(B)
| Weighted average maturity of the underlying residential mortgage loans in the pool is based on the unpaid principal balance.(C) | MSR cost basis consists of the carrying value of the prior period, adjusted for any purchases and sales of the underlying residential mortgage loans.loans in the pool is based on the unpaid principal balance. |
The tables below summarize the geographic distribution for the states representing 5% or greater of the aggregate UPB of the residential mortgage loans underlying the Servicing Related Assets as of the dates indicated: Geographic Concentration of Servicing Related Assets
| | Percentage of Total Outstanding
Unpaid Principal Balance
| | California | | | 11.9 | % | Virginia | | | 9.5 | % | New York | | | 8.9 | % | Maryland | | | 7.2 | % | Texas | | | 6.1 | % | North Carolina | | | 5.9 | % | All other | | | 50.5 | % | Total | | | 100.0 | % |
As of DecemberMarch 31, 20202022
| | Percentage of Total Outstanding Unpaid Principal Balance | | California | | | 11.114.1 | % | Virginia | | | 8.49.2 | % | New York | | | 7.78.8 | % | Maryland | | | 6.76.9 | % | Texas | | | 5.86.2 | % | North Carolina | | | 5.55.6 | % | All other | | | 54.849.2 | % | Total | | | 100.0 | % |
As of December 31, 2021
| | Percentage of Total Outstanding Unpaid Principal Balance | | California | | | 13.8 | % | Virginia | | | 9.3 | % | New York | | | 8.8 | % | Maryland | | | 6.9 | % | Texas | | | 6.2 | % | North Carolina | | | 5.6 | % | All other | | | 49.4 | % | Total | | | 100.0 | % |
Geographic concentrations of investments expose the Company to the risk of economic downturns within the relevant states. Any such downturn in a state where the Company holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and, therefore, could have a meaningful, negative impact on the Company’s Servicing Related Assets.
Note 6 — Equity and Earnings per Common Share
Common and Preferred Stock
On October 9, 2013, the Company completed an initial public offering (the “IPO”) and a concurrent private placement of its common stock. The Company did not conduct any activity prior to the IPO and the concurrent private placement.
The Company’s 8.20% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series A Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series A Preferred Stock is not redeemable by the Company prior to August 17, 2022, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after August 17, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series A Preferred Stock upon certain changes in control, the holders of the Series A Preferred Stock have the right to convert some or all of their shares of Series A Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series A Preferred Stock is 2.62881 shares of common stock, subject to certain adjustments. The Company pays cumulative cash dividends at the rate of 8.20% per annum of the $25.00 per share liquidation preference (equivalent to $2.05 per annum per share) on the Series A Preferred Stock, in arrears, on or about the 15th day of January, April, July and October of each year.
On June 4,2018, the Company issued and sold 2,750,000 shares of its common stock, par value $0.01 per share. The underwriters subsequently exercised their option to purchase an additional 338,857 shares for total proceeds of approximately $53.8 million after underwriting discounts and commissions but before expenses of approximately $265,000. All of the net proceeds were invested in RMBS.
The Company’s 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Stock, par value $0.01 per share (the “Series B Preferred Stock”) ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, and on parity with the Company’s Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series B Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series B Preferred Stock is not redeemable by the Company prior to April 15, 2024, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after April 15, 2024, the Company may, at its option, redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series B Preferred Stock upon certain changes in control, the holders of the Series B Preferred Stock have the right to convert some or all of their shares of Series B Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series B Preferred Stock is 2.68962 shares of common stock, subject to certain adjustments. Holders of Series B Preferred Stock will be entitled to receive cumulative cash dividends (i) from and including February 11, 2019 to, but excluding, April 15, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including April 15, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.631% per annum. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October, when and as authorized by the Company’s board of directors and declared by the Company. On April 28,2020, the Company issued 527,010 shares of Common Stock in partial payment of the previously declared cash dividend of $0.40 per share of Common Stock.
Common Stock ATM Program
In August 2018, the Company instituted an at-the-market offering program (the “Common Stock ATM Program”) of up to $50.0$50.0 million of its common stock.stock, of which, approximately $16.0 million was remaining as of March 31, 2022. Under the Common Stock ATM Program, the Company may, but is not obligated to, sell shares of common stock from time to time through one or more selling agents. The Common Stock ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three and six-monththree-month period ended June 30,2021 and the year ended December March 31,2020, 2022 the Company did 0t issue anyissued and sold 505,000 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.19 per share for gross proceeds of approximately $4.1 million before fees of approximately $83,000. During the year ended December 31, 2021, the Company issued and sold 1,148,398 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.88 per share for gross proceeds of approximately $10.2 million before fees of approximately $200,000.
Preferred Stock ATM Program
In April 2018, the Company instituted an at-the-market offering program (the “Preferred Series A ATM Program”) of up to $35.0 million of its Series A Preferred Stock. Under the Preferred Series A ATM Program, the Company may, but is not obligated to, sell shares of Series A Preferred Stock from time to time through one or more selling agents. The Preferred Series A ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three and six-monththree-month period ended June 30,March 31, 20212022 and the year ended December 31, 20202021, the Company did 0t issue any shares of Series A Preferred Stock under the Preferred Series A ATM Program.
Share Repurchase Program
In September 2019, the Company instituted a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of the Company’s common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. During the three and six-monththree-month period ended June 30,March 31, 2022 and the year ended December 31, 2021, the Company did 0t0t repurchase any shares under the share repurchase program. During the year ended December 31,program2020, the Company repurchased 142,531 shares of its common stock at a weighted average purchase price of $12.96 per share and paid broker commissions of approximately $4,300 on such repurchases.. Equity Incentive Plan
During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards, including long term incentive plan units (“LTIP-OP Units”) of the Operating Partnership. LTIP-OP Units are a special class of partnership interest in the Operating Partnership. LTIP-OP Units may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. Initially, LTIP-OP Units do not have full parity with the Operating Partnership’s common units of limited partnership interest (“OP Units”) with respect to liquidating distributions; however, LTIP-OP Units receive, whether vested or not, the same per-unit distributions as OP Units and are allocated their pro-rata share of the Operating Partnership’s net income or loss. Under the terms of the LTIP-OP Units, the Operating Partnership will revalue its assets upon the occurrence of certain specified events, and any increase in the Operating Partnership’s valuation from the time of grant of the LTIP-OP Units until such event will be allocated first to the holders of LTIP-OP Units to equalize the capital accounts of such holders with the capital accounts of the holders of OP Units. Upon equalization of the capital accounts of the holders of LTIP-OP Units with the other holders of OP Units, the LTIP-OP Units will achieve full parity with OP Units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP-OP Units may be converted into an equal number of OP Units at any time and, thereafter, enjoy all the rights of OP Units, including redemption rights. Each LTIP-OP Unit awarded is deemed equivalent to an award of 1 share of the Company’s common stock under the 2013 Plan and reduces the 2013 Plan’s share authorization for other awards on a one-for-one basis.
An LTIP-OP Unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Holders of LTIP-OP Units that have reached parity with OP Units have the right to redeem their LTIP-OP Units, subject to certain restrictions. The redemption is required to be satisfied in cash, or at the Company’s option, the Company may purchase the OP Units for common stock, calculated as follows: one share of the Company’s common stock, or cash equal to the fair value of a share of the Company’s common stock at the time of redemption, for each LTIP-OP Unit. When an LTIP-OP Unit holder redeems an OP Unit (as described above), non-controlling interest in the Operating Partnership is reduced and the Company’s equity is increased.
LTIP-OP Units vest ratably over the first three annual anniversaries of the grant date. The fair value of each LTIP-OP Unit was determined based on the closing price of the Company’s common stock on the applicable grant date in all other cases. The following table sets forth the number of shares of the Company’s common stock as well as LTIP-OP Units and the values thereof (based on the closing prices on the respective dates of grant) granted under the 2013 Plan. Except as otherwise indicated, all shares are fully vested.
Equity Incentive Plan Information
| | | | | | | | | | | | | | | | | | | | | | | | | | LTIP-OP Units | | | Shares of Common Stock | | | Number of Securities Remaining Available For Future Issuance
Under Equity
| | | Weighted Average Issuance | | | | | | | | | | | | | | | | | | | | | | Number of Securities Remaining Available For | | | Weighted Average | | | | | LTIP-OP Units | | | Shares of Common Stock | | | Future Issuance Under | | | Issuance | | | | | Issued | | | Forfeited | | | Converted | | | Redeemed | | | Issued | | | Forfeited | | | Equity Compensation Plans | | | Price | | | December 31, 2019 | | | (290,275 | ) | | | 916 | | | | 18,917 | | | | 0 | | | | (76,664 | ) | | | 3,155 | | | | 1,156,049 | | | | | | Number of securities issued or to be issued upon exercise | | | (41,900 | )(A) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (41,900 | ) | | $ | 14.55 | | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 9,500 | | | | 0 | | | | (9,500 | ) | | | 0 | | | | 0 | | | $ | 8.01 | | | March 31, 2020 | | | (332,175 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (86,164 | ) | | | 3,155 | | | | 1,114,149 | | | | | | | Number of securities issued or to be issued upon exercise | | | (9,672 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (9,672 | ) | | $ | 6.27 | | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (22,224 | ) | | | 0 | | | | (22,224 | ) | | $ | 9.18 | | | June 30, 2020 | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issued | | | | Forfeited | | | Converted | | | Redeemed | | | Issued | | | Forfeited | | | Compensation Plans | | | Price | | December 31, 2020 | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | | | (341,847 | ) | | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | Number of securities issued or to be issued upon exercise | | | (49,800 | )(B) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (49,800 | ) | | $ | 8.81 | | | | (49,800 | ) | (A) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (49,800 | ) | | $ | 8.81 | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 16,378 | | | | 0 | | | | (16,378 | ) | | | 0 | | | | 0 | | | $ | 9.00 | | | | 0 | | | | | 0 | | | | 16,378 | | | | 0 | | | | (16,378 | ) | | | 0 | | | | 0 | | | $ | 9.00 | | March 31, 2021 | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 0 | | | | (124,766 | ) | | | 3,155 | | | | 1,032,453 | | | | | | | | (391,647 | ) | | | | 916 | | | | 44,795 | | | | 0 | | | | (124,766 | ) | | | 3,155 | | | | 1,032,453 | | | | | | Number of securities redeemed | | | 0 | | | | 0 | | | | 0 | | | | 3,500 | | | | 0 | | | | 0 | | | | 0 | | | $ | 9.53 | | | Number of securities redeemed | | | 0 | | | | 0 | | | | 0 | | | | 3,354 | | | | 0 | | | | 0 | | | | 0 | | | $ | 10.48 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | | | (391,647 | ) | | | | 916 | | | | 44,795 | | | | 9,054 | | | | (144,980 | ) | | | 3,155 | | | | 1,012,239 | | | | | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (20,214 | ) | | | 0 | | | | (20,214 | ) | | $ | 10.39 | | | | (68,250 | ) | (B) | | | 0 | | | | 0 | | | | | | | | 0 | | | | 0 | | | | (68,250 | ) | | $ | 8.40 | | June 30, 2021 | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 6,854 | | | | (144,980 | ) | | | 3,155 | | | | 1,012,239 | | | | | | | | | | | (459,897 | ) | | | | 916 | | | | 44,795 | | | | | | | | (144,980 | ) | | | 3,155 | | | | 943,989 | | | | | |
| (A) | Subject to forfeiture in certain circumstances prior to January 2, 2023.4, 2024. |
| (B) | Subject to forfeiture in certain circumstances prior to January 4, 2024.3, 2025. |
The Company recognized approximately $333,000$225,000 and $359,000$294,000 in share-based compensation expense in the three-month periods ended June 30,March 31, 2022 and March 31, 2021, and June 30, 2020, respectively. The Company recognized approximately $626,000 and $675,000 in share-based compensation expense in the six-month periods ended June 30, 2021 and June 30, 2020, respectively. There was approximately $945,000$862,000 of total unrecognized share-based compensation expense as of June 30, 2021,March 31, 2022, which was related to unvested LTIP-OP Units and unvested directors compensation paid in stock.stock subject to forfeiture. This unrecognized share-based compensation expense is expected to be recognized ratably over the remaining vesting period of up to three years. The aggregate expense related to the LTIP-OP Unit grants is presented as “General and administrative expense” in the Company’s consolidated statements of income (loss).
Non-Controlling Interests in Operating Partnership
Non-controlling interests in the Operating Partnership in the accompanying consolidated financial statements relate to LTIP-OP Units and OP Units issued upon conversion of LTIP-OP Units, in either case, held by parties other than the Company.
As of June 30, 2021,March 31, 2022, the non-controlling interest holders in the Operating Partnership owned 345,501402,857 LTIP-OP Units, or approximately 2.02%2.2% of the units of the Operating Partnership. Pursuant to ASC 810, Consolidation, changes in a parent’s ownership interest (and transactions with non-controlling interest unit holders in the Operating Partnership) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The carrying amount of the non-controlling interest will be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the Company.
Earnings per Common Share
The Company is required to present both basic and diluted earnings per common share (“EPS”). Basic EPS is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period. In accordance with ASC 260, Earnings Per Share, if there is a loss from continuing operations, the common stock equivalents are deemed anti-dilutive and earnings (loss) per share is calculated excluding the potential common shares.
The following table presents basic and diluted earnings per share of common stock for the periods indicated (dollars in thousands, except per share data):
Earnings per Common Share Information | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2022 | | | 2021 | | Numerator: | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (11,613 | ) | | $ | (12,683 | ) | | $ | 9,615 | | | $ | (61,519 | ) | | Net (income) loss allocated to noncontrolling interests in Operating Partnership | | | 240 | | | | 227 | | | | (194 | ) | | | 1,137 | | | Net income
| | | $ | 28,729 | | | $ | 21,228 | | Net income allocated to noncontrolling interests in Operating Partnership | | | | (633 | ) | | | (434 | ) | Dividends on preferred stock | | | 2,465 | | | | 2,461 | | | | 4,928 | | | | 4,920 | | | | 2,463 | | | | 2,463 | | Net income (loss) applicable to common stockholders | | $ | (13,838 | ) | | $ | (14,917 | ) | | $ | 4,493 | | | $ | (65,302 | ) | | Net income applicable to common stockholders | | | $ | 25,633 | | | $ | 18,331 | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding | | | 17,073,943 | | | | 16,882,077 | | | | 17,069,861 | | | | 16,746,758 | | | | 18,252,523 | | | | 17,065,735 | | Weighted average diluted shares outstanding | | | 17,096,124 | | | | 16,895,408 | | | | 17,092,064 | | | | 16,759,818 | | | | 18,272,737 | | | | 17,087,959 | | Basic and Diluted EPS: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.81 | ) | | $ | (0.88 | ) | | $ | 0.26 | | | $ | (3.90 | ) | | $ | 1.40 | | | $ | 1.07 | | Diluted | | $ | (0.81 | ) | | $ | (0.88 | ) | | | | | | | | | | $ | 1.40 | | | $ | 1.07 | |
There were 0 participating securities or equity instruments outstanding that were anti-dilutive for purposes of calculating earnings per share for the periods presented.
Note 7 — Transactions with Related Parties
Manager
The Company has entered into the Management Agreement with the Manager, pursuant to which the Manager provides for the day-to-day management of the Company’s operations. The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the policies that are approved and monitored by the Company’s board of directors. Pursuant to the Management Agreement, the Manager, under the supervision of the Company’s board of directors, formulates investment strategies, arranges for the acquisition of assets, arranges for financing, monitors the performance of the Company’s assets and provides certain advisory, administrative and managerial services in connection with the operations of the Company. For performing these services, the Company pays the Manager the management fee which is payable in cash quarterly in arrears, in an amount equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement). The term of the Management Agreement expires on October 22, 20212022 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless terminated or not renewed as described below. Either the Company or the Manager may elect not to renew the Management Agreement upon expiration of its initial term or any renewal term by providing written notice of non-renewal at least 180 days, but not more than 270 days, before expiration. No such written notice of non-renewal was provided in 2021. In the event the Company elects not to renew the term, the Company will be required to pay the Manager a termination fee equal to three times the average annual management fee amount earned by the Manager during the two four-quarter periods ending as of the end of the most recently completed fiscal quarter prior to the non-renewal. The Company may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from the Company to the Manager, in which case no termination fee would be due. The Company’s board of directors will review the Manager’s performance prior to the automatic renewal of the Management Agreement and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of the Company’s board of directors or of the holders of a majority of the Company’s outstanding common stock, the Company may terminate the Management Agreement based upon unsatisfactory performance by the Manager that is materially detrimental to the Company or a determination by the Company’s independent directors that the management fees payable to the Manager are not fair, subject to the right of the Manager to prevent such a termination by agreeing to a reduction of the management fees payable to the Manager. Upon any termination of the Management Agreement based on unsatisfactory performance or unfair management fees, the Company would be required to pay the Manager the termination fee described above. The Manager may terminate the Management Agreement in the event that the Company becomes regulated as an investment company under the Investment Company Act of 1940, as amended, in which case the Company would not be required to pay the termination fee described above. The Manager may also terminate the Management Agreement upon 60 days’ written notice if the Company defaults in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to the Company, whereupon the Company would be required to pay the Manager the termination fee described above.
The Manager is a party to a services agreement (the “Services Agreement”)the Services Agreement with Freedom Mortgage,the Services Provider, pursuant to which Freedom Mortgagethe Services Provider provides to the Manager personnel and payroll and benefits administration services as needed by the Manager to carry out its obligations and responsibilities under the Management Agreement. The Company is a named third-party beneficiary to the Services Agreement and, as a result, has, as a non-exclusive remedy, a direct right of action against Freedom Mortgagethe Services Provider in the event of any breach by the Manager of any of its duties, obligations or agreements under the Management Agreement that arise out of or result from any breach by Freedom Mortgagethe Services Provider of its obligations under the Services Agreement. The Services Agreement will terminate upon the termination of the Management Agreement.
The Management Agreement between the Company and the Manager was negotiated between related parties, and the terms, including fees payable, may not be as favorable to the Company as if it had been negotiated with an unaffiliated third party. At the time the Management Agreement was negotiated, both the Manager and Freedom Mortgagethe Services Provider were controlled by Mr. Stanley Middleman. In 2016, ownership of the Manager was transferred to CHMM Blind Trust, a grantor trust for the benefit of Mr. Middleman. The Management Agreement provides that the Company will reimburse the Manager for (i) various expenses incurred by the Manager or its officers, and agents on the Company’s behalf, including costs of software, legal, accounting, tax, administrative and other similar services rendered for the Company by providers retained by the Manager and (ii) an agreed upon portion of the compensation paid to specified officers of the Company. The amounts under “Due to Manager” on the consolidated balance sheets consisted of the following for the periods indicated (dollars in thousands):
Management Fees and Compensation Reimbursement to Manager
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Management fees | | $ | 1,699 | | | $ | 1,736 | | | $ | 3,410 | | | $ | 3,463 | | Compensation reimbursement | | | 250 | | | | 238 | | | | 500 | | | | 476 | | Total | | $ | 1,949 | | | $ | 1,974 | | | $ | 3,910 | | | $ | 3,939 | |
| | Three Months Ended March 31, | | | | 2022 | | | 2021 | | Management fees | | $ | 1,678 | | | $ | 1,711 | | Compensation reimbursement | | | 115 | | | | 250 | | Total | | $ | 1,793 | | | $ | 1,961 | |
Subservicing Agreements
During the year ended December 31, 2020, Freedom Mortgage directly serviced Aurora’s portfolio of Ginnie Mae MSRs pursuant to a subservicing agreement entered into on June 10, 2015. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020 as described below, Freedom Mortgage has continued to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Once these loans and any related advance claims are rehabilitated or liquidated, the subservicing agreement with Freedom Mortgage will be terminated. It is not clear when that will occur due to the forbearance requirements as a result of the pandemic.
In August 2020, Freedom Mortgage acquired RoundPoint Mortgage Servicing Corporation (“RoundPoint”), one of Aurora’s subservicers and a seller of Fannie Mae and Freddie Mac MSRs pursuant to a flow purchase agreement with Aurora. The subservicing agreement with RoundPoint had an initial term of two years and is subject to automatic renewal for additional terms equal to the initial term unless either party chooses not to renew. The subservicing agreement may be terminated without cause by either party by giving notice as specified in the agreement. If the agreement is not renewed by Aurora or terminated by Aurora without cause, de-boarding fees will be due to the subservicer. Under the subservicing agreement, the sub-servicer agrees to service the applicable mortgage loans in accordance with applicable law. During the three-month periods ended March 31, 2022 and March 31, 2021, Aurora paid RoundPoint $1.7 million and $1.3 million, respectively, in servicing costs. Aurora had servicing receivables of $4.1 million and $493,000 from RoundPoint as of March 31, 2022 and December 31, 2021, respectively. The flow purchase agreement provides that RoundPoint may offer, and Aurora may purchase mortgage servicing rights from time to time on loans originated through RoundPoint’s network of loan sellers. RoundPoint’s sellers sell the loans to Fannie Mae or Freddie Mac and sell the mortgage servicing rights to RoundPoint which sells the MSR to Aurora. RoundPoint then subservices the loans for Aurora pursuant to the subservicing agreement.
The following table provides information about loans refinanced byapproximately $57.0 million and $1.8 billion, respectively from RoundPoint aspursuant to the flow agreement for purchase prices of the dates indicated (dollars in thousands):$650,000 and $14.0 million, respectively.
| | Three Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 2,173 | | | | 691 | | Aggregate unpaid principal balance of refinanced loans | | $ | 547,290 | | | $ | 178,409 | |
| | Six Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 4,926 | | | | 1,443 | | Aggregate unpaid principal balance of refinanced loans | | $ | 1,240,012 | | | $ | 377,764 | |
Joint Marketing Recapture Agreements
In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned subsidiary of Freedom Mortgage. Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, RoundPointFreedom Mortgage will sell the loan to Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora. The agreement continues in effect while the subservicing agreement remains in effect.
Other Transactions with Related Parties
Aurora leases 3 employees from Freedom Mortgage and reimburses Freedom Mortgage on a monthly basis.
On June 30, 2020, Aurora sold its portfolio of Ginnie Mae MSRs with a carrying value of approximately $15.7 million to Freedom Mortgage pursuant to a Loan Servicing Purchase and Sale Agreement, dated as of that date, between Freedom Mortgage as buyer and Aurora as seller for proceeds of approximately $15.8 million. The Company recorded a realized loss of $11.3 million on the sale which includes $11.5 million of previously incurred unrealized losses in market value through the six-month period ended June 30, 2020. The sale is part of the Company’s servicing related assets segment. The sale was approved by the Nominating and Corporate Governance Committee of the Company’s board of directors which consists solely of independent directors. The proceeds were used in part to pay off in full a $11.2 million term loan facility financing the Ginnie Mae MSRs and a related advancing facility, with the balance of the proceeds available for general corporate purposes.
The Ginnie Mae MSRs were originally acquired from Freedom Mortgage pursuant to the loan servicing purchase and sale agreement with Freedom Mortgage, dated as of December 15, 2016. As a result of the sale of these MSRs back to Freedom Mortgage the remaining holdback payable under the original purchase agreement of approximately $757,000 was applied to reduce the original cost of acquisition and included within “Realized loss on investments in MSRs, net” on the consolidated statements of income (loss) for the six-month period ended June 30, 2020.
Note 8 — Derivative Instruments
Interest Rate Swap Agreements, Swaptions, TBAs and U.S. Treasury Futures
In order to help mitigate exposure to higher short-term interest rates in connection with borrowings under its repurchase agreements, the Company enters into interest rate swap agreements and swaption agreements. Interest rate swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates. A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. The Company’s interest rate swap agreements and swaptions have not been designated as qualifying hedging instruments for GAAP purposes. In order to help mitigate duration risk and manage basis risk and the pricing risk under the Company’s financing facilities, the Company utilizes U.S. Treasurytreasury futures and forward-settling purchases and sales of RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Unless otherwise indicated, references to U.S. Treasurytreasury futures include options on U.S. Treasurytreasury futures.
The following table summarizes the outstanding notional amounts of derivative instruments as of the dates indicated (dollars in thousands):
Derivatives | | June 30, 2021 | | | December 31, 2020 | | | March 31, 2022 | | | December 31, 2021 | | Notional amount of interest rate swaps | | $ | 1,427,500 | | | $ | 1,451,900 | | | $ | 1,395,000 | | | $ | 1,448,000 | | Notional amount of swaptions | | | 70,000 | | | | 70,000 | | | | 40,000 | | | | 40,000 | | Notional amount of TBAs, net | | | 352,900 | | | | 332,000 | | | | 166,600 | | | | 439,000 | | Notional amount of treasury futures | | | 67,000 | | | | 110,000 | | | Notional amount of options on treasury futures | | | 30,000 | | | | 0 | | | Notional amount of U.S. treasury futures | | | | (271,300 | ) | | | (80,600 | ) | Notional amount of options on U.S. treasury futures | | | | 70,000 | | | | 0 | | Total notional amount | | $ | 1,947,400 | | | $ | 1,963,900 | | | $ | 1,400,300 | | | $ | 1,846,400 | |
The following table presents information about the Company’s interest rate swap agreements as of the dates indicated (dollars in thousands):
| | Notional Amount | | | Fair Value | | | Weighted Average Pay Rate | | | Weighted Average Receive Rate | | | Weighted Average Years to Maturity | | March 31, 2022
| | $ | 1,395,000 | | | $
| 13,883 | | | | 0.63 | % | | | 0.98 | % | | | 5.8 | | December 31, 2021 | | $ | 1,448,000 | | | $
| 9,883 | | | | 0.50 | % | | | 0.73 | % | | | 6.1 | |
| | Notional Amount | | | Fair Value | | | Weighted Average Pay Rate | | | Weighted Average Receive Rate | | | Weighted Average Years to Maturity | | June 30, 2021 | | $ | 1,427,500 | | | $ | 14,268 | | | | 0.50 | % | | | 0.72 | % | | | 6.6 | | December 31, 2020 | | $ | 1,451,900 | | | $ | 4,913 | | | | 0.45 | % | | | 0.84 | % | | | 6.4 | |
The following table presents information about the Company’s interest rate swaption agreements as of the dates indicated (dollars in thousands): | | Notional Amount | | | Fair Value | | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate(A) | | Weighted Average Underlying Years to Maturity(B) | | | Weighted Average Years to Expiration | | June 30, 2021 | | $ | 70,000 | | | $ | 1,516 | | | | 1.54 | % | LIBOR-BBA% | | | 9.3 | | | | 0.6 | | December 31, 2020 | | $ | 70,000 | | | $ | 798 | | | | 1.32 | % | LIBOR-BBA% | | | 10.6 | | | | | |
| | Notional Amount | | | Fair Value | | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate(A) | | Weighted Average Underlying Years to Maturity(B) | | | Weighted Average Years to Expiration | | March 31, 2022
| | $ | 40,000 | | | $
| 1,417 | | | | 1.90 | % | LIBOR-BBA% | | | 7.7 | | | | 0.1 | | December 31, 2021 | | $ | 40,000 | | | $
| 183 | | | | 1.90 | % | LIBOR-BBA% | | | 8.0 | | | | | |
(A) | Floats in accordance with LIBOR. |
(B) | Weighted average years to maturity of the underlying swaps from the reporting date. |
The following tables present information about the Company’s TBA derivatives as of the dates indicated (dollars in thousands): As June March 3130,, 20212022
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 1,364,500 | | | $ | 1,405,001 | | | $ | 1,407,235 | | | $ | 2,235 | | Sale contracts | | | (1,011,600 | ) | | | (1,042,991 | ) | | | (1,044,343 | ) | | | (1,352 | ) | Net TBA derivatives | | $ | 352,900 | | | $ | 362,010 | | | $ | 362,892 | | | $ | 883 | |
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair
Value | | | Net Carrying Value | | Purchase contracts | | $ | 1,075,500 | | | $ | 1,069,521 | | | $ | 1,053,940 | | | $
| (15,581 | ) | Sale contracts | | | (908,900 | ) | | | (895,704 | ) | | | (887,491 | ) | | | 8,213 | | Net TBA derivatives | | $ | 166,600 | | | $ | 173,817 | | | $ | 166,449 | | | $
| (7,368 | ) |
As of December 31, 20212020
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 875,000 | | | $ | 904,653 | | | $ | 911,393 | | | $ | 6,740 | | Sale contracts | | | (543,000 | ) | | | (564,934 | ) | | | (567,544 | ) | | | (2,610 | ) | Net TBA derivatives | | $ | 332,000 | | | $ | 339,719 | | | $ | 343,849 | | | $ | 4,130 | |
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 970,500 | | | $ | 988,173 | | | $ | 987,146 | | | $ | (1,026 | ) | Sale contracts | | | (531,500 | ) | | | (544,346 | ) | | | (544,327 | ) | | | 19 |
| Net TBA derivatives | | $ | 439,000 | | | $ | 443,827 | | | $ | 442,819 | | | $ | (1,007 | ) |
The following tables present information about the Company’s U.S. Treasurytreasury futures agreements as of the dates indicated (dollars in thousands) thousands):
As of March 31,2022 Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 5 years
| | $ | 0 | | | $ | (104,300 | ) | | $ | 1,720 | | 10 years | | | 0 | | | | (167,000 | ) | | | 4,200 | | Total | | $ | 0 | | | $ | (271,300 | ) | | $ | 5,920 | |
As of June 30, 2021
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 5 years | | $ | 11,500 | | | $ | 0 | | | $ | 18 | | 10 years | | | 55,500 | | | | 0 | | | | (42 | ) | Total | | $ | 67,000 | | | $ | 0 | | | $ | (24 | ) |
As of December 31, 20202021
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 5 years | | $ | 85,000 | | | $ | 0 | | | $ | 252 | | 10 years | | | 25,000 | | | | 0 | | | | 0 | | Total | | $ | 110,000 | | | $ | 0 | | | $ | 252 | |
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 2 years
| | $ | 0 | | | $ | (85,000 | ) | | $ | 63 | | 5 years | | | 0 | | | | (15,000 | ) | | | (53 | ) | 10 years | | | 19,400 | | | | 0 | | | | (63 | ) | Total | | $ | 19,400 | | | $ | (100,000 | ) | | $ | (53 | ) |
The Company did not have any U.S. Treasury futures options agreements as of December 31, 2020. The following table presents information about the Company’s U.S. Treasurytreasury futures options agreements as of the dates indicated (dollars in thousands):
As of June 30, 2021March 31, 2022 Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 10 years | | $ | 70,000 | | | $ | 40,000 | ) | | $ | 83 | | Total | | $ | 70,000 | | | $ | (40,000 | ) | | $ | 83 | |
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 10 years | | $ | 90,000 | | | $ | (20,000 | ) | | $ | 47 | | Total | | $ | 90,000 | | | $ | (20,000 | ) | | $
| 47 | |
As of December 31, 2021
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 10 years | | $ | 60,000 | | | $ | (60,000 | ) | | $ | 234 | | Total | | $ | 60,000 | | | $ | (60,000 | ) | | $
| 234 | |
The following table presents information about realized gain (loss) on derivatives, which is included on the consolidated statements of income (loss) for the periods indicated (dollars in thousands) thousands): Realized Gains (Losses) on Derivatives | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | | Derivatives | Consolidated Statements of Income (Loss) Location | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2022 | | | 2021 | | Interest rate swaps(A) | Realized gain (loss) on derivatives, net | | $ | (209 | ) | | $ | (6,759 | ) | | $ | (292 | ) | | $ | (54,624 | ) | | $ | (1,191 | ) | | $ | 57 | | Swaptions | Realized gain (loss) on derivatives, net | | | (321 | ) | | | (212 | ) | | | (594 | ) | | | (212 | ) | | | 0 | | | | (273 | ) | TBAs | Realized gain (loss) on derivatives, net | | | (7,473 | ) | | | (115 | ) | | | (10,739 | ) | | | 344 | | | | (15,443 | ) | | | (582 | ) | Treasury futures | Realized gain (loss) on derivatives, net | | | (2,136 | ) | | | 11,644 | | | | (3,255 | ) | | | 40,294 | | | U.S. Treasury futures | | | | 5,270 | | | | (1,084 | ) | U.S. Treasury futures options
| | | | (190 | ) | | | 0 | | Total | | | $ | (10,139 | ) | | $ | 4,558 | | | $ | (14,880 | ) | | $ | (14,198 | ) | | $ | (11,554 | ) | | $ | (1,882 | ) |
36(A) | Excludes interest rate swap periodic interest income of $915,000 and $1.3 million, for the three-month periods ended March 31, 2022 and March 31, 2021, respectively. |
Offsetting Assets and Liabilities
The Company has netting arrangements in place with all of its derivative counterparties pursuant to standard documentation developed by the International Swaps and Derivatives Association.Association and the Securities Industry and Financial Markets Association. Under GAAP, if the Company has a valid right of offset, it may offset the related asset and liability and report the net amount. The Company presents interest rate swaps, swaptions and U.S. Treasurytreasury futures assets and liabilities on a gross basis in its consolidated balance sheets, but in the case of interest rate swaps, net of variation margin. The Company presents TBA assets and liabilities on a net basis in its consolidated balance sheets. The Company presents repurchase agreements in this section even though they are not derivatives because they are subject to master netting arrangements. However, repurchase agreements are presented on a gross basis. Additionally, the Company does not offset financial assets and liabilities with the associated cash collateral on the consolidated balance sheets. The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s consolidated balance sheets as of the dates indicated (dollars in thousands) thousands): Offsetting Assets and Liabilities As of June 30, 2021March 31, 2022 | | | | | | | | Net Amounts of Assets and | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) (A)
| | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 19,796 | | | $ | 0 | | | $ | 19,796 | | | $ | (19,796 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 1,417 | | | | 0 | | | | 1,417 | | | | (1,417 | ) | | | 0 | | | | 0 | | TBAs | | | 9,082 | | | | (9,082 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | | 5,919 | | | | 0 | | | | 5,919 | | | | (5,919 | ) | | | 0 | | | | 0 | | U.S. treasury futures options
| | | 47 | | | | 0 | | | | 47 | | | | (47 | ) | | | 0 | | | | 0 | | Total Assets | | $ | 36,261 | | | $ | (9,082 | ) | | $ | 27,179 | | | $ | (27,179 | ) | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) | | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 15,164 | | | $ | 0 | | | $ | 15,164 | | | $ | (15,164 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 1,516 | | | | 0 | | | | 1,516 | | | | (1,516 | ) | | | 0 | | | | 0 | | TBAs | | | 2,235 | | | | (1,352 | ) | | | 883 | | | | (883 | ) | | | 0 | | | | 0 | | U.S. treasury futures options | | | 83 | | | | 0 | | | | 83 | | | | 1,129 | | | | (1,212 | ) | | | 0 | | Total Assets | | $ | 18,998 | | | $ | (1,352 | ) | | $ | 17,646 | | | $ | (16,434 | ) | | $ | (1,212 | ) | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 897,047 | | | $ | 0 | | | $ | 897,047 | | | $ | (888,441 | ) | | $ | (8,606 | ) | | $ | 0 | | Interest rate swaps | | | 896 | | | | 0 | | | | 896 | | | | (896 | ) | | | 0 | | | | 0 | | TBAs | | | 1,352 | | | | (1,352 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | U.S. treasury futures | | | 24 | | | | 0 | | | | 24 | | | | (24 | ) | | | 0 | | | | 0 | | Total Liabilities | | $ | 899,319 | | | $ | (1,352 | ) | | $ | 897,967 | | | $ | (889,361 | ) | | $ | (8,606 | ) | | $ | 0 | |
Liabilities | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 764,885 | | | $ | 0 | | | $ | 764,885 | | | $ | (737,911 | ) | | $ | (26,974 | ) | | $ | 0 | | Interest rate swaps | | | 5,914 | | | | 0 | | | | 5,914 | | | | (5,914 | ) | | | 0 | | | | 0 | | TBAs | | | 16,450 | | | | (9,082 | ) | | | 7,368 | | | | (7,368 | ) | | | 0 | | | | 0 | | U.S. treasury futures | | | 1,865 | | | | 0 | | | | 1,865 | | | | (1,865 | ) | | | 0 | | | | 0 | | Total Liabilities | | $ | 789,114 | | | $ | (9,082 | ) | | $ | 780,032 | | | $ | (753,058 | ) | | $ | (26,974 | ) | | $ | 0 | |
(A) | Includes cash pledged / received as collateral. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero for individual counterparties, as applicable.
|
As of December 31, 2020 2021 | | | | | | | | Net Amounts of Assets and | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) (A) | | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 10,101 | | | $ | 0 | | | $ | 10,101 | | | $ | (10,101 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 183 | | | | 0 | | | | 183 | | | | (183 | ) | | | 0 | | | | 0 | | TBAs | | | 338 | | | | (338 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | U.S. treasury futures options
| | | 234 | | | | 0 | | | | 234 | | | | 430 | | | | (664) | | | | 0 | | Total Assets | | $ | 10,856 | | | $ | (338 | ) | | $ | 10,518 | | | $ | (9,854 | ) | | $ | (664) | | | $ | 0 | |
| | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) | | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 10,791 | | | $ | 0 | | | $ | 10,791 | | | $ | (10,791 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 798 | | | | 0 | | | | 798 | | | | (798 | ) | | | 0 | | | | 0 | | TBAs | | | 6,740 | | | | (2,611 | ) | | | 4,129 | | | | (4,129 | ) | | | 0 | | | | 0 | | Treasury futures | | | 252 | | | | 0 | | | | 252 | | | | 1,717 | | | | (1,969 | ) | | | 0 | | Total Assets | | $ | 18,581 | | | $ | (2,611 | ) | | $ | 15,970 | | | $ | (14,001 | ) | | $ | (1,969 | ) | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 1,149,978 | | | $ | 0 | | | $ | 1,149,978 | | | $ | (1,105,621 | ) | | $ | (44,357 | ) | | $ | 0 | | Interest rate swaps | | | 5,878 | | | | 0 | | | | 5,878 | | | | (5,878 | ) | | | 0 | | | | 0 | | TBAs | | | 2,611 | | | | (2,611 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Total Liabilities | | $ | 1,158,467 | | | $ | (2,611 | ) | | $ | 1,155,856 | | | $ | (1,111,499 | ) | | $ | (44,357 | ) | | $ | 0 | |
Liabilities | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 865,494 | | | $ | 0 | | | $ | 865,494 | | | $ | (853,297 | ) | | $ | (12,197 | ) | | $ | 0 | | Interest rate swaps | | | 218 | | | | 0 | | | | 218 | | | | (218 | ) | | | 0 | | | | 0 | | TBAs | | | 1,345 | | | | (338 | ) | | | 1,007 | | | | (1,007 | ) | | | 0 | | | | 0 | | U.S. treasury futures | | | 53 | | | | 0 | | | | 53 | | | | (53 | ) | | | 0 | | | | 0 | | Total Liabilities | | $ | 867,110 | | | $ | (338 | ) | | $ | 866,772 | | | $ | (854,575 | ) | | $ | (12,197 | ) | | $ | 0 | |
(A) | Includes cash pledged / received as collateral. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero for individual counterparties, as applicable.
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Note 9 – Fair Value
Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Recurring Fair Value Measurements
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
RMBS
The Company holds a portfolio of RMBS that are classified as available for sale and are carried at fair value in the consolidated balance sheets. The Company determines the fair value of its RMBS based upon prices obtained from third-party pricing providers. The third-party pricing providers develop their pricing based on transaction prices of recent trades for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security.which utilize observable inputs. As a result, the Company classified 100% of its RMBS as Level 2 fair value assets at June 30, 2021March 31, 2022 and December 31, 2020.2021.
MSRs
The Company, through its subsidiary Aurora, holds a portfolio of MSRs that are reported at fair value in the consolidated balance sheets. The Company uses a discounted cash flow model to estimate the fair value of these assets. Although MSR transactions are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). As a result, the Company classified 100% of its MSRs as Level 3 fair value assets at June 30, 2021March 31, 2022 and December 31, 2020.2021.
Derivative Instruments
The Company enters into a variety of derivative instruments as part of its economic hedging strategies. The Company executes interest rate swaps, swaptions, TBAs and U.S. Treasurytreasury futures. The Company utilizes third-party pricing providers to value its derivative instruments. The third-party pricing providers develop their pricing based on transaction prices of recent trades for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, which utilize observable inputs. As a result, the Company classified 100% of its derivative instruments as Level 2 fair value assets and liabilities at June 30, 2021March 31, 2022 and December 31, 2020.2021.
Both the Company and the derivative counterparties under their netting arrangements are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparties. Posting of cash collateral typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateral posting at low posting thresholds, credit exposure to the Company and/or counterparties is considered materially mitigated. The Company’s interest rate swaps and U.S. Treasurytreasury futures are required to be cleared on an exchange, which further mitigates, but does not eliminate, credit risk. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated (dollars in thousands). Recurring Fair Value Measurements As of June 30, 2021March 31, 2022 | | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 454,991 | | | $ | 0 | | | $ | 454,991 | | Freddie Mac | | | 0 | | | | 319,122 | | | | 0 | | | | 319,122 | | RMBS total | | | 0 | | | | 774,113 | | | | 0 | | | | 774,113 | | Derivative assets | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 19,796 | | | | 0 | | | | 19,796 | | Interest rate swaptions | | | 0 | | | | 1,417 | | | | 0 | | | | 1,417 | | U.S. treasury futures | | | 0 | | | | 5,919 | | | | 0 | | | | 5,919 | | U.S. treasury futures options | | | 0 | | | | 47 | | | | 0 | | | | 47 | | Derivative assets total | | | 0 | | | | 27,179 | | | | 0 | | | | 27,179 | | Servicing related assets | | | 0 | | | | 0 | | | | 246,103 | | | | 246,103 | | Total Assets | | $ | 0 | | | $ | 801,292 | | | $ | 246,103 | | | $ | 1,047,395 | | Liabilities | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 5,914 | | | | 0 | | | | 5,914 | | | | | 0 | | | | 7,368 | | | | 0 | | | | 7,368 | | U.S. treasury futures | | | 0 | | | | 1,865 | | | | 0 | | | | 1,865 | | Derivative liabilities total | | | 0 | | | | 15,147 | | | | 0 | | | | 15,147 | | Total Liabilities | | $ | 0 | | | $ | 15,147 | | | $ | 0 | | | $ | 15,147 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 617,044 | | | $ | 0 | | | $ | 617,044 | | Freddie Mac | | | 0 | | | | 381,755 | | | | 0 | | | | 381,755 | | RMBS total | | | 0 | | | | 998,799 | | | | 0 | | | | 998,799 | | Derivative assets | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 15,164 | | | | 0 | | | | 15,164 | | Interest rate swaptions | | | 0 | | | | 1,516 | | | | 0 | | | | 1,516 | | TBAs | | | 0 | | | | 883 | | | | 0 | | | | 883 | | U.S. treasury futures options | | | 0 | | | | 83 | | | | 0 | | | | 83 | | Derivative assets total | | | 0 | | | | 17,646 | | | | 0 | | | | 17,646 | | Servicing related assets | | | 0 | | | | 0 | | | | 211,995 | | | | 211,995 | | Total Assets | | $ | 0 | | | $ | 1,016,445 | | | $ | 211,995 | | | $ | 1,228,440 | | Liabilities | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 896 | | | | 0 | | | | 896 | | U.S. treasury futures | | | 0 | | | | 24 | | | | 0 | | | | 24 | | Derivative liabilities total | | | 0 | | | | 920 | | | | 0 | | | | 920 | | Total Liabilities | | $ | 0 | | | $ | 920 | | | $ | 0 | | | $ | 920 | |
As of December 31, 20202021
| | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 715,156 | | | $ | 0 | | | $ | 715,156 | | | $ | 0 | | | $ | 559,777 | | | $ | 0 | | | $ | 559,777 | | Freddie Mac | | | 0 | | | | 506,954 | | | | 0 | | | | 506,954 | | | | 0 | | | | 393,719 | | | | 0 | | | | 393,719 | | Private Label MBS | | | 0 | | | | 6,141 | | | | 0 | | | | 6,141 | | | RMBS total | | | 0 | | | | 1,228,251 | | | | 0 | | | | 1,228,251 | | | | 0 | | | | 953,496 | | | | 0 | | | | 953,496 | | Derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 10,791 | | | | 0 | | | | 10,791 | | | | 0 | | | | 10,101 | | | | 0 | | | | 10,101 | | Interest rate swaptions | | | 0 | | | | 798 | | | | 0 | | | | 798 | | | | 0 | | | | 183 | | | | 0 | | | | 183 | | TBAs | | | 0 | | | | 4,129 | | | | 0 | | | | 4,129 | | | Treasury futures | | | 0 | | | | 252 | | | | 0 | | | | 252 | | | U.S. treasury futures options | | | | 0 | | | | 234 | | | | 0 | | | | 234 | | Derivative assets total | | | 0 | | | | 15,970 | | | | 0 | | | | 15,970 | | | | 0 | | | | 10,518 | | | | 0 | | | | 10,518 | | Servicing related assets | | | 0 | | | | 0 | | | | 174,414 | | | | 174,414 | | | | 0 | | | | 0 | | | | 218,727 | | | | 218,727 | | Total Assets | | $ | 0 | | | $ | 1,244,221 | | | $ | 174,414 | | | $ | 1,418,635 | | | $ | 0 | | | $ | 964,014 | | | $ | 218,727 | | | $ | 1,182,741 | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 218 | | | | 0 | | | | 218 | | TBAs, net | | | | 0 | | | | 1,007 | | | | 0 | | | | 1,007 | | U.S. treasury futures | | | | 0 | | | | 53 | | | | 0 | | | | 53 | | Derivative liabilities total | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 1,278 | | | | 0 | | | | 1,278 | | Total Liabilities | | $ | 0 | | | $ | 5,878 | | | $ | 0 | | | $ | 5,878 | | | $ | 0 | | | $ | 1,278 | | | $ | 0 | | | $ | 1,278 | |
The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.
Level 3 Assets and Liabilities
The valuation of Level 3 assets and liabilities requires significant judgment by management. The Company estimates the fair value of its Servicing Related Assets based on internal pricing models rather than quotations and compares the results of these internal models against the results from models generated by third-party pricing providers. The third-party pricing providers and management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by third-party pricing providers and management in the absence of market information. Assumptions used by third-party pricing providers and management due to lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s consolidated financial statements. The Company’s management reviews all valuations that are based on pricing information received from third-party pricing providers. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable.
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair values. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of June 30, 2021March 31, 2022 and December 31, 20202021 and do not take into consideration the effects of subsequent changes in market or other factors. The tables below present the reconciliation for the Company’s Level 3 assets (Servicing Related Assets) measured at fair value on a recurring basis as of the dates indicated (dollars in thousands):
Level 3 Fair Value Measurements As of June 30, 2021March 31, 2022 | | Level 3 | | | Level 3 | | | | MSRs | | | MSRs | | Balance at December 31, 2020 | | $ | 174,414 | | | Purchases, sales and principal paydowns: | | | | | | Balance at December 31, 2021 | | | $ | 218,727 | | Purchases and sales: | | | | | | Purchases | | | 36,059 | | | | 5,821 | | Other changes (A) | | | (441 | ) | | | (176 | ) | Purchases, sales and principal paydowns: | | $ | 35,618 | | | Purchases and sales:
| | | $ | 5,645 | | Changes in Fair Value due to: | | | | | | | | | Changes in valuation inputs or assumptions used in valuation model | | | 47,201 | | | | 30,214 | | Other changes in fair value (B) | | | (45,238 | ) | | | (8,483 | ) | Unrealized gain (loss) included in Net Income | | $ | 1,963 | | | $ | 21,731 | | Balance at June 30, 2021 | | $ | 211,995 | | | Balance at March 31, 2022 | | | $ | 246,103 | |
As of December 31, 20202021 | | Level 3 | | | Level 3 | | | | MSRs | | | MSRs | | Balance at December 31, 2019 | | $ | 291,111 | | | Purchases, sales and principal paydowns: | | | | | | Balance at December 31, 2020 | | | $ | 174,414 | | Purchases and sales: | | | | | | Purchases | | | 54,439 | | | | 56,638 | | Sales | | | (27,754 | ) | | Other changes (A) | | | (1,482 | ) | | | (1,263 | ) | Purchases, sales and principal paydowns: | | $ | 25,203 | | | Purchases and sales: | | | $ | 55,375 | | Changes in Fair Value due to: | | | | | | | | | Changes in valuation inputs or assumptions used in valuation model | | | (8,318 | ) | | | 61,881 | | Other changes in fair value (B) | | | (133,582 | ) | | | (72,943 | ) | Unrealized gain (loss) included in Net Income | | $ | (141,900 | ) | | $ | (11,062 | ) | Balance at December 31, 2020 | | $ | 174,414 | | | Balance at December 31, 2021 | | | $ | 218,727 | |
(A) | Represents purchase price adjustments, principally contractual prepayment protection, and changes due to the Company’s repurchase of the underlying collateral. |
(B) | Represents changes due to realization of expected cash flows and estimated MSR runoff. |
The tables below present information about the significant unobservable inputs used in the fair value measurement of the Company’s Servicing Related Assets classified as Level 3 fair value assets as of the dates indicated (dollars in thousands): As of June 30, 2021March 31, 2022 | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average | | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average (B) | | MSRs | $ | 211,995 | | Discounted cash flow | | Constant prepayment speed | | 6.9% - 25.0 | % | | 12.7 | % | $ | 246,103 | | Discounted cash flow | | Constant prepayment speed | | 5.0% - 18.1 | % | | | 8.9 | % | | | | | | | Uncollected payments | | 0.3% - 2.5 | % | | 0.7 | % | | | | | | Uncollected payments | | 0.4% - 2.5 | % | | | 0.7 | % | | | | | | | Discount rate | | | | | 7.0 | % | | | | | | Discount rate | | | | | 8.1 | % | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | | | | | | Annual cost to service, per loan | | | | $ | 78 | | Total | $ | 211,995 | | | | | | | | | | | | TOTAL | | $ | 246,103 | | | | | | | | | | |
As of December 31, 2020 2021 | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average | | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average (B) | | MSRs | $ | 174,414 | | Discounted cash flow | | Constant prepayment speed | | 5.0% -38.0 | % | | 15.4 | % | $ | 218,727 | | Discounted cash flow | | Constant prepayment speed | | 5.0% -19.1 | % | | | 11.5 | % | | | | | | | Uncollected payments | | 0.3% - 2.6 | % | | 0.6 | % | | | | | | Uncollected payments | | 0.4% - 2.5 | % | | | 0.6 | % | | | | | | | Discount rate | | | | | 6.1 | % | | | | | | Discount rate | | | | | 7.2 | % | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | Total | $ | 174,414 | | | | | | | | | | | TOTAL | | $ | 218,727 | | | | | | | | | |
| (A) | Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurements. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of uncollected payments and a directionally opposite change in the assumption used for prepayment rates. |
| (B) | Weighted averages for unobservable inputs are calculated based on the unpaid principal balance of the portfolios. |
Fair Value of Financial Assets and Liabilities
In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheets, for which fair value can be estimated. The following describes the Company’s methods for estimating the fair value for financial instruments.
RMBS available for sale securities, Servicing Related Assets, derivative assets and derivative liabilities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the “Fair Value Measurements” section of this footnote. Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. The carrying value of servicing receivables, repurchase agreements and corporate debt that mature in less than one year generally approximates fair value due to the short maturities. The Company does not hold any repurchase agreements that are considered long-term.
Corporate debt that matures in more than one year consists solely of financing secured by Aurora’s Servicing Related Assets. All of the Company’s debt is revolving and bears interest at adjustable rates. The Company considers that the amount of the corporate debt generally approximates fair value. The fixed rate portion of the financing for all of the Company’s Servicing Related Assets was paid in full on June 30, 2020.
Note 10 — Commitments and Contingencies
The commitments and contingencies of the Company as of June 30, 2021March 31, 2022 and December 31, 20202021 are described below.
Management Agreement
The Company pays the Manager a quarterly management fee, calculated and payable quarterly in arrears, equal to the product of one quarter of the 1.5% management fee annual rate and the stockholders’ equity, adjusted as set forth in the Management Agreement as of the end of such fiscal quarter. The Manager relies on Freedom Mortgagethe Services Provider to provide the Manager with the necessary resources and personnel to conduct the Company’s operations. For further discussion regarding the management fee, see Note 7.
Legal and Regulatory
From time to time, the Company may be subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. The Company has established immaterial reserves for these possible matters. Based on information currently available, management is not aware of any legal or regulatory claims that would have a material effect on the Company’s consolidated financial statements. Commitments to Purchase/Sell RMBS
As of June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company held forward TBA purchase and sale commitments, respectively, with counterparties, which are forward Agency RMBS trades, whereby the Company committed to purchasing or selling a pool of securities at a particular interest rate. As of the date of the trade, the mortgage-backed securities underlying the pool that will be delivered to fulfill a TBA trade are not yet designated. The securities are typically “to be announced” 48 hours prior to the established trade settlement date.
As of June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company was 0t obligated to purchase or sell any RMBS securities. Acknowledgment Agreements
In connection with the Fannie Mae MSR Financing Facility (as defined below in Note 12), entered into by Aurora and QRS III, those parties also entered into an acknowledgment agreement with Fannie Mae. Pursuant to that agreement, Fannie Mae consented to the pledge by Aurora and QRS III of their respective interests in MSRs for loans owned or securitized by Fannie Mae, and acknowledged the security interest of the lender in those MSRs. See Note 12—Notes Payable for a description of the Fannie Mae MSR Financing Facility and the financing facility it replaced.
In connection with the Freddie Mac MSR Revolver (as defined below in Note 12), Aurora, QRS V, and the lender, with a limited joinder by the Company, entered into an acknowledgement agreement with Freddie Mac pursuant to which Freddie Mac consented to the pledge of the Freddie Mac MSRs securing the Freddie Mac MSR Revolver. Aurora and the lender also entered into a consent agreement with Freddie Mac pursuant to which Freddie Mac consented to the pledge of Aurora’s rights to reimbursement for advances on the underlying loans. See Note 12—Notes Payable for a description of the Freddie Mac MSR Revolver.
Note 11 – Repurchase Agreements
The Company had outstanding approximately $897$764.9 million and $1.1 billion$865.5 million of borrowings under its repurchase agreements as of June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively. The Company’s obligations under these agreements had weighted average remaining maturities of 4133 days and 2838 days as of June 30, 2021March 31, 2022 and December 31, 2020.2021. RMBS and cash have been pledged as collateral under these repurchase agreements (see Note 4).
The repurchase agreements had the following remaining maturities and weighted average rates as of the dates indicated (dollars in thousands):
Repurchase Agreements Characteristics As of June 30, 2021March 31, 2022 | | Repurchase Agreements | | | Weighted Average Rate | | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 400,417 | | | | 0.10 | % | | $ | 396,958 | | | | 0.33 | % | One to three months | | | 496,630 | | | | 0.11 | % | | | 367,927 | | | | 0.46 | % | Total/Weighted Average | | $ | 897,047 | | | | 0.11 | % | | $ | 764,885 | | | | 0.39 | % |
As of December 31, 2020 2021 | | Repurchase Agreements | | | Weighted Average Rate | | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 482,319 | | | | 0.23 | % | | $ | 291,007 | | | | 0.13 | % | One to three months | | | 667,659 | | | | 0.23 | % | | | 574,487 | | | | 0.14 | % | Total/Weighted Average | | $ | 1,149,978 | | | | 0.23 | % | | $ | 865,494 | | | | 0.14 | % |
There were 0 overnight or demand securities as of June 30, 2021March 31, 2022 or December 31, 2020.2021.
Note 12 – Notes Payable
As of March 31, 2022, the Company had 2 separate MSR financing facilities: (i) the Freddie Mac MSR Revolver, which is revolving credit facility for up to $100.0 million that is secured by all Freddie Mac MSRs owned by Aurora; and (ii) the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora. Both financing facilities are available for MSRs as well as certain servicing related advances associated with MSRs. Freddie Mac MSR Revolver. In July 2018, the Company, Aurora and QRS V (collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0 million revolving credit facility (the “MSR“Freddie Mac MSR Revolver”) pursuant to which Aurora pledged all of its existing and future MSRs on loans owned or securitized by Freddie Mac. The term of the Freddie Mac MSR Revolver is 364 days with the Borrowers’ option for 2two renewals for similar terms followed by a one-year term out feature with a 24-month amortization schedule. The Freddie Mac MSR Revolver was upsized to $45.0 million in September 2018 and the2018. The Company hadalso has the ability to request up to an additional $5.0 million of borrowings. On April 2, 2019, the BorrowersAurora and QRS V entered into an amendment that increased the maximum amount of the Freddie Mac MSR Revolver to $100.0 million. In July 2021, the Borrowers entered into an amendment to the Freddie Mac MSR Revolver that extended the revolving period for an additional 364 days with the option for 2 more renewals of 364 days each. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan. Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. ApproximatelyAt March 31, 2022 and December 31, 2021, approximately $65.0 million and $63.0 million, and $47.5 millionrespectively, was outstanding under the Freddie Mac MSR RevolverRevolver.
Fannie Mae MSR Revolving Facility. In October 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), to replace the Prior Fannie Mae MSR Financing Facility. Under the Fannie Mae MSR Revolving Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at June 30, 2021any one time under the Fannie Mae MSR Revolving Facility is $150.0 million. The revolving period is 24 months which may be extended by agreement with the lender. During the revolving period, borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. At the end of the revolving period, the outstanding amount will be converted to a three-year term loan that will bear interest at a rate calculated at a spread over the rate for one-year interest rate swaps. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Revolving Facility. At March 31, 2022 and December 31, 2020, respectively.2021, approximately $94.8 million and $83.0 million, respectively, was outstanding under the Fannie Mae MSR Revolving Facility.
As noted above, the Fannie Mae MSR Revolving Facility replaced the Prior Fannie Mae MSR Financing Facility. In September 2019, Aurora and QRS III entered into a loan and security agreement (the “Fannie“Prior Fannie Mae MSR Financing Facility”), to replace. Under the MSR Financing Facility. Under thePrior Fannie Mae MSR Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the facility is $200.0was $200 million, of which $100.0$100 million iswas committed. Borrowings bearbore interest at a rate equal to a spread over one-month LIBOR subject to a floor. The term of theThis facility is 24 months subject to extension for an additional 12 months if the lender agrees beginningwas terminated and replaced in the 20th month. Aurora is currently negotiating a replacement facilityOctober 2021 with another lender that is expected to close before the expiration of the Fannie Mae MSR FinancingRevolving Facility in September 2021(as defined and discussed above). The Company has guaranteed repayment of all indebtednessAs a result, there was no outstanding balance under the Fannie Mae MSR Financing Facility. Approximately $72.0 million and $64.0 million was outstanding under thePrior Fannie Mae MSR Financing Facility at June 30, 2021March 31, 2022 and December 31, 2020, respectively.2021.
The outstanding borrowings had the following remaining maturities as of the dates indicated (dollars in thousands): Notes Payable Repayment Characteristics As of June 30, 2021March 31, 2022 | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver Facility | | $ | 0 | | | $ | 63,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 63,000 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 72,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 72,000 | | Total | | $ | 72,000 | | | $ | 63,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 135,000 | |
| | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | Freddie Mac MSR Revolver | | | | | | | | | | | | | | | | | | | Borrowings under Freddie Mac MSR Revolver | | $ | 65,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 65,000 | | Fannie Mae MSR Revolving Facility | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Revolving Facility | |
| 0 | | |
| 615 | | |
| 7,581 | | |
| 7,957 | | |
| 78,647 | | |
| 94,800 | | Total | | $ | 65,000 | | | $ | 615 | | | $ | 7,581 | | | $ | 7,957 | | | $ | 78,647 | | | $ | 159,800 | |
As of December 31, 2020 2021 | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver Facility | | $ | 47,500 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 47,500 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 64,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 64,000 | | Total | | $ | 111,500 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 111,500 | |
| | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | | | | | | | | | | | | | | | | | | | | Borrowings under Freddie Mac MSR Revolver | | $ | 63,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 63,000 | | Fannie Mae MSR Revolving Facility | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Revolving Facility | |
| 0 | | |
| 571 | | |
| 6,994 | | |
| 7,261 | | |
| 68,174 | | |
| 83,000 | | Total | | $ | 63,000 | | | $ | 571 | | | $ | 6,994 | | | $ | 7,261 | | | $ | 68,174 | | | $ | 146,000 | |
Note 13 – Receivables and Other Assets
The assets comprising “Receivables and other assets” as of June 30, 2021March 31, 2022 and December 31, 20202021 are summarized in the following table (dollars in thousands):
Receivables and Other Assets | | June 30, 2021 | | | December 31, 2020 | | | March 31, 2022 | | | December 31, 2021 | | Servicing advances | | $ | 14,589 | | | $ | 18,253 | | | $ | 13,192 | | | $ | 17,609 | | Interest receivable | | | 2,476 | | | | 3,119 | | | | 2,242 | | | | 2,393 | | Deferred tax receivable | | | 19,762 | | | | 21,523 | | | | | | | 16,740 | | | | 20,614 | | Other receivables | | | 5,301 | | | | 1,740 | | | | 6,297 | | | | 2,728 | | Total other assets | | $ | 42,128 | | | $ | 44,635 | | | $ | 38,471 | | | $ | 43,344 | |
The Company only records as an asset those servicing advances that the Company deems recoverable.
Note 14 – Accrued Expenses and Other Liabilities
The liabilities comprising “Accrued expenses and other liabilities” as of June 30, 2021March 31, 2022 and December 31, 20202021 are summarized in the following table (dollars in thousands):
Accrued Expenses and Other Liabilities
| | June 30, 2021 | | | December 31, 2020 | | Accrued interest payable | | $ | 723 | | | $ | 1,008 | | Accrued expenses | | | 2,765 | | | | 2,737 | | Total accrued expenses and other liabilities | | $ | 3,488 | | | $ | 3,745 | |
| | March 31, 2022 | | | December 31, 2021 | | Accrued interest payable | | $ | 1,041 | | | $ | 996 | | Accrued expenses | | | 1,387 | | | | 2,065 | | Total accrued expenses and other liabilities | | $ | 2,428 | | | $ | 3,061 | |
The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short taxable year ended December 31, 2013. As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. It is the Company’s policy to distribute all or substantially all of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company can elect to distribute such shortfall within the next year as permitted by the Code.
Effective January 1, 2014, CHMI Solutions elected to be taxed as a corporation for U.S. federal income tax purposes; prior to this date, CHMI Solutions was a disregarded entity for U.S. federal income tax purposes. CHMI Solutions has jointly elected with the Company, the ultimate beneficial owner of CHMIthe Sub-REIT to be treated as a TRS of the Company, and all activities conducted through CHMI Solutions and its wholly-owned subsidiary, Aurora, are subject to federal and state income taxes. CHMI Solutions files a consolidated tax return with Aurora and is fully taxed as a U.S. C-Corporation.
The state and local tax jurisdictions for which the Company is subject to tax filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. CHMI Solutions and Aurora are subject to U.S. federal, state and local income taxes.
The components of the Company’s income tax expense (benefit) are as follows for the periods indicated below (dollars in thousands):
| | Three Months Ended March 31, | | | | 2022 | | | 2021 | | Current federal income tax benefit | | $ | 0 | | | $ | (128 | ) | Deferred federal income tax expense | |
| 3,295 | | |
| 3,240 | | Deferred state income tax expense
| | | 580 | | | | 351 | | Provision for Corporate Business Taxes | | $ | 3,875 | | | $ | 3,463 | |
| | Six Months Ended June 30, | | | | 2021 | | | 2020 | | Current federal income tax benefit | | $ | (128 | ) | | $ | 0 | | Deferred federal income tax expense (benefit) | | | 1,595 | | | | (14,302 | ) | Deferred state income tax expense (benefit) | | | 166 | | | | (1,130 | ) | Provision for (benefit from) Corporate Business Taxes | | $ | 1,633 | | | $ | (15,432 | ) |
The following is a reconciliation of the statutory federal rate to the effective rate, for the periods indicated below (dollars in thousands):
| | Six Months Ended June 30, | | | | 2021 | | | 2020 | | Computed income tax expense (benefit) at federal rate | | $ | 2,361 | | | | 21.0 | % | | $ | (16,160 | ) | | | 21.0 | % | State tax expense (benefit), net of federal tax, if applicable | | | 159 | | | | 1.4 | % | | | (1,130 | ) | | | 1.5 | % | Permanent differences in taxable income from GAAP pre-tax income | | | 66 | | | | 0.5 | % | | | 0 | | | | 0 | | REIT income not subject to tax (benefit) | | | (953 | ) | | | (8.5 | )% | | | 1,858 | | | | (2.4 | )% | Provision for (benefit from) Corporate Business Taxes/Effective Tax Rate(A) | | $ | 1,633 | | | | 14.4 | % | | $ | (15,432 | ) | | | 20.1 | % |
| | Three Months Ended March 31, | | | | 2022 | | | 2021 | | Computed income tax expense at federal rate | | $ | 6,847 | | | | 21.0 | % | | $ | 5,185 | | | | 21.0 | % | State tax expense, net of federal tax, if applicable | | | 459 | | | | 1.4 | % | | | 351 | | | | 1.4 | % | REIT income not subject to tax (benefit)
| | | (3,431 | ) | | | (10.5 | )% | | | (2,073 | ) | | | (8.4 | )% | Provision for Corporate Business Taxes/Effective Tax Rate(A) | | $ | 3,875 | | | | 11.9 | % | | $ | 3,463 | | | | 14.0 | % |
(A) | The provision for income taxes is recorded at the TRS level. |
The Company’s consolidated balance sheets at June 30, 2021 and December 31, 2020, contain the following income taxes recoverable and deferred tax assets, which are recorded at the TRS level (dollars in thousands):
| | March 31, 2022 | | | December 31, 2021 | | Income taxes recoverable
| | | | | | | Federal income taxes recoverable
| | $ | 128
| | | $ | 128
| | Income taxes recoverable
| | $ | 128
| | | $ | 128
| |
| | March 31, 2022 | | | December 31, 2021 | | Deferred tax assets | | | | | | | Deferred tax - mortgage servicing rights | | $ | 5,605 | | | $ | 10,539 | | Deferred tax - net operating loss | | | 11,135 | | | | 10,075 | | Total net deferred tax assets | | $ | 16,740 | | | $ | 20,614 | |
| | June 30, 2021 | | | December 31, 2020 | | Income taxes recoverable | | | | | | | Federal income taxes recoverable | | $ | 128 | | | $ | 0 | | Income taxes recoverable | | $ | 128 | | | $ | 0 | |
| | June 30, 2021 | | | December 31, 2020 | | Deferred tax assets | | | | | | | Deferred tax - mortgage servicing rights | | $ | 11,791 | | | $ | 15,176 | | Deferred tax - net operating loss | | | 7,971 | | | | 6,347 | | Total net deferred tax assets | | $ | 19,762 | | | $ | 21,523 | |
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. The Company’s net operating losses (“NOLs”) of $46.7 million were created subsequent to 2017 and can be carried forward indefinitely pursuant to the Tax Cuts and Jobs Act ofpassed on December 22, 2017 (“2017 Tax Act”) passed on December 22, 2017.. As of June 30, 2021,March 31, 2022, the Company believes it is more likely than not that it will fully realize its deferred tax assets. Deferred tax assets are included in “Receivables and other assets” in the consolidated balance sheets.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the 2017 Tax Act. Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. The CARES Act did not have a material financial impact on the Company’s consolidated financial statements.
Based on the Company'sCompany’s evaluation, the Company has concluded that there are no significant liabilities for unrecognized tax benefits required to be reported in the Company'sCompany’s consolidated financial statements. Additionally, there were no amounts accrued for penalties or interest as of or during the periodperiods presented in these consolidated financial statements.
The Company’s 2020, 2019 2018 and 20172018 federal, state and local income tax returns remain open for examination by the relevant authorities.
Distributions to stockholders generally will be primarily taxable as ordinary income, although a portion of such distributions may be designated as qualified dividend income or may constitute a return of capital. The Company furnishes annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment.
Note 16 – Subsequent Events
Events subsequent to June 30, 2021March 31, 2022 were evaluated and no additional events were identified requiring further disclosure in the consolidated financial statements.statements.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included in “Part I, Item 1. Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
This section discusses our results of operations for the current quarter ended March 31, 2022 compared to the immediately preceding prior quarter ended December 31, 2021 as well as the corresponding quarter of the prior year ended March 31, 2021. In this report, we are changing the basis of comparison from the corresponding quarter of the prior year to the immediately preceding prior quarter, in order to provide readers greater insight into our quarterly performance. For our future Quarterly Reports on Form 10-Q, we will present a discussion of our results of operations for the current quarter compared to the immediately preceding prior quarter only. General
We are a public residential real estate finance company focused on acquiring, investing in and managing residential mortgage assets in the United States. We were incorporated in Maryland on October 31, 2012, and we commenced operations on or about October 9, 2013 following the completion of our initial public offering and a concurrent private placement. Our common stock, our 8.20% Series A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (our “Series B Preferred Stock”) are listed and traded on the New York Stock Exchange under the symbols “CHMI,” “CHMI-PRA” and “CHMI-PRB,” respectively. We are externally managed by our Manager, Cherry Hill Mortgage Management, LLC, an SEC-registered investment adviser.
Our principal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We attempt to attain this objective by selectively constructing and actively managing a portfolio of Servicing Related Assets (as defined below) and residential mortgage-backed securities (“RMBS”) and, subject to market conditions, other cash flowing residential mortgage assets.
We are subject to the risks involved with real estate and real estate-related debt instruments. These include, among others, the risks normally associated with changes in the general economic climate, changes in the mortgage market, changes in tax laws, interest rate levels, and the availability of financing.
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2013. We operate so as to continue to qualify to be taxed as a REIT. Our asset acquisition strategy focuses on acquiring a diversified portfolio of residential mortgage assets that balances the risk and reward opportunities our Manager observes in the marketplace. Aurora has or is in the process of obtaining the licenses necessary to invest in mortgage servicing rights (“MSRs”) on a nationwide basis and is an approved seller/servicer for Fannie Mae and Freddie Mac.
In addition to Servicing Related Assets, we invest in RMBS, primarily those backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe to be favorable prepayment and duration characteristics. Our RMBS consist primarily of Agency RMBS on which the payments of principal and interest are guaranteed by an Agency. We have also invested in collateralized mortgage obligations guaranteed by an Agency (“Agency CMOs”) consisting of interest only securities (“IOs”) as well as non-Agency collateralized mortgage obligations that are either risk-sharing securities issued by Fannie Mae or Freddie Mac or private label securities that are issued by a non-government related entity.RMBS. We finance our RMBS with an amount of leverage, that varies from time to time depending on the particular characteristics of our portfolio, the availability of financing and market conditions. We do not have a targeted leverage ratio for our RMBS. Our borrowings for RMBS consist of short-term borrowings under master repurchase agreements. Subject to maintaining our qualification as a REIT, we utilize derivative financial instruments (or hedging instruments) to hedge our exposure to potential interest rate mismatches between the interest we earn on our assets and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives include, where desirable, locking in, on a long-term basis, a spread between the yield on our assets and the cost of our financing in an effort to improve returns to our stockholders.
We also seek to operate our business in a manner that permitsdoes not require us to maintain our exclusion from registrationregister as an investment company under the Investment Company Act.
Effective January 1, 2020, Cherry Hillthe Operating Partnership LP, the Company’s operating partnership subsidiary (the “Operating Partnership”), contributed substantially all of its assets to CHMIthe Sub-REIT Inc. (the “Sub-REIT”) in exchange for all of the common stock of the Sub-REIT. As a result of this contribution, the Sub-REIT is a wholly-owned subsidiary of the Operating Partnership and operations formerly conducted by the Operating Partnership through its subsidiaries are now conducted by the Sub-REIT through those same subsidiaries. The Sub-REIT has elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2020.
OnFrom time to time, we may issue and sell shares of our common stock or preferred stock, including additional shares of our Class A Preferred Stock or Class B Preferred Stock. See “Item 1. Consolidated Financial Statements—Note 6. Equity and Earnings per Common Share—Common and Preferred Stock.”
The Company has an at-the-market offering program for its common stock (the “Common Stock ATM Program” and, together with the Preferred Series A ATM Program, as defined below, the “ATM Programs”) pursuant to which it may offer through one or more sales agents and sell from time to time up to $50.0 million of its common stock at prices prevailing at the time, subject to volume and other regulatory limitations. As of March 29, 2017,31, 2022, approximately $16.0 million was remaining under the Common Stock ATM Program. During the three-month period ended March 31, 2022, the Company issued and sold 5,175,000505,000 shares of common stock par value $0.01under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.19 per share raising approximately $81.1 million after underwriting discounts and commissions but before expensesfor gross proceeds of approximately $229,000. All$4.1 million before fees of approximately $83,000. During the net proceeds were used to invest in RMBS.
On August 17, 2017,year ended December 31, 2021, the Company issued and sold 2,400,0001,148,398 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.88 per share for gross proceeds of approximately $10.2 million before fees of approximately $200,000.
The Company also has an at-the-market offering program for its Series A Preferred Stock raising approximately $58.1 million after underwriting discounts and commissions but before expenses of approximately $193,000. All of the net proceeds from the Series A Preferred Stock offering were also invested in RMBS.
In April 2018, the Company initiated an at-the-market offering program (the “Preferred Series A ATM Program”) pursuant to which it may offer through one or more sales agents and sell from time to time up to $35.0 million of its Series A Preferred Stock at prices prevailing at the time, subject to volume and other regulatory limitations. TheDuring the three-month period ended March 31, 2022 and the year ended December 31, 2021, the Company did not issue and sell any shares of the Series A Preferred Stock during the three and six-month periods ended June 30, 2021 and the year ended December 31, 2020.
On June 4, 2018, the Company issued and sold 2,750,000 shares of its common stock. The underwriters subsequently exercised their optionpursuant to purchase an additional 338,857 shares for total proceeds of approximately $53.8 million after underwriting discounts and commissions but before expenses of approximately $265,000. All of the net proceeds were invested in RMBS.
In August 2018, the Company initiated an at-the-market offering program (the “Common Stock ATM Program” and, together with the Preferred Series A ATM Program, the “ATM Programs”)) pursuant to which it may offer through one or more sales agents and sell from time to time up to $50.0 million of our common stock at prices prevailing at the time, subject to volume and other regulatory limitations. The Company did not issue and sell any common stock under the Common Stock ATM Program during the three and six-month periods ended June 30, 2021 and the year ended December 31, 2020.Program.
On February 11, 2019, the Company issued and sold 1,800,000 shares of its Series B Preferred Stock. The underwriters subsequently exercised their option to purchase an additional 200,000 shares for total proceeds of approximately $48.4 million after underwriting discounts and commissions but before expenses of approximately $285,000. The net proceeds from the Series B Preferred Stock offering were invested in RMBS and MSRs.
In September 2019, the Company initiated a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of its common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. During the threethree-month period ended March 31, 2022 and six-month periodsthe year ended June 30,December 31, 2021, the Company did not repurchase any common stock pursuant to the repurchase program. During the year ended December 31, 2020, the Company repurchased 142,531 shares of its common stock pursuant to the repurchase program for approximately $1.8 million.
A significant portionEffects of COVID-19 on the paydowns of the RMBS acquired as a result of these equity offerings have been deployed into the acquisition of MSRs. The Company may also sell certain of these RMBS and deploy the net proceeds from such sales to the extent necessary to fund the purchase price of MSRs.
Recent Developments
The COVID-19 pandemic continues to take its tollcreate substantial uncertainty for government policy makers and the Federal Reserve Board with consequent effects on the public health and the economy in the United States. The rollout ofWhile the available vaccineseconomy has had positive effects on reopening the economy. However,largely reopened, the increased presence of highly contagious variants, of the virus has added toexacerbated supply chain issues that arose during the substantial uncertainty regarding the full and permanent reopeningshutdown of the economy. Forbearancevarious economies. Certain forbearance programs and prohibitions on foreclosures have been extended while others have expired adding to the uncertainty.concern of the consequences once all such programs end. As of June 30, 2021, 3.0%March 31, 2022, 1.3% of borrowers on loans underlying the MSRs owned by Aurora are reflected as being in an active forbearance program, with 6.8%10.6% of those borrowers continuing to make their regular scheduled monthly payment. The Company continues On March 16, 2022, the Federal Reserve raised the federal funds rate to maintain an elevated levela range of unrestricted cash duebetween 0.25% and 0.5% and signaled that a series of rate increases is likely to follow over the course of the year. In March, the Federal Reserve also ended its monthly asset purchases, including its purchases of Agency RMBS. With these actions, the Federal Reserve reversed its policy stance from the highly accommodative polices it adopted in 2020 in response to the continuing uncertainty regardingmacro-economic effects of the economy. Based on information currently availableCOVID-19 pandemic. In response to the Company,COVID-19 pandemic, the Company continuesFederal Reserve adopted a policy of quantitative easing whereby it purchased each month significant amounts of U.S. Treasury securities and Agency RMBS. The Federal Reserve also reduced the federal funds rate target to believe0 to 0.25 percent, established a series of emergency lending programs, reduced the discount rate and encouraged depository institutions to borrow from the discount window, and took regulatory actions to ease capital and liquidity requirements at depository institutions. The purpose of these actions was to stabilize financial markets and reduce both interest rates generally and the spread between long-term and short-term interest rates. The Federal Reserve’s balance sheet increased by more than $4.5 trillion to nearly $9 trillion, including $2.5 trillion in Agency RMBS. Due to the reduction in interest rates, prepayment speeds and mortgage refinancing activity increased. The Federal Reserve took similar actions during the 2008 financial crisis. The ending of the Federal Reserve’s highly accommodative polices and initiation of a series of increases in the federal funds rate will likely result in higher interest rates across asset classes, including for Agency RMBS. These actions also may decrease spreads on interest rates, reducing our net interest income. They may also negatively impact our results as we have certain assets and liabilities that itare sensitive to changes in interest rates. In addition, lower net interest income resulting from higher rates is expected to be partially offset by lower prepayments which extends the length of cash flows from the MSRs and slows the premium amortization on the RMBS portfolio. Any benefit we expect to receive from lower prepayments on the mortgages underlying our MSRS and RMBS could be offset by increased volatility in the market and increased hedging costs attributable to such volatility.
We cannot predict or control the impact future actions by the Federal Reserve will be ablehave on our business. Accordingly, future actions by the Federal Reserve could have a material and adverse effect on our business, financial condition and results of operations and our ability to satisfy all of its servicing obligations in 2021.pay distributions to our stockholders.
Factors Impacting our Operating Results
Our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of discounts. Our net income includes the actual interest payments we receive on our RMBS, the net servicing fees we receive on our MSRs and the accretion/amortization of any purchase discounts/premiums. Changes in various factors such as market interest rates, prepayment speeds, estimated future cash flows, servicing costs and credit quality could affect the amount of premium to be amortized or discount to be accreted into interest income for a given period. Prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlyunderlie the MSRs held by Aurora or the non-Agency RMBS held in our portfolio. Set forth below is the positive net spread between the yield on RMBS and our costs of funding those assets at the end of each of the quarters indicated below:
Average Net Yield Spread at Period End
Quarter Ended | | Average Asset Yield | | | Average Cost of Funds | | | Average Net Interest Rate Spread | | June 30, 2021 | | | 2.94 | % | | | 0.62 | % | | | 2.32 | % | March 31, 2021 | | | 3.04 | % | | | 0.53 | % | | | 2.52 | % | December 31, 2020 | | | 3.05 | % | | | 0.59 | % | | | 2.46 | % | September 30, 2020 | | | 3.17 | % | | | 0.63 | % | | | 2.54 | % |
Quarter Ended | | Average Asset Yield | | | Average Cost of Funds | | | Average Net Interest Rate Spread | | March 31, 2022 | | | 2.98 | % | | | 0.49 | % | | | 2.49 | % | December 31, 2021 | | | 2.93 | % | | | 0.62 | % | | | 2.31 | % | September 30, 2021 | | | 2.94 | % | | | 0.63 | % | | | 2.31 | % | June 30, 2021 | | | 2.94 | % | | | 0.62 | % | | | 2.32 | % |
The Average Cost of Funds also includes the benefits of related swaps.
Changes in the Market Value of Our Assets
We hold our Servicing Related Assets as long-term investments. Our MSRs are carried at their fair value with changes in their fair value recorded in other income or loss in our consolidated statements of income (loss). Those values may be affected by events or headlines that are outside of our control, such as the COVID-19 pandemic and other events impacting the U.S. or global economy generally or the U.S. residential market specifically, and events or headlines impacting the parties with which we do business. See “Part I, Item 1A. Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
Our RMBS are carried at their fair value, as available-for-sale in accordance with ASC 320, Investments – Debt and Equity Securities. Beginning on January 1, 2020, upon adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses, weWe evaluate the cost basis of our RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security’s cost basis is considered impaired. If we determine that we intend to sell the security or it is more likely than not that we will be required to sell before recovery, we recognize the difference between the fair value and amortized cost as a loss in the consolidated statements of income (loss). If we determine we do not intend to sell the security or it is not more likely than not we will be required to sell the security before recovery, we must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we perform a qualitative assessment around whether a credit loss exists and if necessary, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant” would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss). If it is determined as of the financial reporting date that all or a portion of a security’s cost basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security’s cost basis. This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, available-for-sale, net in the consolidated statements of income (loss).
Impact of Changes in Market Interest Rates on Our Assets
The value of our assets may be affected by prepayment ratesspeeds on mortgage loans. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance (“UPB”) of their loans or how quickly loans are otherwise liquidated or charged off. Generally, in a declining interest rate environment, prepayment speeds tend to increase. Conversely, in an increasing interest rate environment, prepayment speeds tend to decrease. When we acquire Servicing Related Assets or RMBS, we anticipate that the underlying mortgage loans will prepay at a projected rate generating an expected cash flow (in the case of Servicing Related Assets) and yield. If we purchase assets at a premium to par value and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on our assets may reduce the expected yield on such assets because we will have to amortize the related premium on an accelerated basis. In addition, we will have to reinvest the greater amounts of prepayments in that lower rate environment, thereby affecting future yields on our assets. If we purchase assets at a discount to par value, and borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments may reduce the expected yield on assets because we will not be able to accrete the related discount as quickly as originally anticipated. If prepayment speeds are significantly greater than expected, the fair value of the Servicing Related Assets could be less than their fair value as previously reported on our consolidated balance sheets. Such a reduction in the fair value of the Servicing Related Assets would have a negative impact on our book value. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from the Servicing Related Assets, and we could receive substantially less than what we paid for such assets. Our balance sheet, results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of, or cash flows from, the Servicing Related Assets as interest rates change.
A slower than anticipated rate of prepayment due to an increase in market interest rates also will cause the life of the related RMBS to extend beyond that which was projected. As a result, we would have an asset with a lower yield than current investments for a longer period of time. In addition, if we have hedged our interest rate risk, extension may cause the security to be outstanding longer than the related hedge, thereby reducing the protection intended to be provided by the hedge.
Voluntary and involuntary prepayment rates may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of, or natural disasters affecting, the area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors, none of which can be predicted with any certainty.
We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers. Under these agreements, the subservicer attempts to refinance specified mortgage loans. The subservicer sells the new mortgage loan to the applicable Agency, transfers the related MSR to Aurora and then subservices the new mortgage loan on behalf of Aurora. See “Part I, Item 1. Notes to Consolidated Financial Statements—Note 7. Transactions with Related Parties” for information regarding Aurora’s recapture agreements.
With respect to our business operations, increases in interest rates, in general, may over time cause:
the interest expense associated with our borrowings to increase; the value of our assets to fluctuate; the coupons on any adjustable-rate and hybrid RMBS we may own to reset, although on a delayed basis, to higher interest rates; prepayments on our RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and an increase in the value of any interest rate swap agreements we may enter into as part of our hedging strategy.
Conversely, decreases in interest rates, in general, may over time cause:
prepayments on our RMBS to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts; the interest expense associated with our borrowings to decrease; the value of our assets to fluctuate; a decrease in the value of any interest rate swap agreements we may enter into as part of our hedging strategy; and coupons on any adjustable-rate and hybrid RMBS assets we may own to reset, although on a delayed basis, to lower interest rates. Effects of Spreads on our Assets
The spread between the yield on our assets and our funding costs affects the performance of our business. Wider spreads imply the potential for greater income on new asset purchases but may have a negative impact on our stated book value. Wider spreads may also negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply the potential for lower income on new asset purchases but may have a positive impact on stated book value of our existing assets. In this case, we may be able to reduce the amount of collateral required to secure borrowings.
Credit Risk
We are subject to varying degrees of credit risk in connection with our assets. Although we expect relatively low credit risk with respect to our portfolios of Agency RMBS, we are subject to the credit risk of borrowers under the loans backing any CMOs that we may own and to the credit enhancements built into the CMO structure. We also are subject to the credit risk of the borrowers under the mortgage loans underlying the MSRs that Aurora owns. Through loan level due diligence, we attempt to mitigate this risk by seeking to acquire high quality assets at appropriate prices given anticipated and unanticipated losses. We also conduct ongoing monitoring of acquired MSRs. Nevertheless, unanticipated credit losses could occur which could adversely impact our operating results.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with US GAAP, which requires the use of estimates that involve the exercise of judgment and the use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we apply with respect to our operations. Our most critical accounting policies involve decisions and assessments that could affect our reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, as well as our reported amounts of revenues and expenses. We believe that the decisions and assessments upon which our financial statements are based were reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates may be expandedchange over time as we diversify our portfolio. The material accounting policies and estimates that we expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. For additional information on our material accounting policies and estimates, see “Item 1. Consolidated Financial Statements – Note 2. Basis of Presentation and Significant Accounting Policies”.
Classification of InvestmentInvestments in Securities and Impairment of Financial Instruments
ASC 320, Investments – Debt and Equity Securities, requires that at the time of purchase, we designate a securityWe have elected to classify our investments in RMBS as either trading, available-for-sale, or held-to-maturity depending on our ability and intent to hold such security to maturity. Securities available-for-sale will be reported at fair value, while securities held-to-maturity will be reported at amortized cost.available-for-sale. Although we may hold most of our securities until maturity, we may, from time to time, sell any of our securities as part of our overall management of our asset portfolio. Accordingly, we elect to classify all of our RMBS as available-for-sale. All assets classified as available-for-sale will be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. See “–Fair Valued Assets and Liabilities.”
Beginning on January 1, 2020, upon adoption of ASU 2016-13, Financial Instruments-Credit Losses, we evaluate the cost basisvalue of our investments in RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When theis determined based upon prices obtained from third-party pricing providers. Changes in underlying assumptions used in estimating fair value of a security is less than its amortized cost basis as ofimpact the balance sheet date, the security’s cost basis is considered impaired. If we determine that we intend to sell the security or it is more likely than not that we will be required to sell before recovery, we recognize the difference between the fair value and amortized cost as a loss in the consolidated statements of income (loss). If we determine we do not intend to sell the security or it is not more likely than not we will be required to sell the security before recovery, we must evaluate the decline in the faircarrying value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we perform a qualitative assessment around whether a credit loss exists and if necessary, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant” would use and typically include assumptions related to fluctuationsinvestments in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses,RMBS as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss). If it is determined as of the financial reporting date that all or a portion of a security’s cost basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security’s cost basis. This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, available-for-sale, net in the consolidated statements of income (loss).
Fair Valued Assets and Liabilities
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:
| • | Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
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| • | Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.
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| • | Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
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The level in the fair value hierarchy within which the entirety of a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. We have used Level 2 for our RMBSs, our derivative assets and liabilities and Level 3 for our Servicing Related Assets.
When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we will consult independent pricing services or third-party broker quotes, provided that there is no ongoing material event that affects the issuer of the securities being valued or the market. If there is such an ongoing event, or if quoted market prices are not available, we will determine the fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates.
Investments in MSRs
We have elected the fair value option to record our investments in MSRs in order to provide users of our consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs. Under this election, we record a valuation adjustment on our investments in MSRs on a quarterly basis to recognize the changes in fair value of our MSRs in net income as described below. As an owner and manager of MSRs, we may be obligated to fund advances of principal and interest payments due to third-party owners of the underlying loans, but not yet received from the individual borrowers. These advances are reported as servicing advances within the “Receivables and other assets” line item on the consolidated balance sheets. Although transactions in MSRs are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). Changes in the fair value of MSRs as well as servicing fee income and servicing expenses are reported on the consolidated statements of income (loss). In determining the valuation of MSRs, management uses internally developed models that are primarily based on observable market-based inputs but which also include unobservable market data inputs.their yield. For additional information on our assessment of credit-related impairment and our fair value methodology, see “Part I, Item“Item 1. Consolidated Financial Statements–Statements – Note 4. Investments in RMBS and Note 9. Fair Value.”Value”.
Revenue Recognition on Investments in MSRs53
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