVID-19 pandemic, and such differences could be material.
Recent Accounting Guidance Adopted
Accounting Standards Update No. 2016-13, Financial Instruments2019-12, Income Taxes (Topic 740) - Credit Losses (Topic 326),Simplifying the Accounting for Income Taxes (“ASU 2016-13”2019-12”) requires expected credit lossessimplifies accounting for financial instruments held atincome taxes by removing certain exceptions from 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 (“CECL”) methodology. The update eliminates the initial recognition of credit losses on an incurred basisgeneral principles in current GAAP and instead reflects an entity’s current estimate of all expected credit losses over the lifeTopic 740 including elimination of the asset. Previously,exception to the incremental approach for intraperiod tax allocation when credit losses were measured under GAAP, an entity generally only considered past eventsthere is a loss from continuing operations and current conditionsincome or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in measuring the incurred loss. The new standard will reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The guidance wasTopic 740. ASU 2019-12 is effective for the Company as of January 1, 2020, with a cumulative-effect adjustment to retained earnings as of that date.
Based upon management’s scoping analysis, the Company determined that reverse mortgage interests, net of reserves, advances and other receivables, net of reserves, and certain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and loan product guarantees. 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 agencies. For reverse mortgage interests the Company determined that the guarantee from Federal Housing Administration (“FHA”) on Home Equity Conversion Mortgage (“HECM“) loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. For other assets, primarily trade receivables, 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. For each of the aforementioned financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, as applicable, into the determination of credit-related losses.
On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method for the above-mentioned financial assets. Results for reporting periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded transition adjustments aggregating to a net increase of $9, or $7 after tax, to retained earnings and a reduction of $7 to the advances and other receivables reserve and a $2 reduction in the other assets reserves, as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
In connection with adoption of ASU 2016-13, the Company updated its accounting policies as follows:
For certain financial instruments included in advances and other receivables, net, and certain trade receivables and accrued revenues included in other assets that within the scope of ASU 2016-13, the reserve methodology was revised to consider CECL losses. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life to determine the current expected credit loss required. Due to the nature of the financial instrument, reverse mortgage interests, net of reserves, and advances and other receivables had limited impact from the adoption of CECL to the reserve methodology. See Note 4, Advances and Other Receivables, Net, Note 5, Reverse Mortgage Interests, Net, and Note 7, Other Assets, for additional information.
Factors that influenced management’s current estimate of expected credit losses for certain advances and other receivables and certain trade receivables and accrued revenues included the following: historical collection and loss rates, passage of time, weighted average life of receivables, and various qualitative factors including current economic conditions.
Factors that influenced management’s current estimate of expected credit related losses for certain reverse mortgage interests included the following: historical collection and loss rates, foreclosure timelines, and values of underlying collateral.
Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820)- Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020.2021. The guidance doesadoption of the standard did not have a material impact to the disclosures currently provided by the Company.Company’s condensed consolidated financial statements.
2. Acquisitions
Acquisition of Pacific Union Financial, LLC
On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. Pacific Union was a privately held company that was engaged in the origination, as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities.
The acquisition has been accounted for in accordance with Accounting Standards Codification 805, Business Combinations, 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 liabilities assumed based on their estimated fair values as of the acquisition date. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The final purchase price was $116, paid in cash. Based on the allocation of fair value, goodwill of $40 was recorded, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies with the Company’s current operations. $28 and $12 of the goodwill is assigned to the Originations and Servicing segments, respectively, based on expected cash flows, and is expected to be deductible for tax purposes.
| | | | | |
Final Estimated Fair Value of Net Assets Acquired: | |
Cash and cash equivalents | $ | 37 | |
Restricted cash | 2 | |
Mortgage servicing rights | 271 | |
Advances and other receivables | 84 | |
Mortgage loans held for sale | 536 | |
Mortgage loans held for investment | 1 | |
Property and equipment | 8 | |
Other assets | 483 | |
Fair value of assets acquired | 1,422 | |
Notes payable(1)
| 294 | |
Advance facilities | 13 | |
Warehouse facilities | 393 | |
Payables and other liabilities | 530 | |
Other nonrecourse debt | 129 | |
Fair value of liabilities assumed | 1,359 | |
Total fair value of net tangible assets acquired | 63 | |
Intangible assets: | |
Customer relationships(2)
| 13 | |
Goodwill | 40 | |
Final purchase price | $ | 116 | |
(1)Notes payable was subsequently paid off in February 2019 after the consummation of the acquisition.
(2)The estimated fair values for customer relationships were measured using the excess earnings method and were determined to have a remaining useful life of 10 years.
The Company incurred total acquisition costs of $2 during the three months ended June 30, 2019, of which $1 is included in salaries, wages and benefits expense and $1 in general and administrative expense in the Company’s consolidated statements of operations. The Company incurred total acquisition costs of $4 during the six months ended June 30, 2019, of which $2 is included in salaries, wages and benefits expense and $2 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services. There were 0 acquisition costs incurred by the Company during the six months ended June 30, 2020.
For the three and six months ended June 30, 2019, the operations contributed by this acquisition generated total revenues of $79 and $118 and income before income tax of $36 and $50, respectively, which are reported in the Company’s consolidated statements of operations.
The following unaudited pro forma financial information presents the combined results of operations for the three and six months ended June 30, 2019, as if the acquisition had occurred on January 1, 2019:
| | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Pro forma financial information | (unaudited) | | (unaudited) |
| Pro forma total revenues | $ | 399 | | | $ | 668 | |
| | | |
| Pro forma net loss | $ | (87) | | | $ | (271) | |
3. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities. In estimating the fair value of all mortgage servicing rights and related liabilities, the impact of the COVID-19 pandemic was considered in the determination of key assumptions.
| | MSRs and Related Liabilities | MSRs and Related Liabilities | June 30, 2020 | | December 31, 2019 | MSRs and Related Liabilities | March 31, 2021 | | December 31, 2020 |
| Forward MSRs - fair value | Forward MSRs - fair value | $ | 2,757 | | | $ | 3,496 | | Forward MSRs - fair value | $ | 3,354 | | | $ | 2,703 | |
| Reverse MSRs - amortized cost | Reverse MSRs - amortized cost | 6 | | | 6 | | Reverse MSRs - amortized cost | 5 | | | 5 | |
| Mortgage servicing rights | Mortgage servicing rights | $ | 2,763 | | | $ | 3,502 | | Mortgage servicing rights | $ | 3,359 | | | $ | 2,708 | |
| | Mortgage servicing liabilities - amortized cost | Mortgage servicing liabilities - amortized cost | $ | 48 | | | $ | 61 | | Mortgage servicing liabilities - amortized cost | $ | 38 | | | $ | 41 | |
| | Excess spread financing - fair value | Excess spread financing - fair value | $ | 1,124 | | | $ | 1,311 | | Excess spread financing - fair value | $ | 934 | | | $ | 934 | |
| Mortgage servicing rights financing - fair value | Mortgage servicing rights financing - fair value | 49 | | | 37 | | Mortgage servicing rights financing - fair value | 23 | | | 33 | |
| MSR related liabilities - nonrecourse at fair value | MSR related liabilities - nonrecourse at fair value | $ | 1,173 | | | $ | 1,348 | | MSR related liabilities - nonrecourse at fair value | $ | 957 | | | $ | 967 | |
Forward Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage (“forward”) 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.
The following table sets forth the activities of forward MSRs:
| | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| Forward MSRs - Fair Value | Forward MSRs - Fair Value | 2020 | | 2019 | | Forward MSRs - Fair Value | 2021 | | 2020 | |
| Fair value - beginning of period | Fair value - beginning of period | $ | 3,496 | | | $ | 3,665 | | | Fair value - beginning of period | $ | 2,703 | | | $ | 3,496 | | |
| Additions: | Additions: | | | Additions: | | |
| Servicing retained from mortgage loans sold | Servicing retained from mortgage loans sold | 249 | | | 169 | | | Servicing retained from mortgage loans sold | 288 | | | 123 | | |
Purchases of servicing rights(1) | Purchases of servicing rights(1) | 24 | | | 689 | | | Purchases of servicing rights(1) | 67 | | | 24 | | |
| Dispositions: | Dispositions: | | | Dispositions: | | |
| Sales of servicing assets | Sales of servicing assets | — | | | (294) | | | Sales of servicing assets | (2) | | | 0 | | |
| Changes in fair value: | Changes in fair value: | | | Changes in fair value: | | |
| Changes in valuation inputs or assumptions used in the valuation model | Changes in valuation inputs or assumptions used in the valuation model | (717) | | | (542) | | | Changes in valuation inputs or assumptions used in the valuation model | 510 | | | (401) | | |
| Other changes in fair value | Other changes in fair value | (295) | | | (182) | | | Other changes in fair value | (212) | | | (133) | | |
| Fair value - end of period | Fair value - end of period | $ | 2,757 | | | $ | 3,505 | | | Fair value - end of period | $ | 3,354 | | | $ | 3,109 | | |
(1)Purchases of servicing rights duringDuring the sixthree months ended June 30, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion. In addition, in January 2019, the Company entered into a subservicing contract for $24 billion in mortgages, which were subsequently purchased in May 2019, resulting in additional $253 servicing rights in the second quarter of 2019.
From time to time, the Company sells its ownership interest in certain MSRsMarch 31, 2021 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 six months ended June 30, 2020, and 2019, the Company sold $71$50 and $22,932$40 in unpaid principal balance (“UPB”) of forward MSRs, of which NaN and $20,560 were retained by the Company as subservicer, respectively.
MSRs measured at fair value are primarily segregated between credit sensitive and interest sensitive pools (referred to herein as “acquisition pools”). Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition, and no subsequent changes are made. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria.
Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Due to the Company’s focus on recapture and modifications, significant amounts of the credit sensitive portfolio have been re-underwritten and, therefore, behave more like the interest sensitive portfolio. Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors.
MSRs measured at fair value are also 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.
The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| Forward MSRs - UPB and fair value breakdown | UPB | | Fair Value | | UPB | | Fair Value |
| Acquisition Pools | | | | | | | |
| Credit sensitive | $ | 131,105 | | | $ | 1,307 | | | $ | 147,895 | | | $ | 1,613 | |
| Interest sensitive | 146,870 | | | 1,450 | | | 148,887 | | | 1,883 | |
| Total | $ | 277,975 | | | $ | 2,757 | | | $ | 296,782 | | | $ | 3,496 | |
| | | | | | | |
| Investor Pools | | | | | | | |
Agency(1) | $ | 228,680 | | | $ | 2,308 | | | $ | 240,688 | | | $ | 2,944 | |
Non-agency(2) | 49,295 | | | 449 | | | 56,094 | | | 552 | |
| Total | $ | 277,975 | | | $ | 2,757 | | | $ | 296,782 | | | $ | 3,496 | |
(1)Agency investors primarily consist of 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”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”).
(2)Non-agency investors consist of investors in private-label securitizations.
The Company usedfollowing table provides a breakdown of UPB and fair value for the followingCompany’s forward MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Forward MSRs - UPB and Fair Value Breakdown | UPB | | Fair Value | | UPB | | Fair Value |
| Investor Pools | | | | | | | |
| Agency | $ | 234,589 | | | $ | 2,965 | | | $ | 227,136 | | | $ | 2,305 | |
| Non-agency | 41,439 | | | 389 | | | 44,053 | | | 398 | |
| Total | $ | 276,028 | | | $ | 3,354 | | | $ | 271,189 | | | $ | 2,703 | |
Refer to Note 13, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of forward MSRs:
| | | | | | | | | | | |
| Forward MSRs - Key inputs and assumptions | June 30, 2020 | | December 31, 2019 |
| Total MSR Portfolio | | | |
| Discount rate | 9.5 | % | | 9.7 | % |
| Prepayment speeds | 14.2 | % | | 13.1 | % |
| Average life | 5.3 years | | 5.8 years |
| | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 9.9 | % | | 10.4 | % |
| Prepayment speeds | 12.6 | % | | 12.7 | % |
| Average life | 5.6 years | | 6.0 years |
| | | |
| Interest Sensitive | | | |
| Discount rate | 9.0 | % | | 9.1 | % |
| Prepayment speeds | 15.8 | % | | 13.5 | % |
| Average life | 4.9 years | | 5.7 years |
| | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 8.9 | % | | 9.0 | % |
| Prepayment speeds | 14.4 | % | | 13.0 | % |
| Average life | 5.2 years | | 5.8 years |
| | | |
| Non-agency | | | |
| Discount rate | 12.0 | % | | 12.6 | % |
| Prepayment speeds | 13.4 | % | | 13.8 | % |
| Average life | 5.6 years | | 6.2 years |
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| | | Discount Rate | | | Total Prepayment Speeds | | | Discount Rate | | Total Prepayment Speeds | | Cost to Service per Loan |
| Forward MSRs - Hypothetical Sensitivities | Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| June 30, 2020 | | | | | | | | |
| March 31, 2021 | | March 31, 2021 | | | | | | | | | | | |
| Mortgage servicing rights | Mortgage servicing rights | $ | (104) | | | $ | (201) | | | $ | (175) | | | $ | (335) | | Mortgage servicing rights | $ | (142) | | | $ | (273) | | | $ | (187) | | | $ | (360) | | | $ | (49) | | | $ | (99) | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Mortgage servicing rights | Mortgage servicing rights | $ | (127) | | | $ | (245) | | | $ | (165) | | | $ | (317) | | Mortgage servicing rights | $ | (100) | | | $ | (192) | | | $ | (181) | | | $ | (347) | | | $ | (45) | | | $ | (89) | |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10%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.
Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECMHome Equity Conversion Mortgage (“HECM”) reverse mortgage loans with an unpaid principal balance of $20,758$17,269 and $22,725$18,091 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Reverse MSRs and Liabilities - Amortized Cost | Assets | | Liabilities | | Assets | | Liabilities |
| Balance - beginning of period | $ | 6 | | | $ | 61 | | | $ | 11 | | | $ | 71 | |
| Amortization/accretion | — | | | (13) | | | (1) | | | (28) | |
Adjustments(1) | — | | | — | | | (4) | | | 37 | |
| Balance - end of the period | $ | 6 | | | $ | 48 | | | $ | 6 | | | $ | 80 | |
| Fair value - end of period | $ | 6 | | | $ | 12 | | | $ | 7 | | | $ | 44 | |
(1)Reverse MSR and MSL net adjustments recorded by the Company during the six months ended June 30, 2019 primarily relate to the fair value adjustments for reverse MSR and MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of reverse MSR and MSL during the measurement period. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Reverse MSRs and MSLs - Amortized Cost | Reverse MSRs | | Reverse MSLs | | Reverse MSRs | | Reverse MSLs |
| Balance - beginning of period | $ | 5 | | | $ | 41 | | | $ | 6 | | | $ | 61 | |
| Amortization/accretion | 0 | | | (3) | | | 0 | | | (8) | |
| Balance - end of the period | $ | 5 | | | $ | 38 | | | $ | 6 | | | $ | 53 | |
| Fair value - end of period | $ | 5 | | | $ | 38 | | | $ | 6 | | | $ | 27 | |
Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at June 30, 2020,March 31, 2021, 0 impairment or increased obligation was needed.recorded.
Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSRs on various Portfolios, the Company has 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 fee, ancillary incomehad excess spread financing liability of $934 as of March 31, 2021 and interest float earningsDecember 31, 2020. Refer to Note 13, Fair Value Measurements, for further discussion on principal along with interest paymentskey weighted-average inputs and escrows, 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 recapture agreement 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 recaptures any loanassumptions used 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. Accordingly, a recapture assumption is included withinvaluation of excess spread valuation.financing.
The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing:
| | | | | | | | | | | |
| Excess Spread Financing Assumptions | June 30, 2020 | | December 31, 2019 |
| Discount rate | 12.0 | % | | 11.6 | % |
| Prepayment speeds | 13.4 | % | | 12.6 | % |
| Recapture rate | 18.7 | % | | 20.1 | % |
| Average life | 5.4 years | | 5.8 years |
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:
| | | Discount Rate | | | Prepayment Speeds | | | Discount Rate | | Prepayment Speeds |
| Excess Spread Financing - Hypothetical Sensitivities | Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| June 30, 2020 | | | | | | | | |
| March 31, 2021 | | March 31, 2021 | | | | | | | |
| Excess spread financing | Excess spread financing | $ | 38 | | | $ | 78 | | | $ | 47 | | | $ | 97 | | Excess spread financing | $ | 33 | | | $ | 68 | | | $ | 36 | | | $ | 75 | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Excess spread financing | Excess spread financing | $ | 46 | | | $ | 95 | | | $ | 46 | | | $ | 96 | | Excess spread financing | $ | 30 | | | $ | 62 | | | $ | 41 | | | $ | 84 | |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variationan 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 - Fair Value
From December 2013 through June 2014, the Company entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer, and, for accounting purposes, ownership of the MSR resides with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in the consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation. The Company had MSR financing liability of $49$23 and $37$33 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Refer to
The following table sets forth the, for further discussion on key weighted-average inputs and assumptions used in the valuation of the mortgage servicing rightsMSR financing liability:
| | | | | | | | | | | |
| Mortgage Servicing Rights Financing Assumptions | June 30, 2020 | | December 31, 2019 |
| Advance financing rates | 4.3 | % | | 3.5 | % |
| Annual advance recovery rates | 18.6 | % | | 18.8 | % |
Servicing Segment Revenues
The following table sets forth the items comprising total revenues for the Servicing segment:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| Total Revenues - Servicing | Total Revenues - Servicing | 2020 | | 2019 | | 2020 | | 2019 | Total Revenues - Servicing | 2021 | | 2020 | |
Contractually specified servicing fees(1) | Contractually specified servicing fees(1) | $ | 285 | | | $ | 307 | | | $ | 582 | | | $ | 588 | | Contractually specified servicing fees(1) | $ | 276 | | | $ | 297 | | |
Other service-related income(1) | Other service-related income(1) | 62 | | | 32 | | | 111 | | | 82 | | Other service-related income(1) | 145 | | | 49 | | |
Incentive and modification income(1) | Incentive and modification income(1) | 8 | | | 10 | | | 18 | | | 17 | | Incentive and modification income(1) | 14 | | | 10 | | |
Late fees(1) | Late fees(1) | 20 | | | 27 | | | 47 | | | 52 | | Late fees(1) | 18 | | | 27 | | |
| Reverse servicing fees | Reverse servicing fees | 7 | | | 8 | | | 13 | | | 17 | | Reverse servicing fees | 5 | | | 6 | | |
Mark-to-market adjustments(2) | Mark-to-market adjustments(2) | (261) | | | (231) | | | (644) | | | (524) | | Mark-to-market adjustments(2) | 354 | | | (383) | | |
Counterparty revenue share(3) | Counterparty revenue share(3) | (88) | | | (70) | | | (164) | | | (118) | | Counterparty revenue share(3) | (83) | | | (76) | | |
Amortization, net of accretion(4) | Amortization, net of accretion(4) | (102) | | | (56) | | | (178) | | | (79) | | Amortization, net of accretion(4) | (153) | | | (76) | | |
| Total revenues - Servicing | Total revenues - Servicing | $ | (69) | | | $ | 27 | | | $ | (215) | | | $ | 35 | | Total revenues - Servicing | $ | 576 | | | $ | (146) | | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues.
(2)Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes 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. The impact of negative modeled cash flows was $3$12 and $17 for$10 during the three months ended June 30,March 31, 2021 and 2020, and 2019 and $13 and $28 for the six months ended June 30, 2020 and 2019, respectively.
(3)Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.
(4)Amortization is net of excess spread accretion of $79$76 and $59$68 and MSL accretion of $5$3 and $11 for$8 during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. For the six months ended June 30, 2020 and 2019, amortization is net of excess spread accretion of $147 and $95 and MSL accretion of $13 and $29, respectively.
4.3. Advances and Other Receivables Net
Advances and other receivables, net, consists of the following:
| | Advances and Other Receivables, Net | Advances and Other Receivables, Net | June 30, 2020 | | December 31, 2019 | Advances and Other Receivables, Net | March 31, 2021 | | December 31, 2020 |
Servicing advances, net of $117 and $131 purchase discount, respectively | $ | 695 | | | $ | 970 | | |
| Receivables from agencies, investors and prior servicers, net of $21 and $21 purchase discount, respectively | 189 | | | 193 | | |
| Servicing advances, net of $63 and $72 purchase discount, respectively | | Servicing advances, net of $63 and $72 purchase discount, respectively | $ | 882 | | | $ | 975 | |
Receivables from agencies, investors and prior servicers, net of $20 and $21 purchase discount, respectively | | Receivables from agencies, investors and prior servicers, net of $20 and $21 purchase discount, respectively | 162 | | | 173 | |
| Reserves | Reserves | (216) | | | (175) | | Reserves | (206) | | | (208) | |
| Total advances and other receivables, net | Total advances and other receivables, net | $ | 668 | | | $ | 988 | | Total advances and other receivables, net | $ | 838 | | | $ | 940 | |
The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, mortgage insurance claims or the borrower. Reserves for advances and other receivables on loans liquidated or purchased out of the MSR portfolio are established within advances and other receivables.
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| Reserves for Advances and Other Receivables | Reserves for Advances and Other Receivables | 2020 | | | 2019 | | 2020 | | 2019 | Reserves for Advances and Other Receivables | 2021 | | 2020 |
| Balance - beginning of period | Balance - beginning of period | $ | 193 | | | | $ | 71 | | | $ | 168 | | | $ | 47 | | Balance - beginning of period | $ | 208 | | | $ | 168 | |
Provision and other additions(1) | Provision and other additions(1) | 29 | | | | 37 | | | 59 | | | 67 | | Provision and other additions(1) | 15 | | | 30 | |
| Write-offs | Write-offs | (6) | | | | (10) | | | (11) | | | (16) | | Write-offs | (17) | | | (5) | |
| Balance - end of period | Balance - end of period | $ | 216 | | | | $ | 98 | | | $ | 216 | | | $ | 98 | | Balance - end of period | $ | 206 | | | $ | 193 | |
(1)The Company recorded a provision of $3$12 and $17$10 through the MTM adjustments in revenues - service related, net, in the unaudited condensed consolidated statements of operations forduring the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $13 and $28 for the six months ended June 30, 2020 and 2019, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
Purchase Discount for Advances and Other Receivables
In connection with the acquisition of Pacific Union in February 2019, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount of $19. Refer to Note 2, Acquisitions, for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connection with the Merger at estimated fair value as of the acquisition date, which resulted in a purchase discount of $302.
As of June 30, 2020, a total of $183 purchase discount has been utilized, with $138 purchase discount remaining.
The following tables set forth the activities of the purchase discounts for advances and other receivables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | Three Months Ended June 30, 2019 | | |
| 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 period | $ | 125 | | | $ | 21 | | | $ | 169 | | | $ | 48 | |
| Utilization of purchase discounts | (8) | | | — | | | (13) | | | — | |
| Balance - end of period | $ | 117 | | | $ | 21 | | | $ | 156 | | | $ | 48 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, |
| | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2019 | | | 2021 | | 2020 |
| Purchase Discount for Advances and Other Receivables | 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 | 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 period | Balance - beginning of period | $ | 131 | | | $ | 21 | | | $ | 205 | | | $ | 48 | | Balance - beginning of period | $ | 72 | | | $ | 21 | | | $ | 131 | | | $ | 21 | |
| Addition from acquisition | — | | | — | | | 19 | | | — | | |
| Utilization of purchase discounts | Utilization of purchase discounts | (14) | | | — | | | (68) | | | — | | Utilization of purchase discounts | (9) | | | (1) | | | (6) | | | 0 | |
| Balance - end of period | Balance - end of period | $ | 117 | | | $ | 21 | | | $ | 156 | | | $ | 48 | | Balance - end of period | $ | 63 | | | $ | 20 | | | $ | 125 | | | $ | 21 | |
Credit Loss for Advances and Other Receivables
As described in Note 1, Nature of Business and Basis of Presentation, advances and other receivables are within the scope of ASU 2016-13, and the Company modified its accounting policy regarding its assessment of reserves for credit-related losses in accordance with CECL framework. During the three and six months ended June 30,March 31, 2021 and 2020, the Company increased the CECLcurrent expected credit loss (“CECL”) reserve by $8$1 and $14,$6, respectively. As of June 30, 2020,March 31, 2021, the total CECL reserve was $31,$39, of which $14$22 and $17 waswere recorded in reserves and purchase discount for advances and other receivables, respectively. As of March 31, 2020, the total CECL reserve was $23, of which $6 and $17 were recorded in reserves and purchase discount for advances and other receivables, respectively.
Based upon the Company’s application of ASU 2016-13, theThe Company determined that the credit-related risk associated with applicable financial instruments typically 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.
5.4. Reverse Mortgage Interests Net
Reverse mortgage interests, net, consists of the following:
| | Reverse Mortgage Interests, Net | Reverse Mortgage Interests, Net | June 30, 2020 | | December 31, 2019 | Reverse Mortgage Interests, Net | March 31, 2021 | | December 31, 2020 |
| Participating interests in HECM mortgage-backed securities (“HMBS”) | Participating interests in HECM mortgage-backed securities (“HMBS”) | $ | 3,873 | | | $ | 4,282 | | Participating interests in HECM mortgage-backed securities (“HMBS”) | $ | 3,304 | | | $ | 3,471 | |
| Unsecuritized interests | | Unsecuritized interests | 972 | | | 964 | |
| Other interests securitized | Other interests securitized | 825 | | | 994 | | Other interests securitized | 908 | | | 945 | |
| Unsecuritized interests | 1,138 | | | 1,117 | | |
| Purchase discount, net | Purchase discount, net | (127) | | | (114) | | Purchase discount, net | (93) | | | (127) | |
| Total reverse mortgage interests, net | Total reverse mortgage interests, net | $ | 5,709 | | | $ | 6,279 | | Total reverse mortgage interests, net | $ | 5,091 | | | $ | 5,253 | |
Participating Interests in HMBS
Participating interests in HMBS consist of the Company’s reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated in Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, a total of $95 $33 and $149$52 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company, respectively.
In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the six months ended June 30, 2019. There was no such activity during the six months ended June 30, 2020.
Other Interests Securitized
Other interests securitized consist ofThe reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because theyunder other interest securitized have reached 98% of their Max Claim Amount (“MCA”), which is established at origination and in accordance with HMBS program guidelines, requiring a repurchase of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. No such securitizationssecuritization occurred during the sixthree months ended June 30,March 31, 2021 and 2020. During the six months ended June 30, 2019, the Company securitized a total of $398 UPB through Trust 2019-1 and a total of $249 UPB from Trust 2017-2 was called and the related debt was extinguished. The Company sold $20 UPB of Trust 2018-3 during the six months ended June 30, 2019. Refer to Other Nonrecourse Debt in Note 9, Indebtedness for additional information.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consist of the following:
| | Unsecuritized interests | June 30, 2020 | | December 31, 2019 | |
| Repurchased HECM loans (exceeds 98% MCA) | $ | 804 | | | $ | 789 | | |
| Unsecuritized Interests | | Unsecuritized Interests | March 31, 2021 | | December 31, 2020 |
| Repurchased HECM loans (exceeds 98% of their Max Claim Amount (“MCA”)) | | Repurchased HECM loans (exceeds 98% of their Max Claim Amount (“MCA”)) | $ | 699 | | | $ | 665 | |
HECM related receivables(1) | HECM related receivables(1) | 244 | | | 250 | | HECM related receivables(1) | 180 | | | 208 | |
| Funded borrower draws not yet securitized | Funded borrower draws not yet securitized | 53 | | | 64 | | Funded borrower draws not yet securitized | 77 | | | 72 | |
| Real estate owned (“REO”) related receivables | Real estate owned (“REO”) related receivables | 37 | | | 14 | | Real estate owned (“REO”) related receivables | 16 | | | 19 | |
| Total unsecuritized interests | Total unsecuritized interests | $ | 1,138 | | | $ | 1,117 | | Total unsecuritized interests | $ | 972 | | | $ | 964 | |
(1)HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from the U.S. Department of Housing and Urban Development (“HUD”) on reverse mortgage interests.
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the MCA established at origination and in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company repurchased a total of $686$216 and $1,457$383 of HECM loans out of GNMA HMBS securitizations during the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively, of which $186$66 and $371$103 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage. The Company assigned a total of $461$137 and $983$266 of HECM loans to HUD during the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
Purchase Discount, net, for Reverse Mortgage Interests
In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a net purchase discount of $256 associated with financial and operational losses on reverse mortgage interests associated with servicing the loans through foreclosure and collateral liquidation. The premium and discount are amortized and accreted, respectively, based on the effective yield method, whereby the Company updates its prepayment assumptions for actual prepayments on a quarterly basis. Consistent with the Company’s accounting policy, the Company calculates reserve requirements on the reverse mortgage interest portfolio each reporting period and compares such calculated reserve requirements against the remaining net purchase discount. If the calculated reserve requirements exceed the remaining net purchase discount, the Company will record an additional reserve and associated provision to general and administrative expense. No additional reserves were required to be recorded as of June 30, 2020.
The following table sets forth the activities of the purchase discounts, net, for reverse mortgage interests:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, |
Purchase discount, net, for reverse mortgage interests(1) | 2020 | | 2019 | | 2020 | | 2019 | |
Purchase Discount, Net, for Reverse Mortgage Interests(1) | | Purchase Discount, Net, for Reverse Mortgage Interests(1) | 2021 | | 2020 |
| Balance - beginning of period | Balance - beginning of period | $ | (129) | | | $ | (171) | | | $ | (114) | | | $ | (164) | | Balance - beginning of period | $ | (127) | | | $ | (114) | |
Adjustments(2) | — | | | — | | | — | | | (24) | | |
Utilization of purchase discounts(3) | 9 | | | 12 | | | 19 | | | 40 | | |
Utilization of purchase discounts(2) | | Utilization of purchase discounts(2) | 35 | | | 10 | |
| Amortization, net of accretion | Amortization, net of accretion | (7) | | | (4) | | | (32) | | | (15) | | Amortization, net of accretion | (1) | | | (25) | |
| Balance - end of period | Balance - end of period | $ | (127) | | | $ | (163) | | | $ | (127) | | | $ | (163) | | Balance - end of period | $ | (93) | | | $ | (129) | |
(1)Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans.
(2)Adjustments during the six months ended June 30, 2019 due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger.
(3)Utilization of purchase discounts on liquidated loans, for which the remaining receivable was written-off.written off.
Credit Loss for Reverse Mortgage Interests
As described in Note 1, Nature of Business and Basis of Presentation, reverse mortgage interests are within the scope of ASU 2016-13, requiring an assessment of reserves regarding credit-related losses in accordance with the CECL framework. Upon applying ASU 2016-13, theThe Company determined that credit-related losses are immaterial given the government insured nature of the HECM loan product. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument.Accordingly, no cumulative effect adjustment was required upon adoption of ASU 2016-13CECL related accounting guidance on January 1, 2020 and no additional CECL reserve was recorded as of June 30,March 31, 2021 and 2020.
The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s participating interest in reverse mortgage interests was $55 and $85 formortgages was $40 and $62 during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $117 and $167 for the six months ended June 30, 2020 and 2019, respectively.
6.5. 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 closed 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.
Mortgage loans held for sale are recorded at fair value as set forth below:
| | Mortgage Loans Held for Sale | Mortgage Loans Held for Sale | June 30, 2020 | | December 31, 2019 | Mortgage Loans Held for Sale | March 31, 2021 | | December 31, 2020 |
| Mortgage loans held for sale – UPB | Mortgage loans held for sale – UPB | $ | 3,033 | | | $ | 3,949 | | Mortgage loans held for sale – UPB | $ | 6,204 | | | $ | 5,438 | |
Mark-to-market adjustment(1) | Mark-to-market adjustment(1) | 146 | | | 128 | | Mark-to-market adjustment(1) | 147 | | | 282 | |
| Total mortgage loans held for sale | Total mortgage loans held for sale | $ | 3,179 | | | $ | 4,077 | | Total mortgage loans held for sale | $ | 6,351 | | | $ | 5,720 | |
(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 net gain on mortgage loans held for sale in the unaudited condensed consolidated statements of operations.operations.
The following table sets forth the activities of mortgage loans held for sale:
| | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| Mortgage Loans Held for Sale | Mortgage Loans Held for Sale | 2020 | | 2019 | Mortgage Loans Held for Sale | 2021 | | 2020 |
| Balance - beginning of period | Balance - beginning of period | $ | 4,077 | | | $ | 1,631 | | Balance - beginning of period | $ | 5,720 | | | $ | 4,077 | |
| Loans sold | Loans sold | (26,149) | | | (15,203) | | Loans sold | (26,734) | | | (13,510) | |
| Mortgage loans originated and purchased, net of fees | Mortgage loans originated and purchased, net of fees | 23,110 | | | 16,263 | | Mortgage loans originated and purchased, net of fees | 25,214 | | | 12,375 | |
| Repurchase of loans out of Ginnie Mae securitizations | Repurchase of loans out of Ginnie Mae securitizations | 2,092 | | | 715 | | Repurchase of loans out of Ginnie Mae securitizations | 2,255 | | | 919 | |
| Changes in fair value | 42 | | | 16 | | |
| Net change in unrealized (loss) gain on loans held for sale | | Net change in unrealized (loss) gain on loans held for sale | (105) | | | 61 | |
Net transfers of mortgage loans held for sale(1) | Net transfers of mortgage loans held for sale(1) | 7 | | | — | | Net transfers of mortgage loans held for sale(1) | 1 | | | 0 | |
| Balance - end of period | Balance - end of period | $ | 3,179 | | | $ | 3,422 | | Balance - end of period | $ | 6,351 | | | $ | 3,922 | |
(1)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.
ForDuring the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, the Company received proceeds of $26,606$27,152 and $15,422,$13,724, respectively, on the sale of mortgage loans held for sale, resulting in gains of $457$418 and $219,$214, respectively.
The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including having not received borrower payments for 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.
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 and fair value of mortgage loans held for sale on non-accrual status was as follows:
| | | June 30, 2020 | | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| Mortgage Loans Held for Sale | Mortgage Loans Held for Sale | UPB | | Fair Value | | UPB | | Fair Value | Mortgage Loans Held for Sale | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | Non-accrual(1) | $ | 35 | | | $ | 25 | | | $ | 29 | | | $ | 22 | | Non-accrual(1) | $ | 67 | | | $ | 54 | | | $ | 64 | | | $ | 54 | |
(1)Non-accrual UPB includes $27 and $25$48 of UPB related to Ginnie Mae repurchased loans as of June 30, 2020March 31, 2021 and December 31, 2019, respectively.2020.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $21$18 and $21$20 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
7. Other Assets6. Loans Subject to Repurchase from Ginnie Mae
Other assets consist of the following:
| | | | | | | | | | | |
| Other assets | June 30, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | $ | 1,171 | | | $ | 560 | |
| Derivative financial instruments | 391 | | | 153 | |
| Trade receivables and accrued revenues | 133 | | | 126 | |
| Goodwill | 120 | | | 120 | |
| Operating lease right-of-use assets | 108 | | | 121 | |
| Intangible assets | 54 | | | 74 | |
| Other | 197 | | | 236 | |
| Total other assets | $ | 2,174 | | | $ | 1,390 | |
Loans Subject to Repurchase Right from Ginnie Mae
Forward 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 condensed 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 $5,816 and $6,159 as of March 31, 2021 and December 31, 2020, respectively, which are included in both other assets and payables and other liabilities in the condensed consolidated balance sheets. Loans subject to repurchase from Ginnie Mae as of June 30,March 31, 2021 and December 31, 2020 include $818$5,557 and $5,879 loans in forbearance related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), respectively, whereby no payments have been received from borrowers for greater than 90 days.
Derivative Financial Instruments
See Note 8, Derivative Financial Instruments, for further details on derivative financial instruments.
Trade Receivables
7. Goodwill and Accrued Revenues
Trade receivables and accrued revenues are primarily comprised of trade receivables and service fees earned but not received based upon the terms of the Company’s servicing and subservicing agreements. As described in Intangible AssetsNote 1, Nature of Business and Basis of Presentation, certain trade receivables and accrued revenues included in other assets are within the scope of ASU 2016-13, requiring an assessment of CECL losses. As of June 30, 2020, the total CECL reserve was $4.
The credit-risk characteristicsCompany had goodwill of trade receivables$120 as of March 31, 2021 and December 31, 2020. The Company had intangible assets of $30 and $34 as of March 31, 2021 and December 31, 2020, respectively. Goodwill and intangible assets are included in other assets and within the scope of ASU 2016-13 do not change with time as they are primarily short-term in nature. However, the Company does monitor the financial status of customers to determine if any specific loss considerations are required.
Goodwill and Intangible Assets
In 2019, the Company recorded goodwill and intangible assets of $40 and $13, respectively, in connection with the acquisition of Pacific Union. See further discussion in Note 2, Acquisitions. The Company recorded a $4 impairment of technology intangible assets within Corporate/Other segment during the six months ended June 30, 2020 in connection with an ancillary business. The impairment charges were included in the general and administrative expenses in thecondensed consolidated statements of operations. There was 0 impairment expense for intangible assets during the six months ended June 30, 2019.
Operating Lease Right-of-Use (“ROU”) Assets
Operating lease ROU assets represent the Company’s right to use an underlying leased asset during the lease term.
Other
Other primarily includes prepaid expenses, margin call deposits, REO, tax receivables, receivables related to recent loan transfers and various receivables due from investors. REO includes $6 and $11 of REO-related receivables with government insurance as of June 30, 2020 and December 31, 2019, respectively, limiting loss exposure to the Company.balance sheets.
8. 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 rates related to originations. Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar and Treasury futures and interest rate swap agreements.
Associated withThe following tables provide the Company’s derivatives are $23outstanding notional balances, fair values of outstanding positions and $6recorded gains/(losses) for the derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | | | Three Months Ended March 31, 2021 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | | | Gains/(Losses) |
| Assets | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | |
| Loan sale commitments | 2021 | | $ | 2,341 | | | $ | 42 | | | | | $ | (60) | |
| Derivative financial instruments | | | | | | | | | |
| IRLCs | 2021 | | 8,950 | | | 232 | | | | | (182) | |
| LPCs | 2021 | | 1,165 | | | 8 | | | | | (30) | |
| Forward MBS trades | 2021 | | 22,566 | | | 286 | | | | | 249 | |
| Total derivative financial instruments - assets | | | $ | 32,681 | | | $ | 526 | | | | | $ | 37 | |
| Liabilities | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | |
| IRLCs | 2021 | | $ | 240 | | | $ | 1 | | | | | $ | 1 | |
| LPCs | 2021 | | 3,974 | | | 38 | | | | | 37 | |
| Forward MBS trades | 2021 | | 6,341 | | | 76 | | | | | (80) | |
| Swap futures | 2021 | | 60 | | | 1 | | | | | 1 | |
| Total derivative financial instruments - liabilities | | | $ | 10,615 | | | $ | 116 | | | | | $ | (41) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2020 | | Three Months Ended March 31, 2020 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Gains/(Losses) |
| Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | |
| Loan sale commitments | 2020 | | $ | 2,598 | | | $ | 111 | | | $ | 79 | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 2020 | | 6,923 | | | 263 | | | 128 | |
| LPCs | 2020 | | 834 | | | 25 | | | 13 | |
| Forward MBS trades | 2020 | | 886 | | | 6 | | | 0 | |
| Eurodollar futures | 2020-2021 | | 6 | | | 0 | | | 0 | |
| Total derivative financial instruments - assets | | | $ | 8,649 | | | $ | 294 | | | $ | 141 | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 2020 | | $ | 22 | | | $ | 0 | | | $ | 0 | |
| LPCs | 2020 | | 10 | | | 0 | | | (3) | |
| Forward MBS trades | 2020 | | 10,229 | | | 223 | | | 211 | |
| Eurodollar futures | 2020-2021 | | 6 | | | 0 | | | 0 | |
| Total derivative financial instruments - liabilities | | | $ | 10,267 | | | $ | 223 | | | $ | 208 | |
As of March 31, 2021, the Company held $2 and $113 in collateral deposits and collateral obligations on derivative instruments, respectively. As of December 31, 2020 the Company held $61 in collateral deposits on derivative instrumentsinstruments. Collateral deposits and collateral obligations are recorded in other assets onand payable and other liabilities, respectively, in the Company’s condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively.sheets. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the condensed consolidated balance sheets.
The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | | | | | Six Months Ended June 30, 2020 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | | | Recorded Gains/(Losses) |
| Assets | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | |
| Loan sale commitments | 2020 | | $ | 1,673 | | | $ | 81 | | | | | $ | 48 | |
| Derivative financial instruments | | | | | | | | | |
| IRLCs | 2020 | | 9,227 | | | 370 | | | | | 235 | |
| LPCs | 2020 | | 1,823 | | | 18 | | | | | 6 | |
| Forward MBS trades | 2020 | | 1,239 | | | 3 | | | | | (3) | |
| Eurodollar futures | 2020-2021 | | 6 | | | — | | | | | — | |
| Total derivative financial instruments - assets | | | $ | 12,295 | | | $ | 391 | | | | | $ | 238 | |
| Liabilities | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | |
| | | | | | | | | |
| LPCs | 2020 | | $ | 55 | | | $ | — | | | | | $ | (2) | |
| Forward MBS trades | 2020 | | 10,119 | | | 50 | | | | | 37 | |
| Eurodollar futures | 2020-2021 | | 5 | | | — | | | | | — | |
| Total derivative financial instruments - liabilities | | | $ | 10,179 | | | $ | 50 | | | | | $ | 35 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | | | Six Months Ended June 30, 2019 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Recorded Gains/(Losses) |
| Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | |
| Loan sale commitments | 2019 | | $ | 1,659 | | | $ | 47 | | | $ | 21 | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 2019 | | 3,649 | | | 110 | | | 51 | |
| LPCs | 2019 | | 1,327 | | | 17 | | | 15 | |
| Forward MBS trades | 2019 | | 762 | | | 1 | | | (1) | |
| Eurodollar futures | 2019-2021 | | 8 | | | — | | | — | |
| Total derivative financial instruments - assets | | | $ | 5,746 | | | $ | 128 | | | $ | 65 | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 2019 | | $ | 4 | | | $ | — | | | $ | — | |
| LPCs | 2019 | | 212 | | | 1 | | | 1 | |
| Forward MBS trades | 2019 | | 4,932 | | | 30 | | | 6 | |
| Eurodollar futures | 2019-2021 | | 12 | | | — | | | — | |
| Total derivative financial instruments - liabilities | | | $ | 5,160 | | | $ | 31 | | | $ | 7 | |
9. Indebtedness
Notes PayableAdvance and Warehouse Facilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | June 30, 2020 | | | | December 31, 2019 | | |
| Advance Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral pledged |
$875 advance facility(1) | | CP+2.5% to 6.5% | | April 2021 | | Servicing advance receivables | | $ | 875 | | | $ | 193 | | | $ | 220 | | | $ | 37 | | | $ | 88 | |
$425 advance facility(2) | | LIBOR+2.8% to 6.5% | | October 2021 | | Servicing advance receivables | | 425 | | | 211 | | | 273 | | | 224 | | | 285 | |
$250 advance facility(3) | | LIBOR+1.5% to 2.6% | | December 2020 | | Servicing advance receivables | | 250 | | | — | | | — | | | 98 | | | 167 | |
| $200 advance facility | | LIBOR+2.5% | | January 2021 | | Servicing advance receivables | | 200 | | | 76 | | | 106 | | | 63 | | | 125 | |
| Advance facilities principal amount | | | | | | | | | | 480 | | | $ | 599 | | | 422 | | | $ | 665 | |
| Unamortized debt issuance costs | | | | | | | | | | (5) | | | | | — | | | |
| Advance facilities, net | | | | | | | | | | $ | 475 | | | | | $ | 422 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral Pledged |
| Advance Facilities | | | | | | | | | | | | | | | | |
| $875 advance facility | | CP+2.0% to 6.5% | | January 2022 | | Servicing advance receivables | | $ | 875 | | | $ | 140 | | | $ | 165 | | | $ | 168 | | | $ | 195 | |
$640 advance facility(1) | | LIBOR+3.9% | | August 2022 | | Servicing advance receivables | | 640 | | | 231 | | | 299 | | | 235 | | | 305 | |
| $425 advance facility | | LIBOR+1.6% to 6.5% | | October 2021 | | Servicing advance receivables | | 425 | | | 197 | | | 250 | | | 192 | | | 246 | |
| $100 advance facility | | LIBOR+2.5% | | January 2022 | | Servicing advance receivables | | 100 | | | 70 | | | 92 | | | 74 | | | 98 | |
| Advance facilities principal amount | | | | | | 638 | | | 806 | | | 669 | | | 844 | |
| | | | | | | | | | | | | | | | |
| Warehouse Facilities | | | | | | | | | | | | | | | | |
$2,500 warehouse facility(2) | | LIBOR+1.6% to 1.9% | | October 2021 | | Mortgage loans or MBS | | 2,500 | | | 1,442 | | | 1,495 | | | 1,003 | | | 1,037 | |
| $2,000 warehouse facility | | LIBOR+1.6% to 2.0% | | February 2023 | | Mortgage loans or MBS | | 2,000 | | | 940 | | | 1,055 | | | 339 | | | 392 | |
| $1,500 warehouse facility | | LIBOR+1.5% | | June 2021 | | Mortgage loans or MBS | | 1,500 | | | 867 | | | 838 | | | 1,081 | | | 1,028 | |
$1,350 warehouse facility(3) | | LIBOR+1.7% to 3.9% | | September 2022 | | Mortgage loans or MBS | | 1,350 | | | 918 | | | 990 | | | 1,067 | | | 1,128 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral Pledged |
| $1,200 warehouse facility | | LIBOR+1.8% to 3.0% | | November 2021 | | Mortgage loans or MBS | | 1,200 | | | 497 | | | 543 | | | 787 | | | 839 | |
| $750 warehouse facility | | LIBOR+1.8% to 2.3% | | August 2021 | | Mortgage loans or MBS | | 750 | | | 612 | | | 631 | | | 477 | | | 492 | |
| $750 warehouse facility | | LIBOR+1.7% to 2.8% | | October 2021 | | Mortgage loans or MBS | | 750 | | | 535 | | | 549 | | | 562 | | | 574 | |
| $600 warehouse facility | | LIBOR+2.5% | | February 2022 | | Mortgage loans or MBS | | 600 | | | 332 | | | 374 | | | 187 | | | 222 | |
| $500 warehouse facility | | LIBOR+2.5% to 4.0% | | May 2021 | | Mortgage loans or MBS | | 500 | | | 0 | | | 0 | | | 0 | | | 0 | |
| $300 warehouse facility | | LIBOR+1.4% | | January 2022 | | Mortgage loans or MBS | | 300 | | | 129 | | | 130 | | | 163 | | | 164 | |
| $250 warehouse facility | | LIBOR+1.4% to 2.3% | | May 2021 | | Mortgage loans or MBS | | 250 | | | 1 | | | 1 | | | 0 | | | 0 | |
| $200 warehouse facility | | LIBOR+1.8% | | July 2021 | | Mortgage loans or MBS | | 200 | | | 169 | | | 173 | | | 131 | | | 134 | |
| $50 warehouse facility | | LIBOR+1.8% to 4.8% | | June 2021 | | Mortgage loans or MBS | | 50 | | | 36 | | | 43 | | | 37 | | | 42 | |
$30 warehouse facility(4) | | LIBOR+3.3% | | January 2022 | | Mortgage loans or MBS | | 30 | | | 2 | | | 2 | | | 1 | | | 1 | |
| Warehouse facilities principal amount | | 6,480 | | | 6,824 | | | 5,835 | | | 6,053 | |
| | | | | | | | | | | | | | | | |
| MSR Facilities | | | | | | | | | | | | | | | | |
$260 warehouse facility(1) | | LIBOR+3.9% | | August 2022 | | MSR | | 260 | | 260 | | 838 | | 260 | | 668 |
| $200 warehouse facility | | LIBOR+3.5% | | August 2021 | | MSR | | 200 | | 0 | | 471 | | 0 | | 247 |
$150 warehouse facility(3) | | LIBOR+3.8% | | September 2022 | | MSR | | 150 | | 0 | | 438 | | 0 | | 228 |
| $50 warehouse facility | | LIBOR+3.3% | | November 2022 | | MSR | | 50 | | 10 | | 80 | | 10 | | 74 |
| MSR facilities principal amount | | 270 | | 1,827 | | 270 | | 1,217 |
| | | | | | | | | | | | | | | | |
| Advance, warehouse and MSR facilities principal amount | | 7,388 | | | $ | 9,457 | | 6,774 | | | $ | 8,114 | |
| Unamortized debt issuance costs | | | | | | | | (9) | | | | (11) | | | |
| Advance and warehouse facilities, net | | $ | 7,379 | | | | $ | 6,763 | | |
| | | | | | | | | | | | | | | | |
| Pledged Collateral for warehouse and MSR facilities: | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | $ | 5,970 | | | $ | 6,210 | | | $ | 5,330 | | | $ | 5,447 | |
| Reverse mortgage interests | | | | | | | | 510 | | | 614 | | | 505 | | | 606 | |
| MSR | | | | | | | | 270 | | | 1,827 | | | 270 | | | 1,217 | |
(1)Total capacity for this facility is $900, of which $640 is internally allocated for advance financing and $260 is internally allocated for MSR financing; capacity is fully fungible and is not restricted by these allocations.
(2)The capacity amount for this advancewarehouse facility increased from $125$1,500 to $875$2,500 in April 2020.
(2)The capacity amount for this advance facility increased from $325 to $425 in April 2020.
(3)This advance facility was terminated and transferred to another advance facility in April 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | June 30, 2020 | | | | December 31, 2019 | | |
| Warehouse Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral pledged | | Outstanding | | Collateral pledged |
| $1,500 warehouse facility | | LIBOR+1.7% | | June 2021 | | Mortgage loans or MBS | | $ | 1,500 | | | $ | 669 | | | $ | 637 | | | $ | 759 | | | $ | 733 | |
| $1,200 warehouse facility | | LIBOR+1.5% to 3.0% | | November 2020 | | Mortgage loans or MBS | | 1,200 | | | 568 | | | 606 | | | 683 | | | 724 | |
$800 warehouse facility(1) | | LIBOR+2.1% to 3.8% | | April 2021 | | Mortgage loans or MBS | | 800 | | | 642 | | | 700 | | | 589 | | | 656 | |
| $750 warehouse facility | | LIBOR+1.4% to 2.8% | | September 2020 | | Mortgage loans or MBS | | 750 | | | 572 | | | 583 | | | 411 | | | 425 | |
| $700 warehouse facility | | LIBOR+1.3% to 2.2% | | November 2020 | | Mortgage loans or MBS | | 700 | | | 624 | | | 644 | | | 469 | | | 488 | |
| $600 warehouse facility | | LIBOR+2.2% | | February 2021 | | Mortgage loans or MBS | | 600 | | | 233 | | | 278 | | | 174 | | | 202 | |
| $500 warehouse facility | | LIBOR+2.5% to 4.0% | | May 2021 | | Mortgage loans or MBS | | 500 | | | — | | | 1 | | | 336 | | | 349 | |
$250 warehouse facility(2) | | LIBOR+1.4% to 2.3% | | September 2020 | | Mortgage loans or MBS | | 250 | | | — | | | — | | | 762 | | | 783 | |
| $200 warehouse facility | | LIBOR+1.4% | | January 2021 | | Mortgage loans or MBS | | 200 | | | 175 | | | 175 | | | 136 | | | 136 | |
| $200 warehouse facility | | LIBOR+2.5% | | May 2021 | | Mortgage loans or MBS | | 200 | | | 50 | | | 74 | | | 54 | | | 78 | |
| $200 warehouse facility | | LIBOR+1.8% | | April 2021 | | Mortgage loans or MBS | | 200 | | | 19 | | | 19 | | | 27 | | | 27 | |
| $200 warehouse facility | | LIBOR+1.3% | | October 2020 | | Mortgage loans or MBS | | 200 | | | — | | | — | | | — | | | — | |
| $50 warehouse facility | | LIBOR+1.8% to 4.8% | | April 2021 | | Mortgage loans or MBS | | 50 | | | 31 | | | 36 | | | 11 | | | 15 | |
| $40 warehouse facility | | LIBOR+3.3% | | September 2020 | | Mortgage loans or MBS | | 40 | | | 4 | | | 4 | | | 5 | | | 6 | |
| Warehouse facilities principal amount | | | | | | | | | | 3,587 | | | 3,757 | | | 4,416 | | | 4,622 | |
| MSR Facility | | | | | | | | | | | | | | | | |
$450 warehouse facility(3) | | LIBOR+5.1% | | May 2021 | | MSR | | 450 | | | 300 | | | 628 | | | 150 | | | 945 | |
| $400 warehouse facility | | LIBOR+2.3% | | December 2020 | | MSR | | 400 | | | 75 | | | 176 | | | — | | | 200 | |
$150 warehouse facility(1) | | LIBOR+3.8% | | April 2021 | | MSR | | 150 | | | 40 | | | 117 | | | — | | | 130 | |
| $50 warehouse facility | | LIBOR+2.8% | | August 2020 | | MSR | | 50 | | | 30 | | | 87 | | | 10 | | | 84 | |
| MSR facilities principal amount | | | | | | | | | | 445 | | | 1,008 | | | 160 | | | 1,359 | |
| Warehouse and MSR facilities principal amount | | | | | | | | | | 4,032 | | | $ | 4,765 | | | 4,576 | | | $ | 5,981 | |
| Unamortized debt issuance costs | | | | | | | | | | (1) | | | | | (1) | | | |
| Warehouse facilities, net | | | | | | | | | | $ | 4,031 | | | | | $ | 4,575 | | | |
| | | | | | | | | | | | | | | | |
| Pledged Collateral: | | | | | | | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | | $ | 2,963 | | | $ | 3,016 | | | $ | 3,826 | | | $ | 3,931 | |
| Reverse mortgage interests | | | | | | | | | | 624 | | | 741 | | | 590 | | | 691 | |
| MSR | | | | | | | | | | 445 | | | 1,008 | | | 160 | | | 1,359 | |
(1)Total capacity amount for this facility is $800$1,500, of which $150 is a sublimit for MSR financing.
(2)(4)The capacity amount for this warehouse facility decreased from $1,000$40 to $250$30 in May 2020.
(3)The capacity amount for this MSR facility increased from $400 to $450 in May 2020.2021.
Unsecured Senior Notes
Unsecured senior notes consist of the following:
| | | | | | | | | | | |
| Unsecured senior notes | June 30, 2020 | | December 31, 2019 |
| $950 face value, 8.125% interest rate payable semi-annually, due July 2023 | $ | 950 | | | $ | 950 | |
| $750 face value, 9.125% interest rate payable semi-annually, due July 2026 | 750 | | | 750 | |
$600 face value, 6.000% interest rate payable semi-annually, due January 2027(1) | 600 | | | — | |
$600 face value, 6.500% interest rate payable semi-annually, due July 2021(2) | — | | | 492 | |
$300 face value, 6.500% interest rate payable semi-annually, due June 2022(2) | — | | | 206 | |
| Unsecured senior notes principal amount | 2,300 | | | 2,398 | |
| Unamortized debt issuance costs, premium and discount | (39) | | | (32) | |
| Unsecured senior notes, net | $ | 2,261 | | | $ | 2,366 | |
| | | | | | | | | | | |
| Unsecured Senior Notes | March 31, 2021 | | December 31, 2020 |
| $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 | |
| Unsecured senior notes principal amount | 2,100 | | | 2,100 | |
| Unamortized debt issuance costs | (26) | | | (26) | |
| Unsecured senior notes, net | $ | 2,074 | | | $ | 2,074 | |
(2)This note was redeemed in full on February 15, 2020 using the net proceeds of the 2027 Notes offering, together with cash on hand.
The ratios included in the indentures 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 portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates. NoNo notes were repurchased or redeemed during the three months ended June 30, 2020. March 31, 2021. During the sixthree months ended June 30,March 31, 2020, the Company repaid $100$100 in principal of outstanding notes. Additionally, the Company redeemed $598 in principal of outstanding notes during the sixthree months ended June 30,March 31, 2020, resulting in a gain of $1. No notes were repurchased or redeemed during the three and six months ended June 30, 2019.
As of June 30, 2020,March 31, 2021, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2020 | | $ | — | |
| 2021 | | — | |
| 2022 | | — | |
| 2023 | | 950 | |
| 2024 | | — | |
| Thereafter | | 1,350 | |
| Total unsecured senior notes principal amount | | $ | 2,300 | |
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2021 through 2025 | | $ | 0 | |
| Thereafter | | 2,100 | |
| Total unsecured senior notes principal amount | | $ | 2,100 | |
Other Nonrecourse Debt
Other nonrecourse debt consists of the following:
| | | June 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Other nonrecourse debt | Issue Date | | Maturity Date | | Class of Note | | Collateral Amount | | Outstanding | | Outstanding | |
| Other Nonrecourse Debt | | Other Nonrecourse Debt | Issue Date | | Maturity Date | | Interest Rate | | Class of Note | | Collateral Amount | | Outstanding | | Outstanding |
Participating interest financing(1) | Participating interest financing(1) | — | | — | | — | | $ | — | | | $ | 3,875 | | | $ | 4,284 | | Participating interest financing(1) | — | | — | | 0.3%-5.6% | | — | | $ | 0 | | | $ | 3,306 | | | $ | 3,473 | |
| Securitization of nonperforming HECM loans | Securitization of nonperforming HECM loans | | Securitization of nonperforming HECM loans | |
| Trust 2020-1 | | Trust 2020-1 | September 2020 | | September 2030 | | 1.3%-7.5% | | A, M1, M2, M3, M4, M5 | | 489 | | | 471 | | | 490 | |
| Trust 2019-2 | Trust 2019-2 | November 2019 | | November 2029 | | A, M1, M2, M3, M4, M5 | | 287 | | | 274 | | | 333 | | Trust 2019-2 | November 2019 | | November 2029 | | 2.3%-6.0% | | A, M1, M2, M3, M4, M5 | | 254 | | | 232 | | | 241 | |
| Trust 2019-1 | Trust 2019-1 | June 2019 | | June 2029 | | A, M1, M2, M3, M4, M5 | | 264 | | | 244 | | | 302 | | Trust 2019-1 | June 2019 | | June 2029 | | 2.7%-6.0% | | A, M1, M2, M3, M4, M5 | | 231 | | | 203 | | | 212 | |
| Trust 2018-3 | November 2018 | | November 2028 | | A, M1, M2, M3, M4, M5 | | 200 | | | 179 | | | 209 | | |
| Trust 2018-2 | July 2018 | | July 2028 | | A, M1, M2, M3, M4, M5 | | 149 | | | 127�� | | | 148 | | |
| Other nonrecourse debt principal amount | Other nonrecourse debt principal amount | | 4,699 | | | 5,276 | | Other nonrecourse debt principal amount | | 4,212 | | | 4,416 | |
| Unamortized debt issuance costs, premium and discount | | 8 | | | 10 | | |
| Unamortized premium, net of debt issuance costs and discount | | Unamortized premium, net of debt issuance costs and discount | | 9 | | | 8 | |
| Other nonrecourse debt, net | Other nonrecourse debt, net | | $ | 4,707 | | | $ | 5,286 | | Other nonrecourse debt, net | | $ | 4,221 | | | $ | 4,424 | |
(1)Amounts represent the Company’s participating interest in GNMA HMBS securitized portfolios.
Participating Interest Financing
Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Company issues HMBS in connection with the securitization of borrower draws and accrues interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a “participating interest”) in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate with a range of 0.6% to 5.6%.
Securitizations of Nonperforming HECM Loans
From time to time, the Company securitizes its interests in non-performing reverse mortgages. The transactions provide investors with the ability to invest in a pool of both non-performing HECM loans secured by one-to-four-family residential properties and a pool of REO properties acquired through foreclosure of a deed in lieu of foreclosure in connection with HECM loans that are covered by FHA insurance. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.3% to 6.0% on the outstanding securitized notes and recorded as interest expense in consolidated statements of operations. The HECM securitizations are callable with expected weighted average lives of less than one to three years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.
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 compliance with its required financial covenants as of June 30, 2020.March 31, 2021.
10. Payables and Other Liabilities
Payables and other liabilities consist of the following:
| | | | | | | | | | | |
| Payables and other liabilities | June 30, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | $ | 1,171 | | | $ | 560 | |
| Payables to servicing and subservicing investors | 345 | | | 423 | |
| Payable to GSEs and securitized trusts | 129 | | | 182 | |
| Operating lease liabilities | 121 | | | 135 | |
| Derivative financial instruments | 50 | | | 15 | |
| Other liabilities | 644 | | | 701 | |
| Total payables and other liabilities | $ | 2,460 | | | $ | 2,016 | |
Loans Subject to Repurchase Right from Ginnie Mae
See Note 7, Other Assets, for a description of assets and liabilities related to loans subject to repurchase right from Ginnie Mae. Loans subject to repurchase from Ginnie Mae as of June 30, 2020 include $818 loans in forbearance related to the CARES Act whereby no payments have been received from borrowers for greater than 90 days.
Payables to Servicing and Subservicing Investors and Payables to GSEs and Securitized Trusts
Payables to servicing and subservicing investors, GSEs and securitized trusts represent amounts due to investors, GSEs and securitized trusts in connection with loans serviced that are paid from collections of the underlying loans, insurance proceeds or proceeds from property disposal.
Derivative Financial Instruments
See Note 8, Derivative Financial Instruments, for further details on derivative financial instruments.
Operating Lease Liabilities
Operating lease liabilities represent the Company’s obligation to make lease payments arising from a lease, measured on a discount basis.
Other Liabilities
Other liabilities primarily include accrued bonus and payroll, accrued interest, accrued legal expenses, payables to insurance carriers and insurance cancellation reserves, repurchase reserves, accounts payable and other accrued liabilities. Payables to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third-party investors on liquidated loans.
The following table sets forth the activities of the repurchase reserves:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| Repurchase Reserves | 2020 | | 2019 | | 2020 | | 2019 |
| Balance - beginning of period | $ | 29 | | | $ | 16 | | | $ | 25 | | | $ | 8 | |
| Provisions | 4 | | | 8 | | | 9 | | | 16 | |
| Releases | (4) | | | (1) | | | (5) | | | (1) | |
| Balance - end of period | $ | 29 | | | $ | 23 | | | $ | 29 | | | $ | 23 | |
The provision for repurchases represents an estimate of losses to be incurred on the repurchase of loans or indemnification of purchaser’s losses related to forward loans. Certain sale contracts and GSE standards require the Company to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties with respect to underwriting standards.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant factors including economic conditions. Current loss rates have significantly declined attributable to stronger underwriting standards and due to the falloff of loans underwritten prior to the mortgage loan crisis period prior to 2008. The Company believes its reserve balance as of June 30, 2020 is sufficient to cover loss exposure associated with repurchase contingencies.
11. Securitizations and Financings
Variable Interest Entities (VIEs)
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be 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 the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.
The Company has determined that the SPEs created in connection with the (i) Nationstar Mortgage Advance Receivables Trust (NMART), (ii) Nationstar Agency Advance Financing Trust (NAAFT) and (iii) Nationstar Advance Agency Receivables Trust (NAART)certain advance facilities trusts should be consolidated as the Company is the primary beneficiary of each of these entities. Also, the Company consolidated 4certain reverse mortgage SPEs as it is the primary beneficiary of each of these entities. These SPEs include the Nationstar HECM Loan Trusts.
A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s condensed consolidated financial statementsbalance sheets is presented below:
| | | June 30, 2020 | | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| Consolidated transactions with VIEs | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | |
| Consolidated Transactions with VIEs | | Consolidated Transactions with VIEs | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Restricted cash | Restricted cash | $ | 95 | | | $ | 27 | | | $ | 66 | | | $ | 42 | | Restricted cash | $ | 80 | | | $ | 27 | | | $ | 47 | | | $ | 23 | |
| Advances and other receivables, net | | Advances and other receivables, net | 415 | | | 0 | | | 441 | | | 0 | |
Reverse mortgage interests, net(1) | Reverse mortgage interests, net(1) | — | | | 4,639 | | | — | | | 5,230 | | Reverse mortgage interests, net(1) | 0 | | | 4,159 | | | 0 | | | 4,356 | |
| Advances and other receivables, net | 492 | | | — | | | 540 | | | — | | |
| Total assets | Total assets | $ | 587 | | | $ | 4,666 | | | $ | 606 | | | $ | 5,272 | | Total assets | $ | 495 | | | $ | 4,186 | | | $ | 488 | | | $ | 4,379 | |
| | Liabilities | Liabilities | | Liabilities | |
Advance facilities(2) | Advance facilities(2) | $ | 399 | | | $ | — | | | $ | 359 | | | $ | — | | Advance facilities(2) | $ | 337 | | | $ | 0 | | | $ | 358 | | | $ | 0 | |
| Payables and other liabilities | Payables and other liabilities | 1 | | | 1 | | | 1 | | | 1 | | Payables and other liabilities | 0 | | | 0 | | | 1 | | | 0 | |
| Participating interest financing | Participating interest financing | — | | | 3,875 | | | — | | | 4,284 | | Participating interest financing | 0 | | | 3,306 | | | 0 | | | 3,473 | |
| HECM Securitizations (HMBS) | HECM Securitizations (HMBS) | | HECM Securitizations (HMBS) | |
| Trust 2020-1 | | Trust 2020-1 | 0 | | | 471 | | | 0 | | | 490 | |
| Trust 2019-2 | Trust 2019-2 | — | | | 274 | | | — | | | 333 | | Trust 2019-2 | 0 | | | 232 | | | 0 | | | 241 | |
| Trust 2019-1 | Trust 2019-1 | — | | | 244 | | | — | | | 302 | | Trust 2019-1 | 0 | | | 203 | | | 0 | | | 212 | |
| Trust 2018-3 | — | | | 179 | | | — | | | 209 | | |
| Trust 2018-2 | — | | | 127 | | | — | | | 148 | | |
| Total liabilities | Total liabilities | $ | 400 | | | $ | 4,700 | | | $ | 360 | | | $ | 5,277 | | Total liabilities | $ | 337 | | | $ | 4,212 | | | $ | 359 | | | $ | 4,416 | |
(1)Amounts include net purchase discount of $59 and $46 $53 and $61 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
(2)Amounts include the Nationstar agency advance financing facility and notes payable recorded by the Nationstar Mortgage Advance Receivable Trust, and the Nationstar Agency Advance Receivables Trust. Refer to Notes Payableadvance facilities in Note 9, Indebtedness, for additional information.
The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company:
| | Unconsolidated securitization trusts | June 30, 2020 | | December 31, 2019 | |
| Unconsolidated Securitization Trusts | | Unconsolidated Securitization Trusts | March 31, 2021 | | December 31, 2020 |
| Total collateral balances - UPB | Total collateral balances - UPB | $ | 1,422 | | | $ | 1,503 | | Total collateral balances - UPB | $ | 1,283 | | | $ | 1,326 | |
| Total certificate balances | Total certificate balances | $ | 1,421 | | | $ | 1,512 | | Total certificate balances | $ | 1,281 | | | $ | 1,329 | |
The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of June 30, 2020March 31, 2021 and December 31, 20192020 and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs.
A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below:
| | Principal Amount of Transferred Loans 60 Days or More Past Due | Principal Amount of Transferred Loans 60 Days or More Past Due | June 30, 2020 | | December 31, 2019 | Principal Amount of Transferred Loans 60 Days or More Past Due | March 31, 2021 | | December 31, 2020 |
| Unconsolidated securitization trusts | Unconsolidated securitization trusts | $ | 239 | | | $ | 193 | | Unconsolidated securitization trusts | $ | 147 | | | $ | 154 | |
12.11. 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.On March 26, 2021, the Company repurchased 3,700 thousand shares of its common stock from affiliates of Kohlberg Kravis Roberts & Co. L.P., a related party of the Company, for a total cost of $119 or $32.25 per share.
The following table sets forth the computation of basic and diluted net income (loss) per common share (amounts in millions, except per share amounts):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| Computation of earnings per share | 2020 | | 2019 | | 2020 | | 2019 | |
| Computation of Earnings Per Share | | Computation of Earnings Per Share | 2021 | | 2020 | |
| Net income (loss) attributable to Mr. Cooper | Net income (loss) attributable to Mr. Cooper | $ | 73 | | | $ | (87) | | | $ | (95) | | | $ | (273) | | Net income (loss) attributable to Mr. Cooper | $ | 561 | | | $ | (168) | | |
| Less: Undistributed earnings attributable to participating stockholders | Less: Undistributed earnings attributable to participating stockholders | 1 | | | — | | | — | | | — | | Less: Undistributed earnings attributable to participating stockholders | 5 | | | 0 | | |
| Net income (loss) attributable to common stockholders | Net income (loss) attributable to common stockholders | $ | 72 | | | $ | (87) | | | $ | (95) | | | $ | (273) | | Net income (loss) attributable to common stockholders | $ | 556 | | | $ | (168) | | |
| | Net income (loss) per common share attributable to Mr. Cooper: | Net income (loss) per common share attributable to Mr. Cooper: | | Net income (loss) per common share attributable to Mr. Cooper: | | |
| Basic | Basic | $ | 0.78 | | | $ | (0.96) | | | $ | (1.04) | | | $ | (3.00) | | Basic | $ | 6.22 | | | $ | (1.84) | | |
| Diluted | Diluted | $ | 0.77 | | | $ | (0.96) | | | $ | (1.04) | | | $ | (3.00) | | Diluted | $ | 5.92 | | | $ | (1.84) | | |
| | Weighted average shares of common stock outstanding (in thousands): | Weighted average shares of common stock outstanding (in thousands): | | Weighted average shares of common stock outstanding (in thousands): | | |
| Basic | Basic | 91,997 | | | 91,054 | | | 91,691 | | | 90,978 | | Basic | 89,458 | | | 91,385 | | |
Dilutive effect of stock awards(1) | Dilutive effect of stock awards(1) | 176 | | | — | | | — | | | — | | Dilutive effect of stock awards(1) | 3,590 | | | 0 | | |
Dilutive effect of participating securities(1) | Dilutive effect of participating securities(1) | 839 | | | — | | | — | | | — | | Dilutive effect of participating securities(1) | 839 | | | 0 | | |
| Diluted | Diluted | 93,012 | | | 91,054 | | | 91,691 | | | 90,978 | | Diluted | 93,887 | | | 91,385 | | |
(1)For periods with net loss, the Company excluded potential common shares from the computation of diluted EPS because inclusion would be antidilutive.
13.12. Income Taxes
The following table sets forthFor the computation ofthree months ended March 31, 2021, the effective tax rate:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Income (loss) before income tax expense (benefit) | $ | 110 | | | $ | (117) | | | $ | (129) | | | $ | (350) | |
| | | | | | | |
| Income tax expense (benefit) | $ | 37 | | | $ | (29) | | | $ | (31) | | | $ | (76) | |
| | | | | | | |
Effective tax rate(1) | 33.4 | % | | 24.6 | % | | 24.1 | % | | 21.7 | % |
(1)Effective tax rate, is calculated usingbased on whole numbers.numbers, was
For the three and six months ended June 30, 2020, the effective tax rateh differed from the statutory federal rate of 21% primarily due to state income taxes, as well as unfavorable permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m). The effective tax rate increased indecreased during the three and six months ended June 30, 2020, asMarch 31, 2021 compared to the same periodsperiod in 2019,2020, primarily attributabledue to quarterly discrete tax items related to the increased relative unfavorableexcess tax impactsbenefit from stock-based compensation and the recognition of a deferred tax asset for the permanent differences oninvestment in subsidiaries as it relates to the annual effective rate.Title Transaction.
For the three and six months ended June 30, 2019,March 31, 2020, the effective tax rate, based on whole numbers, was 28.4% which differed from the statutory federal rate of 21% primarily due to permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses, as well as other recurring items such as the state tax benefit.
14.13. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the 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).
There have been no significant changes to the methodsvaluation techniques and assumptionsinputs 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) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae 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.
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. Mortgage loans held for sale 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, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may also purchase loans out of a 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. See Note 6, Mortgage Loans Held for Sale, for more information.
Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward 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. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrow and costs to service. These 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 judgment by the Company and can have a significant 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 3, 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 4, Advances and Other Receivables, Net for more information.
Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Company determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information.
Derivative Financial Instruments (Level 3 and Level 2) – 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. Derivative instruments utilized by the Company primarily include IRLCs, LPCs, forward MBS trades, Eurodollar and Treasury futures and interest rate swap agreements.
During the three months ended June 30, 2020, the Company changed the fair value classification of its IRLCs and LPCs derivatives from Level 2 to Level 3. 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 was previously much less significant, resulting in a classificationvalues of Level 2 and Level 3 assets and liabilities as disclosed in the fair value hierarchy as ofCompany’s Annual Reports on Form 10-K for the year ended December 31, 2019. During the three months ended June 30,2020, market interest rates continued to decline and fell to record lows, which drove an increase in the volume of the Company’s IRLCs and LPCs and increased the impact of the unobservable input on the overall valuation of IRLCs and LPCs. Such increased impact of the unobservable input on the overall valuation resulted in a classification of Level 3 in the fair value hierarchy as of June 30, 2020.
For other derivatives, they 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, the Company classifies these contracts as Level 2 in the fair value disclosure.
Derivative financial instruments are recorded in other assets and payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, 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 at amortized cost on the consolidated balance sheets approximates fair value. See Note 9, Indebtedness, for more information.
Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 9, Indebtedness, for more information.
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. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. 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 3, 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 and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value 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 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Participating Interest Financing (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. Participating interest financing is recorded in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, Net, and Note 9, Indebtedness, for more information.
HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the consolidated balance sheets. See Note 9, Indebtedness, for more information.
The following tables present the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:
| | | | June 30, 2020 | | | March 31, 2021 |
| | | | | Recurring Fair Value Measurements | | | | | Recurring Fair Value Measurements |
| Fair value - Recurring basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | |
| Fair Value - Recurring Basis | | Fair Value - Recurring Basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Mortgage loans held for sale | Mortgage loans held for sale | $ | 3,179 | | | $ | — | | | $ | 3,179 | | | $ | — | | Mortgage loans held for sale | $ | 6,351 | | | $ | 0 | | | $ | 6,351 | | | $ | 0 | |
| Forward mortgage servicing rights | Forward mortgage servicing rights | 2,757 | | | — | | | — | | | 2,757 | | Forward mortgage servicing rights | 3,354 | | | 0 | | | 0 | | | 3,354 | |
| Derivative financial instruments | Derivative financial instruments | | Derivative financial instruments | |
| IRLCs | IRLCs | 370 | | | — | | | — | | | 370 | | IRLCs | 232 | | | 0 | | | 0 | | | 232 | |
| Forward MBS trades | Forward MBS trades | 3 | | | — | | | 3 | | | — | | Forward MBS trades | 286 | | | 0 | | | 286 | | | 0 | |
| LPCs | LPCs | 18 | | | — | | | — | | | 18 | | LPCs | 8 | | | 0 | | | 0 | | | 8 | |
| Total assets | $ | 6,327 | | | $ | — | | | $ | 3,182 | | | $ | 3,145 | | |
| | Liabilities | Liabilities | | | | | | | | Liabilities | |
| Derivative financial instruments | Derivative financial instruments | | Derivative financial instruments | |
| IRLCs | | IRLCs | 1 | | | 0 | | | 0 | | | 1 | |
| Forward MBS trades | Forward MBS trades | $ | 50 | | | $ | — | | | $ | 50 | | | $ | — | | Forward MBS trades | 76 | | | 0 | | | 76 | | | 0 | |
| | LPCs | | LPCs | 38 | | | 0 | | | 0 | | | 38 | |
| Swap futures | | Swap futures | 1 | | | 0 | | | 1 | | | 0 | |
| Mortgage servicing rights financing | Mortgage servicing rights financing | 49 | | | — | | | — | | | 49 | | Mortgage servicing rights financing | 23 | | | 0 | | | 0 | | | 23 | |
| Excess spread financing | Excess spread financing | 1,124 | | | — | | | — | | | 1,124 | | Excess spread financing | 934 | | | 0 | | | 0 | | | 934 | |
| Total liabilities | $ | 1,223 | | | $ | — | | | $ | 50 | | | $ | 1,173 | | |
| | | | December 31, 2019 | | | December 31, 2020 |
| | | | | Recurring Fair Value Measurements | | | | | Recurring Fair Value Measurements |
| Fair value - Recurring basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | |
| Fair Value - Recurring Basis | | Fair Value - Recurring Basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Mortgage loans held for sale | Mortgage loans held for sale | $ | 4,077 | | | $ | — | | | $ | 4,077 | | | $ | — | | Mortgage loans held for sale | $ | 5,720 | | | $ | 0 | | | $ | 5,720 | | | $ | 0 | |
| Forward mortgage servicing rights | Forward mortgage servicing rights | 3,496 | | | — | | | — | | | 3,496 | | Forward mortgage servicing rights | 2,703 | | | 0 | | | 0 | | | 2,703 | |
| Derivative financial instruments | Derivative financial instruments | | Derivative financial instruments | |
| IRLCs | IRLCs | 135 | | | — | | | 135 | | | — | | IRLCs | 414 | | | 0 | | | 0 | | | 414 | |
| Forward MBS trades | Forward MBS trades | 7 | | | — | | | 7 | | | — | | Forward MBS trades | 37 | | | 0 | | | 37 | | | 0 | |
| LPCs | LPCs | 12 | | | — | | | 12 | | | — | | LPCs | 38 | | | 0 | | | 0 | | | 38 | |
| Total assets | $ | 7,727 | | | $ | — | | | $ | 4,231 | | | $ | 3,496 | | |
| | Liabilities | Liabilities | | | | | | | | Liabilities | |
| Derivative financial instruments | Derivative financial instruments | | Derivative financial instruments | |
| Forward MBS trades | Forward MBS trades | $ | 12 | | | $ | — | | | $ | 12 | | | $ | — | | Forward MBS trades | 156 | | | 0 | | | 156 | | | 0 | |
| LPCs | LPCs | 3 | | | — | | | 3 | | | — | | LPCs | 1 | | | 0 | | | 0 | | | 1 | |
| Mortgage servicing rights financing | Mortgage servicing rights financing | 37 | | | — | | | — | | | 37 | | Mortgage servicing rights financing | 33 | | | 0 | | | 0 | | | 33 | |
| Excess spread financing | Excess spread financing | 1,311 | | | — | | | — | | | 1,311 | | Excess spread financing | 934 | | | 0 | | | 0 | | | 934 | |
| Total liabilities | $ | 1,363 | | | $ | — | | | $ | 15 | | | $ | 1,348 | | |
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:
| | | Six Months Ended June 30, 2020 | | | Three Months Ended March 31, 2021 |
| | | Assets | | | Liabilities | | | Assets | | Liabilities |
| Fair value - Level 3 assets and liabilities | Forward mortgage servicing rights | | IRLCs | | Excess spread financing | | Mortgage servicing rights financing | |
| Fair Value - Level 3 Assets and Liabilities | | Fair Value - Level 3 Assets and Liabilities | Forward mortgage servicing rights | | IRLCs | | LPCs | | Excess spread financing | | Mortgage servicing rights financing | | LPCs |
| Balance - beginning of period | Balance - beginning of period | $ | 3,496 | | | $ | 135 | | | $ | 1,311 | | | $ | 37 | | Balance - beginning of period | $ | 2,703 | | | $ | 414 | | | $ | 38 | | | $ | 934 | | | $ | 33 | | | $ | 1 | |
| Total gains or losses included in earnings | Total gains or losses included in earnings | (1,012) | | | 235 | | | (101) | | | 12 | | Total gains or losses included in earnings | 298 | | | (182) | | | (30) | | | 41 | | | (10) | | | 37 | |
| | Purchases, issuances, sales, repayments and settlements | Purchases, issuances, sales, repayments and settlements | | Purchases, issuances, sales, repayments and settlements | |
| Purchases | Purchases | 24 | | | — | | | — | | | — | | Purchases | 67 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Issuances | Issuances | 249 | | | — | | | 24 | | | — | | Issuances | 288 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | Sales | | Sales | (2) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Settlements and repayments | Settlements and repayments | — | | | — | | | (110) | | | — | | Settlements and repayments | 0 | | | 0 | | | 0 | | | (41) | | | 0 | | | 0 | |
| Balance - end of period | Balance - end of period | $ | 2,757 | | | $ | 370 | | | $ | 1,124 | | | $ | 49 | | Balance - end of period | $ | 3,354 | | | $ | 232 | | | $ | 8 | | | $ | 934 | | | $ | 23 | | | $ | 38 | |
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | |
| | Assets | | | | Liabilities | | |
| Fair value - Level 3 assets and liabilities | Forward mortgage servicing rights | | | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,665 | | | | | $ | 1,184 | | | $ | 32 | |
| Total gains or losses included in earnings | (724) | | | | | (74) | | | 11 | |
| | | | | | | |
| Purchases, issuances, sales, repayments and settlements | | | | | | | |
| Purchases | 689 | | | | | — | | | — | |
| Issuances | 169 | | | | | 438 | | | — | |
| Sales | (294) | | | | | — | | | — | |
| Settlements and repayments | — | | | | | (119) | | | — | |
| Balance - end of period | $ | 3,505 | | | | | $ | 1,429 | | | $ | 43 | |
As of June 30, 2020 and December 31, 2019, the Company had 0 mortgage loans held for investment as the related portfolio was sold in September 2019. During the six months ended June 30, 2019, the Company had an immaterial change in mortgage loans held for investment.
As of June 30, 2020 and December 31, 2019, the Company had LPCs assets of $18 and $12, respectively. The Company had less than $1 LPCs liabilities as of June 30, 2020 and LPCs liabilities of $3 as of December 31, 2019. During the six months ended June 30, 2020, the Company had an immaterial change in LPCs assets and liabilities. | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| | Assets | | Liabilities |
| Fair Value - Level 3 Assets and Liabilities | Forward mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,496 | | | $ | 1,311 | | | $ | 37 | |
| Total gains or losses included in earnings | (534) | | | (35) | | | 6 | |
| Purchases, issuances, sales, repayments and settlements | | | | | |
| Purchases | 24 | | | 0 | | | 0 | |
| Issuances | 123 | | | 24 | | | 0 | |
| Settlements and repayments | 0 | | | (58) | | | 0 | |
| Balance - end of period | $ | 3,109 | | | $ | 1,242 | | | $ | 43 | |
No transfers were made in or out of Level 3 fair value assets and liabilities for the Company for the six months ended June 30, 2020 and 2019, with the exception of the change in classification for IRLCs of $370 and LPCs of $18 from Level 2 fair value assets to Level 3 fair value assets during the three months ended June 30,March 31, 2021 and 2020.
The tables below present the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Level 3 Inputs | Min | | Max | | | Min | | Max | |
| Forward MSR | | | | | | | | | | | |
| Discount rate | 8.2 | % | | 12.0 | % | | 9.3 | % | | 8.2 | % | | 12.0 | % | | 9.4 | % |
| Prepayment speed | 10.5 | % | | 17.7 | % | | 12.4 | % | | 14.2 | % | | 21.3 | % | | 15.4 | % |
Cost to service per loan(1) | $ | 64 | | | $ | 226 | | | $ | 92 | | | $ | 66 | | | $ | 257 | | | $ | 98 | |
Average life(2) | | | | | 5.9 years | | | | | | 5.0 years |
| | | | | | | | | | | |
| IRLCs | | | | | | | | | | | |
| Value of servicing (basis points per loan) | (1.3) | | | 2.2 | | | 1.2 | | | (1.0) | | | 2.2 | | | 1.2 | |
| | | | | | | | | | | |
| Excess spread financing | | | | | | | | | | | |
| Discount rate | 9.6 | % | | 15.7 | % | | 11.9 | % | | 9.9 | % | | 15.7 | % | | 12.2 | % |
| Prepayment speed | 11.3 | % | | 14.6 | % | | 12.5 | % | | 13.9 | % | | 15.0 | % | | 14.4 | % |
| Recapture rate | 17.1 | % | | 23.1 | % | | 19.0 | % | | 17.7 | % | | 24.2 | % | | 19.5 | % |
Average life(2) | | | | | 5.7 years | | | | | | 5.1 years |
| | | | | | | | | | | |
| Mortgage servicing rights financing | | | | | | | | | | | |
| Advance financing and counterparty fee rates | 4.1 | % | | 8.4 | % | | 7.4 | % | | 4.6 | % | | 8.5 | % | | 7.5 | % |
| Annual advance recovery rates | 18.1 | % | | 22.0 | % | | 19.9 | % | | 18.3 | % | | 22.0 | % | | 19.9 | % |
(1)Presented in whole dollar amounts.
(2)Average life is included for informational purposes.
The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments:instruments not carried at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | |
| | Carrying
Amount | | Fair Value | | | | |
| Financial instruments | | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 1,041 | | | $ | 1,041 | | | $ | — | | | $ | — | |
| Restricted cash | 260 | | | 260 | | | — | | | — | |
| Advances and other receivables, net | 668 | | | — | | | — | | | 668 | |
| Reverse mortgage interests, net | 5,709 | | | — | | | — | | | 5,736 | |
| Mortgage loans held for sale | 3,179 | | | — | | | 3,179 | | | — | |
| Derivative financial instruments | 391 | | | — | | | 3 | | | 388 | |
| Financial liabilities | | | | | | | |
Unsecured senior notes(1) | 2,261 | | | 2,307 | | | — | | | — | |
Advance facilities(1) | 475 | | | — | | | 475 | | | — | |
Warehouse facilities(1) | 4,031 | | | — | | | 4,031 | | | — | |
| Mortgage servicing rights financing liability | 49 | | | — | | | — | | | 49 | |
| Excess spread financing | 1,124 | | | — | | | — | | | 1,124 | |
| Derivative financial instruments | 50 | | | — | | | 50 | | | — | |
Participating interest financing(1) | 3,886 | | | — | | | — | | | 3,857 | |
HECM Securitization (HMBS)(1) | | | | | | | |
| Trust 2019-2 | 272 | | | — | | | — | | | 272 | |
| Trust 2019-1 | 243 | | | — | | | — | | | 243 | |
| Trust 2018-3 | 179 | | | — | | | — | | | 179 | |
| Trust 2018-2 | 127 | | | — | | | — | | | 127 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 674 | | | $ | 674 | | | $ | 0 | | | $ | 0 | |
| Restricted cash | 261 | | | 261 | | | 0 | | | 0 | |
| Advances and other receivables, net | 838 | | | 0 | | | 0 | | | 838 | |
| Reverse mortgage interests, net | 5,091 | | | 0 | | | 0 | | | 5,166 | |
| Loans subject to repurchase from Ginnie Mae | 5,816 | | | 0 | | | 5,816 | | | 0 | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 2,074 | | | 2,120 | | | 0 | | | 0 | |
| Advance and warehouse facilities, net | 7,379 | | | 0 | | | 7,388 | | | 0 | |
| Liability for loans subject to repurchase from Ginnie Mae | 5,816 | | | 0 | | | 5,816 | | | 0 | |
| Participating interest financing, net | 3,318 | | | 0 | | | 0 | | | 3,319 | |
| HECM Securitization (HMBS), net | | | | | | | |
| Trust 2020-1 | 469 | | | 0 | | | 0 | | | 471 | |
| Trust 2019-2 | 231 | | | 0 | | | 0 | | | 231 | |
| Trust 2019-1 | 203 | | | 0 | | | 0 | | | 203 | |
(1)The amounts are presented net of unamortized debt issuance costs, premium and discount.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Carrying
Amount | | Fair Value | | | | |
| Financial instruments | | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 329 | | | $ | 329 | | | $ | — | | | $ | — | |
| Restricted cash | 283 | | | 283 | | | — | | | — | |
| Advances and other receivables, net | 988 | | | — | | | — | | | 988 | |
| Reverse mortgage interests, net | 6,279 | | | — | | | — | | | 6,318 | |
| Mortgage loans held for sale | 4,077 | | | — | | | 4,077 | | | — | |
| | | | | | | |
| Derivative financial instruments | 153 | | | — | | | 153 | | | — | |
| Financial liabilities | | | | | | | |
Unsecured senior notes(1) | 2,366 | | | 2,505 | | | — | | | — | |
Advance facilities(1) | 422 | | | — | | | 422 | | | — | |
Warehouse facilities(1) | 4,575 | | | — | | | 4,575 | | | — | |
| Mortgage servicing rights financing liability | 37 | | | — | | | — | | | 37 | |
| Excess spread financing | 1,311 | | | — | | | — | | | 1,311 | |
| Derivative financial instruments | 15 | | | — | | | 15 | | | — | |
Participating interest financing(1) | 4,299 | | | — | | | — | | | 4,299 | |
HECM Securitization (HMBS)(1) | | | | | | | |
| Trust 2019-2 | 331 | | | — | | | — | | | 331 | |
| Trust 2019-1 | 300 | | | — | | | — | | | 300 | |
| Trust 2018-3 | 208 | | | — | | | — | | | 208 | |
| Trust 2018-2 | 148 | | | — | | | — | | | 148 | |
(1)The amounts are presented net of unamortized debt issuance costs, premium and discount. | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 695 | | | $ | 695 | | | $ | 0 | | | $ | 0 | |
| Restricted cash | 218 | | | 218 | | | 0 | | | 0 | |
| Advances and other receivables, net | 940 | | | 0 | | | 0 | | | 940 | |
| Reverse mortgage interests, net | 5,253 | | | 0 | | | 0 | | | 5,383 | |
| Loans subject to repurchase from Ginnie Mae | 6,159 | | | 0 | | | 6,159 | | | 0 | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 2,074 | | | 2,208 | | | 0 | | | 0 | |
| Advance and warehouse facilities, net | 6,763 | | | 0 | | | 6,774 | | | 0 | |
| Liability for loans subject to repurchase from Ginnie Mae | 6,159 | | | 0 | | | 6,159 | | | 0 | |
| Participating interest financing, net | 3,485 | | | 0 | | | 0 | | | 3,496 | |
| HECM Securitization (HMBS), net | | | | | | | |
| Trust 2020-1 | 488 | | | 0 | | | 0 | | | 490 | |
| Trust 2019-2 | 240 | | | 0 | | | 0 | | | 241 | |
| Trust 2019-1 | 211 | | | 0 | | | 0 | | | 212 | |
15.14. Capital Requirements
Certain of the Company’s secondary market investors require minimum net worth (“capital”) requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to 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 servicing 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 its outstanding selling and servicing agreements are measured based on the Company’s operating subsidiary, Nationstar Mortgage LLC. As of June 30, 2020,March 31, 2021, the Company was in compliance with its selling and servicing capital requirements.
16.15. Commitments and Contingencies
Litigation and Regulatory
The Company and its subsidiaries are routinely and currently involved in a significant number of legal 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, employment, 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 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.
The Company’sCompany operates within highly regulated industries on a federal, state and local level. In the normal and ordinary course of its business, the Company is alsoroutinely subject to extensive examinations, investigations, subpoenas, inquiries and reviews by various federal, state and local governmental, regulatory and enforcement agencies. The Company has historically had a number of open investigations with these agencies, and that trend continues. The Company is currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations byincluding the Consumer Financial Protection Bureau, (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, 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, the multi-state committee ofvarious State mortgage banking regulators and various State Attorneys General. These specific mattersGeneral, 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 matters 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 orand results of operation.
In particular, as previously disclosed, the Company continues to progress towards resolution of certain legacy regulatory matters with (i) the CFPB, (ii) the multi-state committee of mortgage banking regulators and various State Attorneys General and (iii) the Executive Office of the United States Trustee, all of which involve examination findings in prior years for alleged violations of certain laws related to the Company’s business practices. The Company believes that it has reached a settlement in principle to resolve these matters with each of these parties. Accordingly, the Company has recorded an additional accrual during the three months ended June 30, 2020 in addition to amounts previously accrued and believes that it has fully accrued for these matters.
The Company seeks to resolve all legal proceedings and other matters in the 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 their claims.
On at least a quarterly basis, the Company assesses its liabilities and contingencies 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.
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 estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further 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. Legal-related expense for the Company, which includes legal settlements and the fees paid to external legal service providers, of $12$13 and $27$15 for the three and six months ended June 30,March 31, 2021 and 2020, respectively, and $21 and $32 for the three and six months ended June 30, 2019, respectively, was included in general and administrative expenses on the unaudited condensed consolidated statements of operations.operations.
For a number of 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. For those matters for which an estimate is possible, managementManagement currently believes the aggregate range of reasonably possible loss is $2$2 to $18 in excess of the accrued liability (if any) related to those matters as of June 30, 2020.March 31, 2021. This estimated range of possible loss isis based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters 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 estimated 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 in 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 these 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 condensed consolidated financial statements.
Other Loss Contingencies
As part of the Company’s ongoing operations, it acquires servicing rights of forward and reverse mortgage loan portfolios 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 and reverse mortgage interests 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 June 30, 2020,March 31, 2021, 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.
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 8, Derivative Financial Instruments, for more information.
The Company had certain reverse MSRs, reverse MSLs and reverse mortgage loans related to approximately $20,758 $17,269 and $22,725$18,091 of UPB in reverse mortgage loans as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. As a servicer for these reverse mortgage loans, among other things, the Company is obligated to fund borrowers’ draws to the loan customers as required in accordance with the loan agreement. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company’s maximum unfunded advance obligation to fund borrower draws related to these reverse MSRs and loans was approximately $2,408$2,113 and $2,617,$2,202, respectively. Upon funding any portion of these draws, the Company expects to securitize and sell the advances in transactions that will be accounted for as secured borrowings.
17. Business16. Segment ReportingInformation
The Company’s segments are based upon the Company’s organizational structure, which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on the actual cost of services performed, based on direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. 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 Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties.
In the second quarter of 2020, the Company updated its presentation of segment assets to be aligned with a change in the reporting package provided to the Chief Operating Decision Maker. The presentation change had no impact on the segments' operations. Assets allocated to the Servicing segment include MSRs; advances and other receivables, except for co-issue MSR holdback; Servicing related mortgage loans held for sale; and other assets including property, plant and equipment, lease-related assets, prepaid assets, and goodwill. Assets allocated to Originations segment include co-issue MSR holdback in advances and other receivables; Originations related mortgage loans held for sale; derivative assets; and other assets including property, plant and equipment, lease-related assets, prepaid assets, and goodwill. Assets allocated to the Xome segment include cash and cash equivalents; tax-related assets; receivables; and other assets including property, plant and equipment, lease-related assets, prepaid assets, goodwill, and other intangible assets. All assets that are not specifically identified or allocated to a reporting segment are reported as part of Corporate/Other segment, and include cash and cash equivalents; tax-related assets; and intangibles assets excluding goodwill and assets allocated to Xome. Eliminations are also included in Corporate/Other segment.Other. Prior year financial information has been adjusted retrospectively to reflect the updated presentation.
The following tables present financial information by segment:
| | | | Three Months Ended June 30, 2020 | | | Three Months Ended March 31, 2021 |
| Financial information by segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated | |
| Financial Information by Segment | | Financial Information by Segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | Revenues | | | | | | | | | | Revenues | | | | | | | | | |
| Service related, net | Service related, net | $ | (114) | | | $ | 21 | | | $ | 106 | | | $ | (1) | | | $ | 12 | | Service related, net | $ | 449 | | | $ | 43 | | | $ | 96 | | | $ | 0 | | | $ | 588 | |
| Net gain on mortgage loans held for sale | Net gain on mortgage loans held for sale | 45 | | | 573 | | | — | | | — | | | 618 | | Net gain on mortgage loans held for sale | 127 | | | 552 | | | 0 | | | 0 | | | 679 | |
| Total revenues | Total revenues | (69) | | | 594 | | | 106 | | | (1) | | | 630 | | Total revenues | 576 | | | 595 | | | 96 | | | 0 | | | 1,267 | |
| Total expenses | Total expenses | 122 | | | 167 | | | 95 | | | 35 | | | 419 | | Total expenses | 125 | | | 231 | | | 87 | | | 26 | | | 469 | |
| Interest income | Interest income | 57 | | | 19 | | | — | | | — | | | 76 | | Interest income | 66 | | | 23 | | | 0 | | | 0 | | | 89 | |
| Interest expense | Interest expense | (117) | | | (13) | | | — | | | (47) | | | (177) | | Interest expense | (104) | | | (25) | | | 0 | | | (30) | | | (159) | |
| Other income (expenses), net | — | | | — | | | 1 | | | (1) | | | — | | |
| Total other (expenses) income, net | (60) | | | 6 | | | 1 | | | (48) | | | (101) | | |
| (Loss) income before income tax (benefit) expense | $ | (251) | | | $ | 433 | | | $ | 12 | | | $ | (84) | | | $ | 110 | | |
| | Total other expenses, net | | Total other expenses, net | (38) | | | (2) | | | 0 | | | (30) | | | (70) | |
| Income (loss) before income tax expense (benefit) | | Income (loss) before income tax expense (benefit) | $ | 413 | | | $ | 362 | | | $ | 9 | | | $ | (56) | | | $ | 728 | |
| Depreciation and amortization for property and equipment and intangible assets | Depreciation and amortization for property and equipment and intangible assets | $ | 5 | | | $ | 4 | | | $ | 3 | | | $ | 6 | | | $ | 18 | | Depreciation and amortization for property and equipment and intangible assets | $ | 5 | | | $ | 4 | | | $ | 3 | | | $ | 4 | | | $ | 16 | |
| Total assets | Total assets | $ | 10,736 | | | $ | 3,592 | | | $ | 135 | | | $ | 2,837 | | | $ | 17,300 | | Total assets | $ | 16,696 | | | $ | 5,559 | | | $ | 120 | | | $ | 2,338 | | | $ | 24,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | | | |
| Financial information by segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | 9 | | | $ | 20 | | | $ | 108 | | | $ | — | | | $ | 137 | |
| Net gain on mortgage loans held for sale | 18 | | | 244 | | | — | | | — | | | 262 | |
| Total revenues | 27 | | | 264 | | | 108 | | | — | | | 399 | |
| Total expenses | 189 | | | 145 | | | 101 | | | 57 | | | 492 | |
| Interest income | 136 | | | 23 | | | — | | | 3 | | | 162 | |
| Interest expense | (109) | | | (25) | | | — | | | (53) | | | (187) | |
| Other income, net | — | | | 1 | | | — | | | — | | | 1 | |
| Total other income (expenses), net | 27 | | | (1) | | | — | | | (50) | | | (24) | |
| (Loss) income before income tax (benefit) expense | $ | (135) | | | $ | 118 | | | $ | 7 | | | $ | (107) | | | $ | (117) | |
| Depreciation and amortization for property and equipment and intangible assets | $ | 4 | | | $ | 6 | | | $ | 3 | | | $ | 11 | | | $ | 24 | |
| Total assets | $ | 12,906 | | | $ | 3,462 | | | $ | 112 | | | $ | 1,925 | | | $ | 18,405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | | | |
| Financial information by segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | (294) | | | $ | 41 | | | $ | 212 | | | $ | — | | | $ | (41) | |
| Net gain on mortgage loans held for sale | 79 | | | 870 | | | — | | | — | | | 949 | |
| Total revenues | (215) | | | 911 | | | 212 | | | — | | | 908 | |
| Total expenses | 271 | | | 333 | | | 191 | | | 68 | | | 863 | |
| Interest income | 140 | | | 53 | | | — | | | 1 | | | 194 | |
| Interest expense | (230) | | | (40) | | | — | | | (99) | | | (369) | |
| Other income (expense), net | — | | | — | | | 2 | | | (1) | | | 1 | |
| Total other (expenses) income, net | (90) | | | 13 | | | 2 | | | (99) | | | (174) | |
| (Loss) income before income tax (benefit) expense | $ | (576) | | | $ | 591 | | | $ | 23 | | | $ | (167) | | | $ | (129) | |
| Depreciation and amortization for property and equipment and intangible assets | $ | 8 | | | $ | 7 | | | $ | 6 | | | $ | 16 | | | $ | 37 | |
| Total assets | $ | 10,736 | | | $ | 3,592 | | | $ | 135 | | | $ | 2,837 | | | $ | 17,300 | |
| | | Six Months Ended June 30, 2019 | | | Three Months Ended March 31, 2020 |
| Financial information by segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated | |
| Financial Information by Segment | | Financial Information by Segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | Revenues | | | | | | | | | | Revenues | | | | | | | | | |
| Service related, net | Service related, net | $ | (18) | | | $ | 35 | | | $ | 204 | | | $ | — | | | $ | 221 | | Service related, net | $ | (180) | | | $ | 20 | | | $ | 106 | | | $ | 1 | | | $ | (53) | |
| Net gain on mortgage loans held for sale | Net gain on mortgage loans held for sale | 53 | | | 375 | | | — | | | — | | | 428 | | Net gain on mortgage loans held for sale | 34 | | | 297 | | | 0 | | | 0 | | | 331 | |
| Total revenues | Total revenues | 35 | | | 410 | | | 204 | | | — | | | 649 | | Total revenues | (146) | | | 317 | | | 106 | | | 1 | | | 278 | |
| Total expenses | Total expenses | 384 | | | 249 | | | 200 | | | 102 | | | 935 | | Total expenses | 149 | | | 166 | | | 96 | | | 33 | | | 444 | |
| Interest income | Interest income | 251 | | | 40 | | | — | | | 5 | | | 296 | | Interest income | 83 | | | 34 | | | 0 | | | 1 | | | 118 | |
| Interest expense | Interest expense | (223) | | | (43) | | | — | | | (110) | | | (376) | | Interest expense | (113) | | | (27) | | | 0 | | | (52) | | | (192) | |
| Other income, net | Other income, net | — | | | 5 | | | 11 | | | — | | | 16 | | Other income, net | 0 | | | 0 | | | 1 | | | 0 | | | 1 | |
| Total other income (expenses), net | 28 | | | 2 | | | 11 | | | (105) | | | (64) | | |
| Total other (expenses) income, net | | Total other (expenses) income, net | (30) | | | 7 | | | 1 | | | (51) | | | (73) | |
| (Loss) income before income tax (benefit) expense | (Loss) income before income tax (benefit) expense | $ | (321) | | | $ | 163 | | | $ | 15 | | | $ | (207) | | | $ | (350) | | (Loss) income before income tax (benefit) expense | $ | (325) | | | $ | 158 | | | $ | 11 | | | $ | (83) | | | $ | (239) | |
| Depreciation and amortization for property and equipment and intangible assets | Depreciation and amortization for property and equipment and intangible assets | $ | 8 | | | $ | 9 | | | $ | 7 | | | $ | 21 | | | $ | 45 | | Depreciation and amortization for property and equipment and intangible assets | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 10 | | | $ | 19 | |
| Total assets | Total assets | $ | 12,906 | | | $ | 3,462 | | | $ | 112 | | | $ | 1,925 | | | $ | 18,405 | | Total assets | $ | 10,619 | | | $ | 4,459 | | | $ | 135 | | | $ | 2,400 | | | $ | 17,613 | |
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, including the projected impact of COVID-19 on our business, financial performance and operating results. 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 express 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:
•the severityeconomic, financial and duration ofpublic health disruptions caused by the COVID-19 pandemic; the pandemic’s impact on the U.S. and global economies;pandemic and federal, state and local governmental responses to the pandemicpandemic;
•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;
•delays in our ability to collect or be reimbursed for servicing advances;
•our ability to obtain sufficient liquidity and capital to operate our business;
•changes in prevailing interest rates;
•our ability to finance and recover costs of our reverse servicing operations;
•our ability to successfully implement our strategic initiatives;
•our ability to realize anticipated benefits of our previous acquisitions;
•our ability to use net operating loss carryforwards and other tax attributes;
•changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•Xome’s ability to compete in highly competitive markets;
•our ability to pay down debt;
•our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•our ability to prevent cyber intrusions and mitigate cyber risks; and
•our ability to maintain our licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Risk FactorFactors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this report and in our Annual Report on Form 10-K for the year ended December 31, 20192020 for further information on these and other risk factors affecting us.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.2020. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.
Dollar amounts are reported in millions, except per share data and 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.
We are a leading servicer and originator of residential mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers 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 from $10 billion in 20062009 to $596$646 billion as of June 30, 2020.March 31, 2021. We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, 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. More information on the Company is available at investors.mrcoopergroup.com. Information contained on our website is not, and should not be deemed to be, a part of this report.
Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on tangible equity of 12% or higher. Key strategic priorities include the following:
•Strengthen our balance sheet by reducing leverage, building capital and liquidity, and managing interest rate and creditother forms of risk;
•Improve efficiency by driving continuous improvement in unit costs for Servicing and Originations and Xome,segments, as well as by taking corporate actions to eliminate costs throughout the organizationsorganization;
•Grow our servicing portfolio and strengthen our customer base in each of our segmentsby acquiring new customers and retaining existing customers;
•Reinvent the customer experience by acting as the customer’s advocate and by harnessing technology to deliver user-friendly digital solutionssolutions;
•Sustain the talent of our people and the culture of our organizationorganization; and
•Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have taken aggressive steps to address these risks, including moving in excess of 95% of our staff to work-from-home status as well as implementing other practices for mitigating the risk of the pandemic, including restrictions on non-essential travel and face-to-face meetings and enhanced sanitization of our facilities. We have also implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to one yeareighteen months for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio.portfolio. As of July 27, 2020,April 18, 2021, approximately 197,000 or 5.9% of4.5% of our customers were on a forbearance plan, down from a peak of 7.1% at the end of June 2020. The numbers7.2%. More customers are subsequently falling as we have the first tranche of borrowers rolling off of 90-day plans, either because they remained current all the way through, or because they no longer desire to defer payments and elected to come off.now exiting forbearance than are entering. We include loans in forbearance related to the CARES Act, whereby no payments have been received from borrowers for greater than 90 days, in loans subject to repurchase rightrights from Ginnie Mae in other assets and payables and other liabilities on a gross basis. The balance was $818 $5,557 as of June 30, 2020 and is expected to continue to increase during the third quarter.
Depending on how long the pandemic continues to disrupt the economy and employment, our Servicing segment could experience a cost-to-service increase as we deal with higher delinquencies and foreclosures. We expect servicing costs to be moderately elevated for loans on forbearance, however investor incentives should more than offset the elevated costs. As the pandemic began to impact the mortgage capital markets, our Originations segment took several steps to rapidly de-risk the pipeline and slowed correspondent production. Our Originations segment has experienced volume growth and higher margins as a result of the lower interest rate environment, which more than offset the decline in our Servicing segment. As the foreclosure process is currently on hold, with moratoriums in place at the national level and in some local markets, Xome’s revenue from the Exchange division has been, and is expected to continue to be, negatively impacted. However, Xome’s revenue from the Services division has benefited from the lower interest rate environment and increase in Originations volume and has helped balance out the decrease in Exchange’s revenues. Once the moratoriums are lifted, we expect Xome to contribute meaningfully to our consolidated results.March 31, 2021. See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A.
Anticipated Trends
In the first quarter of 2021, our Servicing segment experienced portfolio growth due to strong execution across all channels - correspondent, direct-to-consumer, subservicing and acquisitions. We expect to see continued portfolio growth in the remainder of 2021. We benefited from early-buyout gains in the first quarter of 2021 as we helped customers exit forbearance and expect a similar level of contributions from early-buyout volumes to continue throughout 2021.
Our Originations segment experienced record funded volumes from both the correspondent and direct-to-consumer channels in the first quarter of 2021. As interest rates are on the rise, we expect lower volumes and a more normalized originations margin in the second quarter of 2021.
Our Xome segment revenue from Title division has benefited from the lower interest rate environment and increase in origination volume. On March 12, 2021, we entered into an agreement to sell the Title business for a total purchase price of $500, which is expected to close in the second quarter of 2021. In connection with the sale agreement, earnings from the Title business subsequent to March 12, 2021 will be held for the benefit of the buyer, therefore, the division will not contribute to earnings in the second quarter of 2021. Xome’s revenue from the Exchange division has been, and is expected to continue to be, negatively impacted, as the REO exchange continues to be idle while the foreclosure moratoriums remain in effect.
Results of Operations
| | |
| Table 1. Consolidated Operations |
| | | Three Months Ended June 30, | | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Revenues - operational(1) | Revenues - operational(1) | $ | 891 | | | $ | 630 | | | $ | 261 | | | 41 | % | Revenues - operational(1) | $ | 913 | | | $ | 661 | | | $ | 252 | | | 38 | % |
| Revenues - Mark-to-market | (261) | | | (231) | | | (30) | | | 13 | % | |
| Revenues - mark-to-market | | Revenues - mark-to-market | 354 | | | (383) | | | 737 | | | NM |
| Total revenues | Total revenues | 630 | | | 399 | | | 231 | | | 58 | % | Total revenues | 1,267 | | | 278 | | | 989 | | | NM |
| Total expenses | Total expenses | 419 | | | 492 | | | (73) | | | (15) | % | Total expenses | 469 | | | 444 | | | 25 | | | 6 | % |
| Total other expenses, net | Total other expenses, net | (101) | | | (24) | | | (77) | | | 321 | % | Total other expenses, net | (70) | | | (73) | | | 3 | | | (4) | % |
| Income (loss) before income tax expense (benefit) | Income (loss) before income tax expense (benefit) | 110 | | | (117) | | | 227 | | | (194) | % | Income (loss) before income tax expense (benefit) | 728 | | | (239) | | | 967 | | | NM |
| Less: Income tax expense (benefit) | Less: Income tax expense (benefit) | 37 | | | (29) | | | 66 | | | (228) | % | Less: Income tax expense (benefit) | 167 | | | (68) | | | 235 | | | NM |
| Net income (loss) | Net income (loss) | 73 | | | (88) | | | 161 | | | (183) | % | Net income (loss) | 561 | | | (171) | | | 732 | | | NM |
| Less: Net loss attributable to non-controlling interests | — | | | (1) | | | 1 | | | (100) | % | |
| Less: Net income (loss) attributable to non-controlling interests | | Less: Net income (loss) attributable to non-controlling interests | — | | | (3) | | | 3 | | | 100 | % |
| Net income (loss) attributable to Mr. Cooper | Net income (loss) attributable to Mr. Cooper | $ | 73 | | | $ | (87) | | | $ | 160 | | | (184) | % | Net income (loss) attributable to Mr. Cooper | $ | 561 | | | $ | (168) | | | $ | 729 | | | NM |
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
NM = Not meaningful or greater than 200% change.
We recorded net income of $73 duringDuring the three months ended June 30, 2020March 31, 2021, we recorded income before income tax expense of $728 compared to a net loss before income tax benefit of $88 during the same period$239 for 2020. The change was primarily driven by favorable MTM adjustments in 2019. The net income2021 compared to negative MTM adjustments in 2020, was primarilyand due to an increase in totalhigher revenues and a decrease in total expenses, partially offset by an increase in total other expenses, net. Consolidated operational revenues increased primarily due to increased revenue infrom our Originations segment. For more information on our segment driven by higher originations volume predominately in the direct-to-consumer (”DTC”) channel, partially offset by an increase in negative mark-to-market (“MTM”) adjustments forresults, see below.
During the three months ended June 30, 2020 compared to the same period in 2019. Refer to Table 10. Servicing - Revenues March 31, 2021 andTable 21. Originations - Revenues for further discussion.
Total expenses for the three months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to lower foreclosure and other liquidation related expenses and recoveries in our Servicing segment, primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. The decrease in total expenses was partially offset by higher total expense in our Originations segment, primarily attributable to higher originations volume in the lower interest rate environment.
Total other expenses, net, increased for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest income in our Servicing segment, partially offset by a decrease in interest expense. Refer to Table 12. Servicing - Other (Expenses) Income, Net for further discussion.
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Table 1.1 Consolidated Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Revenues - operational(1) | $ | 1,552 | | | $ | 1,173 | | | $ | 379 | | | 32 | % |
| Revenues - Mark-to-market | (644) | | | (524) | | | (120) | | | 23 | % |
| Total revenues | 908 | | | 649 | | | 259 | | | 40 | % |
| Total expenses | 863 | | | 935 | | | (72) | | | (8) | % |
| Total other expenses, net | (174) | | | (64) | | | (110) | | | 172 | % |
| Loss before income tax benefit | (129) | | | (350) | | | 221 | | | (63) | % |
| Less: Income tax benefit | (31) | | | (76) | | | 45 | | | (59) | % |
| Net loss | (98) | | | (274) | | | 176 | | | (64) | % |
| Less: Net loss attributable to non-controlling interests | (3) | | | (1) | | | (2) | | | 200 | % |
| Net loss attributable to Mr. Cooper | $ | (95) | | | $ | (273) | | | $ | 178 | | | (65) | % |
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
We recorded a net loss of $98 during the six months ended June 30, 2020 compared to a net loss of $274 during the same period in 2019. The net loss in 2020 was lower primarily due to an increase in total revenues and decrease in total expenses. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume predominately in the DTC channel, partially offset by an increase in negative MTM adjustments for the six months ended June 30, 2020 compared to the same period in 2019. Refer to Table 10.1 Servicing - Revenues and Table 21.1 Originations - Revenues for further discussion.
Total expenses for the six months ended June 30, 2020 decreased compared with the same period in 2019 primarily due to lower foreclosure and other liquidation related expenses in our Servicing segment primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. In addition, total expenses in our Corporate/Other segment were higher in the six months ended June 30, 2019 due to acquisition and integration expenses related to the Pacific Union acquisition and the acquisition of the Seterus mortgage servicing platform and assumption of assets related thereto from IBM (“Seterus acquisition”) in February 2019. Partially offsetting the decrease in total expenses in our Servicing segment and Corporate/Other segment was an increase in total expenses in our Originations segment primarily driven by higher originations volume in a declining interest rate environment.
Total other expenses, net, increased for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and other income, net, partially offset by a decrease in interest expense. Interest income decreased primarily due to a decrease in other interest income in our Servicing segment due to lower income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other income, net, was lower in the six months ended June 30, 2020 primarily due to income related to the change in fair value of the contingent consideration recorded in 2019 for the acquisition of Assurant Mortgage Solutions (“AMS”).
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Table 2. Provision for Income Taxes | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Income tax expense (benefit) | $ | 37 | | | $ | (29) | | | $ | 66 | | | (228) | % |
| | | | | | | |
Effective tax rate(1) | 33.4 | % | | 24.6 | % | | | | |
(1)Effective tax rate is calculated using whole numbers.
For the three months ended June 30, 2020, we had an income tax expense compared to an income taxand benefit, for the same period ended in 2019.respectively. The effective tax rate forduring the three months ended June 30, 2020March 31, 2021 was 33.4%22.9% as compared to the effective tax rate of 24.6% for the three months ended June 30, 2019.28.4% in 2020. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items induring the three months ended June 30, 2020March 31, 2021 as compared to the three months ended June 30, 2019.2020.
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Table 2.1. Provision for Income Taxes | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Income tax benefit | $ | (31) | | | $ | (76) | | | $ | 45 | | | (59) | % |
| | | | | | | |
Effective tax rate(1) | 24.1 | % | | 21.7 | % | | | | |
(1)Effective tax rate is calculated using whole numbers.
For the six months ended June 30, 2020 and 2019, we had an income tax benefit. The effective tax rate for the six months ended June 30, 2020 was 24.1% as compared to the effective tax rate of 21.7% for the six months ended June 30, 2019. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.
Our operations are conducted through fourthree segments: Servicing, Originations, Xome, and Corporate/Other.Xome.
•The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, 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.
•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. Our wholesale channel was shut down during the three months ended June 30, 2020 and subsequently ceased originating loans and funded out the remaining pipeline.
•The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties.
• On March 12, 2021, we entered into an agreement to sell the title business. The sale is expected to close during the second quarter of 2021. For more information, see The Corporate/Other segment represents unallocated overhead expenses, including the costsNote 1, Nature of executive managementBusiness and other corporate functions that are not directly attributable to our operating segments, interest expense on our senior unsecured notes, and the resultsBasis of a legacy mortgage investment portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held Presentation in the trust in September 2019. The Corporate/Other segment also includes inter-segment eliminations.Notes to the Condensed Consolidated Financial Statements (unaudited).
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Table 3. Segment ResultsNote 16, Segment Information, in the Notes to the Condensed Consolidated Financial Statements (unaudited) for a summary of segment results. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | | | | | | | |
| | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | (114) | | | $ | 21 | | | $ | 106 | | | $ | (1) | | | $ | 12 | |
| Net gain on mortgage loans held for sale | 45 | | | 573 | | | — | | | — | | | 618 | |
| Total revenues | (69) | | | 594 | | | 106 | | | (1) | | | 630 | |
| Total expenses | 122 | | | 167 | | | 95 | | | 35 | | | 419 | |
| Interest income | 57 | | | 19 | | | — | | | — | | | 76 | |
| Interest expense | (117) | | | (13) | | | — | | | (47) | | | (177) | |
| Other income (expenses), net | — | | | — | | | 1 | | | (1) | | | — | |
| Total other (expenses) income, net | (60) | | | 6 | | | 1 | | | (48) | | | (101) | |
| (Loss) income before income tax (benefit) expense | $ | (251) | | | $ | 433 | | | $ | 12 | | | $ | (84) | | | $ | 110 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | | | |
| Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | 9 | | | $ | 20 | | | $ | 108 | | | $ | — | | | $ | 137 | |
| Net gain on mortgage loans held for sale | 18 | | | 244 | | | — | | | — | | | 262 | |
| Total revenues | 27 | | | 264 | | | 108 | | | — | | | 399 | |
| Total expenses | 189 | | | 145 | | | 101 | | | 57 | | | 492 | |
| Interest income | 136 | | | 23 | | | — | | | 3 | | | 162 | |
| Interest expense | (109) | | | (25) | | | — | | | (53) | | | (187) | |
| Other income, net | — | | | 1 | | | — | | | — | | | 1 | |
| Total other income (expenses), net | 27 | | | (1) | | | — | | | (50) | | | (24) | |
| (Loss) income before income tax (benefit) expense | $ | (135) | | | $ | 118 | | | $ | 7 | | | $ | (107) | | | $ | (117) | |
| | |
Table 3.1 Segment Results |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | | | | | | | |
| | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | (294) | | | $ | 41 | | | $ | 212 | | | $ | — | | | $ | (41) | |
| Net gain on mortgage loans held for sale | 79 | | | 870 | | | — | | | — | | | 949 | |
| Total revenues | (215) | | | 911 | | | 212 | | | — | | | 908 | |
| Total expenses | 271 | | | 333 | | | 191 | | | 68 | | | 863 | |
| Interest income | 140 | | | 53 | | | — | | | 1 | | | 194 | |
| Interest expense | (230) | | | (40) | | | — | | | (99) | | | (369) | |
| Other income (expenses), net | — | | | — | | | 2 | | | (1) | | | 1 | |
| Total other (expenses) income, net | (90) | | | 13 | | | 2 | | | (99) | | | (174) | |
| (Loss) income before income tax (benefit) expense | $ | (576) | | | $ | 591 | | | $ | 23 | | | $ | (167) | | | $ | (129) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | | | |
| Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | (18) | | | $ | 35 | | | $ | 204 | | | $ | — | | | $ | 221 | |
| Net gain on mortgage loans held for sale | 53 | | | 375 | | | — | | | — | | | 428 | |
| Total revenues | 35 | | | 410 | | | 204 | | | — | | | 649 | |
| Total expenses | 384 | | | 249 | | | 200 | | | 102 | | | 935 | |
| Interest income | 251 | | | 40 | | | — | | | 5 | | | 296 | |
| Interest expense | (223) | | | (43) | | | — | | | (110) | | | (376) | |
| Other income, net | — | | | 5 | | | 11 | | | — | | | 16 | |
| Total other income (expenses), net | 28 | | | 2 | | | 11 | | | (105) | | | (64) | |
| (Loss) income before income tax (benefit) expense | $ | (321) | | | $ | 163 | | | $ | 15 | | | $ | (207) | | | $ | (350) | |
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in our strong servicer ratings.
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Table 4.2. Servicer Ratings | | | | |
| | | | | | | | | | | | | | | | | |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | January 2020 | | May 2019February 2021 | | May 2019December 2020 |
| | | | | |
| Residential | RPS2- | | Not RatedSQ2- | | Above Average |
| Master Servicer | RMS2+ | | SQ2 | | Above Average |
| Special Servicer | RSS2- | | Not RatedSQ2- | | Above Average |
| Subprime Servicer | RPS2- | | Not RatedSQ2- | | 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
Servicing Portfolio Composition
As of June 30, 2020, the unpaid principal balance in our servicing portfolio consisted of approximately $278.0 billion in forward loans, $296.8 billion in subservicing and other, and $20.8 billion in reverse mortgage loans.
•The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.
•Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not record an MSR on our balance sheet.
•Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired our reverse mortgages in prior years through several transactions and the portfolio is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.
The following tables set forth the results of operations for the Servicing segment:
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Table 5.3. Servicing Segment Results of Operations | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operational | $ | 294 | | | $ | 314 | | | $ | (20) | | | (6) | % |
| Amortization, net of accretion | (102) | | | (56) | | | (46) | | | 82 | % |
| Mark-to-market | (261) | | | (231) | | | (30) | | | 13 | % |
| Total revenues | (69) | | | 27 | | | (96) | | | (356) | % |
| Total expenses | 122 | | | 189 | | | (67) | | | (35) | % |
| Total other (expenses) income, net | (60) | | | 27 | | | (87) | | | (322) | % |
| Loss before income tax benefit | $ | (251) | | | $ | (135) | | | $ | (116) | | | 86 | % |
For the three months ended June 30, 2020, we incurred a loss before income tax benefit of $251 compared to $135 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased during three months ended June 30, 2020 compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of elevated prepayments driven by the declining interest rate environment. Additionally, negative mark-to-market revenues increased during the three months ended June 30, 2020 compared to the same period in 2019 due to the lower interest rate environment. Total expenses for the three months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation expenses and a decrease in salaries, wages and benefits. The decrease in foreclosure and other liquidation expenses was mainly driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to improved performance of $15 on loss recoveries related to settlement with a prior servicer. The decrease in salaries, wages and benefits was primarily due to improved operational efficiencies, , which included consolidation of one of our servicing centers. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps | | Amt | | bps |
| Revenues | | | | | | | | | | | | | | | |
| Operational | $ | 375 | | | 24 | | | $ | 313 | | | 20 | | | $ | 62 | | | 4 | | | 20 | % | | 20 | % |
| Amortization, net of accretion | (153) | | | (10) | | | (76) | | | (5) | | | (77) | | | (5) | | | 101 | % | | 100 | % |
| Mark-to-market | 354 | | | 22 | | | (383) | | | (24) | | | 737 | | | 46 | | | NM | | NM |
| Total revenues | 576 | | | 36 | | | (146) | | | (9) | | | 722 | | | 45 | | | NM | | NM |
| Expenses | | | | | | | | | | | | | | | |
| Salaries, wages and benefits | 73 | | | 5 | | | 86 | | | 5 | | | (13) | | | — | | | (15) | % | | — | % |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 24 | | | 2 | | | 25 | | | 2 | | | (1) | | | — | | | (4) | % | | — | % |
| Corporate and other general and administrative expenses | 32 | | | 2 | | | 35 | | | 2 | | | (3) | | | — | | | (9) | % | | — | % |
| Foreclosure and other liquidation related (recoveries) expenses, net | (9) | | | (1) | | | — | | | — | | | (9) | | | (1) | | | NM | | NM |
| Depreciation and amortization | 5 | | | — | | | 3 | | | — | | | 2 | | | — | | | 67 | % | | — | % |
| Total general and administrative expenses | 52 | | | 3 | | | 63 | | | 4 | | | (11) | | | (1) | | | (17) | % | | (25) | % |
| Total expenses | 125 | | | 8 | | | 149 | | | 9 | | | (24) | | | (1) | | | (16) | % | | (11) | % |
| Other income (expense) | | | | | | | | | | | | | | | |
| Income earned on reverse mortgage interests | 44 | | | 3 | | | 43 | | | 3 | | | 1 | | | — | | | 2 | % | | — | % |
| Other interest income | 22 | | | 1 | | | 40 | | | 2 | | | (18) | | | (1) | | | (45) | % | | (50) | % |
| Interest income | 66 | | | 4 | | | 83 | | | 5 | | | (17) | | | (1) | | | (20) | % | | (20) | % |
| Reverse mortgage interest expense | (33) | | | (2) | | | (52) | | | (3) | | | 19 | | | 1 | | | (37) | % | | (33) | % |
| Advance interest expense | (6) | | | — | | | (5) | | | — | | | (1) | | | — | | | 20 | % | | — | % |
| Other interest expense | (65) | | | (4) | | | (56) | | | (4) | | | (9) | | | — | | | 16 | % | | — | % |
| Interest expense | (104) | | | (6) | | | (113) | | | (7) | | | 9 | | | 1 | | | (8) | % | | (14) | % |
| | | | | | | | | | | | | | | |
| Total other expenses, net | (38) | | | (2) | | | (30) | | | (2) | | | (8) | | | — | | | 27 | % | | — | % |
| Income (loss) before income tax expense (benefit) | $ | 413 | | | 26 | | | $ | (325) | | | (20) | | | $ | 738 | | | 46 | | | NM | | NM |
| | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 3.0 | % | | | | — | % | | | | — | % | | |
| Weighted average cost - excess spread financing | 9.0 | % | | | | 9.0 | % | | | | — | % | | | | — | % | | |
Total other (expenses) income, net, for the three months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to lower income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance. Refer to (1)Table 10. Servicing - Revenues, Table 11. Servicing - Expenses and Table 12. Servicing - Other (Expenses) Income, Net, for further discussions on the changes in total revenues, total expenses and total other (expenses) income, net, respectively.
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Table 5.1 Servicing Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operational | $ | 607 | | | $ | 638 | | | $ | (31) | | | (5) | % |
| Amortization, net of accretion | (178) | | | (79) | | | (99) | | | 125 | % |
| Mark-to-market | (644) | | | (524) | | | (120) | | | 23 | % |
| Total revenues | (215) | | | 35 | | | (250) | | | (714) | % |
| Total expenses | 271 | | | 384 | | | (113) | | | (29) | % |
| Total other (expenses) income, net | (90) | | | 28 | | | (118) | | | (421) | % |
| Loss before income tax benefit | $ | (576) | | | $ | (321) | | | $ | (255) | | | 79 | % |
For the six months ended June 30, 2020, we incurred a loss before income tax benefit of $576 compared to $321 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues during the six months ended June 30, 2020 compared to the same period in 2019. Amortization, net of accretion, for the six months ended June 30, 2020 increased compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of elevated prepayments driven by the declining interest rate environment. Total expenses for the six months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation expenses and a decrease in salaries, wages and benefits. The decrease in foreclosure and other liquidation expenses was primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to improved performance of $15 on loss recoveries related to settlement with a prior servicer. The decrease in salaries, wages and benefits was primarily due to improved operational efficiencies, which included consolidation of one of our servicing centers.
Total other (expenses) income, net, for the six months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in other interest income due to lower interest income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance. Refer to Table 10.1 Servicing - Revenues, Table 11.1 Servicing - Expenses and Table 12.1 Servicing - Other (Expenses) Income, Net, for further discussions on the changes in total revenues, total expenses and total other (expenses) income, net, respectively.
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Table 6. Servicing Portfolio - Unpaid Principal Balances | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Average UPB | | | | | | | |
| Forward MSRs | $ | 289,707 | | | $ | 315,333 | | | $ | 296,446 | | | $ | 312,158 | |
Subservicing and other(1) | 301,680 | | | 297,924 | | | 306,121 | | | 268,696 | |
| Reverse loans | 21,058 | | | 26,028 | | | 21,559 | | | 26,750 | |
| Total average UPB | $ | 612,445 | | | $ | 639,285 | | | $ | 624,126 | | | $ | 607,604 | |
| | | | | | | |
| | | | | June 30, 2020 | | June 30, 2019 |
| Ending UPB | | | | | | | |
| Forward MSRs | | | | | | | |
| Agency | | | | | $ | 228,680 | | | $ | 254,543 | |
| Non-agency | | | | | 49,295 | | | 61,469 | |
| Total forward MSRs | | | | | 277,975 | | | 316,012 | |
| | | | | | | |
Subservicing and other(1) | | | | | | | |
| Agency | | | | | 286,710 | | | 253,846 | |
| Non-agency | | | | | 10,082 | | | 48,262 | |
| Total subservicing and other | | | | | 296,792 | | | 302,108 | |
| | | | | | | |
| Reverse loans | | | | | | | |
| MSR | | | | | 2,190 | | | 3,127 | |
| MSL | | | | | 12,891 | | | 15,374 | |
| Securitized loans | | | | | 5,677 | | | 7,068 | |
| Total reverse portfolio serviced | | | | | 20,758 | | | 25,569 | |
| Total ending UPB | | | | | $ | 595,525 | | | $ | 643,689 | |
(1)Subservicing and other includes (i) loans we service 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.
The following tables provide a rollforward of our forward MSR and subservicing and other portfolio UPB:
| | |
Table 7. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | Three Months Ended June 30, 2019 | | | | |
| Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 290,634 | | | $ | 316,933 | | | $ | 607,567 | | | $ | 303,692 | | | $ | 301,191 | | | $ | 604,883 | |
| Additions: | | | | | | | | | | | |
| Originations | 9,478 | | | 1,024 | | | 10,502 | | | 9,521 | | | 399 | | | 9,920 | |
Acquisitions / Increase in subservicing(1) | (1,634) | | | 16,908 | | | 15,274 | | | 20,073 | | | 12,715 | | | 32,788 | |
| Deductions: | | | | | | | | | | | |
| Dispositions | (31) | | | (9,751) | | | (9,782) | | | (2,239) | | | (675) | | | (2,914) | |
| Principal reductions and other | (2,678) | | | (2,168) | | | (4,846) | | | (3,031) | | | (2,669) | | | (5,700) | |
Voluntary reductions(2) | (17,435) | | | (26,113) | | | (43,548) | | | (11,113) | | | (8,665) | | | (19,778) | |
Involuntary reductions(3) | (251) | | | (41) | | | (292) | | | (807) | | | (188) | | | (995) | |
| Net changes in loans serviced by others | (108) | | | — | | | (108) | | | (84) | | | — | | | (84) | |
| Balance - end of period | $ | 277,975 | | | $ | 296,792 | | | $ | 574,767 | | | $ | 316,012 | | | $ | 302,108 | | | $ | 618,120 | |
(1)Includes transfers to/from Subservicing and Other.
(2)Voluntary reductions are related to loan payoffs by customers.
(3)Involuntary reductions refer to loan chargeoffs.
During the three months ended June 30, 2020, our forward MSR UPB decreased primarily due to increased voluntary reductions driven by the low interest rate environment. During the three months ended June 30, 2020, our subservicing and other portfolio ending UPB decreased primarily driven by increased voluntary reductions in the low interest rate environment and increased dispositions due to various MSR sales, partially offset by portfolio growth from our subservicing clients.
| | |
Table 7.1 Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | Six Months Ended June 30, 2019 | | | | |
| Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 296,782 | | | $ | 323,983 | | | $ | 620,765 | | | $ | 295,481 | | | $ | 223,886 | | | $ | 519,367 | |
| Additions: | | | | | | | | | | | |
| Originations | 21,113 | | | 1,686 | | | 22,799 | | | 14,412 | | | 803 | | | 15,215 | |
Acquisitions / Increase in subservicing(1) | (2,307) | | | 40,260 | | | 37,953 | | | 33,477 | | | 97,121 | | | 130,598 | |
| Deductions: | | | | | | | | | | | |
| Dispositions | (71) | | | (20,110) | | | (20,181) | | | (2,372) | | | (1,793) | | | (4,165) | |
| Principal reductions and other | (5,426) | | | (5,133) | | | (10,559) | | | (5,858) | | | (4,986) | | | (10,844) | |
Voluntary reductions(2) | (31,299) | | | (43,785) | | | (75,084) | | | (17,410) | | | (12,640) | | | (30,050) | |
Involuntary reductions(3) | (638) | | | (109) | | | (747) | | | (1,569) | | | (283) | | | (1,852) | |
| Net changes in loans serviced by others | (179) | | | — | | | (179) | | | (149) | | | — | | | (149) | |
| Balance - end of period | $ | 277,975 | | | $ | 296,792 | | | $ | 574,767 | | | $ | 316,012 | | | $ | 302,108 | | | $ | 618,120 | |
(1)Includes transfers to/from Subservicing and Other.
(2)Voluntary reductions are related to loan payoffs by customers.
(3)Involuntary reductions refer to loan chargeoffs.
During the six months ended June 30, 2020, our forward MSR UPB decreased primarily due to increased voluntary reductions in the low interest rate environment, partially offset by increased origination volumes. During the six months ended June 30, 2020, our subservicing and other portfolio ending UPB decreased primarily driven by increased voluntary reductions in the low interest rate environment and increased dispositions due to various MSR sales, partially offset by portfolio growth from our subservicing clients.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio:
| | |
Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, 2020 | | June 30, 2019 |
Loan count(2) | | | | | | 3,360,826 | | | 3,637,538 | |
Average loan amount(3) | | | | | | $ | 171,022 | | | $ | 169,935 | |
Average coupon - credit sensitive(4) | | | | | | 4.7 | % | | 4.8 | % |
Average coupon - interest sensitive(4) | | | | | | 4.2 | % | | 4.4 | % |
Average coupon - agency(4) | | | | | | 4.4 | % | | 4.5 | % |
Average coupon - non-agency(4) | | | | | | 4.7 | % | | 4.8 | % |
60+ delinquent (% of loans)(5) | | | | | | 4.7 | % | | 2.3 | % |
90+ delinquent (% of loans)(5) | | | | | | 2.2 | % | | 2.0 | % |
120+ delinquent (% of loans)(5) | | | | | | 1.6 | % | | 1.8 | % |
| | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Total prepayment speed (12-month constant prepayment rate) | | 26.0 | % | | 13.0 | % | | 22.6 | % | | 10.8 | % |
(1)Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others.
(2)As of June 30, 2020, loan count includes 195,423 loans in forbearance related to the CARES Act, whereby the borrowers have failed to make at least one payment.
(3)Average loan amount is presented in whole dollar amounts.
(4)The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value.
(5)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 a significant 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. Due to the COVID-19 pandemic and the implementation of the CARES Act, loans greater than 60 days delinquent have increased as of June 30, 2020 compared to the same period in 2019.
| | |
Table 9. Forward Loan Modifications and Workout Units |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | Amount Change | | % Change |
| Modifications | 4,329 | | | 5,632 | | | (1,303) | | | (23) | % |
| Workouts | 34,355 | | | 6,476 | | | 27,879 | | | 430 | % |
| Total modifications and workout units | 38,684 | | | 12,108 | | | 26,576 | | | 219 | % |
Total modifications and workouts during the three months ended June 30, 2020 increased compared to the same period in 2019 primarily due to an increase in workouts related to loans impacted by the COVID-19 pandemic which successfully exited their forbearance plans.
| | |
Table 9.1 Forward Loan Modifications and Workout Units |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | |
| 2020 | | 2019 | | Amount Change | | % Change |
| Modifications | 9,044 | | | 10,821 | | | (1,777) | | | (16) | % |
| Workouts | 38,349 | | | 10,877 | | | 27,472 | | | 253 | % |
| Total modifications and workout units | 47,393 | | | 21,698 | | | 25,695 | | | 118 | % |
Total modifications and workouts during the six months ended June 30, 2020 increased compared to the same period in 2019 primarily due to an increase in workouts related to loans impacted by the COVID-19 pandemic which successfully exited their forbearance plans.
The following tables provide the composition of revenues for the Servicing segment:
| | |
Table 10. Servicing - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | $ Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 239 | | | 16 | | $ | 257 | | | 16 | | $ | (18) | | | — | | (7) | % | | — | % |
Modification fees(2) | 2 | | | — | | 6 | | | — | | (4) | | | — | | (67) | % | | — | % |
Incentive fees(2) | 5 | | | — | | 1 | | | — | | 4 | | | — | | 400 | % | | — | % |
Late payment fees(2) | 16 | | | 1 | | 20 | | | 2 | | (4) | | | (1) | | (20) | % | | (50) | % |
Other ancillary revenues(2) | 44 | | | 3 | | 30 | | | 2 | | 14 | | | 1 | | 47 | % | | 50 | % |
| Total forward MSR operational revenue | 306 | | | 20 | | 314 | | | 20 | | (8) | | | — | | (3) | % | | — | % |
Base subservicing fees and other subservicing revenue(3) | 69 | | | 5 | | 62 | | | 4 | | 7 | | | 1 | | 11 | % | | 25 | % |
| Reverse servicing fees | 7 | | | — | | 8 | | | — | | (1) | | | — | | (13) | % | | — | % |
| Total servicing fee revenue | 382 | | | 25 | | 384 | | | 24 | | (2) | | | 1 | | (1) | % | | 4 | % |
| MSR financing liability costs | (9) | | | (1) | | (11) | | | (1) | | 2 | | | — | | (18) | % | | — | % |
| Excess spread costs - principal | (79) | | | (5) | | (59) | | | (3) | | (20) | | | (2) | | 34 | % | | 67 | % |
| Total operational revenue | 294 | | | 19 | | 314 | | | 20 | | (20) | | | (1) | | (6) | % | | (5) | % |
| Amortization, net of accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (186) | | | (12) | | (125) | | | (8) | | (61) | | | (4) | | 49 | % | | 50 | % |
| Excess spread accretion | 79 | | | 5 | | 59 | | | 3 | | 20 | | | 2 | | 34 | % | | 67 | % |
| Reverse MSL accretion | 5 | | | — | | 11 | | | 1 | | (6) | | | (1) | | (55) | % | | (100) | % |
| Reverse MSR amortization | — | | | — | | (1) | | | — | | 1 | | | — | | 100 | % | | — | % |
| Total amortization, net of accretion | (102) | | | (7) | | (56) | | | (4) | | (46) | | | (3) | | 82 | % | | 75 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | (321) | | | (21) | | (227) | | | (14) | | (94) | | | (7) | | 41 | % | | 50 | % |
| Excess spread / financing MTM | 60 | | | 4 | | (4) | | | — | | 64 | | | 4 | | (1,600) | % | | 100 | % |
| Total MTM adjustments | (261) | | | (17) | | (231) | | | (14) | | (30) | | | (3) | | 13 | % | | 21 | % |
| Total revenues - Servicing | $ | (69) | | | (5) | | $ | 27 | | | 2 | | $ | (96) | | | (7) | | (356) | % | | (350) | % |
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
NM = Not meaningful or greater than 200% change.
| | |
| Table 4. Servicing - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps | | Amt | | bps |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 223 | | | 14 | | $ | 250 | | | 16 | | $ | (27) | | | (2) | | (11) | % | | (13) | % |
Modification fees(2) | 7 | | | — | | 3 | | | — | | 4 | | | — | | 133 | % | | — | % |
Incentive fees(2) | 1 | | | — | | 4 | | | — | | (3) | | | — | | (75) | % | | — | % |
Late payment fees(2) | 14 | | | 1 | | 23 | | | 2 | | (9) | | | (1) | | (39) | % | | (50) | % |
Other ancillary revenues(2) | 140 | | | 9 | | 38 | | | 2 | | 102 | | | 7 | | NM | | NM |
| Total forward MSR operational revenue | 385 | | | 24 | | 318 | | | 20 | | 67 | | | 4 | | 21 | % | | 20 | % |
Base subservicing fees and other subservicing revenue(2) | 68 | | | 5 | | 65 | | | 4 | | 3 | | | 1 | | 5 | % | | 25 | % |
| Reverse servicing fees | 5 | | | — | | 6 | | | — | | (1) | | | — | | (17) | % | | — | % |
| Total servicing fee revenue | 458 | | | 29 | | 389 | | | 24 | | 69 | | | 5 | | 18 | % | | 21 | % |
| MSR financing liability costs | (7) | | | — | | (8) | | | — | | 1 | | | — | | (13) | % | | — | % |
| Excess spread costs - principal | (76) | | | (5) | | (68) | | | (4) | | (8) | | | (1) | | 12 | % | | 25 | % |
| Total operational revenue | 375 | | | 24 | | 313 | | | 20 | | 62 | | | 4 | | 20 | % | | 20 | % |
| Amortization, Net of Accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (232) | | | (15) | | (152) | | | (10) | | (80) | | | (5) | | 53 | % | | 50 | % |
| Excess spread accretion | 76 | | | 5 | | 68 | | | 4 | | 8 | | | 1 | | 12 | % | | 25 | % |
| Reverse MSL accretion | 3 | | | — | | 8 | | | 1 | | (5) | | | (1) | | (63) | % | | (100) | % |
| | | | | | | | | | | | | | | |
| Total amortization, net of accretion | (153) | | | (10) | | (76) | | | (5) | | (77) | | | (5) | | 101 | % | | 100 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | 385 | | | 24 | | (412) | | | (26) | | 797 | | | 50 | | NM | | NM |
| Excess spread / financing MTM | (31) | | | (2) | | 29 | | | 2 | | (60) | | | (4) | | NM | | NM |
| Total MTM adjustments | 354 | | | 22 | | (383) | | | (24) | | 737 | | | 46 | | NM | | NM |
| Total revenues - Servicing | $ | 576 | | | 36 | | $ | (146) | | | (9) | | $ | 722 | | | 45 | | NM | | NM |
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.
(3)The amount of MSR MTM includes 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. The impact of negative modeled cash flows was $3$12 and $17 for$10 during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
NM = Not meaningful or greater than 200% change.
Servicing Segment RevenuesForward - Due toThe following provides the decrease of the forward MSR portfolio’s UPB, base servicing fee revenue decreasedchanges in revenues for the three months ended June 30, 2020 as compared to the same period in 2019. Other ancillary revenues increased primarily due to higher sales lead incentives due to increased portfolio recapture activity. Incentive fee revenue increased primarily due to higher investor incentives driven by better overall performance.
Forward MSR amortization increased for the three months ended June 30, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment.
Total negative MTM adjustments increased for the three months ended June 30, 2020 as compared to the same period in 2019 primarily due to the declining interest rate environment during 2020.
Subservicing - Subservicing fees increased for the three months ended June 30, 2020 as compared to the same period in 2019, primarily due to higher average subservicing portfolio UPB.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended June 30, 2020 decreased as compared to the same period in 2019, primarily due to the decline in the reverse mortgage portfolio.
| | |
Table 10.1 Servicing - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | $ Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 489 | | | 16 | | $ | 497 | | | 17 | | $ | (8) | | | (1) | | (2) | % | | (6) | % |
Modification fees(2) | 5 | | | — | | 9 | | | — | | (4) | | | — | | (44) | % | | — | % |
Incentive fees(2) | 9 | | | — | | 2 | | | — | | 7 | | | — | | 350 | % | | — | % |
Late payment fees(2) | 39 | | | 1 | | 39 | | | 1 | | — | | | — | | — | % | | — | % |
Other ancillary revenues(2) | 82 | | | 3 | | 78 | | | 3 | | 4 | | | — | | 5 | % | | — | % |
| Total forward MSR operational revenue | 624 | | | 20 | | 625 | | | 21 | | (1) | | | (1) | | — | % | | (5) | % |
Base subservicing fees and other subservicing revenue(3) | 134 | | | 5 | | 114 | | | 4 | | 20 | | | 1 | | 18 | % | | 25 | % |
| Reverse servicing fees | 13 | | | — | | 17 | | | — | | (4) | | | — | | (24) | % | | — | % |
| Total servicing fee revenue | 771 | | | 25 | | 756 | | | 25 | | 15 | | | — | | 2 | % | | — | % |
| MSR financing liability costs | (17) | | | (1) | | (23) | | | (1) | | 6 | | | — | | (26) | % | | — | % |
| Excess spread costs - principal | (147) | | | (5) | | (95) | | | (3) | | (52) | | | (2) | | 55 | % | | 67 | % |
| Total operational revenue | 607 | | | 19 | | 638 | | | 21 | | (31) | | | (2) | | (5) | % | | (10) | % |
| Amortization, net of accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (338) | | | (11) | | (204) | | | (7) | | (134) | | | (4) | | 66 | % | | 57 | % |
| Excess spread accretion | 147 | | | 5 | | 95 | | | 3 | | 52 | | | 2 | | 55 | % | | 67 | % |
| Reverse MSL accretion | 13 | | | — | | 29 | | | 1 | | (16) | | | (1) | | (55) | % | | (100) | % |
| Reverse MSR amortization | — | | | — | | 1 | | | — | | (1) | | | — | | (100) | % | | — | % |
| Total amortization, net of accretion | (178) | | | (6) | | (79) | | | (3) | | (99) | | | (3) | | 125 | % | | 100 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | (733) | | | (23) | | (587) | | | (19) | | (146) | | | (4) | | 25 | % | | 21 | % |
| Excess spread / financing MTM | 89 | | | 3 | | 63 | | | 2 | | 26 | | | 1 | | 41 | % | | 50 | % |
| Total MTM adjustments | (644) | | | (20) | | (524) | | | (17) | | (120) | | | (3) | | 23 | % | | 18 | % |
| Total revenues - Servicing | $ | (215) | | | (7) | | $ | 35 | | | 1 | | $ | (250) | | | (8) | | (714) | % | | (800) | % |
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.
(3)The amount of MSR MTM includes 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. The impact of negative modeled cash flows was $13 and $28 for the six months ended June 30, 2020 and 2019, respectively.segment:
Forward - Due to the decrease of the forward MSR portfolio’s UPB, base servicing fee revenue decreased forduring the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019. Incentive fee revenue2020. Other ancillary revenues increased primarily due to higher investor incentives driven by better overall performance.the $101 gain on sale associated with loans bought out of GNMA securitization, modified and redelivered following GNMA guidelines. Late payment fees decreased due to loan forbearance related to the CARES Act.
Forward MSR amortization increased forduring the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019,2020, primarily due to higher prepayments driven by the lowerlow interest rate environment.
TotalWe recorded favorable MTM adjustments during the three months ended March 31, 2021 compared to negative MTM adjustments increased for the six months ended June 30,in 2020, as compared to the same period in 2019 primarily due to the decliningfavorable impact from changes in interest rate environment during 2020.rates.
Subservicing - Subservicing fees increased forduring the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 20192020, primarily due to a higher average subservicing portfolio UPB.
Servicing fees and reverse MSL accretion on reverse mortgage portfolios forSegment Expenses
Total expenses decreased during the sixthree months ended June 30, 2020 decreasedMarch 31, 2021 as compared to 2020, primarily driven by the same perioddecrease in 2019,salaries, wages and benefits and the change in foreclosure and other liquidation related recoveries, net. Salaries, wages and benefits decreased in 2021 compared to 2020 primarily due to operational efficiencies driven by cost saving initiatives, which included consolidation of one of our servicing centers in the second quarter of 2020. We had foreclosure and other liquidation related recoveries, net during the three months ended March 31, 2021, primarily due to release of loss reserves on servicing advances as a result of loan modification programs related to the COVID-19 pandemic.
Servicing Segment Other Income (Expenses), net
Total other expenses, net increased during the three months ended March 31, 2021 as compared to 2020, primarily due to decrease in other interest income due to lower interest income earned on custodial balances due to lower LIBOR rates. Interest expense decreased during the three months ended March 31, 2021 as compared to 2020, due to a decrease in reverse mortgage interest expense primarily driven by the decline in the reverse mortgage portfolio. Reverse MSL accretion was further impactedinterests portfolio, partially offset by $6 pertaining to accumulated accretion recorded during the six months ended June 30, 2019 related to fair value adjustments for MSL assumed from the Merger. The fair value adjustment resulted from the revised cost to service assumption used in the valuation of MSL during the measurement period.higher compensating interest expense and bank fees.
The tables below summarize expenses for the Servicing segment: | | | | | | | | | | | | | | |
Table 11.5. Servicing Portfolio - Expenses | | | | Unpaid Principal Balances |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 75 | | | 5 | | $ | 90 | | | 6 | | $ | (15) | | | (1) | | (17) | % | | (17) | % |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 27 | | | 2 | | 24 | | | 2 | | 3 | | | — | | 13 | % | | — | % |
| Corporate and other general and administrative expenses | 32 | | | 2 | | 39 | | | 2 | | (7) | | | — | | (18) | % | | — | % |
| Foreclosure and other liquidation related expenses (recoveries), net | (17) | | | (1) | | 32 | | | 2 | | (49) | | | (3) | | (153) | % | | (150) | % |
| Depreciation and amortization | 5 | | | — | | 4 | | | — | | 1 | | | — | | 25 | % | | — | % |
| Total general and administrative expenses | 47 | | | 3 | | 99 | | | 6 | | (52) | | | (3) | | (53) | % | | (50) | % |
| Total expenses - Servicing | $ | 122 | | | 8 | | $ | 189 | | | 12 | | $ | (67) | | | (4) | | (35) | % | | (33) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended March 31, |
| | | | | | | | | | 2021 | | 2020 |
| Average UPB | | | | | | | | | | | | |
| Forward MSRs | | | | | | | | | | $ | 281,519 | | | $ | 303,578 | |
Subservicing and other(1) | | | | | | | | | | 335,230 | | | 310,160 | |
| Reverse loans | | | | | | | | | | 17,627 | | | 22,059 | |
| Total average UPB | | | | | | | | | | $ | 634,376 | | | $ | 635,797 | |
| | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 |
| | UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs | | | | | | | | | | | | |
| Agency | | $ | 234,589 | | | $ | 2,965 | | | 126 | | $ | 238,956 | | | $ | 2,618 | | | 110 |
| Non-agency | | 41,439 | | | 389 | | | 94 | | 51,678 | | | 491 | | | 95 |
| Total forward MSRs | | 276,028 | | | 3,354 | | | 122 | | 290,634 | | | 3,109 | | | 107 |
| | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | | |
| Agency | | 338,064 | | | N/A | | | | 302,060 | | | N/A | | |
| Non-agency | | 14,417 | | | N/A | | | | 14,873 | | | N/A | | |
| Total subservicing and other | | 352,481 | | | N/A | | | | 316,933 | | | N/A | | |
| | | | | | | | | | | | |
| Reverse loans | | | | | | | | | | | | |
| MSR | | 1,847 | | | 5 | | | | | 2,332 | | | 6 | | | |
| MSL | | 10,372 | | | (38) | | | | | 13,360 | | | (53) | | | |
| Securitized loans | | 5,050 | | | 5,091 | | | | | 5,898 | | | 5,955 | | | |
| Total reverse portfolio serviced | | 17,269 | | | 5,058 | | | | | 21,590 | | | 5,908 | | | |
| Total ending balance | | $ | 645,778 | | | $ | 8,412 | | | | | $ | 629,157 | | | $ | 9,017 | | | |
| | | | | | | | | | | | |
| Forward MSRs UPB Encumbrance | | | | | | | | March 31, 2021 | | March 31, 2020 |
| Forward MSRs - unencumbered | | | | | | | | $ | 121,311 | | | $ | 85,124 | |
Forward MSRs - encumbered(2) | | | | | | | | | | 154,717 | | | 205,510 | |
| Total Forward MSRs UPB | | | | | | | | | | $ | 276,028 | | | $ | 290,634 | |
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
Total expenses decreased during the three months ended June 30, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosureSubservicing and other liquidation expenses (recoveries), net. Foreclosureincludes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and other liquidation related expenses (recoveries), net, decreased primarily due to operational improvements(iii) agency REO balances for which we own the mortgage servicing rights.
(2)The encumbered forward MSRs consist of the reverse portfolio with respect to assignmentsresidential mortgage loans included within our excess spread financing transactions and adherence to HUD curtailment guidelines, in addition to improved performance of $15 on loss recoveries related to settlement with a prior servicer. Salaries, wages and benefits decreased in 2020 compared to the same period in 2019 primarily due to operational efficiencies which included consolidation of one of our servicing centers.MSR financing liability.
The following tables provide a rollforward of our forward MSR and subservicing and other portfolio UPB:
| | |
Table 11.16. Forward Servicing - Expensesand Subservicing and Other Portfolio UPB Rollforward |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 161 | | | 5 | | $ | 176 | | | 6 | | $ | (15) | | | (1) | | (9) | % | | (17) | % |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 52 | | | 2 | | 63 | | | 2 | | (11) | | | — | | (17) | % | | — | % |
| Corporate and other general and administrative expenses | 67 | | | 2 | | 78 | | | 3 | | (11) | | | (1) | | (14) | % | | (33) | % |
| Foreclosure and other liquidation related expenses (recoveries), net | (17) | | | — | | 59 | | | 2 | | (76) | | | (2) | | (129) | % | | (100) | % |
| Depreciation and amortization | 8 | | | — | | 8 | | | — | | — | | | — | | — | % | | — | % |
| Total general and administrative expenses | 110 | | | 4 | | 208 | | | 7 | | (98) | | | (3) | | (47) | % | | (43) | % |
| Total expenses - Servicing | $ | 271 | | | 9 | | $ | 384 | | | 13 | | $ | (113) | | | (4) | | (29) | % | | (31) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 271,189 | | | $ | 336,513 | | | $ | 607,702 | | | $ | 296,782 | | | $ | 323,983 | | | $ | 620,765 | |
| Additions: | | | | | | | | | | | |
| Originations | 23,623 | | | 1,504 | | | 25,127 | | | 11,635 | | | 662 | | | 12,297 | |
Acquisitions / Increase in subservicing(1) | 4,647 | | | 53,318 | | | 57,965 | | | (673) | | | 23,352 | | | 22,679 | |
| Deductions: | | | | | | | | | | | |
| Dispositions | (50) | | | (1,130) | | | (1,180) | | | (40) | | | (10,359) | | | (10,399) | |
| Principal reductions and other | (2,702) | | | (3,231) | | | (5,933) | | | (2,748) | | | (2,965) | | | (5,713) | |
Voluntary reductions(2) | (20,474) | | | (34,455) | | | (54,929) | | | (13,864) | | | (17,672) | | | (31,536) | |
Involuntary reductions(3) | (133) | | | (38) | | | (171) | | | (387) | | | (68) | | | (455) | |
| Net changes in loans serviced by others | (72) | | | — | | | (72) | | | (71) | | | — | | | (71) | |
| Balance - end of period | $ | 276,028 | | | $ | 352,481 | | | $ | 628,509 | | | $ | 290,634 | | | $ | 316,933 | | | $ | 607,567 | |
(1)Calculated basis points (“bps”)Includes transfers to/from Subservicing and Other.
(2)Voluntary reductions are as follows: Annualized dollar amount/Total average UPB X 10000.related to loan payoffs by customers.
(3)Involuntary reductions refer to loan chargeoffs.
Total expenses decreased duringDuring the sixthree months ended June 30, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation expenses (recoveries), net. Foreclosure and other liquidation related expenses (recoveries), net decreasedMarch 31, 2021, our ending forward MSR UPB increased primarily due to operational improvements ofincreased originations volumes driven by the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to improved performance of $15 on loss recoveries related to a settlement with a prior servicer duringlow interest rate environment, partially offset by increased voluntary reductions. During the sixthree months ended June 30, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019March 31, 2021, our subservicing and other portfolio ending UPB increased primarily due to lower legal and tax service expenses. The decreaseportfolio growth from our subservicing clients, partially offset by increased voluntary reductions in Corporate and other general and administrative expenses in 2020 compared to the same period in 2019 was primarily driven by lower occupancy expenses. Salaries, wages and benefits decreased in 2020 compared to the same period in 2019 primarily due to improved operational efficiencies which included consolidation of one of our servicing centers.low interest rate environment.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio:
| | | | | | | | | | | | | | |
Table 12.7. Key Performance Metrics - Forward Servicing - Other (Expenses) Income, Netand Subservicing Portfolio | | | | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Income earned on Reverse mortgage interest | $ | 54 | | | 4 | | $ | 86 | | | 6 | | $ | (32) | | | (2) | | (37) | % | | (33) | % |
| Other interest income | 3 | | | — | | 50 | | | 3 | | (47) | | | (3) | | (94) | % | | (100) | % |
| Interest income | 57 | | | 4 | | 136 | | | 9 | | (79) | | | (5) | | (58) | % | | (56) | % |
| | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (51) | | | (3) | | (46) | | | (3) | | (5) | | | — | | 11 | % | | — | % |
| Advance interest expense | (8) | | | (1) | | (8) | | | (1) | | — | | | — | | — | % | | — | % |
| Other interest expense | (58) | | | (4) | | (55) | | | (3) | | (3) | | | (1) | | 5 | % | | 33 | % |
| Interest expense | (117) | | | (8) | | (109) | | | (7) | | (8) | | | (1) | | 7 | % | | 14 | % |
| | | | | | | | | | | | | | | |
| Total other (expenses) income, net - Servicing | $ | (60) | | | (4) | | $ | 27 | | | 2 | | $ | (87) | | | (6) | | (322) | % | | (300) | % |
| | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 2.9 | % | | | | 5.5 | % | | | | (2.6) | % | | | | (47) | % | | |
| Weighted average cost - excess spread financing | 9.0 | % | | | | 8.9 | % | | | | 0.1 | % | | | | 1 | % | | |
| | | | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 |
Loan count(2) | | 3,373,173 | | | 3,506,998 | |
Average loan amount(3) | | $ | 186,328 | | | $ | 173,231 | |
Average coupon - agency(4) | | 4.0 | % | | 4.4 | % |
Average coupon - non-agency(4) | | 4.4 | % | | 4.7 | % |
60+ delinquent (% of loans)(5) | | 5.3 | % | | 1.9 | % |
90+ delinquent (% of loans)(5) | | 4.9 | % | | 1.6 | % |
120+ delinquent (% of loans)(5) | | 4.6 | % | | 1.4 | % |
| | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
| Total prepayment speed (12-month constant prepayment rate) | | 30.8 | % | | 19.2 | % |
(1)Calculated basis points (“bps”)Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others.
(2)As of March 31, 2021, loan count includes 154,194 loans in forbearance related to the CARES Act.
(3)Average loan amount is presented in whole dollar amounts.
(4)The weighted average coupon amounts presented in the table above are as follows: Annualized dollar amount/Total average UPB X 10000.only reflective of our owned forward MSR portfolio that is reported at fair value.
(5)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.
ForDelinquency is an assumption in determining the three months ended June 30, 2020, we had total other expenses, net,mark-to-market adjustment and is a key indicator of $60 comparedMSR portfolio performance. Delinquent loans contribute to total other income, net, of $27 for the same period in 2019. The change was primarily due to a decrease in interest income, mainly driven by lower interest income earned on custodial balances driven by lower LIBOR rates. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Interest expense increased for the three months ended June 30, 2020 as compared to the same period in 2019, primarily due to an increase in other interest expense and reverse mortgage interest expense. Other interest expense increasedMSR values due to higher bank feescosts to service and higher compensating interest expense. The increase in reverse mortgage interest expense was primarily driven by lower bond premium amortization, partially offset byincreased carrying costs of advances. Due to the decline inCOVID-19 pandemic and the reverse mortgage interest portfolio.implementation of the CARES Act, loans greater than 60 days, 90 days and 120 days delinquent have increased as of March 31, 2021 compared to 2020.
| | |
Table 12.1 Servicing - Other (Expenses) Income, Net8. Forward Loan Modifications and Workout Units |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | Change | | | | % Change | | |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Income earned on Reverse mortgage interest | $ | 97 | | | 3 | | $ | 168 | | | 5 | | $ | (71) | | | (2) | | (42) | % | | (40) | % |
| Other interest income | 43 | | | 1 | | 83 | | | 3 | | (40) | | | (2) | | (48) | % | | (67) | % |
| Interest income | 140 | | | 4 | | 251 | | | 8 | | (111) | | | (4) | | (44) | % | | (50) | % |
| | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (103) | | | (3) | | (117) | | | (4) | | 14 | | | 1 | | (12) | % | | (25) | % |
| Advance interest expense | (13) | | | — | | (17) | | | — | | 4 | | | — | | (24) | % | | — | % |
| Other interest expense | (114) | | | (4) | | (89) | | | (3) | | (25) | | | (1) | | 28 | % | | 33 | % |
| Interest expense | (230) | | | (7) | | (223) | | | (7) | | (7) | | | — | | 3 | % | | — | % |
| | | | | | | | | | | | | | | |
| Total other (expenses) income, net - Servicing | $ | (90) | | | (3) | | $ | 28 | | | 1 | | $ | (118) | | | (4) | | (421) | % | | (400) | % |
| | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 5.1 | % | | | | (2.1) | % | | | | (41) | % | | |
| Weighted average cost - excess spread financing | 9.0 | % | | | | 8.9 | % | | | | 0.1 | % | | | | 1 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | Amount Change | | % Change |
Modifications(1) | 15,635 | | | 4,715 | | | 10,920 | | | NM |
Workouts(2) | 18,341 | | | 3,113 | | | 15,228 | | | NM |
| Total modifications and workout units | 33,976 | | | 7,828 | | | 26,148 | | | NM |
(1)Calculated basis points (“bps”)Modifications adjust the terms of the loan.
(2)Workouts are as follows: Annualized dollar amount/Total average UPB X 10000.other loss mitigation options which do not adjust the terms of the loan. Workouts exclude loans which did not miss a contractual payment during forbearance related to the CARES Act.
NM = Not meaningful or greater than 200% change.
ForTotal modifications and workouts during the sixthree months ended June 30, 2020, we had total other expenses, net, of $90March 31, 2021 increased compared to total other income, net, of $28 for the same period in 2019. The change was2020 primarily due to a decreasean increase in interest income, mainly drivenmodifications and workouts related to loans impacted by lower interest income earned on custodial balances driven by lower LIBOR rates. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Interest expense remained relatively flat for the six months ended June 30, 2020 as compared to the same period in 2019.COVID-19 pandemic which successfully exited their forbearance plans.
Servicing Portfolio and Related Liabilities
The table below summarizes the servicing portfolio and related liabilities in the Servicing segment:
| | | | | | | | | | | | | | |
Table 13. Servicing Portfolios and Related Liabilities | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | December 31, 2019 | | | | |
| UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs - acquisition pool: | | | | | | | | | | | |
| Credit sensitive | $ | 131,105 | | | $ | 1,307 | | | 100 | | $ | 147,895 | | | $ | 1,613 | | | 109 |
| Interest sensitive | 146,870 | | | 1,450 | | | 99 | | 148,887 | | | 1,883 | | | 126 |
| Total forward MSRs - fair value | $ | 277,975 | | | $ | 2,757 | | | 99 | | $ | 296,782 | | | $ | 3,496 | | | 118 |
| | | | | | | | | | | |
| Forward MSRs - investor pool: | | | | | | | | | | | |
| Agency | $ | 228,680 | | | $ | 2,308 | | | 101 | | $ | 240,688 | | | $ | 2,944 | | | 122 |
| Non-agency | 49,295 | | | 449 | | | 91 | | 56,094 | | | 552 | | | 98 |
| Total forward MSRs - fair value | $ | 277,975 | | | $ | 2,757 | | | 99 | | $ | 296,782 | | | $ | 3,496 | | | 118 |
| | | | | | | | | | | |
| Total forward MSRs | $ | 277,975 | | | $ | 2,757 | | | | | $ | 296,782 | | | $ | 3,496 | | | |
| | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | |
| Agency | 286,710 | | | N/A | | | | 308,532 | | | N/A | | |
| Non-agency | 10,082 | | | N/A | | | | 15,451 | | | N/A | | |
| Total subservicing and other | 296,792 | | | N/A | | | | 323,983 | | | N/A | | |
| | | | | | | | | | | |
| Reverse portfolio - amortized cost | | | | | | | | | | | |
| MSR | 2,190 | | | 6 | | | | | 2,508 | | | 6 | | | |
| MSL | 12,891 | | | (48) | | | | | 13,994 | | | (61) | | | |
| Securitized loans | 5,677 | | | 5,709 | | | | | 6,223 | | | 6,279 | | | |
| Total reverse portfolio serviced | 20,758 | | | 5,667 | | | | | 22,725 | | | 6,224 | | | |
| Total servicing portfolio unpaid principal balance | $ | 595,525 | | | $ | 8,424 | | | | | $ | 643,490 | | | $ | 9,720 | | | |
(1)Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances for which we own the mortgage servicing rights.
As of June 30, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value by 27 bps, compared to December 31, 2019 primarily due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020.
We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolios primarily consist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.
The following table sets forth the activities of forward MSRs:
| | | | | | | | | | | | | | |
Table 14.9. Forward MSRs - Fair Value Rollforward | | | | |
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | |
| Fair value - beginning of period | Fair value - beginning of period | $ | 3,109 | | | $ | 3,481 | | | $ | 3,496 | | | $ | 3,665 | | Fair value - beginning of period | $ | 2,703 | | | $ | 3,496 | | |
| Additions: | Additions: | | Additions: | | |
| Servicing retained from mortgage loans sold | Servicing retained from mortgage loans sold | 126 | | | 103 | | | 249 | | | 169 | | Servicing retained from mortgage loans sold | 288 | | | 123 | | |
| Purchases of servicing rights | Purchases of servicing rights | — | | | 280 | | | 24 | | | 689 | | Purchases of servicing rights | 67 | | | 24 | | |
| Dispositions: | Dispositions: | | Dispositions: | | |
| Sales and cancellation of servicing assets | Sales and cancellation of servicing assets | — | | | (34) | | | — | | | (294) | | Sales and cancellation of servicing assets | (2) | | | — | | |
| Changes in fair value: | Changes in fair value: | | Changes in fair value: | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | Due to changes in valuation inputs or assumptions used in the valuation model: | | Due to changes in valuation inputs or assumptions used in the valuation model: | | |
| Credit sensitive | (40) | | | (35) | | | (221) | | | (156) | | |
| Interest sensitive | (276) | | | (175) | | | (496) | | | (386) | | |
| Agency | | Agency | 149 | | | (351) | | |
| Non-agency | | Non-agency | 361 | | | (50) | | |
| Other changes in fair value: | Other changes in fair value: | | Other changes in fair value: | | |
| Scheduled principal payments | Scheduled principal payments | (24) | | | (23) | | | (47) | | | (45) | | Scheduled principal payments | (24) | | | (23) | | |
Disposition of negative MSRs and other(1) | Disposition of negative MSRs and other(1) | 25 | | | 11 | | | 45 | | | 23 | | Disposition of negative MSRs and other(1) | 20 | | | 20 | | |
| Prepayments | Prepayments | | Prepayments | | |
| Voluntary prepayments | Voluntary prepayments | | Voluntary prepayments | | |
| Credit sensitive | (26) | | | (26) | | | (50) | | | (45) | | |
| Interest sensitive | (135) | | | (70) | | | (237) | | | (102) | | |
| Agency | | Agency | (197) | | | (116) | | |
| Non-agency | | Non-agency | (10) | | | (10) | | |
| Involuntary prepayments | Involuntary prepayments | | Involuntary prepayments | | |
| Credit sensitive | — | | | (2) | | | (1) | | | (4) | | |
| Interest sensitive | (2) | | | (5) | | | (5) | | | (9) | | |
| Agency | | Agency | (1) | | | (4) | | |
| Non-agency | | Non-agency | — | | | — | | |
| Fair value - end of period | Fair value - end of period | $ | 2,757 | | | $ | 3,505 | | | $ | 2,757 | | | $ | 3,505 | | Fair value - end of period | $ | 3,354 | | | $ | 3,109 | | |
(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.
The following table sets forthNote 2, Mortgage Servicing Rights and Related Liabilities and Note 13, Fair Value Measurements, in the weighted-average keyNotes to the Condensed Consolidated Financial Statements (unaudited), for additional information regarding the range of assumptions in estimatingand sensitivities related to the fair value measurement of forward MSRs:
| | | | | | | | | | | | | | |
Table 15. MSRs - Fair ValueMSRs as of March 31, 2021 and December 31, 2020. | | | | |
| | | | | | | | | | | |
| June 30, 2020 | | June 30, 2019 |
| Total MSRs Portfolio | | | |
| Discount rate | 9.5 | % | | 9.7 | % |
| Prepayment speeds | 14.2 | % | | 13.7 | % |
| Average life | 5.3 years | | 5.8 years |
| | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 9.9 | % | | 10.6 | % |
| Prepayment speeds | 12.6 | % | | 13.5 | % |
| Average life | 5.6 years | | 5.9 years |
| | | |
| Interest Sensitive | | | |
| Discount rate | 9.0 | % | | 8.9 | % |
| Prepayment speeds | 15.8 | % | | 13.9 | % |
| Average life | 4.9 years | | 5.6 years |
| | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 8.9 | % | | 9.0 | % |
| Prepayment speeds | 14.4 | % | | 13.5 | % |
| Average life | 5.2 years | | 5.7 years |
| | | |
| Non-Agency | | | |
| Discount rate | 12.0 | % | | 12.6 | % |
| Prepayment speeds | 13.4 | % | | 14.5 | % |
| Average life | 5.6 years | | 6.0 years |
The weighted-average discount rate for total MSRs portfolio decreased as of June 30, 2020 compared to the same period in 2019 due to the declining interest rate environment in 2020. Weighted-average life for total MSRs portfolio decreased due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists.
Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.
The key assumptions were separately applied to the servicing of loans in forbearance to account for differences in the underlying estimate of future servicing revenues related to those loans.
Excess Spread Financing
As further disclosed in Note 3,2, Mortgage Servicing Rights and Related Liabilities, in the Notes to the Condensed Consolidated Financial Statements (unaudited), we have entered 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 revenues, is designed 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. We do not currently utilize these transactions as a primary source of financing due to the 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 (i) prepayment speeds and (ii) our ability to recapture mortgage prepayments through the origination platform. See Note 3,2, Mortgage Servicing Rights and Related Liabilitiesand Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements (unaudited), for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of June 30, 2020March 31, 2021 and December 31, 2019.2020.
The following table sets forth the change in the excess spread financing and the related weighted-average assumptions:financing:
| | | | | | | | | | | | | | |
Table 16.10. Excess Spread Financing | | - Rollforward | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Fair value - beginning of period | $ | 1,242 | | | $ | 1,309 | | | $ | 1,311 | | | $ | 1,184 | |
| Additions: | | | | | | | |
| New financings | — | | | 193 | | | 24 | | | 438 | |
| Deductions: | | | | | | | |
| Settlements and repayments | (52) | | | (68) | | | (110) | | | (119) | |
| Changes in fair value: | | | | | | | |
| Credit Sensitive | (22) | | | 17 | | | (24) | | | (15) | |
| Interest Sensitive | (44) | | | (22) | | | (77) | | | (59) | |
| Fair value - end of period | $ | 1,124 | | | $ | 1,429 | | | $ | 1,124 | | | $ | 1,429 | |
| | | | | | | |
| Key Weighted-Average Assumptions: | | | | | June 30, 2020 | | June 30, 2019 |
| Total Excess Spread Portfolio | | | | | | | |
| Discount rate | | | | | 12.0 | % | | 9.6 | % |
| Prepayment speeds | | | | | 13.4 | % | | 13.1 | % |
| Recapture rate | | | | | 18.7 | % | | 20.2 | % |
| Average life | | | | | 5.4 years | | 5.7 years |
| | | | | | | |
| Credit Sensitive | | | | | | | |
| Discount rate | | | | | 12.7 | % | | 10.3 | % |
| Prepayment speeds | | | | | 12.7 | % | | 13.1 | % |
| Recapture rate | | | | | 20.3 | % | | 22.3 | % |
| Average life | | | | | 5.6 years | | 5.8 years |
| | | | | | | |
| Interest Sensitive | | | | | | | |
| Discount rate | | | | | 10.7 | % | | 8.4 | % |
| Prepayment speeds | | | | | 14.6 | % | | 12.9 | % |
| Recapture rate | | | | | 15.8 | % | | 17.4 | % |
| Average life | | | | | 5.1 years | | 5.4 years |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Fair value - beginning of period | $ | 934 | | | $ | 1,311 | | | | | |
| Additions: | | | | | | | |
| New financings | — | | | 24 | | | | | |
| Deductions: | | | | | | | |
| Settlements and repayments | (41) | | | (58) | | | | | |
| Changes in fair value: | | | | | | | |
| Agency | 38 | | | (43) | | | | | |
| Non-agency | 3 | | | 8 | | | | | |
| Fair value - end of period | $ | 934 | | | $ | 1,242 | | | | | |
The following table sets forth the change in the MSRs financing liability and the related weighted-average assumptions:
| | | | | | | | | | | | | | |
Table 17. MSRs Financing LiabilityReverse - Rollforward | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Fair value - beginning of period | $ | 43 | | | $ | 34 | | | $ | 37 | | | $ | 32 | |
| Changes in fair value: | | | | | | | |
| Changes in valuation inputs or assumptions used in the valuation model | 9 | | | 13 | | | 18 | | | 19 | |
| Other changes in fair value | (3) | | | (4) | | | (6) | | | (8) | |
| Fair value - end of period | $ | 49 | | | $ | 43 | | | $ | 49 | | | $ | 43 | |
| | | | | | | |
| | | | | June 30, 2020 | | June 30, 2019 |
| Weighted-Average Assumptions | | | | | | | |
| Advance financing rates | | | | | 4.3 | % | | 3.7 | % |
| Annual advance recovery rates | | | | | 18.6 | % | | 19.3 | % |
We entered into several sale agreements whereby we sold the right to receive repayment of servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs, and also transferred the obligations to make future advances. These transactions are recorded as an MSR financing liability in our consolidated balance sheets and represent the incremental costs relative to the market participant assumptions contained in the MSR valuation. Changes in the value of the MSR financing liability are recorded against servicing revenue and interest imputed on the outstanding liability is recorded as interest expense.
We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market rate 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 and annual advance recovery rates.
The following table provides an overview of our forward servicing portfolio and amounts that involve excess spread financing with our co-investment partners for the periods indicated:
| | | | | | | | | | | | | | |
Table 18. Leveraged Portfolio Characteristics | | | | |
| | | | | | | | | | | |
| June 30, 2020 | | June 30, 2019 |
| Owned forward servicing portfolio - unencumbered | $ | 83,683 | | | $ | 87,007 | |
| Owned forward servicing portfolio - encumbered | 194,292 | | | 229,005 | |
| Subserviced forward servicing portfolio and other | 296,792 | | | 302,108 | |
| Total unpaid principal balance | $ | 574,767 | | | $ | 618,120 | |
The encumbered forward servicing portfolio consists of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold and (3) agency REO balances for which we own the mortgage servicing rights.
Reverse MSRs, MSLs and Participating Interests in Reverse Mortgages - Amortized Cost
The table below provides detail of the characteristics and key performance metrics of the reverse servicing portfolio, which is included in reverse MSRs, MSLs and participating interests in reverse mortgages. Such assets are recorded at amortized cost.
| | | | | | | | | | | | | | |
Table 19.11. Reverse Mortgage Portfolio Characteristics | | | | |
| | | June 30, 2020 | | June 30, 2019 | | March 31, 2021 | | March 31, 2020 |
| Loan count | Loan count | 154,313 | | | 180,899 | | Loan count | 135,979 | | | 158,838 | |
| Ending unpaid principal balance | Ending unpaid principal balance | $ | 20,758 | | | $ | 25,569 | | Ending unpaid principal balance | $ | 17,269 | | | $ | 21,590 | |
Average loan amount(1) | Average loan amount(1) | $ | 134,516 | | | $ | 141,342 | | Average loan amount(1) | $ | 126,995 | | | $ | 135,924 | |
| Average coupon | Average coupon | 2.2 | % | | 4.3 | % | Average coupon | 2.1 | % | | 3.3 | % |
| Average borrower age | Average borrower age | 81 | | | 80 | | Average borrower age | 81.5 years | | 80.9 years |
(1)Average loan amount is calculated and presented in whole dollar amounts.
Historically, we acquired servicing rights and participating interests in reverse mortgage portfolios.portfolios; however, the portfolio is no longer regarded as a core business and is currently in run-off. Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. For acquired servicing rights, an MSR or MSL is established on the acquisition date at fair value, as applicable, based on the expected discounted cash flow from servicing the reverse portfolio.
Each quarter, we accrete the MSL to revenues - service related, net of the respective portfolios’ run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the key assumptions being discount rates, prepayment speeds and borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance.
Based on our assessment, no impairment or increased obligation was required to be recorded for reverse MSRs and MSLs as of June 30, 2020.March 31, 2021.
The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Growing the Originations segment has been a strategic focus for us for several years.
The Originations segment includes threetwo channels:
•Our direct-to-consumer (“DTC”) lending channel relies on our call centers, our website and mobile apps, specially trained teams of licensed mortgage originators, predictive analytics and modeling utilizing proprietary data from our servicing portfolio to interact with customers. Our primary focus isreach 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 assist our customers withconvert leads into loans in a refinance or home purchase by providing them with a needs-based approach to understanding their current mortgage options.cost-efficient manner.
•Our correspondent lending channel acquires 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 flow acquisitions.
•Our wholesale lending channel works with mortgage brokers to source loans which are underwritten and funded by us in our name. Counterparty risk is mitigated through quality and compliance monitoring and all brokers are subject to our eligibility requirements coupled with an annual recertification process. We shut down our wholesale lending operations during the three months ended June 30, 2020 and subsequently ceased originating loans and funded out the remaining pipeline.
The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix ($ in Billions):
The following tables set forth the results of operations for the Originations segment:
| | |
Table 20.12. Originations Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total revenues | $ | 594 | | | $ | 264 | | | $ | 330 | | | 125 | % |
| Total expenses | 167 | | | 145 | | | 22 | | | 15 | % |
| Total other income (expenses), net | 6 | | | (1) | | | 7 | | | (700) | % |
| Income before income tax expense | $ | 433 | | | $ | 118 | | | $ | 315 | | | 267 | % |
| | | | | | | |
| Originations Margin | | | | | | | |
| Revenue | $ | 594 | | | $ | 264 | | | $ | 330 | | | 125 | % |
| Pull through adjusted lock volume | $ | 12,394 | | | $ | 11,197 | | | $ | 1,197 | | | 11 | % |
Revenue as a percentage of pull through adjusted lock volume(1) | 4.79 | % | | 2.36 | % | | 2.43 | % | | 103 | % |
| | | | | | | |
| Expenses | $ | 167 | | | $ | 145 | | | $ | 22 | | | 15 | % |
| Funded volume | $ | 10,729 | | | $ | 9,996 | | | $ | 733 | | | 7 | % |
Expenses as a percentage of funded volume(2) | 1.56 | % | | 1.45 | % | | 0.11 | % | | 8 | % |
| | | | | | | |
| Originations Margin | 3.23 | % | | 0.91 | % | | 2.32 | % | | 255 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Service related, net | $ | 43 | | | $ | 20 | | | $ | 23 | | | 115 | % |
| Net gain on mortgage loans held for sale | | | | | | | |
| Net gain on loans originated and sold | 286 | | | 183 | | | 103 | | | 56 | % |
| Capitalized servicing rights | 274 | | | 119 | | | 155 | | | 130 | % |
| Provision for repurchase reserves, net of release | (8) | | | (5) | | | (3) | | | 60 | % |
| Total net gain on mortgage loans held for sale | 552 | | | 297 | | | 255 | | | 86 | % |
| Total revenues | 595 | | | 317 | | | 278 | | | 88 | % |
| Expenses | | | | | | | |
| Salaries, wages and benefits | 167 | | | 117 | | | 50 | | | 43 | % |
| General and administrative | | | | | | | |
| Loan origination expenses | 27 | | | 16 | | | 11 | | | 69 | % |
| Corporate and other general administrative expenses | 20 | | | 18 | | | 2 | | | 11 | % |
| Marketing and professional service fees | 13 | | | 12 | | | 1 | | | 8 | % |
| Depreciation and amortization | 4 | | | 3 | | | 1 | | | 33 | % |
| Total general and administrative | 64 | | | 49 | | | 15 | | | 31 | % |
| Total expenses | 231 | | | 166 | | | 65 | | | 39 | % |
| Other income (expenses) | | | | | | | |
| Interest income | 23 | | | 34 | | | (11) | | | (32) | % |
| Interest expense | (25) | | | (27) | | | 2 | | | (7) | % |
| | | | | | | |
| Total other (expenses) income, net | (2) | | | 7 | | | (9) | | | (129) | % |
| Income before income tax expense | $ | 362 | | | $ | 158 | | | $ | 204 | | | 129 | % |
| | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 2.9 | % | | 3.8 | % | | (0.9) | % | | (24) | % |
| Weighted average cost of funds (excluding facility fees) | 2.2 | % | | 3.2 | % | | (1.0) | % | | (31) | % |
| | |
| Table 13. Originations - Key Metrics |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Key Metrics | | | | | | | |
Consumer direct lock pull through adjusted volume(1) | $ | 10,322 | | | $ | 7,423 | | | $ | 2,899 | | | 39 | % |
Other locked pull through adjusted volume(1) | 12,945 | | | 5,254 | | | 7,691 | | | 146 | % |
| Total pull through adjusted lock volume | $ | 23,267 | | | $ | 12,677 | | | $ | 10,590 | | | 84 | % |
| Funded volume | $ | 25,133 | | | $ | 12,359 | | | $ | 12,774 | | | 103 | % |
| Volume of loans sold | $ | 26,311 | | | $ | 13,255 | | | $ | 13,056 | | | 98 | % |
Recapture percentage(2) | 31.0 | % | | 29.8 | % | | 1.2 | % | | 4 | % |
Refinance recapture percentage(3) | 36.5 | % | | 37.5 | % | | (1.0) | % | | (3) | % |
| Purchase as a percentage of funded volume | 12.2 | % | | 26.0 | % | | (13.8) | % | | (53) | % |
| Value of capitalized servicing on retained settlements | 128 | bps | | 137 | bps | | (9) | bps | | (7) | % |
| | | | | | | |
| Originations Margin | | | | | | | |
| Revenue | $ | 595 | | | $ | 317 | | | $ | 278 | | | 88 | % |
| Pull through adjusted lock volume | $ | 23,267 | | | $ | 12,677 | | | $ | 10,590 | | | 84 | % |
Revenue as a percentage of pull through adjusted lock volume(4) | 2.56 | % | | 2.50 | % | | 0.06 | % | | 2 | % |
| | | | | | | |
Expenses(5) | $ | 233 | | | $ | 159 | | | $ | 74 | | | 47 | % |
| Funded volume | $ | 25,133 | | | $ | 12,359 | | | $ | 12,774 | | | 103 | % |
Expenses as a percentage of funded volume(6) | 0.93 | % | | 1.29 | % | | (0.36) | % | | (28) | % |
| | | | | | | |
| Originations Margin | 1.63 | % | | 1.21 | % | | 0.42 | % | | 35 | % |
(1)Pull through adjusted volume represents the expected funding from locks taken during the period.
(2)Recapture percentage includes new loan originations for 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.
(3)Refinance recapture percentage includes new loan originations for 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.
(4)Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(2)(5)Expenses include total expenses and total other income (expenses), net.
(6)Calculated on funded volume as expenses are incurred based on closing of the loan.
Income before income tax expense increased for the three months ended June 30, 2020March 31, 2021 as compared to the same period in 20192020 primarily due to an increase in total revenues driven by origination volume growth predominately in the DTC channel. In responsedue to the COVID-19 pandemic, we slowed operations in the correspondent channel in order to prioritize cash build and de-risk the pipeline. The growth in origination volume was primarily due to declininglow interest rates.rate environment. The Originations Margin for the three months ended June 30, 2020March 31, 2021 increased as compared to the same period in 20192020 primarily due to higher revenuea lower expenses ratio as a percentage of pull through adjusted lockfunded volume driven by an increase in volume from the DTC channel.operational efficiencies.
| | |
Table 20.1 Originations Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total revenues | $ | 911 | | | $ | 410 | | | $ | 501 | | | 122 | % |
| Total expenses | 333 | | | 249 | | | 84 | | | 34 | % |
| Total other income, net | 13 | | | 2 | | | 11 | | | 550 | % |
| Income before income tax expense | $ | 591 | | | $ | 163 | | | $ | 428 | | | 263 | % |
| | | | | | | |
| Originations Margin | | | | | | | |
| Revenue | $ | 911 | | | $ | 410 | | | $ | 501 | | | 122 | % |
| Pull through adjusted lock volume | $ | 25,071 | | | $ | 17,157 | | | $ | 7,914 | | | 46 | % |
Revenue as a percentage of pull through adjusted lock volume(1) | 3.63 | % | | 2.39 | % | | 1.24 | % | | 52 | % |
| | | | | | | |
| Expenses | $ | 333 | | | $ | 249 | | | $ | 84 | | | 34 | % |
| Funded volume | $ | 23,088 | | | $ | 15,712 | | | $ | 7,376 | | | 47 | % |
Expenses as a percentage of funded volume(2) | 1.44 | % | | 1.58 | % | | (0.14) | % | | (9) | % |
| | | | | | | |
| Originations Margin | 2.19 | % | | 0.81 | % | | 1.38 | % | | 170 | % |
(1)Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(2)Calculated on funded volume as expenses are incurred based on closing of the loan.
Income before tax expense increased for the six months ended June 30, 2020 as compared to the same period in 2019 primarily due to an increase in revenues driven by origination volume growth predominately in the DTC channel. In response to the COVID-19 pandemic, we slowed operations in the correspondent channel in order to prioritize cash build and de-risk the pipeline. The growth in origination volume was primarily due to declining interest rates. The Originations Margin for the six months ended June 30, 2020 increased as compared to the same period in 2019 due to higher revenue as a percentage of pull through adjusted lock volume driven by an increase in volume from the DTC channel.
Originations Segment Revenues
Service related fee, net - Originations refers to 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.
Net gain on loans originated and sold represents the gains and losses from the origination, purchase, and sale of loans and related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity and is impacted by fluctuation in interest rates.
Capitalized servicing rights represents 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.
Total revenues for the Originations segment are set forth in the tables below:
| | |
Table 21. Originations - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Service related, net - Originations | $ | 21 | | | $ | 20 | | | $ | 1 | | | 5 | % |
| Net gain on mortgage loans held for sale | | | | | | | |
| Net gain on loans originated and sold | 453 | | | 152 | | | 301 | | | 198 | % |
| Capitalized servicing rights | 123 | | | 100 | | | 23 | | | 23 | % |
| Provision for repurchase reserves, net of release | (3) | | | (8) | | | 5 | | | (63) | % |
| Total net gain on mortgage loans held for sale | 573 | | | 244 | | | 329 | | | 135 | % |
| Total revenues - Originations | $ | 594 | | | $ | 264 | | | $ | 330 | | | 125 | % |
| | | | | | | |
| Key Metrics | | | | | | | |
Consumer direct lock pull through adjusted volume(1) | $ | 9,595 | | | $ | 4,390 | | | $ | 5,205 | | | 119 | % |
Other locked pull through adjusted volume(1) | 2,799 | | | 6,807 | | | (4,008) | | | (59) | % |
| Total pull through adjusted volume | $ | 12,394 | | | $ | 11,197 | | | $ | 1,197 | | | 11 | % |
| Funded volume | $ | 10,729 | | | $ | 9,996 | | | $ | 733 | | | 7 | % |
| Volume of loans sold | $ | 11,172 | | | $ | 9,089 | | | $ | 2,083 | | | 23 | % |
Recapture percentage(2) | 26.1 | % | | 23.1 | % | | 3.0 | % | | 13 | % |
Refinance recapture percentage(3) | 30.9 | % | | 43.7 | % | | (12.8) | % | | (29) | % |
| Purchase as a percentage of funded volume | 10.3 | % | | 52.8 | % | | (42.5) | % | | (80) | % |
| Value of capitalized servicing on retained settlements | 133 | bps | | 149 | bps | | (16) | bps | | (11) | % |
(1)Pull through adjusted volume represents the expected funding from locks taken during the period.
(2)Recapture percentage includes both purchase and refinance origination and payoff activity.
(3)Refinance recapture percentage excludes purchase originations and purchase payoff activity.
Total revenues increased forduring the three months ended June 30, 2020March 31, 2021 compared to the same period in 20192020 primarily driven by the higher origination volumes in a declininglower interest rate environment, and higher volumesprimarily from the DTC channel. Total revenue increased $330$278 or 125%88% period over period as consumer direct locktotal pull through adjusted lock volume increased 119%84% during the same period. There were no material changes for repurchase reserves.
| | |
Table 21.1 Originations - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Service related, net - Originations | $ | 41 | | | $ | 35 | | | $ | 6 | | | 17 | % |
| Net gain on mortgage loans held for sale | | | | | | | |
| Net gain on loans originated and sold | 636 | | | 224 | | | 412 | | | 184 | % |
| Capitalized servicing rights | 242 | | | 161 | | | 81 | | | 50 | % |
| Provision for repurchase reserves, net of release | (8) | | | (10) | | | 2 | | | (20) | % |
| Total net gain on mortgage loans held for sale | 870 | | | 375 | | | 495 | | | 132 | % |
| Total revenues - Originations | $ | 911 | | | $ | 410 | | | $ | 501 | | | 122 | % |
| | | | | | | |
| Key Metrics | | | | | | | |
Consumer direct lock pull through adjusted volume(1) | $ | 17,018 | | | $ | 6,723 | | | $ | 10,295 | | | 153 | % |
Other locked pull through adjusted volume(1) | 8,053 | | | 10,434 | | | (2,381) | | | (23) | % |
| Total pull through adjusted volume | $ | 25,071 | | | $ | 17,157 | | | $ | 7,914 | | | 46 | % |
| Funded volume | $ | 23,088 | | | $ | 15,712 | | | $ | 7,376 | | | 47 | % |
| Volume of loans sold | $ | 24,427 | | | $ | 15,324 | | | $ | 9,103 | | | 59 | % |
Recapture percentage(2) | 27.5 | % | | 24.9 | % | | 2.6 | % | | 10 | % |
Refinance recapture percentage(3) | 33.4 | % | | 46.9 | % | | (13.5) | % | | (29) | % |
| Purchase as a percentage of funded volume | 18.7 | % | | 52.4 | % | | (33.7) | % | | (64) | % |
| Value of capitalized servicing on retained settlements | 135 | bps | | 146 | bps | | (11) | bps | | (8) | % |
(1)Pull through adjusted volume represents the expected funding from locks taken during the period.
(2)Recapture percentage includes both purchase and refinance origination and payoff activity.
(3)Refinance recapture percentage excludes purchase originations and purchase payoff activity.
Total revenues increased for the six months ended June 30, 2020 compared to the same period in 2019 primarily driven by the higher origination volumes in a declining interest rate environment and higher volumes from the DTC channel. Total revenue increased $501 or 122% period over period as consumer direct lock pull through adjusted volume increased 153% during the same period.
The tables below summarize expenses for the Originations segment:
| | |
Table 22. Originations -Segment Expenses |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 120 | | | $ | 88 | | | $ | 32 | | | 36 | % |
| General and administrative | | | | | | | |
| Loan origination expenses | 16 | | | 17 | | | (1) | | | (6) | % |
| Corporate and other general and administrative expenses | 16 | | | 13 | | | 3 | | | 23 | % |
| Marketing and professional service fees | 11 | | | 21 | | | (10) | | | (48) | % |
| Depreciation and amortization | 4 | | | 6 | | | (2) | | | (33) | % |
| | | | | | | |
| Total general and administrative | 47 | | | 57 | | | (10) | | | (18) | % |
| Total expenses - Originations | $ | 167 | | | $ | 145 | | | $ | 22 | | | 15 | % |
Total expenses forduring the three months ended June 30, 2020March 31, 2021 increased when compared to the same period in 20192020 primarily due to growth in origination volumes, which was driven by the low interest rate environment.volumes. The origination volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs. The increase in salaries, wages and benefits was partially offset by a decrease in marketing and professional service fee expenses which were higher in 2019 due to a $10 legal reserve.
| | |
Table 22.1 Originations - Expenses |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 237 | | | $ | 157 | | | $ | 80 | | | 51 | % |
| General and administrative | | | | | | | |
| Loan origination expenses | 32 | | | 27 | | | 5 | | | 19 | % |
| Corporate and other general and administrative expenses | 34 | | | 27 | | | 7 | | | 26 | % |
| Marketing and professional service fees | 23 | | | 29 | | | (6) | | | (21) | % |
| Depreciation and amortization | 7 | | | 9 | | | (2) | | | (22) | % |
| | | | | | | |
| Total general and administrative | 96 | | | 92 | | | 4 | | | 4 | % |
| Total expenses - Originations | $ | 333 | | | $ | 249 | | | $ | 84 | | | 34 | % |
Total expenses for the six months ended June 30, 2020 increased when compared to the same period in 2019 primarily due to growth in origination volumes, which was driven by the low interest rate environment. The origination volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs, and loan origination expenses. In addition, corporate and other general and administrative expenses increased during the six months ended June 30, 2020 primarily driven by higher outsourcing costs, partially offset by a decrease in marketing and professional service fee expenses. Marketing and professional service fee expenses were higher in 2019 primarily due to a $10 legal reserve.
The tables below summarize other income (expenses), net, for the Originations segment:
| | |
Table 23. Originations -Segment Other Income (Expenses), Net |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Interest income | $ | 19 | | | $ | 23 | | | $ | (4) | | | (17) | % |
| Interest expense | (13) | | | (25) | | | 12 | | | (48) | % |
| Other income, net | — | | | 1 | | | (1) | | | (100) | % |
| Total other income (expenses), net - Originations | $ | 6 | | | $ | (1) | | | $ | 7 | | | (700) | % |
| | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 3.3 | % | | 4.4 | % | | (1.1) | % | | (25) | % |
| Weighted average cost of funds (excluding facility fees) | 2.6 | % | | 4.3 | % | | (1.7) | % | | (40) | % |
Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans.
Interest income forduring the three months ended June 30, 2020March 31, 2021 decreased when compared to the same period in 20192020 primarily driven by a lower average note rate on mortgage loans held for sale, partially offset by higher funded volume. The decrease in interest income was offset by a decrease in interest expense due to a lower cost of funds.
| | |
Table 23.1 Originations - Other Income, Net |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Interest income | $ | 53 | | | $ | 40 | | | $ | 13 | | | 33 | % |
| Interest expense | (40) | | | (43) | | | 3 | | | (7) | % |
| Other income, net | — | | | 5 | | | (5) | | | (100) | % |
| Total other income, net - Originations | $ | 13 | | | $ | 2 | | | $ | 11 | | | 550 | % |
| | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 3.5 | % | | 4.6 | % | | (1.1) | % | | (24) | % |
| Weighted average cost of funds (excluding facility fees) | 2.9 | % | | 4.5 | % | | (1.6) | % | | (36) | % |
Interest income for the six months ended June 30, 2020 increased when compared to the same period in 2019 primarily driven by higher funded volume, partially offset by lower average note rate on mortgage loans held for sale. The increase in interest income was partially offset by a decrease in other income, net. Other income, net, was higher in 2019 due to recognition of incentives we received related to our financing of certain loans satisfying certain customer relief characteristics. In September 2018, we entered into a master repurchase agreement that provided us with incentives to finance mortgage loans satisfying certain consumer relief characteristics as provided in the agreement. We recorded $5 in other income, net, related to such incentives for the six months ended June 30, 2019. The master repurchase agreement expired during the third quarter of 2019.
Xome is a real estate services company that provides services for mortgage originators and servicers, including Mr. Cooper, as well as mortgage and real estate investors. Xome is strategically important because it generates fee income that complements our servicing and origination businesses without requiring a significant amount of capital or exposing us to the same level of interest rate or credit risk.
Xome is organized into three divisions: Exchange, ServicesTitle and Data/Technology.Solutions.
•The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.
•The ServicesTitle division includesis a tech-enabled platform and offers an extensive product suite including origination, home equity, and default with centralized title escrow, collateral valuationproduction. Title insurance workflow is enhanced via X1 Analytics proprietary automated title data and field services relateddecision engine. On March 12, 2021, we entered into an agreement to real estate investments or transactions including purchases, sales, refinancessell the title business. The sale is expected to close during the second quarter of 2021. For more information, see Note 1, Nature of Business and defaults.Basis of Presentation, in theNotes to the Condensed Consolidated Financial Statements (unaudited).
•The Data/TechnologySolutions division contains a diversified setconsists of businesses that provide technologyfield services, collateral valuation, recapture and data analytic solutions to real estate service providers, aggregators,improve purchase, refinance and a variety of investors. This includes providing aggregation, standardization and licensing for one of the nation’s largest set of MLS, public records and neighborhood demographic data.default transactions.
The charts below set forth Xome’s total revenues ($ in Millions), Exchange properties sold, and Services completed orders:
The following tables set forth the results of operations for the Xome segment:
| | |
Table 24.14. Xome Segment Results of Operations |
| | | Three Months Ended June 30, | | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
| Xome - Operations | Xome - Operations | | | | | | | | Xome - Operations | | | | | | | |
| Revenues: | | Revenues: | |
| Exchange | | Exchange | $ | 5 | | | $ | 16 | | | $ | (11) | | | (69) | % |
| Title | | Title | 56 | | | 43 | | | 13 | | | 30 | % |
| Solutions | | Solutions | 35 | | | 47 | | | (12) | | | (26) | % |
| Total revenues | Total revenues | $ | 106 | | | $ | 108 | | | $ | (2) | | | (2) | % | Total revenues | 96 | | | 106 | | | (10) | | | (9) | % |
| Expenses: | | Expenses: | | | | | | |
| Salaries, wages and benefits | | Salaries, wages and benefits | 29 | | | 35 | | | (6) | | | (17) | % |
| General and administrative | | General and administrative | |
| Operational expenses | | Operational expenses | 55 | | | 58 | | | (3) | | | (5) | % |
| Depreciation and amortization | | Depreciation and amortization | 3 | | | 3 | | | — | | | — | % |
| Total general and administrative | | Total general and administrative | 58 | | | 61 | | | (3) | | | (5) | % |
| Total expenses | Total expenses | 95 | | | 101 | | | (6) | | | (6) | % | Total expenses | 87 | | | 96 | | | (9) | | | (9) | % |
| Total other income, net | Total other income, net | 1 | | | — | | | 1 | | | 100 | % | Total other income, net | — | | | 1 | | | (1) | | | (100) | % |
| Income before income tax expense | Income before income tax expense | $ | 12 | | | $ | 7 | | | $ | 5 | | | 71 | % | Income before income tax expense | $ | 9 | | | $ | 11 | | | $ | (2) | | | (18) | % |
| Pre-tax margin | Pre-tax margin | 11.3 | % | | 6.5 | % | | 4.8 | % | | 74 | % | Pre-tax margin | 9.4 | % | | 10.4 | % | | (1.0) | % | | (10) | % |
| | Xome - Revenues | | |
| Exchange | $ | 9 | | | $ | 20 | | | $ | (11) | | | (55) | % | |
| Services | 94 | | | 82 | | | 12 | | | 15 | % | |
| Data/Technology | 3 | | | 6 | | | (3) | | | (50) | % | |
| Total revenues - Xome | $ | 106 | | | $ | 108 | | | $ | (2) | | | (2) | % | |
| | Key Metrics | Key Metrics | | Key Metrics | |
| Exchange properties sold | Exchange properties sold | 1,191 | | | 2,645 | | | (1,454) | | | (55) | % | Exchange properties sold | 710 | | | 2,114 | | | (1,404) | | | (66) | % |
| Average Exchange properties under management | Average Exchange properties under management | 17,438 | | | 6,693 | | | 10,745 | | | 161 | % | Average Exchange properties under management | 14,210 | | | 17,777 | | | (3,567) | | | (20) | % |
| Services completed orders | 423,974 | | | 417,510 | | | 6,464 | | | 2 | % | |
| Title completed orders | | Title completed orders | 188,356 | | | 230,648 | | | (42,292) | | | (18) | % |
| Solutions completed orders | | Solutions completed orders | 546,552 | | | 430,726 | | | 115,826 | | | 27 | % |
| Percentage of revenue earned from third-party customers | Percentage of revenue earned from third-party customers | 53.3 | % | | 52.9 | % | | 0.4 | % | | 1 | % | Percentage of revenue earned from third-party customers | 48.2 | % | | 54.6 | % | | (6.4) | % | | (12) | % |
| | Xome - Expenses | | |
| Salaries, wages and benefits | $ | 33 | | | $ | 36 | | | $ | (3) | | | (8) | % | |
| General and administrative | | |
| Operational expenses | 59 | | | 62 | | | (3) | | | (5) | % | |
| Depreciation and amortization | 3 | | | 3 | | | — | | | — | % | |
| Total general and administrative | 62 | | | 65 | | | (3) | | | (5) | % | |
| Total expenses - Xome | $ | 95 | | | $ | 101 | | | $ | (6) | | | (6) | % | |
Income before income tax expense increased fordecreased during the three months ended June 30, 2020March 31, 2021 as compared to the same period in 20192020 primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. The decrease in total expensesrevenues was due todriven by a decrease in both salaries, wages and benefits and operational expenses primarily driven by operational efficiencies. TotalSolutions revenues remained relatively flat during the three months ended June 30, 2020 as compared to the same period in 2019 primarily due to a decreaseshift in Exchange revenues attributable to a decrease in defaultsproduct mix with lower third party originations and foreclosures nationwide, offset by an increase in Services revenues from higher volume of units for titledefault appraisals and close, and field services.
| | |
Table 24.1 Xome Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Xome - Operations | | | | | | | |
| Total revenues | $ | 212 | | | $ | 204 | | | $ | 8 | | | 4 | % |
| Total expenses | 191 | | | 200 | | | (9) | | | (5) | % |
| Total other income, net | 2 | | | 11 | | | (9) | | | (82) | % |
| Income before income tax expense | $ | 23 | | | $ | 15 | | | $ | 8 | | | 53 | % |
| Pre-tax margin | 10.8 | % | | 7.4 | % | | 3.4 | % | | 46 | % |
| | | | | | | |
| Xome - Revenues | | | | | | | |
| Exchange | $ | 25 | | | $ | 40 | | | $ | (15) | | | (38) | % |
| Services | 179 | | | 153 | | | 26 | | | 17 | % |
| Data/Technology | 8 | | | 11 | | | (3) | | | (27) | % |
| Total revenues - Xome | $ | 212 | | | $ | 204 | | | $ | 8 | | | 4 | % |
| | | | | | | |
| Key Metrics | | | | | | | |
| Exchange properties sold | 3,305 | | | 5,066 | | | (1,761) | | | (35) | % |
| Average Exchange properties under management | 17,608 | | | 6,484 | | | 11,124 | | | 172 | % |
| Services completed orders | 832,708 | | | 797,095 | | | 35,613 | | | 4 | % |
| Percentage of revenue earned from third-party customers | 54.0 | % | | 53.0 | % | | 1.0 | % | | 2 | % |
| | | | | | | |
| Xome - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 68 | | | $ | 74 | | | $ | (6) | | | (8) | % |
| General and administrative | | | | | | | |
| Operational expenses | 117 | | | 119 | | | (2) | | | (2) | % |
| Depreciation and amortization | 6 | | | 7 | | | (1) | | | (14) | % |
| Total general and administrative | 123 | | | 126 | | | (3) | | | (2) | % |
| Total expenses - Xome | $ | 191 | | | $ | 200 | | | $ | (9) | | | (5) | % |
Income before income tax expense increased for the six months ended June 30, 2020 as compared to the same period in 2019 due to an increase in total revenues and decrease in total expenses, partially offset by a decrease in total other income, net. The increase in total revenues was driven by an increase in Services revenues from higher volumes of units for title and close, and field services, partially offset by a decrease in Exchange revenues due to the decrease in defaults and foreclosures nationwide.nationwide related to the CARES Act. The decrease in total revenues was partially offset by an increase in Title revenues primarily driven by a shift in product mix with higher Title origination orders. The decrease in total expenses was primarily due to a decrease in salaries, wages and benefits driven by operational efficiencies. The decrease in total other income, net, was due to the change in fair value of the contingent consideration of $11 recorded in 2019 in connection with the acquisition of AMS.
Corporate/Other represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, and interest expense on our unsecured senior notes.
The following tablestable set forth the selected financial results of operations for the Corporate/Other segment:Other:
| | |
Table 25.15. Corporate/Other SegmentSelected Financial Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total revenues | $ | (1) | | | $ | — | | | $ | (1) | | | (100) | % |
| Total expenses | 35 | | | 57 | | | (22) | | | (39) | % |
| Total other expenses, net | (48) | | | (50) | | | 2 | | | (4) | % |
| Loss before income tax benefit - Corporate/Other | $ | (84) | | | $ | (107) | | | $ | 23 | | | (21) | % |
| | | | | | | |
| Corporate/Other - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 20 | | | $ | 24 | | | $ | (4) | | | (17) | % |
| General and administrative | | | | | | | |
| Operational expenses | 9 | | | 22 | | | (13) | | | (59) | % |
| Depreciation and amortization | 6 | | | 11 | | | (5) | | | (45) | % |
| | | | | | | |
| Total general and administrative | 15 | | | 33 | | | (18) | | | (55) | % |
| Total expenses - Corporate/Other | $ | 35 | | | $ | 57 | | | $ | (22) | | | (39) | % |
| | | | | | | |
| Corporate/Other - Other Expenses, Net | | | | | | | |
| Total interest income | $ | — | | | $ | 3 | | | $ | (3) | | | (100) | % |
| Interest expense | | | | | | | |
| Interest expense on unsecured senior notes | (47) | | | (51) | | | 4 | | | (8) | % |
| Other interest expense | — | | | (2) | | | 2 | | | 100 | % |
| Total interest expense | (47) | | | (53) | | | 6 | | | (11) | % |
| Other expenses, net | (1) | | | — | | | (1) | | | (100) | % |
| Total other expenses, net - Corporate/Other | $ | (48) | | | $ | (50) | | | $ | 2 | | | (4) | % |
| | | | | | | |
| Weighted average cost - unsecured senior notes | 7.9 | % | | 7.9 | % | | — | % | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total expenses | $ | 26 | | | $ | 33 | | | $ | (7) | | | (21) | % |
| Interest expense | 30 | | | 52 | | | (22) | | | (42) | % |
| | | | | | | |
Loss before income tax benefitTotal expenses decreased in the three months ended June 30, 2020March 31, 2021 as compared to the same period in 20192020 primarily due to a decrease in total expenses. Total expenses weregeneral and administrative expense. General and administrative expense was higher in the three months ended June 30, 2019March 31, 2020 due to acquisitionan $8 loss on impairment of assets in connection with an ancillary business and integrationhigher legal reserves. The decrease in total expenses related to the Pacific Union acquisitionwas partially offset by higher salaries, wages and the Seterus acquisitionbenefits primarily driven by an increase in February 2019. Depreciationstock based compensation and amortizationseverance.
Interest expense decreased in the three months ended June 30, 2020March 31, 2021 as compared to the same period in 2019 primarily due to a decrease in amortization of intangible assets.
Other expenses, net for the Corporate/Other segment consists of interest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.
The change in total other expenses, net, in the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to a decrease in interest expense on unsecured senior notes as a result of the repayment and redemption in 2020 of the 2021 and 2022 unsecured senior notes partially offset bydue 2021, 2022, 2023 and 2026 and the issuance in 2020 of the 2027 unsecured senior notes which was completed in January 2020.
| | |
Table 25.1 Corporate/Other Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total revenues | $ | — | | | $ | — | | | $ | — | | | — | % |
| Total expenses | 68 | | | 102 | | | (34) | | | (33) | % |
| Total other expenses, net | (99) | | | (105) | | | 6 | | | (6) | % |
| Loss before income tax benefit - Corporate/Other | $ | (167) | | | $ | (207) | | | $ | 40 | | | (19) | % |
| | | | | | | |
| Corporate/Other - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 28 | | | $ | 46 | | | $ | (18) | | | (39) | % |
| General and administrative | | | | | | | |
| Operational expenses | 16 | | | 35 | | | (19) | | | (54) | % |
| Depreciation and amortization | 16 | | | 21 | | | (5) | | | (24) | % |
| Loss on impairment of assets | 8 | | | — | | | 8 | | | 100 | % |
| Total general and administrative | 40 | | | 56 | | | (16) | | | (29) | % |
| Total expenses - Corporate/Other | $ | 68 | | | $ | 102 | | | $ | (34) | | | (33) | % |
| | | | | | | |
| Corporate/Other - Other Expenses, Net | | | | | | | |
| Total interest income | $ | 1 | | | $ | 5 | | | $ | (4) | | | (80) | % |
| Interest expense | | | | | | | |
| Interest expense on unsecured senior notes | (98) | | | (102) | | | 4 | | | (4) | % |
| Other interest expense | (1) | | | (8) | | | 7 | | | (88) | % |
| Total interest expense | (99) | | | (110) | | | 11 | | | (10) | % |
| Other expenses, net | (1) | | | — | | | (1) | | | (100) | % |
| Total other expenses, net - Corporate/Other | $ | (99) | | | $ | (105) | | | $ | 6 | | | (6) | % |
| | | | | | | |
| Weighted average cost - unsecured senior notes | 7.9 | % | | 7.9 | % | | — | % | | — | % |
Loss before income tax benefit decreased in the six months ended June 30, 2020 as compared to the same period in 2019 primarily due to a decrease in total expenses. Total expenses were higher in the six months ended June 30, 2019 due to acquisition and integration expenses related to the Pacific Union acquisition and the Seterus acquisition in February 2019. The decrease in salaries, wage and benefits and operational expenses was partially offset by an $8 loss on impairment of assets in connection with an ancillary business in 2020.
The change in total other expenses, net, in the six months ended June 30, 2020 as compared to the same period in 2019 was primarily due to a decrease in other interest expense as a result of lower commitment and facility fees, which were higher in 2019 due to the Pacific Union acquisition.
| | | | | | | | | | | | | | |
Changes in Financial Position | | | | |
The following table sets forth the change in assets for the periods presented:
| | | | | | | | | | | | | | |
Table 26. Changes in Assets | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Cash and cash equivalents | $ | 1,041 | | | $ | 329 | | | $ | 712 | | | 216 | % |
| Mortgage servicing rights | 2,763 | | | 3,502 | | | (739) | | | (21) | % |
| Advances and other receivables, net | 668 | | | 988 | | | (320) | | | (32) | % |
| Reverse mortgage interests, net | 5,709 | | | 6,279 | | | (570) | | | (9) | % |
| Mortgage loans held for sale at fair value | 3,179 | | | 4,077 | | | (898) | | | (22) | % |
| Deferred tax assets, net | 1,391 | | | 1,345 | | | 46 | | | 3 | % |
| Other | 2,549 | | | 1,785 | | | 764 | | | 43 | % |
| Total assets | $ | 17,300 | | | $ | 18,305 | | | $ | (1,005) | | | (5) | % |
Total assets asTable of June 30, 2020 decreased $1,005 or 5% compared with December 31, 2019 primarily due to the decrease in mortgage loans held for sale, mortgage servicing rights, reverse mortgage interests, net, and advances and other receivables, net. Mortgage loans held for sale decreased $898 primarily due to a larger quantity of loans sold in 2020. Mortgage servicing rights decreased primarily due to a negative mark-to-market adjustment of $644 driven by declining interest rates. Reverse mortgage interests, net, decreased $570 primarily due to the collection on participating interests in HMBS. Advances and other receivables, net, decreased primarily due to recoveries on advances through claim proceeds, customer payments and servicing transfers. The decrease in assets was partially offset by an increase in cash and cash equivalents, and other. Cash and cash equivalents was higher as of June 30, 2020 compared with December 31, 2019 primarily due to strong operating cash flow and additional funds drawn on our MSR facilities given the market risk at the end of the quarter in relation to the COVID-19 pandemic. Other increased primarily due to an increase in loans subject to repurchase by Ginnie Mae, which include loans in forbearance plans due to the impact of the COVID-19 pandemic and implementation of the CARES Act, and an increase in derivative financials instruments due to the low interest rate environment.
The following table sets forth the change in liabilities and stockholders’ equity for the periods presented:
| | | | | | | | | | | | | | |
Table 27. Changes in Liabilities and Stockholders’ Equity | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Unsecured senior notes, net | $ | 2,261 | | | $ | 2,366 | | | $ | (105) | | | (4) | % |
| Advance facilities, net | 475 | | | 422 | | | 53 | | | 13 | % |
| Warehouse facilities, net | 4,031 | | | 4,575 | | | (544) | | | (12) | % |
| MSR related liabilities - nonrecourse at fair value | 1,173 | | | 1,348 | | | (175) | | | (13) | % |
| Other nonrecourse debt, net | 4,707 | | | 5,286 | | | (579) | | | (11) | % |
| Other | 2,508 | | | 2,077 | | | 431 | | | 21 | % |
| Total liabilities | 15,155 | | | 16,074 | | | (919) | | | (6) | % |
| Total stockholders’ equity | 2,145 | | | 2,231 | | | (86) | | | (4) | % |
| Total liabilities and stockholders’ equity | $ | 17,300 | | | $ | 18,305 | | | $ | (1,005) | | | (5) | % |
Total stockholders’ equity at June 30, 2020 decreased $86 or 4% compared with the balance as of December 31, 2019 primarily due to net loss of $98 during the six months ended June 30, 2020. Total liabilities at June 30, 2020 decreased $919 or 6% compared with the balance as of December 31, 2019 primarily due to a decrease in other nonrecourse debt, net, and warehouse facilities, net, partially offset by an increase in other. Other nonrecourse debt, net, decreased $579 primarily due to repayments of reverse mortgage related nonrecourse debt. Warehouse facilities, net, decreased $544 primarily due to lower Originations funded volume as of June 30, 2020 compared to December 31, 2019. Other increased primarily due to an increase in loans subject to repurchase by Ginnie Mae, which include loans in forbearance plans due to the impact of the COVID-19 pandemic and implementation of the CARES Act, and an increase in derivative financials instruments due to the low interest rate environment.
| | | | | | | | | | | | | | |
| Liquidity and Capital Resources | | | | |
We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities and other facilities. OurWe held cash and cash equivalents on hand increased to $1,041of $674 as of June 30, 2020 from $329March 31, 2021 compared to $695 as of December 31, 2019. We benefited from strong operating cash flow and drew down cash from2020. During the three months ended March 31, 2021, we bought back 4.5 million shares of our MSR facilities to ensure we were prepared to deal with a severe economic scenario resulting fromoutstanding common stocks as part of the COVID-19 pandemic.$210 stock repurchase program.
We have sufficient borrowing capacity to support our operations. As of June 30, 2020,March 31, 2021, total available borrowing capacity was $14,680, of which $7,292 was unused. Specifically, in regards to the MSR facilities as of March 31, 2021, we had $1,008$1,827 collateral pledged against the MSR facilities, of which we could borrow an additional $555. During the six months ended June 30, 2020, operating activities generated cash totaling $2,066. As of June 30, 2020, total available borrowing capacity was $9,590, of which $5,078 was unused.390.
The economic impact of the COVID-19 pandemic could continue to result in an increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. We did see an increase in forbearance plans overForbearance rates have declined since the peak during the second of quarter of 2020, but the forbearance rate has subsequently declined.2020. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage an increase in advances. In April 2020, we expandedAs of March 31, 2021, our committedtotal advance facility capacity by $850, including an expansionwas $2,040, of capacity for private label advances for $200, which we believe will be adequate for$1,402 remained unused. For more information on our needs. We planMSR and advance facilities, see Note 9, Indebtedness in the Notes to finance GNMA advances with existing MSR lines and corporate cash flow.the Condensed Consolidated Financial Statements (unaudited). For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances with even higher forbearance rates.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing advances which continue to increase due to the COVID-19 pandemic; (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) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) 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. See Note 8, Derivative Financial Instruments, in the Notes to the Condensed Consolidated Financial Statements (unaudited) in Item 1, 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 10, Securitizations and Financings, in the Notes to the Condensed Consolidated Financial Statements (unaudited) in Item 1, 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 condensed consolidated financial statements.
Cash Flows
The table below presents the major sources and uses of cash flow for operating activities:flows information:
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Table 28. Operating16. Cash Flow | | | | Flows |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Net loss | $ | (98) | | | $ | (274) | | | $ | 176 | | | (64) | % |
| Deferred tax benefit | (49) | | | (76) | | | 27 | | | (36) | % |
| Other non-cash adjustments to net loss | (966) | | | (536) | | | (430) | | | 80 | % |
| Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment | 910 | | | 629 | | | 281 | | | 45 | % |
| Originations net sales activities | 1,404 | | | (1,013) | | | 2,417 | | | (239) | % |
| Changes in working capital | 865 | | | 1,218 | | | (353) | | | (29) | % |
| Net cash attributable to operating activities | $ | 2,066 | | | $ | (52) | | | $ | 2,118 | | | (4,073) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Net cash attributable to: | | | | | | | |
| Operating activities | $ | (76) | | | $ | 710 | | | $ | (786) | | | NM |
| Investing activities | (82) | | | 4 | | | (86) | | | NM |
| Financing activities | 180 | | | (481) | | | 661 | | | NM |
| Net increase in cash, cash equivalents, and restricted cash | $ | 22 | | | $ | 233 | | | $ | (211) | | | (91) | % |
79NM = Not meaningful or greater than 200% change.
Operating activities
Our operating activities generatedused cash of $2,066$76 during the sixthree months ended June 30, 2020March 31, 2021 compared to cash usedgenerated of $52$710 in the same period in 2019. The change was primarily due to the cash generated from originations net sales activities.
Cash generated from originations net sales activities was $1,404 during the six months ended June 30, 2020 compared to $1,013 cash used in the same period in 2019. The change was primarily due to an increase in proceeds of $11,177 on the sales of previously originated loans, partially offset by higher funding of $7,383 for loan origination activities driven by the declining interest rate environment and an increase in funds used of $1,377 to repurchase forward loan assets out of Ginnie Mae securitizations.
2020. The change in cash attributable to operating activities due to fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment during the six months ended June 30, 2020 increased $281 when compared to the same period in 2019. The change was primarily due to an increase of $747 in fair value changes and amortization/accretionthe cash used from originations net sales activities, as a result of mortgage servicing rights/liabilitiesan increase in repurchases of $304, primarily due to the negative mark-to-market adjustment for the six months ended June 30, 2020.forward loans assets out of Ginnie Mae securitizations, partially offset by an increase in working capital of $161.
The change in cash attributable to operatingInvesting activities due to other non-cash adjustments to net loss during the six months ended June 30, 2020 increased $430 when compared to the same period in 2019 primarily due to the $521 increase in net gain on mortgage loans held for sale primarily driven by the higher origination volumes in a declining interest rate environment.
The table below presents the major sources and uses of cash flow for investing activities:
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Table 29. Investing Cash Flows | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Acquisitions, net | $ | — | | | $ | (85) | | | $ | 85 | | | (100) | % |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | (31) | | | (409) | | | 378 | | | (92) | % |
| Proceeds on sale of forward and reverse mortgage servicing rights | 43 | | | 279 | | | (236) | | | (85) | % |
| Other | (26) | | | (27) | | | 1 | | | (4) | % |
| Net cash attributable to investing activities | $ | (14) | | | $ | (242) | | | $ | 228 | | | (94) | % |
Our investing activities used cash of $14$82 during the sixthree months ended June 30, 2020March 31, 2021 compared to $242 during the same periodcash generated of $4 in 2019.2020. The decreasechange in cash used inattributable to investing activities was primarily due to a decreasean increase of $378$42 in cash used for the purchase of forward mortgage servicing rights net of liabilities incurred. In addition, during the six months ended June 30, 2019, we used $85 cash in connection with the Pacific Union and Seterus acquisitions. The decrease in cash used was partially offset by a decrease in cash generated of $236$42 from proceeds on sale of forward mortgage servicing rights.
The table below presents the major sources and uses of cash flow for financing activities:
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Table 30. Financing Cash Flow | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| (Decrease) increase in warehouse facilities | $ | (544) | | | $ | 1,173 | | | $ | (1,717) | | | (146) | % |
| Increase (decrease) in advance facilities | 58 | | | (40) | | | 98 | | | (245) | % |
| Repayment of notes payable | — | | | (294) | | | 294 | | | (100) | % |
| Redemption and repayment of unsecured senior notes and nonrecourse debt | (698) | | | (6) | | | (692) | | | 11,533 | % |
| Issuance of unsecured senior debt | 600 | | | — | | | 600 | | | 100 | % |
| Issuance of excess spread financing | 24 | | | 437 | | | (413) | | | (95) | % |
| Settlements and repayments of excess spread financing | (110) | | | (119) | | | 9 | | | (8) | % |
| Decrease of participating interest financing | (499) | | | (848) | | | 349 | | | (41) | % |
| Changes in HECM securitizations | (168) | | | (16) | | | (152) | | | 950 | % |
| Other | (26) | | | (5) | | | (21) | | | 420 | % |
| Net cash attributable to financing activities | $ | (1,363) | | | $ | 282 | | | $ | (1,645) | | | (583) | % |
Our financing activities usedgenerated cash of $1,363$180 during the sixthree months ended June 30, 2020March 31, 2021 compared to cash generatedused of $282$481 in the same period in 2019. Contributing to the2020. The change in cash usedattributable to financing activities was primarily due to the $1,717 changeincrease of $570 in cash generated from advance and warehouse facilities due to a net pay downincreased borrowing of $544 in$613 from advance and warehouse facilities during the six months ended June 30, 2020 compared to a net increase$43 in 2020. Additionally, in 2020, $698 of $1,173 in the same period in 2019. Additionally, cash was used in the redemption and repayment of unsecured senior debt and nonrecourse debt during the six months ended June 30, 2020 increased $692 compared to the same period in 2019 due to the repayment and redemption of the 2021 and 2022 unsecured senior notes, in February 2020. The cash generated from the issuance of excess spread financing decreased $413 due to a decline in excess spread financing deals in the six months ended June 30, 2020 compared to the same period in 2019.
The change in cash used was partially offset by an increase in cash generated of $600 duerelated to the issuance of the 2027 unsecured senior notesnotes. There were no such activities in January 2020. In addition, cash used in participating interest financing decreased in 2020 primarily due to a lower repayment of participating interest financing in 2020 compared to the same period in 2019. Further, during the six months ended June 30, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition.
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. These covenants are measured at our operating subsidiary, Nationstar Mortgage LLC. As of June 30, 2020,March 31, 2021, we were in compliance with our required financial covenants.
Seller/Servicer Financial Requirements
We are also subject to net worth, liquidity and capital ratio and liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. In both cases, theseissuers, as summarized below. These requirements apply to our operating subsidiary, Nationstar Mortgage, LLC. As of June 30, 2020, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
Minimum Net Worth
The minimumFHFA - a net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
▪Basebase of $2.5 plus 25 basis points of outstanding UPB for total loans serviced.
▪Tangible Net Worth comprises of total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets.
The minimumGinnie Mae - a net worth requirement for Ginnie Mae is defined as follows:
▪Theequal to the sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective outstanding HMBS outstanding obligations.
▪
Minimum Liquidity
•Tangible Net Worth is defined asFHFA - 3.5 basis points of total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Agency Mortgage Servicing UPB plus incremental 200 basis points of total nonperforming Agency, measured at 90+ delinquencies, servicing in excess of 6% total Agency servicing UPB.
•Ginnie Mae - the greater of $1 or 10 basis points of our outstanding single-family MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimumand at least 20% of our net worth requirement.requirement for HECM MBS.
Minimum Capital Ratio
▪In addition to the minimum net worth requirement, we are also required to holdFHFA and Ginnie Mae - a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
▪3.5 basis points of total Agency Mortgage Servicing, plus
▪Incremental 200 basis points times the sum of the following:
•The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is not in forbearance, plus
•The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance and which were delinquent at the time it entered forbearance, plus
•30% of the UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance and which were current at the time it entered forbearance
▪This liquidity must only be maintained to the extend this sum exceeds 6% of the total Agency Mortgage Servicing UPB.
▪Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.
The minimum liquidity requirement for Ginnie Mae is defined as follows:
▪Maintain liquid assets equal to the greater of $1 or 10 basis points of our outstanding single-family MBS.
▪Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS.
Secured Debt to Gross Tangible Asset Ratio
Under the Ginnie Mae guide, we are also required to maintain- a secured debt to gross tangible asset ratios no greater than 60%.
As of March 31, 2021, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
Since we have a Ginnie Mae single-family servicing portfolio that 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. Effective for fiscal year 2020, weWe are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents.
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 15,14, Capital Requirements, in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information.
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Advance facilities, net | $ | 475 | | | $ | 422 | |
| Warehouse facilities, net | 4,031 | | | 4,575 | |
| Unsecured senior notes, net | 2,261 | | | 2,366 | |
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Advance facilities principal amount | $ | 638 | | | $ | 669 | |
| Warehouse facilities principal amount | 6,480 | | | 5,835 | |
| MSR facilities principal amount | 270 | | | 270 | |
| Unsecured senior notes principal amount | 2,100 | | | 2,100 | |
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 March 31, 2021, we had a total borrowing capacity of $2,040, of which we could borrow an additional $1,402.
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 March 31, 2021, we had a total borrowing capacity of $11,980 and $660 for warehouse and MSR facilities, of which we could borrow an additional $5,500 and $390, respectively.
As a servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. As of June 30, 2020,March 31, 2021, unsecuritized borrower draws totaled $53,totaled $77 and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,408.$2,113.
Unsecured Senior Notes
In 2018 and 2020, we completed offerings of unsecured senior notes which mature on variouswith maturity dates through January 2027.ranging from 2027 to 2030. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.000% to 9.125%. Refer5.125% to 6.000%. For more information regarding our indebtedness, see Note 10, Payables and Other Liabilities9, Indebtedness, forin the contractual maturities of unsecured senior notes.Notes to the Condensed Consolidated Financial Statements (unaudited).
Contractual Obligations
As of June 30, 2020,March 31, 2021, no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 except for the following, in connection with the issuance of the 2027 Notes and redemption of the 2021 and 2022 notes during the six months ended June 30, 2020:
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Table 32. Contractual Obligations | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
| Unsecured senior notes | $ | — | | | $ | — | | | $ | 950 | | | $ | 1,350 | | | $ | 2,300 | |
| Interest payment from unsecured senior notes | 182 | | | 363 | | | 248 | | | 175 | | | 968 | |
| Total | $ | 182 | | | $ | 363 | | | $ | 1,198 | | | $ | 1,525 | | | $ | 3,268 | |
| | | | | | | | | | | | | | |
| 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 condensed consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 14,13, Fair Value Measurements, in notesthe Notes to consolidated financial statements, business combinations andthe Condensed Consolidated Financial Statements (unaudited), goodwill, and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our condensed consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on our condensed consolidated financial statements, 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, (ii) the valuation of excess spread financing, and (iii) the valuation of the mortgage servicing rights financing liability and (iv) the valuation of IRLCs and LPCs.IRLCs. For further information on our critical accounting policies and estimates, please refer to the Company’s Annual Reports on Form 10-K for the year ended December 31, 2019.2020. There have been no material changes to our critical accounting policies and estimates since December 31, 2019. During the three months ended March 31, 2020, we updated the policies for reserves related to certain financial assets that are subject to CECL accounting in connection with adoption of ASU 2016-13. The update did not have material impact on the consolidated financial statements. See 2020.
Note 1, Nature of Business and Basis of Presentation
, in the consolidated financial statements which is incorporated herein for details.
Recent Accounting Developments
Below lists recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”) simplifies accounting for income taxes by removing certain exceptions from the general principles in Topic 740 including elimination of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations2020-04 and income or a gain from other items such2021-01, collectively implemented as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of all amendments in the same period permitted. We are currently assessing the impact of ASU 2019-12, but does not believe it will have a material impact on our consolidated financial statements.
Accounting Standards Update 2020-04,Codification Topic 848 (“ASC 848”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) providesprovide 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 LIBOR. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reasons, interest rates on our floating rate loans, obligation derivatives, and other financial instruments tied to LIBOR rates, may be affected and need renegotiation with its lenders. In January 2021, ASU 2021-01 was issued to clarify that all derivatives instruments affected by changes to the interests rates used for discounting, margining alignment due to reference rate reform are in scope of ASC 848. ASU 2020-04 isand ASU 2021-01 are effective March 12, 2020 and January 2021, respectively, through December 31, 2022. We are currently assessing the impact of ASU 2020-04 and ASU 2020-01 on our consolidated financial statements.
Impact
Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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.
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.
Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated credit risk of borrower default versus payoff.
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.
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.
Home Equity Conversion Mortgage (“HECM”). Reverse mortgage loans issued by FHA. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.
HECM mortgage-backed securities (“HMBS”). A type of asset-backed security that is secured by a group of HECM loans.
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.
Interest-Sensitive Loan. A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
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 adequately compensate the servicer for performing the servicing.
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.
Mortgage Servicing Liability (“MSL”). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
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.
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. 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.The refinancing of a loan currently in the portfolio, or the financing of a customer’s new purchase which resulted in the payoff of an existing loan.
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.
Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.
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.
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,Advances, T&I Advances and Corporate Advances.
(i) P&I advancesAdvances 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 advancesAdvances 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 advancesAdvances 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 advancesAdvances 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.
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.
Wholesale Originations. A type of mortgage loan origination pursuant to which a lender acquires refinancing and purchase money mortgage loans from third party correspondent lenders where the lender funds the loan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the discussion included in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no material changes in the types of market risks faced by us since December 31, 2019 except for2020. Our market risks include the broad effects of the COVID-19 pandemic. As we cannot predictWhile the durationpandemic’s effect on the macroeconomic environment has yet to be fully determined and could continue for months or scopeyears, the pandemic and governmental programs created as a response to the pandemic, has affected and will continue to affect our business, financial conditions and results of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated at this time.operations.
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 primary assumptions in thisdiscounted cash flow model areincorporates prepayment speeds, discount rate, costs to service, and other assumptions (including delinquencies, ancillary revenues, float earnings relatedand forbearance rates) that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to floatdetermine fair value include prepayment speed, discount rate and market discount rates.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 and forward delivery commitments on MBS, 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 June 30, 2020March 31, 2021 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.
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of June 30, 2020March 31, 2021 given hypothetical instantaneous parallel shifts in the yield curve. ResultsActual results could differ materially.
| | | | | | | | | | | | | | |
Table 33.18. Change in Fair Value | | | | |
| | | June 30, 2020 | | | March 31, 2021 |
| Down 25 bps | | Up 25 bps | | Down 25 bps | | Up 25 bps |
| Increase (decrease) in assets | Increase (decrease) in assets | | | | Increase (decrease) in assets | | | |
| Mortgage servicing rights at fair value | Mortgage servicing rights at fair value | $ | (114) | | | $ | 127 | | Mortgage servicing rights at fair value | $ | (182) | | | $ | 191 | |
| Mortgage loans held for sale at fair value | Mortgage loans held for sale at fair value | 11 | | | (14) | | Mortgage loans held for sale at fair value | 43 | | | (48) | |
| Derivative financial instruments: | Derivative financial instruments: | | Derivative financial instruments: | |
| Interest rate lock commitments | Interest rate lock commitments | 42 | | | (54) | | Interest rate lock commitments | 68 | | | (79) | |
| Forward MBS trades | Forward MBS trades | (3) | | | 4 | | Forward MBS trades | (135) | | | 152 | |
| Total change in assets | Total change in assets | (64) | | | 63 | | Total change in assets | (206) | | | 216 | |
| Increase (decrease) in liabilities | Increase (decrease) in liabilities | | Increase (decrease) in liabilities | |
| Mortgage servicing rights financing at fair value | Mortgage servicing rights financing at fair value | (4) | | | 4 | | Mortgage servicing rights financing at fair value | (3) | | | 3 | |
| Excess spread financing at fair value | Excess spread financing at fair value | (17) | | | 20 | | Excess spread financing at fair value | (23) | | | 26 | |
| Derivative financial instruments: | Derivative financial instruments: | | Derivative financial instruments: | |
| Interest rate lock commitments | | Interest rate lock commitments | (41) | | | 46 | |
| Forward MBS trades | Forward MBS trades | 43 | | | (55) | | Forward MBS trades | 18 | | | (20) | |
| Total change in liabilities | Total change in liabilities | 22 | | | (31) | | Total change in liabilities | (49) | | | 55 | |
| Total, net change | Total, net change | $ | (86) | | | $ | 94 | | Total, net change | $ | (157) | | | $ | 161 | |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of June 30, 2020.March 31, 2021.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020,March 31, 2021, our disclosure controls and procedures are 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 reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2020,March 31, 2021, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We areFor a state licensed, non-bank mortgage lender, servicer and ancillary services provider. From time to time, we anddescription of our subsidiaries are involved in a number ofmaterial legal proceedings, including, but not limited to, judicial, arbitration, regulatorysee Note 15, Commitments and governmental proceedings relating to matters that arise in connection with the conduct of our business. These legal proceedings are generally based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities including, without limitation, consumer protection laws, but may also include alleged violations of securities, employment, contract, tort, common law fraud and other laws. Legal proceedings include open and pending examinations, information gathering requests and investigations by governmental, regulatory and enforcement agencies as well as litigation in judicial forums and arbitration proceedings.
Contingencies
Our business is subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. We have historically had and continue to have a number of open investigations with these agencies. We continue to receive governmental and regulatory requests for information, subpoenas, examinations and other inquiries. We are currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees,Notes to the DepartmentCondensed Consolidated Financial Statements within Part I, Item 1. Financial Statements, of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other 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 our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters. Responding to these matters requires us to devote substantial 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 and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.
In particular, as previously disclosed, we continue to progress towards resolution of certain legacy regulatory matters with (i) the CFPB, (ii) the multi-state committee of mortgage banking regulators and various State Attorneys General and (iii) the Executive Office of the United States Trustee, all of which involve examination findings in prior years for alleged violations of certain laws related to our business practices. We believe that we have reached a settlement in principle to resolve these matters with each of these parties. Accordingly, we recorded an additional accrual during the three months ended June 30, 2020 in addition to amounts previously accrued and believe that we have fully accrued for these matters.
Item 1A. Risk Factors
There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K filed for the year ended December 31, 2019, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not make any repurchasesOn July 30, 2020, we announced that our Board of Directors authorized the repurchase of up to $100 of our shares duringoutstanding common stock. On March 25, 2021, our Board of Directors authorized a $110 increase to the original repurchase authorization for an aggregate repurchase authorization of $210 under our stock repurchase program. The stock repurchase program may be suspended, modified or discontinued at any time at our discretion. During the three months ended June 30, 2020.March 31, 2021, we repurchased shares of our common stock at a total cost of $148 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 | | (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) |
| January 2021 | | — | | | $ | — | | | — | | | $ | 42 | |
| February 2021 | | — | | | $ | — | | | — | | | $ | 42 | |
March 2021(1) | | 4,505 | | | $ | 32.93 | | | 4,505 | | | $ | 4 | |
| Total | | 4,505 | | | | | 4,505 | | | |
(1)On March 26, 2021, we repurchased 3,700 thousand shares of our common stock from affiliates of our related party, Kohlberg Kravis Roberts & Co. L.P., for a total cost of $119 or $32.25 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | | | | |
Exhibit
Number | Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith |
| | | | | | |
31.1 | | | | | | X |
31.2 | | | | | | X |
32.1 | | | | | | X |
32.2 | | | | | | X |
101.INS | Inline XBRL Instance 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 | Inline XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | | | | | X |
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
Exhibit
Number | Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith |
| | | | | | |
| 2.1 | | 8-K | 001-14667 | 2.1 | 03/15/2021 | |
| 10.1** | | | | | | X |
| 10.2** | | | | | | X |
| 31.1 | | | | | | X |
| 31.2 | | | | | | X |
| 32.1 | | | | | | X |
| 32.2 | | | | | | X |
| 101.INS | Inline XBRL Instance 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 | Inline XBRL Taxonomy Extension Schema Document | | | | | X |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | | | | | X |
SIGNATURES
Pursuant to the requirements 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.
| | | | | | | | |
| | MR. COOPER GROUP INC. |
| | |
July 30, 2020April 29, 2021 | | /s/ Jay Bray |
| Date | | Jay Bray
Chief Executive Officer
(Principal Executive Officer) |
| | |
July 30, 2020April 29, 2021 | | /s/ Christopher G. Marshall |
| Date | | Christopher G. Marshall
Vice Chairman & Chief Financial Officer
(Principal Financial and Accounting Officer) |
