UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20212022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission File Number: 001-39964
Home Point Capital Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | | 90-1116426 | |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
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2211 Old Earhart Road, Suite 250 Ann Arbor, Michigan | | | 48105 | |
(Address of Principal Executive Offices) | | | (Zip Code) | |
(888) 616-6866
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.0000000072 per share | | HMPT | | The Nasdaq Stock Market LLC (The Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 9, 2021,5, 2022, the registrant had 139,491,635138,381,757 shares of common stock, par value $0.0000000072 per share, outstanding.
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION | |
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PART II—OTHER INFORMATION | |
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Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains certain “forward-looking statements,” as that term is defined inwithin the U.S. federal securities laws, includingmeaning of Section 27A of the Private Securities Litigation Reform Act of 1995. These1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to, statements other than statements of historical facts contained in this Report, including among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs, the industry in which we operate and other similar matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should” and the negative of these terms or other comparable terminology often identify forward-looking statements. These forward-lookingForward-looking statements which are based on currently available information, operating plans, and projections about future events and trends, are not guarantees of future performance, are based upon assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, which was filed on March 12, 202117, 2022 (our “2020“2021 Annual Report”). Factors, risks, and uncertainties that could cause actual outcomes and results to be materially different from those contemplated by forward-looking statements include, among others:
•the spread of the COVID-19 outbreak and severe disruptions in the U.S. and global economy and financial markets it has caused;
•our reliance on our financing arrangements to fund mortgage loans and otherwise operate our business;
•the dependence of our loan origination and servicing revenues on macroeconomic and U.S. residential real estate market conditions;
•the requirement to repurchase mortgage loans or indemnify investors if we breach representations and warranties;
•counterparty risk;
•the requirement to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances;
•risks related to any subservicer;
•competition for mortgage assets that may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns;
•our ability to continue to grow our loan origination business or effectively manage significant increases in our loan production volume;
•difficult conditions or disruptions in the mortgage-backed securities (“MBS”), mortgage, real estate and financial markets;
•competition in the industry in which we operate;
•our successability to acquire loans and growth ofsell the resulting MBS in the secondary markets on favorable terms in our production and servicing activities and the dependence upon activities;
•our ability to adapt to and implement technological changes;
•the effectiveness of our risk management efforts;
•our ability to detect misconduct and fraud;
•any failure to attract and retain a highly skilled workforce, including our senior executives;
•our ability to obtain, maintain, protect and enforce our intellectual property;
•any cybersecurity risks, cyber incidents and technology failures;
•material changes to the laws, regulations or practices applicable to reverse mortgage programs operated by the Federal Housing Administration (“FHA”) and the U.S. Department of Housing and Urban Development;
•our vendor relationships;
•our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements;
•risks and uncertainties associated with litigation, including any employment intellectual property, consumer protection, class action and other litigation matters, and related unfavorable publicity;
•exposure to new risks and increased costs as a result of initiating new business activities or strategies or significantly expanding existing business activities or strategies;
•any failure to comply with the significant amount of regulation applicable to our investment management subsidiary;
•the impact of changes in political or economic stability or inby government policies on our material vendors with operations in India;
•our ability to fully utilize our net operating loss (“NOL”) and other tax carryforwards;
•any challenge by the Internal Revenue Service of the amount, timing and/or use of our NOL carryforwards;
•possible changes in legislation and the effect on our ability to use the tax benefits associated with our NOL carryforwards;
•the impact of other changes in tax laws;
•the impact of interest rate fluctuations;
•risks associated with hedging against interest rate exposure;
•the impact of any prolonged economic slowdown, recession or declining real estate values;
•risks associated with financing our assets with borrowings;
•risks associated with a decrease in value of our collateral;
•the dependence of our operations on access to our financing arrangements, which are mostly uncommitted;
•risks associated with the financial and restrictive covenants included in our financing agreements;
•our exposure to volatilityrisks associated with changes in the London Inter-Bank Offered Rate;Rate reporting practices and the use of alternative reference rates;
•our ability to raise the debt or equity capital required to finance our assets and maintain and grow our business;
•risks associated with higher risk loans that we service;
•risks associated with derivative financial instruments;
•our ability to foreclose on our mortgage assets in a timely manner or at all;
•our ability to obtain and/or maintain licensescomply with continually changing federal, state and other approvals in those jurisdictions where required to conduct our business;local laws and regulations;
•the impact of revised rules and regulations and enforcement of existing rules and regulations by the Consumer Financial Protection Bureau (the “CFPB”);Bureau;
•legislativethe impact of revised rules and regulations and enforcement of existing rules and regulations by state regulatory agencies;
•our ability to comply with the Government-Sponsored Enterprises (“GSE”), FHA, U.S. Department of Veterans Affairs (“VA”) and U.S. Department of Agriculture (“USDA”) guidelines and changes that impact the mortgage loan industryin these guidelines or housing market;GSE and Government National Mortgage Association (“Ginnie Mae”) guarantees;
•changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as Ginnie Mae, the Government National Mortgage Association, the Federal Housing AdministrationFHA or the U.S. Department of Veterans Affairs,VA, the U.S. Department of Agriculture,USDA, or Government-Sponsored EnterprisesGSEs such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or such changes that increase the cost of doing business with such entities;
•our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;
•our ability to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders;applicable to our investment management subsidiary;
•the CFPB, and its issued and future rules and the enforcement thereof;
•changes in government supportimpact of homeownership;
•changes in government or government sponsored home affordability programs;
•changes in governmental regulations, accounting treatment, tax rates and similar matters;private legal proceedings;
•risks associated with our acquisition of mortgage servicing rights;
•the impact of our counterparties terminating our servicing rights under which we conduct servicing activities;
•risks associated with higher risk loans that we service;
•our ability to foreclose on our mortgage assets in a timely manner or at all; and
•the effects of the COVID-19 pandemic on our failure to deal appropriately with issues that may give rise to reputational risk.business.
Many of the important factors that will determine these results are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Report. Except as otherwise required by law, we do not assume any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. You should refer to the risks and uncertainties listed under the heading “Risk Factors” in our 20202021 Annual Report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (“SEC”), for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.
Unless the context otherwise indicates, any reference in this Report to “Home Point,” “our Company,” “the Company,” “us,” “we” and “our” refers to Home Point Capital Inc. and its subsidiaries.
Website and Social Media Disclosure
We use our website (www.investors.homepoint.com) and our corporate Facebook, LinkedIn, and Twitter accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this Report.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
HOME POINT CAPITAL INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
| | | | | | | | | | | | | (Unaudited) | |
| | June 30, 2021 (unaudited) | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Assets: | Assets: | | | | Assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 209,880 | | | $ | 165,230 | | Cash and cash equivalents | $ | 135,843 | | | $ | 170,987 | |
Restricted cash | Restricted cash | 42,994 | | | 31,663 | | Restricted cash | 27,065 | | | 36,803 | |
Cash and cash equivalents and Restricted cash | Cash and cash equivalents and Restricted cash | 252,874 | | | 196,893 | | Cash and cash equivalents and Restricted cash | 162,908 | | | 207,790 | |
Mortgage loans held for sale (at fair value) | Mortgage loans held for sale (at fair value) | 5,412,452 | | | 3,301,694 | | Mortgage loans held for sale (at fair value) | 2,018,640 | | | 5,107,161 | |
Mortgage servicing rights (at fair value) | Mortgage servicing rights (at fair value) | 1,267,253 | | | 748,457 | | Mortgage servicing rights (at fair value) | 1,419,105 | | | 1,525,103 | |
Property and equipment, net | Property and equipment, net | 23,350 | | | 21,710 | | Property and equipment, net | 18,039 | | | 21,892 | |
Accounts receivable, net | Accounts receivable, net | 177,360 | | | 152,845 | | Accounts receivable, net | 176,995 | | | 129,092 | |
Derivative assets | Derivative assets | 125,217 | | | 334,323 | | Derivative assets | 59,280 | | | 84,385 | |
Goodwill and intangibles | 10,789 | | | 10,789 | | |
GNMA loans eligible for repurchase | 988,218 | | | 2,524,240 | | |
Goodwill | | Goodwill | 10,789 | | | 10,789 | |
Government National Mortgage Association loans eligible for repurchase | | Government National Mortgage Association loans eligible for repurchase | 117,092 | | | 65,237 | |
Assets held for sale | | Assets held for sale | 50,748 | | | 63,664 | |
Other assets | Other assets | 112,143 | | | 87,622 | | Other assets | 40,824 | | | 43,228 | |
Total assets | Total assets | $ | 8,369,656 | | | $ | 7,378,573 | | Total assets | $ | 4,074,420 | | | $ | 7,258,341 | |
Liabilities and Shareholders’ Equity: | Liabilities and Shareholders’ Equity: | | | | Liabilities and Shareholders’ Equity: | | | |
Liabilities: | Liabilities: | | Liabilities: | |
Warehouse lines of credit | Warehouse lines of credit | $ | 5,057,590 | | | $ | 3,005,415 | | Warehouse lines of credit | $ | 1,910,395 | | | $ | 4,718,658 | |
Term debt and other borrowings, net | Term debt and other borrowings, net | 1,166,538 | | | 454,022 | | Term debt and other borrowings, net | 845,531 | | | 1,226,524 | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | 146,138 | | | 167,532 | | Accounts payable and accrued expenses | 106,005 | | | 138,193 | |
GNMA loans eligible for repurchase | 988,218 | | | 2,524,240 | | |
Government National Mortgage Association loans eligible for repurchase | | Government National Mortgage Association loans eligible for repurchase | 117,092 | | | 65,237 | |
Deferred tax liabilities | | Deferred tax liabilities | 214,871 | | | 229,752 | |
Derivative liabilities | | Derivative liabilities | 60,309 | | | 26,736 | |
Other liabilities | Other liabilities | 301,844 | | | 299,890 | | Other liabilities | 87,815 | | | 76,588 | |
Total liabilities | Total liabilities | 7,660,328 | | | 6,451,099 | | Total liabilities | 3,342,018 | | | 6,481,688 | |
Commitments and Contingencies (Note 9) | 0 | | 0 | |
Note 9 – Commitments and Contingencies | | Note 9 – Commitments and Contingencies | 0 | | 0 |
| Shareholders’ Equity: | Shareholders’ Equity: | | Shareholders’ Equity: | |
Preferred stock (Authorized shares: 250,000,000; NaN issued and outstanding, par value $0.0000000072 per share) | 0 | | | 0 | | |
Common stock (Authorized shares: 1,000,000,000; 139,487,097 shares issued and outstanding, par value $0.0000000072 per share) | 0 | | | 0 | | |
Preferred stock (250,000,000 authorized shares, NaN issued and outstanding, $0.0000000072 par value per share) | | Preferred stock (250,000,000 authorized shares, NaN issued and outstanding, $0.0000000072 par value per share) | — | | | — | |
Common stock (1,000,000,000 authorized shares, 138,380,272 and 139,326,953 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively, $0.0000000072 par value per share) | | Common stock (1,000,000,000 authorized shares, 138,380,272 and 139,326,953 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively, $0.0000000072 par value per share) | — | | | — | |
Additional paid-in capital | Additional paid-in capital | 520,505 | | | 519,510 | | Additional paid-in capital | 511,675 | | | 523,811 | |
Retained earnings | Retained earnings | 188,823 | | | 407,964 | | Retained earnings | 220,727 | | | 252,842 | |
Total shareholders' equity | 709,328 | | | 927,474 | | |
Total liabilities and shareholders' equity | $ | 8,369,656 | | | $ | 7,378,573 | | |
Total shareholders’ equity | | Total shareholders’ equity | 732,402 | | | 776,653 | |
Total liabilities and shareholders’ equity | | Total liabilities and shareholders’ equity | $ | 4,074,420 | | | $ | 7,258,341 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
1
HOME POINT CAPITAL INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited – dollars in thousands, except share and per share amounts)
(unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
Gain on loans, net | Gain on loans, net | $ | 75,029 | | | $ | 356,871 | | | $ | 376,257 | | | $ | 459,434 | | Gain on loans, net | $ | 13,234 | | | $ | 75,029 | | | $ | 58,638 | | | $ | 376,257 | |
Loan fee income | Loan fee income | 39,500 | | | 20,394 | | | 83,615 | | | 32,425 | | Loan fee income | 15,255 | | | 39,500 | | | 35,159 | | | 83,615 | |
| Interest income | Interest income | 34,648 | | | 11,811 | | | 60,225 | | | 27,660 | | Interest income | 27,533 | | | 34,648 | | | 54,610 | | | 60,225 | |
Interest expense | Interest expense | (44,136) | | | (14,373) | | | (77,071) | | | (30,286) | | Interest expense | (28,920) | | | (44,136) | | | (62,015) | | | (77,071) | |
Interest expense, net | Interest expense, net | (9,488) | | | (2,562) | | | (16,846) | | | (2,626) | | Interest expense, net | (1,387) | | | (9,488) | | | (7,405) | | | (16,846) | |
Loan servicing fees | Loan servicing fees | 85,584 | | | 42,309 | | | 155,922 | | | 85,555 | | Loan servicing fees | 62,872 | | | 85,584 | | | 143,936 | | | 155,922 | |
Change in fair value of mortgage servicing rights, net | (106,905) | | | (72,249) | | | (94,057) | | | (163,776) | | |
Change in fair value of mortgage servicing rights | | Change in fair value of mortgage servicing rights | (29,887) | | | (106,905) | | | (12,704) | | | (94,057) | |
Other income | Other income | 652 | | | 261 | | | 1,453 | | | 1,641 | | Other income | 9,921 | | | 652 | | | 10,555 | | | 1,453 | |
Total revenue, net | Total revenue, net | 84,372 | | | 345,024 | | | 506,344 | | | 412,653 | | Total revenue, net | 70,008 | | | 84,372 | | | 228,179 | | | 506,344 | |
Expenses: | Expenses: | | | | | | | | Expenses: | | | | | | | |
Compensation and benefits | Compensation and benefits | 127,296 | | | 81,335 | | | 280,938 | | | 134,285 | | Compensation and benefits | 75,601 | | | 127,296 | | | 165,033 | | | 280,938 | |
Loan expense | Loan expense | 17,483 | | | 7,624 | | | 35,178 | | | 12,953 | | Loan expense | 6,969 | | | 17,483 | | | 15,984 | | | 35,178 | |
Loan servicing expense | Loan servicing expense | 7,507 | | | 8,307 | | | 15,600 | | | 16,260 | | Loan servicing expense | 7,121 | | | 7,507 | | | 12,867 | | | 15,600 | |
Production technology | Production technology | 8,169 | | | 5,049 | | | 17,455 | | | 8,162 | | Production technology | 4,343 | | | 8,170 | | | 9,208 | | | 17,455 | |
General and administrative | General and administrative | 26,549 | | | 11,868 | | | 52,786 | | | 22,768 | | General and administrative | 16,969 | | | 26,549 | | | 36,640 | | | 52,786 | |
Depreciation and amortization | Depreciation and amortization | 2,350 | | | 1,427 | | | 5,111 | | | 2,926 | | Depreciation and amortization | 2,627 | | | 2,350 | | | 5,314 | | | 5,111 | |
Other expenses | Other expenses | 8,638 | | | 2,756 | | | 17,973 | | | 4,994 | | Other expenses | 5,772 | | | 8,637 | | | 11,068 | | | 17,973 | |
Total expenses | Total expenses | 197,992 | | | 118,366 | | | 425,041 | | | 202,348 | | Total expenses | 119,402 | | | 197,992 | | | 256,114 | | | 425,041 | |
Income (loss) before income tax | (113,620) | | | 226,658 | | | 81,303 | | | 210,305 | | |
Income tax expense (benefit) | (27,209) | | | 59,501 | | | 22,908 | | | 56,012 | | |
Income from equity method investments | 13,198 | | | 1,864 | | | 17,361 | | | 4,180 | | |
Total net income (loss) | $ | (73,213) | | | $ | 169,021 | | | $ | 75,756 | | | $ | 158,473 | | |
(Loss) income before income tax | | (Loss) income before income tax | (49,394) | | | (113,620) | | | (27,935) | | | 81,303 | |
Income tax benefit (expense) | | Income tax benefit (expense) | 14,121 | | | 27,209 | | | 9,798 | | | (22,908) | |
(Loss) income from equity method investment | | (Loss) income from equity method investment | (9,144) | | | 13,198 | | | (14,416) | | | 17,361 | |
Net (loss) income | | Net (loss) income | $ | (44,417) | | | $ | (73,213) | | | $ | (32,553) | | | $ | 75,756 | |
| Earnings (loss) per share: | | |
(Loss) earnings per share: | | (Loss) earnings per share: | |
Basic | Basic | $ | (0.53) | | | $ | 1.22 | | | $ | 0.54 | | | $ | 1.19 | | Basic | $ | (0.32) | | | $ | (0.53) | | | $ | (0.23) | | | $ | 0.54 | |
Diluted | Diluted | (0.53) | | | $ | 1.21 | | | $ | 0.54 | | | $ | 1.19 | | Diluted | $ | (0.32) | | | $ | (0.53) | | | $ | (0.23) | | | $ | 0.54 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
HOME POINT CAPITAL INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited – dollars in thousands, except share amounts)
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Common Stock | | Additional Paid in Capital | | Treasury Stock | | Retained Earnings | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Beginning balance, January 1, 2022 | 139,326,953 | | | $ | — | | | $ | 523,811 | | | $ | — | | | $ | 252,842 | | | $ | 776,653 | |
Stock repurchase | (461,690) | | | — | | | — | | | (1,513) | | | — | | | (1,513) | |
Distributions to shareholders | — | | | — | | | — | | | — | | | (5,575) | | | (5,575) | |
Employee stock purchases (option exercise) | 97,223 | | | — | | | 122 | | | — | | | — | | | 122 | |
Equity-based compensation | — | | | — | | | 1,706 | | | — | | | — | | | 1,706 | |
Net income | — | | | — | | | — | | | — | | | 11,864 | | | 11,864 | |
Balance at March 31, 2022 | 138,962,486 | | | $ | — | | | $ | 525,639 | | | $ | (1,513) | | | $ | 259,131 | | | $ | 783,257 | |
Stock repurchase | (718,106) | | | — | | | — | | | (2,261) | | | — | | | (2,261) | |
Retirement of treasury stock | — | | | — | | | (15,338) | | | 3,774 | | | 11,564 | | | — | |
Distributions to shareholders | — | | | — | | | — | | | — | | | (5,551) | | | (5,551) | |
Employee stock purchases (option exercise) | 11,114 | | | — | | | (33) | | | — | | | — | | | (33) | |
Equity-based compensation (restricted stock units vesting) | 124,778 | | | — | | | 1,407 | | | — | | | — | | | 1,407 | |
Net loss | — | | | — | | | — | | | — | | | (44,417) | | | (44,417) | |
Ending balance, June 30, 2022 | 138,380,272 | | | $ | — | | | $ | 511,675 | | | $ | — | | | $ | 220,727 | | | $ | 732,402 | |
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| Common Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated Deficit) | | Total Shareholders’ Equity |
| Shares | | Amount | | | |
Beginning balance, March 31, 2020 | 138,860,103 | | | 0 | | | $ | 518,780 | | | $ | (55,097) | | | $ | 463,683 | |
| | | | | | | | | |
Stock based compensation | — | | | — | | | 253 | | | — | | | 253 | |
Net income | — | | | — | | | — | | | 169,021 | | | 169,021 | |
Ending balance, June 30, 2020 | 138,860,103 | | | 0 | | | $ | 519,033 | | | $ | 113,924 | | | $ | 632,957 | |
| | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated Deficit) | | Total Shareholders’ Equity |
| Shares | | Amount | | | |
Beginning balance, March 31, 2021 | 139,045,176 | | | 0 | | | $ | 520,261 | | | $ | 262,036 | | | $ | 782,297 | |
| | | | | | | | | |
| | | | | | | | | |
EE stock purchase (option exercise) | 441,921 | | | — | | | (1,503) | | | — | | | (1,503) | |
Stock based compensation | — | | | — | | | 1,747 | | | — | | | 1,747 | |
Net loss | — | | | — | | | — | | | (73,213) | | | (73,213) | |
Ending balance, June 30, 2021 | 139,487,097 | | | 0 | | | $ | 520,505 | | | $ | 188,823 | | | $ | 709,328 | |
| | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated Deficit) | | Total Shareholders’ Equity |
| Shares | | Amount | | | |
Beginning balance, December 31, 2019 | 138,860,103 | | | 0 | | | $ | 454,861 | | | $ | (44,549) | | | $ | 410,312 | |
Contributed capital | — | | | — | | | 63,773 | | | — | | | 63,773 | |
Stock based compensation | — | | | — | | | 399 | | | — | | | 399 | |
Net income | — | | | — | | | — | | | 158,473 | | | 158,473 | |
Ending balance, June 30, 2020 | 138,860,103 | | | 0 | | | $ | 519,033 | | | $ | 113,924 | | | $ | 632,957 | |
| | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated Deficit) | | Total Shareholders’ Equity |
| Shares | | Amount | | | |
Beginning balance, December 31, 2020 | 138,860,103 | | | 0 | | | $ | 519,510 | | | $ | 407,964 | | | $ | 927,474 | |
Contributed capital | — | | | — | | | — | | | 192 | | | 192 | |
Distribution to parent | — | | | — | | | — | | | (295,089) | | | (295,089) | |
EE stock purchase (option exercise) | 626,994 | | | — | | | (2,531) | | | — | | | (2,531) | |
Stock based compensation | — | | | — | | | 3,526 | | | — | | | 3,526 | |
Net income | — | | | — | | | — | | | 75,756 | | | 75,756 | |
Ending balance, June 30, 2021 | 139,487,097 | | | 0 | | | $ | 520,505 | | | $ | 188,823 | | | $ | 709,328 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Retained Earnings | | Total Shareholders’ Equity |
| Shares | | Amount | | | |
Beginning balance, January 1, 2021 | 138,860,103 | | | $ | — | | | $ | 519,510 | | | $ | 407,964 | | | $ | 927,474 | |
Contributed capital | — | | | — | | | — | | | 192 | | | 192 | |
Distributions to parent | — | | | — | | | — | | | (295,089) | | | (295,089) | |
Employee stock purchases (option exercise) | 185,073 | | | — | | | (1,028) | | | — | | | (1,028) | |
Equity-based compensation | — | | | — | | | 1,779 | | | — | | | 1,779 | |
Net income | — | | | — | | | — | | | 148,969 | | | 148,969 | |
Balance at March 31, 2021 | 139,045,176 | | | $ | — | | | $ | 520,261 | | | $ | 262,036 | | | $ | 782,297 | |
Employee stock purchases (option exercise) | 441,921 | | | — | | | (1,503) | | | — | | | (1,503) | |
Equity-based compensation | — | | | — | | | 1,747 | | | — | | | 1,747 | |
Net loss | — | | | — | | | — | | | (73,213) | | | (73,213) | |
Ending balance, June 30, 2021 | 139,487,097 | | | $ | — | | | $ | 520,505 | | | $ | 188,823 | | | $ | 709,328 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
HOME POINT CAPITAL INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited – dollars in thousands)
(unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Operating activities: | | | |
Net income | $ | 75,756 | | | $ | 158,473 | |
Adjustments to reconcile net income to cash used in operating activities: | | | |
Depreciation | 5,111 | | | 2,135 | |
Amortization of intangible assets | 0 | | | 792 | |
Amortization of debt issuance costs | 1,620 | | | 342 | |
Gain on loans, net | (376,257) | | | (459,434) | |
Provision for representation and warranty reserve | 9,821 | | | 10,740 | |
Stock based compensation expense | 3,526 | | | 399 | |
Deferred income tax | 22,789 | | | 55,947 | |
Income from equity method investment | (17,361) | | | (4,180) | |
Origination of mortgage loans held for sale | (57,917,479) | | | (20,245,050) | |
Proceeds on sale and payments from mortgage loans held for sale | 55,578,192 | | | 20,303,654 | |
Change in fair value of mortgage servicing rights, net | 94,057 | | | 163,776 | |
Change in fair value of mortgage loans held for sale | 10,633 | | | (37,635) | |
Non-cash lease expense | 0 | | | 35 | |
Change in fair value of derivative assets | 209,106 | | | (203,514) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (24,515) | | | 12,687 | |
Other assets | (7,157) | | | 1,951 | |
Accounts payable and accrued expenses | (21,394) | | | 38,478 | |
Other liabilities | (30,659) | | | 23,909 | |
Net cash used in operating activities | (2,384,211) | | | (176,495) | |
| | | |
Investing activities: | | | |
Purchases of property and equipment, net of disposals | (6,751) | | | (5,707) | |
Purchases of mortgage servicing rights | (18,701) | | | 0 | |
Net cash used in investing activities | (25,452) | | | (5,707) | |
| | | |
Financing activities: | | | |
Proceeds from warehouse borrowings | 57,710,590 | | | 20,093,890 | |
Payments on warehouse borrowings | (55,658,415) | | | (19,804,563) | |
Proceeds from term debt borrowings | 1,140,000 | | | 22,600 | |
Payments on term debt borrowings | (375,000) | | | (60,000) | |
Proceeds from other borrowings | 65,000 | | | 64,500 | |
Payments on other borrowings | (105,000) | | | (103,500) | |
Payments of debt issuance costs | (14,103) | | | 0 | |
Employee stock purchases (option expense) | (2,531) | | | 0 | |
Capital contributions from parent | 192 | | | 63,773 | |
Distribution to parent | (295,089) | | | 0 | |
Net cash provided by financing activities | 2,465,644 | | | 276,700 | |
Net increase in cash, cash equivalents and restricted cash | 55,981 | | | 94,498 | |
Cash, cash equivalents and restricted cash at beginning of period | 196,893 | | | 81,731 | |
Cash, cash equivalents and restricted cash at end of period | $ | 252,874 | | | $ | 176,229 | |
Supplemental disclosure: | | | |
Cash paid for interest | $ | 53,267 | | | $ | 30,977 | |
Cash paid for taxes | $ | 268 | | | $ | 66 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Operating activities: | | | |
Net (loss) income | $ | (32,553) | | | $ | 75,756 | |
Adjustments to reconcile net (loss) income to cash used in operating activities: | | | |
Depreciation | 5,314 | | | 5,111 | |
Amortization of debt issuance costs | 1,660 | | | 1,620 | |
Gain on loans, net | (58,638) | | | (376,257) | |
Provision for representation and warranty reserve | 13,724 | | | 9,821 | |
Equity-based compensation expense | 3,113 | | | 3,526 | |
Deferred income tax (benefit) expense | (14,881) | | | 22,789 | |
Loss (income) from equity method investment | 14,416 | | | (17,361) | |
Distributions for mortgage loans held for sale | (22,568,858) | | | (57,917,479) | |
Proceeds from sale and payments of mortgage loans held for sale | 25,032,673 | | | 55,578,192 | |
Decrease in fair value of mortgage servicing rights | 12,704 | | | 94,057 | |
Decrease in fair value of mortgage loans held for sale | 113,594 | | | 10,633 | |
Decrease in fair value of derivative assets | 25,105 | | | 209,106 | |
Changes in operating assets and liabilities: | | | |
Decrease (increase) in accounts receivable, net | 10,620 | | | (24,515) | |
Decrease (increase) in other assets | 2,404 | | | (7,157) | |
Decrease in accounts payable and accrued expenses | (40,455) | | | (21,394) | |
Increase (decrease) in other liabilities | 31,075 | | | (30,659) | |
Net cash provided by (used for) operating activities | 2,551,017 | | | (2,384,211) | |
Investing activities: | | | |
Purchases of property and equipment, net of disposals | (1,461) | | | (6,751) | |
Purchase of mortgage servicing rights | (17,833) | | | (18,701) | |
Proceeds from sale of mortgage servicing rights | 630,622 | | | — | |
Equity method investment | (1,500) | | | — | |
Net cash provided by (used for) investing activities | 609,828 | | | (25,452) | |
Financing activities: | | | |
Proceeds from warehouse borrowings | 24,046,240 | | | 57,710,590 | |
Payments on warehouse borrowings | (26,854,503) | | | (55,658,415) | |
Proceeds from term debt borrowings | 400,000 | | | 1,140,000 | |
Payments on term debt borrowings | (780,000) | | | (375,000) | |
Proceeds from other borrowings | 70,000 | | | 65,000 | |
Payments on other borrowings | (73,250) | | | (105,000) | |
Write off (payments of debt issuance costs),net | 597 | | | (14,103) | |
Employee stock purchases (option expense) | 89 | | | (2,531) | |
Common stock repurchases | (3,774) | | | — | |
Contributed capital from parent | — | | | 192 | |
Dividends paid to shareholders | (11,126) | | | — | |
Distributions to parent 1 | — | | | (295,089) | |
Net cash (used for) provided by financing activities | (3,205,727) | | | 2,465,644 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (44,882) | | | 55,981 | |
Cash, cash equivalents and restricted cash at beginning of period | 207,790 | | | 196,893 | |
Cash, cash equivalents and restricted cash at end of period | $ | 162,908 | | | $ | 252,874 | |
Supplemental disclosure: | | | |
Cash paid for interest | $ | 65,502 | | | $ | 53,267 | |
Cash received from tax refunds, net | $ | (1,951) | | | $ | (268) | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Amounts)
(unaudited)
Note 1 – Organization and Operations
Nature of Business
Home Point Capital Inc., a Delaware corporation (“HPC”, or the “Company”), through its subsidiaries, is a residential mortgage originator and servicer with a business model focused on growing originations by leveraging a network of partner relationships. The Company manages the customer experience throughrelationships and its in-house servicing operation and proprietary Home Ownership Platform.operation. The Company’s business operations are organized into the following 2 segments: (1) Origination and (2) Servicing. Home Point Financial Corporation (“HPF”), a New Jersey corporation (“HPF”),and a wholly owned subsidiary of the Company, originates, sells, and services residential real estate mortgage loans throughout the United States.States of America (“U.S.”). Home Point Asset Management LLC (“HPAM”), a Delaware limited liability company, (“HPAM”), is a wholly owned subsidiary of the Company and manages certain servicing assets. HPAM’s wholly owned subsidiary, Home Point Mortgage Acceptance Corporation (“HPMAC”), an Alabama Corporation, (“HPMAC”), services residential real estate mortgage loans. Home Point Corporation Insurance Agency LLC (“HPCIA”), a Michigan limited liability company, (“HPCIA” and together with HPF, HPAM, and HPMAC, the “wholly owned subsidiaries”), is a wholly owned subsidiary of the Company that brokers home owner insurance policies.
Both HPF and HPMAC are each an approved sellersellers and servicerservicers of one-to-four family first mortgages by the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and are each an approved issuerissuers by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) (collectively, the “Agencies”), and as such, HPF and HPMAC must meet certain Agency eligibility requirements.
Note 2 – Basis of Presentation and SignificantNew Accounting PoliciesPronouncements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The condensed consolidated financial statements include the financial statements of HPC and all its wholly owned subsidiaries. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with Article 10 of Regulation S-X promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The consolidated balance sheet as of December 31, 20202021 and related notes were derived from the audited consolidated financial statements but do not include all disclosures required by U.S. GAAP for complete financial statements. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments) necessary to fairly state, in all material respects, the Company’s financial position as of June 30, 2021 and2022, its results of operations for the three and six months ended June 30, 20212022 and 20202021, and its cash flows for the six months ended June 30, 20212022 and 2020.2021. The unaudited condensed consolidated financial information should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020.2021.
All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
The Company reclassified gains and losses on MSR sales from Other income to the Change in fair value of mortgage servicing rights on the consolidated statement of operations. Prior periods have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires HPC to make estimates and assumptions about future events that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.
Examples of reported amounts that rely on significant estimates include mortgage loans held for sale, mortgage servicing rights (“MSRs”), servicing advances reserve, derivative assets, derivative liabilities, assets acquired and liabilities assumed in business combinations, reserves for mortgage repurchases and indemnifications, and deferred tax valuation allowance considerations. Significant estimates are also used in determining the recoverability and fair value of property and equipment goodwill, and intangible assets.
Stock Split
On January 21, 2021, the Company effected a stock split of its outstanding common stock pursuant to which the 100 outstanding shares were split into 1,380,601.11 shares each, for a total of 138,860,103 shares of outstanding common stock. As a result, all amounts relating to share and per share amounts have been retroactively adjusted to reflect this stock split.goodwill.
Initial Public Offering
On February 2, 2021, the Company completed its initial public offering (“IPO”) in which the Company’s stockholders sold 7,250,000 shares of its common stock at a public offering price of $13 per share. In conjunction with the IPO, the Company’s board of directors also approved a reorganization of the Company through merging Home Point Capital LP (“HPLP”) with and into the Company, with the Company as the surviving entity. As a secondary offering, there were 0 proceeds from the sale of the shares being sold by the selling stockholders and all related expenses for the IPO were recorded in General and administrative expenses. Following the completion of the IPO, investment entities directly or indirectly managed by Stone Point Capital LLC, which are referred to as the Trident Stockholders, beneficially owned approximately 92% of the voting power of the Company’s common stock.
COVID-19 Pandemic Update
While the financial markets have demonstrated volatility due to the economic impacts of the COVID-19 pandemic, the adverse impact to the Company has been limited to our MSR Servicing Portfolio. As part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020 in response to the pandemic, borrowers with federally backed loans were able to request a temporary mortgage forbearance. In addition, the federal government announced additional extensions of the eligible forbearance periods for certain federally backed mortgage loans to support the housing market’s orderly transition to post-pandemic operation. The CARES Act imposed various compliance obligations on mortgage servicing activities, including, but not limited to, mandatory forbearance offerings, altered credit reporting obligations, and moratoriums on foreclosure actions and late fee assessments. Additionally, federal regulations issued as of June 28, 2021 with an effective date of August 31, 2021, impose several new compliance obligations and extend the foreclosure moratorium until December 31, 2021, for most mortgage loans. As of June 30, 2021, approximately 6,500 loans that represents about $1.6 billion of Unpaid Principal Balance (“UPB”), or 1.3% of the loans in our MSR Servicing Portfolio had elected the forbearance option. Of the 1.3% of the loans in our MSR Servicing Portfolio that had elected the forbearance option as of June 30, 2021, approximately 77% are 60 days or more delinquent on their June 30, 2021 payments. As a result of the CARES Act forbearance requirements, there has been increases in delinquencies in the MSR Servicing Portfolio and the Company is monitoring delinquencies through the expiration of the applicable CARES Act programs. While the Company has not, to date, experienced a material adverse effect on its results of operations, financial position, or liquidity due to the COVID-19 pandemic, it is difficult to predict what the ongoing impact of the pandemic will be on the economy, the Company’s customers or its business, including the pandemic’s effect on post-pandemic economic activity.
Summary of SignificantRecently Adopted Accounting Policies
Mortgage loans held for sale are accounted for using the fair value option. Therefore, mortgage loans originated and intended for sale in the secondary market are reflected at fair value. Changes in the fair value are recognized in current period earnings in Gain on loans, net, within the unaudited condensed consolidated statements of operations. Refer to Note 3 – Mortgage Loans Held for Sale.
Mortgage servicing rights are recognized as assets on the condensed consolidated balance sheets when loans are sold and the associated servicing rights are retained. The Company maintains one class of MSR asset and has elected the fair value option. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The Company obtains valuations from an independent third party on a quarterly basis and records an adjustment based on this third-party valuation. Changes in the fair value are recognized in Change in fair value of mortgage servicing rights, net on the Company's unaudited condensed consolidated statements of operations. Purchased mortgage servicing rights are recorded at the fair value which often is the purchase price at the date of purchase. Refer to Note 4 – Mortgage Servicing Rights.
Derivative financial instruments, including economic hedging activities, are recorded at fair value as either Derivative assets or in Other liabilities on the condensed consolidated balance sheets on a gross basis. The Company has accounted for its derivative instruments as non-designated hedge instruments and uses the derivative instruments to manage risk. The Company’s derivative instruments include, but are not limited to, forward mortgage-backed securities sales commitments, interest rate lock commitments, and other derivative instruments entered into to hedge fluctuations in MSRs’ fair value. The impact of the Company’s Derivative assets is reported in Change in fair value of derivative assets on the unaudited condensed consolidated statements of cash flows and the impact of the Company’s derivative liabilities is reported in Increase in other liabilities on the unaudited condensed consolidated statements of cash flows. The Company records derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty. Refer to Note 5 – Derivative Financial Instruments.
Forward mortgage-backed securities (“MBS”) sale commitments that have not settled are considered derivative financial instruments and are recognized at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized, new originations, and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments. Gain or loss on derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.
Interest rate lock commitments (“IRLCs”) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Forward MBS sale commitments or whole loans and options on forward contracts are used to manage the interest rate and price risk. These derivatives are not designated as hedging instruments. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. Change in fair value of IRLC derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.
Mortgage servicing rights hedges are accounted for at fair value. MSRs are subject to substantial interest rate risk as the mortgage notes underlying the servicing rights permit the borrowers to prepay the loans. Therefore, the value of MSRs generally tend to diminish in periods of declining interest rates as prepayments increase and increase in periods of rising interest rates as prepayments decrease. Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, and product characteristics.
The Company manages the impact that the volatility associated with changes in fair value of its MSRs has on its earnings with a variety of derivative instruments. The amount and composition of derivatives used to economically hedge the value of MSRs will depend on the Company's exposure to loss of value on the MSRs, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. This serves as a business hedge of the MSRs, providing a benefit when increased borrower refinancing activity results in higher loan origination volumes, which would partially offset declines in the value of the MSRs thereby reducing the need to use derivatives. The benefit of this business hedge depends on the decline in interest rates required to create an incentive for borrowers to refinance their mortgage loans and lower their interest rates; however, this benefit may not be realized under certain circumstances regardless of the change in interest rates. The change in fair value of MSR hedges is recorded in Change in fair value of mortgage servicing rights, net in the unaudited condensed consolidated statements of operations.
Equity Method Investments are business entities, which the Company does not have control of, but has the ability to exercise significant influence over operating and financial policies and are accounted for using the equity method. The Company evaluates its equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other-than-temporary, an impairment loss is recorded. The Company recognizes investments in equity method investments initially at cost and are adjusted for HPC’s share of earnings or losses, contributions or distributions. Equity method investments are reported on the consolidated balance sheets in Other assets. The following presents condensed financial information of Longbridge Financial, LLC (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Investment in Longbridge Financial, LLC | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Sales | $ | 113,263 | | | $ | 67,960 | | | $ | 190,618 | | | $ | 126,675 | |
Net income | 26,555 | | | 12,020 | | | 34,931 | | | 12,939 | |
Net income attributable to the investee | 13,198 | | | 5,974 | | | 17,361 | | | 6,431 | |
Earnings per share (“EPS”) is calculated and presented in the unaudited condensed consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is based on the weighted average number of common shares outstanding during the period. There were 139.0 million and 138.9 million weighted average shares outstanding for the three months ended June 30, 2021 and 2020, respectively, and 139.0 million and 133.2 million weighted average shares outstanding for the six months ended June 30, 2021 and 2020, respectively. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if the Company’s dilutive outstanding stock options and stock awards were issued. For the three months ended June 30, 2021, 1.6 million shares were excluded from the computation of diluted (loss) per share due to their anti-dilutive effect. For the three months ended June 30, 2020, 139.1 million shares would be outstanding on a fully-dilutive basis. For the six months ended June 30, 2021 and 2020, 140.2 million and 133.5 million shares would be outstanding on a fully-diluted basis.
Accounting Standards Issued but Not Yet AdoptedPronouncements
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, eliminates particular exceptions related to the method for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects onof the accounting for income taxes. This amendment is effective for annual periods beginning after December 15, 2021. This will be effective for theThe Company beginningadopted ASU 2019-12 as of January 1, 2022. The Company is currently assessing the potential impact the adoption of this standard willdid not have a material impact on its condensedthe Company’s consolidated financial statements.
ASU 2021-01, Accounting Pronouncements Issued but Not Yet AdoptedReference Rate Reform (Topic 848) Scope
, clarifies some of the guidance of the Financial Accounting Standards BoardUpdate (“FASB” or “the Board”ASU”) as part of the Board’s monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The Company is in the process of reviewing its derivative and hedging instruments that utilize LIBOR (as defined below) as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,. Subjectsubject to meeting certain criteria, the new guidance provides optional expedients and exceptions related to applying contract modification accounting under existing U.S. GAAP to address the expected phase out ofcertain contract modifications and hedging relationships that reference the London Inter-bankInterbank Offered Rate (“LIBOR”("LIBOR") by the end of 2021.or another rate that is expected to be discontinued. This guidance iswas effective upon issuance and allows application to contract changes as early as January 1, 2020. Subsequently, in 2021, the FASB issued ASU 2021-01, Reference Rate Reform, to further clarify and expand certain aspects of Topic 848. The Company is in the process of reviewing its funding facilitiesderivative and financing facilitieshedging instruments that utilize LIBOR as the reference raterate. The Company plans to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is currently evaluatingdiscontinued for the potentialCompany and does not expect it to have a material impact that the adoption of this ASU will have on its condensed consolidated financial statements.
Note 3 – Mortgage Loans Held for Sale
The Company sells its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. The following presents mortgage loans held for sale (“MLHS”) at fair value, by type, as of June 30, 2021 (in thousands):type:
| | | | | | | | | | | | | | | | | | June 30, 2022 |
| | June 30, 2021 | | Unpaid Principal | | Fair Value Adjustment | | Total Fair Value |
| | Unpaid Principal | | Fair Value Adjustment | | Total Fair Value | | (dollars in thousands) |
Conventional(1) | Conventional(1) | $ | 3,885,470 | | | $ | 88,052 | | | $ | 3,973,522 | | Conventional(1) | $ | 1,351,092 | | | $ | (15,935) | | | $ | 1,335,157 | |
Government(2) | Government(2) | 1,394,309 | | | 44,429 | | | 1,438,738 | | Government(2) | 679,660 | | | 3,631 | | | 683,291 | |
Reverse(3) | Reverse(3) | 275 | | | (83) | | | 192 | | Reverse(3) | 275 | | | (83) | | | 192 | |
Total | Total | $ | 5,280,054 | | | $ | 132,398 | | | $ | 5,412,452 | | Total | $ | 2,031,027 | | | $ | (12,387) | | | $ | 2,018,640 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Unpaid Principal | | Fair Value Adjustment | | Total Fair Value |
| (dollars in thousands) |
Conventional(1) | $ | 4,206,099 | | | $ | 79,389 | | | $ | 4,285,488 | |
Government(2) | 799,579 | | | 21,902 | | | 821,481 | |
Reverse(3) | 275 | | | (83) | | | 192 | |
Total | $ | 5,005,953 | | | $ | 101,208 | | | $ | 5,107,161 | |
(1)Conventional includes mortgage loans meeting the eligibility requirements to be sold to FNMA and FHLMC mortgage loans.or FHLMC.
(2)Government includes GNMA mortgage loans meeting the eligibility requirements to be sold to GNMA (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agriculture)Agricultural mortgage loans).
(3)Reverse loan presented in Mortgage loans held for saleMLHS on the condensed consolidated balance sheets as a result of a repurchase.
MLHS on nonaccrual status had $24.0 million and $26.1 million of unpaid principal balances and $19.4 million and $21.6 million estimated fair value, as of June 30, 2022 and December 31, 2021, respectively.
The Company had $2.0 billion in unpaid principal balance pledged to secure its mortgage warehouse line of credit as of June 30, 2022.
The Company had $37.0 million of unpaid principal balances, which had a fair value of $34.8 million, of mortgage loans held for sale on nonaccrual status at June 30, 2021.
The following presents mortgage loans held for sale at fair value, by type, as of December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Unpaid Principal | | Fair Value Adjustment | | Total Fair Value |
Conventional(1) | $ | 2,183,480 | | | $ | 91,939 | | | $ | 2,275,419 | |
Government(2) | 974,908 | | | 51,175 | | | 1,026,083 | |
Reverse(3) | 275 | | | (83) | | | 192 | |
Total | $ | 3,158,663 | | | $ | 143,031 | | | $ | 3,301,694 | |
(1)Conventional includes FNMA and FHLMC mortgage loans.
(2)Government includes GNMA mortgage loans (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agriculture).
(3)Reverse loan presented in Mortgage loans held for sale on the condensed consolidated balance sheets as a result of a repurchase.
The Company had $26.3 million of unpaid principal balances, which had a fair value of $23.5 million, of mortgage loans held for sale on nonaccrual status at December 31, 2020.
The following presents a reconciliation of the changes in mortgage loans held for saleMLHS to the amounts presented on the unaudited condensed consolidated statements of cash flows as of June 30, 2021 and 2020 (in thousands):flows:
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | 2022 | | 2021 |
| | 2021 | | 2020 | | 2021 | | 2020 | | |
Fair value at beginning of period | Fair value at beginning of period | | $ | 5,191,261 | | | $ | 1,732,384 | | | $ | 3,301,694 | | | $ | 1,554,230 | | Fair value at beginning of period | $ | 5,107,161 | | | $ | 3,301,694 | |
Mortgage loans originated and purchased | Mortgage loans originated and purchased | | 26,861,771 | | | 11,900,295 | | | 57,917,479 | | | 20,245,050 | | Mortgage loans originated and purchased | 22,568,858 | | | 57,917,479 | |
Proceeds on sales and payments received | Proceeds on sales and payments received | | (26,576,848) | | | (11,991,811) | | | (55,578,192) | | | (20,303,653) | | Proceeds on sales and payments received | (25,032,673) | | | (55,578,192) | |
Change in fair value | Change in fair value | | 65,157 | | | 2,595 | | | (10,633) | | | 37,635 | | Change in fair value | (113,594) | | | (10,633) | |
(Loss) gain on loans(1) | | (128,889) | | | 260,711 | | | (217,896) | | | 370,912 | | |
Loss on loans(1) | | Loss on loans(1) | (511,112) | | | (217,896) | |
Fair value at end of period | Fair value at end of period | | $ | 5,412,452 | | | $ | 1,904,174 | | | $ | 5,412,452 | | | $ | 1,904,174 | | Fair value at end of period | $ | 2,018,640 | | | $ | 5,412,452 | |
(1)This line as presented on the condensed consolidated statements of cash flows excludes OMSRoriginated mortgage servicing rights and MSRmortgage servicing rights hedging.
Note 4 – Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold.
The MSRsMortgage Servicing Rights (“MSRs”) give the Company the contractual right to receive service fees and other remuneration in exchange for performing loan servicing functions on behalf of investors in mortgage loans and securities. Upon sale of a mortgage loan for which the Company retains the underlying servicing, an MSR asset is capitalized, which represents the current fair value of the future net cash flows that are expected to be realized for performing servicing activities.
The following presents an analysis of the changes in capitalized mortgage servicing rights as of June 30, 2021 and 2020 (in thousands):MSRs:
| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | 2022 | | 2021 | | 2022 | | 2021 |
| | 2021 | | 2020 | | 2021 | | 2020 | | (dollars in thousands) |
Balance at beginning of period | Balance at beginning of period | $ | 1,156,357 | | | $ | 475,871 | | | $ | 748,457 | | | $ | 575,035 | | Balance at beginning of period | $ | 1,490,224 | | | $ | 1,156,357 | | | $ | 1,525,103 | | | $ | 748,457 | |
MSRs originated | MSRs originated | 269,449 | | | 101,523 | | | 563,806 | | | 196,495 | | MSRs originated | 155,942 | | 269,449 | | 364,683 | | 563,806 |
MSRs purchased | MSRs purchased | 13,884 | | | 0 | | | 18,701 | | | 0 | | MSRs purchased | 9,245 | | 13,884 | | 17,833 | | 18,701 |
MSRs sold | | MSRs sold | (275,312) | | — | | (755,556) | | — |
Changes in valuation model inputs | Changes in valuation model inputs | (94,713) | | | (36,474) | | | 103,183 | | | (194,458) | | Changes in valuation model inputs | 72,395 | | (94,713) | | 349,381 | | 103,183 |
Change due to cash payoffs and principal amortization | Change due to cash payoffs and principal amortization | (77,724) | | | (41,138) | | | (166,894) | | | (77,290) | | Change due to cash payoffs and principal amortization | (33,389) | | (77,724) | | (82,339) | | (166,894) |
Balance at end of period | Balance at end of period | $ | 1,267,253 | | | $ | 499,782 | | | $ | 1,267,253 | | | $ | 499,782 | | Balance at end of period | $ | 1,419,105 | | | $ | 1,267,253 | | | $ | 1,419,105 | | | $ | 1,267,253 | |
The following presents the Company’s total capitalized mortgage servicing portfolio (based on the UPBunpaid principal balance (“UPB”) of the underlying mortgage loans) as of June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | June 30, 2022 | | December 31, 2021 |
| | June 30, 2021 | | December 31, 2020 | | (dollars in thousands) |
Ginnie Mae | Ginnie Mae | $ | 26,363,264 | | $ | 26,206,612 | Ginnie Mae | $ | 8,391,398 | | $ | 5,602,582 |
Fannie Mae | Fannie Mae | 58,764,424 | | 36,395,373 | Fannie Mae | 45,950,073 | | 70,174,987 |
Freddie Mac | Freddie Mac | 39,088,699 | | 25,621,697 | Freddie Mac | 36,143,003 | | 52,547,588 |
Other | Other | 42,548 | | 53,567 | Other | 31,947 | | 34,417 |
Total mortgage servicing portfolio | $ | 124,258,935 | | $ | 88,277,249 | |
Total | | Total | $ | 90,516,421 | | $ | 128,359,574 |
| MSR balance | MSR balance | $ | 1,267,253 | | | $ | 748,457 | | MSR balance | $ | 1,419,105 | | | $ | 1,525,103 | |
MSR balance as % of unpaid mortgage principal balance | 1.02 | % | | 0.85 | % | |
The following presents the key weighted average assumptions used in determining the fair value of the Company’s MSRs asMSRs: | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Discount rate | 7.93 | % | | 8.68 | % |
Weighted average prepayment speeds | 6.37 | % | | 8.30 | % |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Discount rate | 9.05 | % | | 9.47 | % |
Prepayment speeds | 11.10 | % | | 14.43 | % |
The key assumptions used to estimate the fair value of the MSRs are discount rate and the Conditional Prepayment Rate (“CPR” or “prepayment speeds”). IncreasesAn increase in prepayment speeds generally havehas an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase. DecreasesA decrease in prepayment speeds generally havehas a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value.
The following table illustrates the hypothetical effect on the fair value of the Company’s MSR portfolio when applying unfavorable discount rate and prepayment speeds at two different data points as of June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Discount Rate | | Prepayment Speeds |
| 100 BPS Adverse Change | | 200 BPS Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
June 30, 2021 | $ | (50,565) | | | $ | (97,114) | | | $ | (59,121) | | | $ | (113,375) | |
December 31, 2020 | $ | (26,354) | | | $ | (50,754) | | | $ | (45,014) | | | $ | (85,484) | |
MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties. Refer to Note 12 – Fair Value Measurements, for further discussions
The following presents the impact on the key assumptions used to estimate the fair value of the MSRs.Company’s MSR portfolio when applying the following hypothetical data points:
| | | | | | | | | | | | | | | | | | | | | | | |
| Discount Rate | | Prepayment Speeds |
| 100 BPS Adverse Change | | 200 BPS Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| (dollars in thousands) |
June 30, 2022 | $ | (69,128) | | | $ | (131,943) | | | $ | (45,752) | | | $ | (88,681) | |
December 31, 2021 | $ | (66,885) | | | $ | (128,172) | | | $ | (56,278) | | | $ | (108,621) | |
The following presents information related to loans serviced as of June 30, 2021 and December 31, 2020 (in thousands):serviced:
| | | | | | | | | | | | | June 30, 2022 | | December 31, 2021 |
| | June 30, 2021 | | December 31, 2020 | | (dollars in thousands) |
Total unpaid principal balance | Total unpaid principal balance | $ | 128,992,697 | | | $ | 91,590,114 | | Total unpaid principal balance | $ | 92,158,562 | | | $ | 133,889,085 | |
Loans 30-89 days delinquent | Loans 30-89 days delinquent | 991,305 | | | 1,353,029 | | Loans 30-89 days delinquent | 898,742 | | | 656,012 | |
Loans delinquent 90 or more days or in foreclosure(1) | 1,848,631 | | | 3,641,183 | | |
Loans delinquent 90 or more days or in foreclosure | | Loans delinquent 90 or more days or in foreclosure | 753,270 | | | 777,650 | |
(1)Of the $1.8 billion and $3.6 billion of loans delinquent 90 days or more, approximately $1.1 billion and $2.5 billion are in forbearance primarily related to COVID-19 forbearance provided under the CARES Act as of June 30, 2021 and December 31, 2020, respectively.
The following presents components of Loan servicing fees as reported in the Company’s unaudited condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Contractual servicing fees | $ | 62,618 | | | $ | 77,615 | | | $ | 143,381 | | | $ | 145,098 | |
Late fees | 891 | | | 1,323 | | | 2,016 | | | 2,465 | |
Other | (637) | | | 6,646 | | | (1,461) | | | 8,359 | |
Total | $ | 62,872 | | | $ | 85,584 | | | $ | 143,936 | | | $ | 155,922 | |
The Company held for its customers $16.5 million and $19.9 million of escrow funds recorded in Other liabilities in the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively. The Company reported $21.2 million and $74.7 million loss on MSR sales in the Change in fair value of mortgage servicing rights in the condensed consolidated statement of operations for the three and six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Contractual servicing fees | $ | 77,615 | | | $ | 43,521 | | | $ | 145,098 | | | $ | 86,426 | |
Late fees | 1,323 | | | 1,186 | | | 2,465 | | | 3,251 | |
Other | 6,646 | | | (2,398) | | | 8,359 | | | (4,122) | |
Loan servicing fees | $ | 85,584 | | | $ | 42,309 | | | $ | 155,922 | | | $ | 85,555 | |
The Company held $26.1 million and $20.6 million of escrow funds within Other liabilities in the condensed consolidated balance sheets for its customers for which it services mortgage loans as of June 30, 2021 and December 31, 2020,2022, respectively.
Note 5 – Derivative Financial Instruments
The following presents the outstanding notional balances foramounts and fair values of derivative instruments not designated as hedging instruments for the six months ended June 30, 2021 and 2020 (in thousands):instruments:
| | | Six Months Ended June 30, 2021 | | June 30, 2022 |
| | Notional Value | | Derivative Asset | | Derivative Liability | | Recorded Gain/(Loss) | | Notional Value | | Derivative Asset | | Derivative Liability |
Mortgage-backed securities forward trades | $ | 9,998,221 | | | $ | 2,968 | | | $ | 19,204 | | | $ | 5,186 | | |
| | | (dollars in thousands) |
Forward sale contracts | | Forward sale contracts | $ | 3,730,800 | | | $ | 13,718 | | | $ | 14,434 | |
Interest rate lock commitments | Interest rate lock commitments | 9,151,691 | | | 56,464 | | | 0 | | | (34,432) | | Interest rate lock commitments | 3,306,824 | | | 22,622 | | | 6,375 | |
Hedging mortgage servicing rights | 6,732,000 | | | 9,206 | | | 2,843 | | | 15,137 | | |
Forward purchase contracts | | Forward purchase contracts | 305,000 | | | 77 | | | 3,741 | |
Treasury futures purchase contracts | | Treasury futures purchase contracts | 510,000 | | | 2,121 | | | 698�� | |
Margin | Margin | | 56,579 | | | 627 | | | Margin | | 20,742 | | | 35,061 | |
Total | Total | | $ | 125,217 | | | $ | 22,674 | | | Total | | $ | 59,280 | | | $ | 60,309 | |
Cash placed with counterparties, net | | $ | 55,952 | | | |
| | | Six Months Ended June 30, 2020 | | December 31, 2021 |
| | Notional Value | | Derivative Asset | | Derivative Liability | | Recorded Gain/(Loss) | | Notional Value | | Derivative Asset | | Derivative Liability |
Mortgage-backed securities forward trades | $ | 7,296,155 | | | $ | 260 | | | $ | 28,702 | | | $ | (24,253) | | |
| | | (dollars in thousands) |
Forward sale contracts | | Forward sale contracts | $ | 7,819,802 | | | $ | 6,969 | | | $ | 8,242 | |
Interest rate lock commitments | Interest rate lock commitments | 10,478,526 | | | 201,873 | | | 0 | | | 178,854 | | Interest rate lock commitments | 6,068,763 | | | 29,887 | | | 2,843 | |
Hedging mortgage servicing rights | 4,296,000 | | | 11,705 | | | 0 | | | 77,014 | | |
Forward purchase contracts | | Forward purchase contracts | 1,521,000 | | | 3,031 | | | 281 | |
Interest rate swap futures contracts | | Interest rate swap futures contracts | 1,540,000 | | | 25,313 | | | 5,662 | |
Treasury futures purchase contracts | | Treasury futures purchase contracts | 4,720,000 | | | 111 | | | — | |
Margin | Margin | | 30,220 | | | 0 | | | Margin | | 19,074 | | | 9,708 | |
Total | Total | | $ | 244,058 | | | $ | 28,702 | | | Total | | $ | 84,385 | | | $ | 26,736 | |
Cash held with counterparties, net | | $ | 30,220 | | | |
The following presents the recorded gain (loss) on derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Forward sale contracts | $ | (91,472) | | | $ | 283,156 | | | $ | (2,804) | | | $ | 43,568 | |
Interest rate lock commitments | 50,983 | | | (386,845) | | | (9,770) | | | (206,291) | |
Forward purchase contracts | 819 | | | 17,509 | | | (3,053) | | | (3,878) | |
Interest rate swap and Treasury futures purchase contracts | $ | (43,601) | | | $ | 52,606 | | | $ | (161,953) | | | $ | (18,049) | |
Counterparty agreements for forward commitments contain master netting agreements. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. The Company incurred no credit losses due to nonperformance of any of its counterparties for the three and six months ended June 30, 2022 and 2021.
The following presents a summary of derivative assets and liabilities and related netting amounts asamounts:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| | | Gross Amounts Not Offset in the Statement of Financial Position(1) | | |
| Gross Amount of Assets (Liabilities) Recognized | | Financial Instruments | | Cash Collateral | | Net Amount |
| (dollars in thousands) |
Derivatives subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Forward sale contracts | $ | 13,718 | | | $ | (9,944) | | | $ | (3,413) | | | $ | 361 | |
Forward purchase contracts | 77 | | | (77) | | | — | | | — | |
Interest rate swap and Treasury futures purchase contracts | 2,121 | | | (2,121) | | | — | | | — | |
Liabilities: | | | | | | | |
Forward sale contracts | (14,434) | | | 9,944 | | | — | | | (4,490) | |
Forward purchase contracts | (3,741) | | | 77 | | | 3,362 | | | (302) | |
Interest rate swap and Treasury futures purchase contracts | (698) | | | 2,121 | | | (1,423) | | | — | |
Derivatives not subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Interest rate lock commitments | 22,622 | | | — | | | — | | | 22,622 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | (6,375) | | | — | | | — | | | (6,375) | |
Total derivatives | | | | | | | |
Assets | $ | 38,538 | | | $ | (12,142) | | | $ | (3,413) | | | $ | 22,983 | |
Liabilities | $ | (25,248) | | | $ | 12,142 | | | $ | 1,939 | | | $ | (11,167) | |
in thousands):
| | | June 30, 2021 | | December 31, 2021 |
| | Gross Amount of Recognized Assets (liabilities) | | Gross Offset | | Net Assets (Liabilities) | | | Gross Amounts Not Offset in the Statement of Financial Position(1) | |
Balance at June 30, 2021 | | | | | | |
| | | Gross Amount of Assets (Liabilities) Recognized | | Financial Instruments | | Cash Collateral | | Net Amount |
| | | (dollars in thousands) |
Derivatives subject to master netting agreements: | Derivatives subject to master netting agreements: | | Derivatives subject to master netting agreements: | |
Assets: | Assets: | | Assets: | |
Mortgage-backed securities forward trades | $ | 2,968 | | | $ | (163) | | | $ | 2,805 | | |
Hedging mortgage servicing rights | 9,206 | | | (2,634) | | | 6,572 | | |
Margin (cash placed with counterparties) | 56,579 | | | (17,944) | | | 38,635 | | |
Forward sale contracts | | Forward sale contracts | $ | 6,969 | | | $ | (4,886) | | | $ | (1,272) | | | $ | 811 | |
Forward purchase contracts | | Forward purchase contracts | 3,031 | | | (258) | | | (2,627) | | | 146 | |
Interest rate swap and Treasury futures purchase contracts | | Interest rate swap and Treasury futures purchase contracts | 25,424 | | | (5,662) | | | — | | | 19,762 | |
Liabilities: | Liabilities: | | Liabilities: | |
Mortgage-backed securities forward trades | (19,204) | | | 18,107 | | | (1,097) | | |
Hedging mortgage servicing rights | (2,843) | | | 2,634 | | | (209) | | |
Margin (cash placed with counterparties) | (627) | | | 0 | | | (627) | | |
| Forward sale contracts | | Forward sale contracts | (8,242) | | | 4,886 | | | 1,252 | | | (2,104) | |
Forward purchase contracts | | Forward purchase contracts | (281) | | | 258 | | | — | | | (23) | |
Interest rate swap and Treasury futures purchase contracts | | Interest rate swap and Treasury futures purchase contracts | (5,662) | | | 5,662 | | | — | | | — | |
Derivatives not subject to master netting agreements: | Derivatives not subject to master netting agreements: | | Derivatives not subject to master netting agreements: | |
Assets: | Assets: | | Assets: | |
Interest rate lock commitments | Interest rate lock commitments | 56,464 | | | 56,464 | | Interest rate lock commitments | 29,887 | | | — | | | — | | | 29,887 | |
Hedging mortgage servicing rights | 0 | | | — | | | 0 | | |
Liabilities: | | Liabilities: | |
Interest rate lock commitments | | Interest rate lock commitments | (2,843) | | | — | | | — | | | (2,843) | |
Total derivatives | Total derivatives | | Total derivatives | |
Assets | Assets | $ | 125,217 | | | $ | (20,741) | | | $ | 104,476 | | Assets | $ | 65,311 | | | $ | (10,806) | | | $ | (3,899) | | | $ | 50,606 | |
Liabilities | Liabilities | $ | (22,674) | | | $ | 20,741 | | | $ | (1,933) | | Liabilities | $ | (17,028) | | | $ | 10,806 | | | $ | 1,252 | | | $ | (4,970) | |
(1) Amounts disclosed for collateral received from or posted to the same counterparty includes cash up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The following presentsfair value of the total collateral received from or posted to the same counterparty may exceed the amounts presented. The amounts of collateral received from or posted to counterparty are presented as margin and included as a summarycomponent of derivativeeither Derivative assets andor Other liabilities and related netting amounts as of December 31, 2020 (in thousands):the Balance Sheet.
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Amount of Recognized Assets (liabilities) | | Gross Offset | | Net Assets (Liabilities) |
Balance at December 31, 2020 | | | | | |
Derivatives subject to master netting agreements: | | | | | |
Assets: | | | | | |
Mortgage-backed securities forward trades | $ | 1,320 | | | $ | 0 | | | $ | 1,320 | |
Hedging mortgage servicing rights | 4,419 | | | 0 | | | 4,419 | |
Margin (cash placed with counterparties) | 58,290 | | | (45,427) | | | 12,863 | |
Liabilities: | | | | | |
Mortgage-backed securities forward trades | (61,124) | | | 45,595 | | | (15,529) | |
Hedging mortgage servicing rights | 0 | | | 0 | | | 0 | |
Margin (cash held with counterparties) | 0 | | | (168) | | | (168) | |
| | | | | |
Derivatives not subject to master netting agreements: | | | | | |
Assets: | | | | | |
Interest rate lock commitments | 257,785 | | | — | | | 257,785 | |
Hedging mortgage servicing rights | 12,509 | | | — | | | 12,509 | |
Total derivatives | | | | | |
Assets | $ | 334,323 | | | $ | (45,427) | | | $ | 288,896 | |
Liabilities | $ | (61,124) | | | $ | 45,427 | | | $ | (15,697) | |
For information on the determination of fair value, refer to Note 12 – Fair Value Measurements.
Note 6 – Accounts Receivable, net
The following presents principal categories of Accounts receivable, net as of June 30, 2021 and December 31, 2020 (in thousands):net:
| | | As of June 30, 2021 | | As of December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | | (dollars in thousands) |
Pair off receivable | | Pair off receivable | $ | 34,813 | | | $ | 3,738 | |
Servicing sale receivable | | Servicing sale receivable | 72,850 | | | 14,364 | |
Servicing advance receivable | Servicing advance receivable | $ | 66,560 | | | $ | 97,893 | | Servicing advance receivable | 34,342 | | | 71,884 | |
Servicing advance reserves | (9,098) | | | (8,380) | | |
Servicing advance reserve | | Servicing advance reserve | (1,769) | | | (4,207) | |
Agency receivable | | Agency receivable | 12,346 | | | 20,184 | |
Income tax receivable | | Income tax receivable | 7,855 | | | 11,181 | |
Servicing receivable-general | Servicing receivable-general | 1,947 | | | 2,660 | | Servicing receivable-general | 10,231 | | | 359 | |
Current income tax receivable | 54,621 | | | 54,347 | | |
Warehouse receivable | | Warehouse receivable | 1,957 | | | 1,934 | |
Interest on servicing deposits | Interest on servicing deposits | 428 | | | 165 | | Interest on servicing deposits | 262 | | | 464 | |
Pair off receivable | 4,074 | | | 0 | | |
Other | Other | 58,828 | | | 6,160 | | Other | 4,108 | | | 9,191 | |
Accounts receivable, net | $ | 177,360 | | | $ | 152,845 | | |
Total | | Total | $ | 176,995 | | | $ | 129,092 | |
As part of managing the Company’s servicing advances, servicing advance reservesreserve is recognized with management’s estimate of current expected losses and maintained at a level that management considers adequate based upon continuing assessments of collectability, historical loss experience, current trends, and reasonable and supportable forecasts.
The following presents changes to the servicing advance reserve for the three months and six months ended June 30, 2021 and 2020 (in thousands):reserve:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Servicing advance reserve, at beginning of period | | $ | (8,749) | | | $ | (5,373) | | | $ | (8,380) | | | $ | (4,308) | | |
| | | (dollars in thousands) |
Servicing advance reserve at beginning of period | | Servicing advance reserve at beginning of period | $ | (2,875) | | | $ | (8,749) | | | $ | (4,207) | | | $ | (8,380) | |
Additions | Additions | | (881) | | | (2,956) | | | (2,224) | | | (4,932) | | Additions | (8,705) | | | (881) | | | (16,222) | | | (2,224) | |
Charge-offs | Charge-offs | | 532 | | | 1,780 | | | 1,506 | | | 2,691 | | Charge-offs | 9,811 | | | 532 | | | 18,660 | | | 1,506 | |
Servicing advance reserve, at end of period | | $ | (9,098) | | | $ | (6,549) | | | $ | (9,098) | | | $ | (6,549) | | |
Servicing advance reserve at end of period | | Servicing advance reserve at end of period | $ | (1,769) | | | $ | (9,098) | | | $ | (1,769) | | | $ | (9,098) | |
Note 7 – Warehouse Lines of Credit
The Company maintains mortgage warehouse lines of credit arrangements with various financial institutions, primarily to fund the origination of mortgage loans. The Company held mortgage funding arrangements with 11 separate financial institutions with a total maximum borrowing capacity of $7.1$6.0 billion at June 30, 2021 and $4.2$7.5 billion at December 31, 2020. Asas of June 30, 2022 and December 31, 2021, therespectively, which is primarily uncommitted. The Company had $2.0$4.1 billion and $2.8 billion of unused capacity under its warehouse lines of credit.credit as of June 30, 2022 and December 31, 2021, respectively.
The following presents the amounts outstanding as of June 30, 2021 and December 31, 2020 and maturity dates under the Company’s various mortgage funding arrangements:
| | | | | | | | | | | | | | | | | |
| Maturity Date | | Balance at June 30, 2021 | | Balance at December 31, 2020 |
$300M Warehouse Facility | September 2021 | | $ | 290.5 | million | | $ | 223.9 | million |
$500M Warehouse Facility | September 2021 | | 416.6 | million | | 401.2 | million |
$500M Warehouse Facility | September 2021 | | 423.3 | million | | 437.8 | million |
$500M Warehouse Facility | January 2022 | | 333.6 | million | | 232.1 | million |
$500M Warehouse Facility | January 2022 | | 441.6 | million | | 0 | million |
$1.2B Warehouse Facility | February 2022 | | 696.3 | million | | 459.9 | million |
$1.0B Warehouse Facility | August 2022 | | 470.2 | million | | 421.9 | million |
$500M Warehouse Facility | March 2023 | | 396.6 | million | | 0 | million |
$1.2B Warehouse Facility (1) | May 2023 | | 823.9 | million | | 466.0 | million |
$550M Warehouse Facility | Evergreen | | 481.9 | million | | 171.0 | million |
$88.5M Warehouse Facility | Evergreen | | 36.6 | million | | 40.6 | million |
Gestation | Evergreen | | 246.6 | million | | 151.0 | million |
Total warehouse lines of credit | | | $ | 5,057.6 | million | | $ | 3,005.4 | million |
| | | | | | | | | | | |
| Maturity Date | | June 30, 2022 |
| | (dollars in thousands) |
$350 million Warehouse Facility1 | August 2022 | | $ | 32,401 | |
$450 million Warehouse Facility | September 2022 | | 163,940 | |
$500 million Warehouse Facility | September 2022 | | 42,866 | |
$500 million Warehouse Facility | September 2022 | | 58,208 | |
$1,200 million Warehouse Facility | February 2023 | | 685,953 | |
$325 million Warehouse Facility | March 2023 | | 231,877 | |
$400 million Warehouse Facility | March 2023 | | 33,780 | |
$250 million Warehouse Facility2 | March 2023 | | 32,608 | |
$1,200 million Warehouse Facility | May 2023 | | 170,149 | |
$89 million Warehouse Facility | Evergreen | | 10,103 | |
$550 million Warehouse Facility | Evergreen | | 280,103 | |
Gestation Warehouse Facility | Evergreen | | 168,407 | |
Early Funding4 | | | — | |
Total | | | $ | 1,910,395 | |
(1) SubsequentThe capacity of this Warehouse Facility has been reduced from $700 million as of March 31, 2022 to $350 million as of June 30, 2021, borrowing2022.
(2)The capacity temporarily increasedof this Warehouse Facility has been reduced from $500 million as of March 31, 2022 to $1.5 billion until September 15, 2021.$250 million as of June 30, 2022.
| | | | | | | | | | | |
| Maturity Date5 | | December 31, 2021 |
| | (dollars in thousands) |
$1,200 million Warehouse Facility4 | February 2022 | | $ | 604,421 | |
$500 million Warehouse Facility4 | March 2022 | | 335,509 | |
$500 million Warehouse Facility4 | March 2022 | | 381,087 | |
$1,000 million Warehouse Facility | August 2022 | | 716,802 | |
$450 million Warehouse Facility | September 2022 | | 277,060 | |
$500 million Warehouse Facility | September 2022 | | 339,521 | |
$500 million Warehouse Facility | September 2022 | | 375,381 | |
$500 million Warehouse Facility | March 2023 | | 309,898 | |
$1,500 million Warehouse Facility | May 2023 | | 731,132 | |
$88.5 million Warehouse Facility | Evergreen | | 11,409 | |
$550 million Warehouse Facility | Evergreen | | 363,959 | |
Gestation Warehouse Facility | Evergreen | | 179,360 | |
Early Funding3 | | | 93,119 | |
Total | | | $ | 4,718,658 | |
(3)In addition to warehouse facilities, the Company is an approved lender for early funding facilities with Fannie Mae through its As Soon As Pooled (“ASAP”) program and Freddie Mac through its Early Funding (“EF”) program. From time to time, the Company enters into agreements to deliver certified pools of mortgage loans and receive funding in exchange for such pools. All mortgage loans delivered under these programs must adhere to a set of eligibility criteria. Early funding programs with Fannie Mae and Freddie Mac do not have stated expiration dates or maximum capacities.
(4)Maturity Dates in this table are as of December 31, 2021. These Warehouse Facilities have been renewed as reflected in the table above.
The Company’s warehouse facilities’ variable interest rates are calculated using a basean index rate generally tied to either (a) 1-month LIBOR or (b) a Secured Overnight Financing Rate (“SOFR”); plus applicable interest rate margins, with varying index interest and interest rate margin floors. The weighted average interest rate for the Company’s warehouse facilities was 2.43%2.44% and 2.36% as of June 30, 20212022 and 2.75% as of December 31, 2020.2021, respectively. The Company’s borrowings are 100% secured by the fair value of the mortgage loans held for saleMLHS at fair value.
The Company’s warehouse facilities generally require the maintenance of certain financial covenants relating to net worth, profitability, liquidity, and ratio of indebtedness to net worth among others. In June 2021, theThe Company’s warehouse lines that contain profitability covenants were amended to the extent necessary to allow for a net loss under such covenants for the three months ended June 30, 2021. As of June 30, 2021, the2022. The Company was in compliance with all warehouse facility covenants.covenants as of June 30, 2022.
The Company continually evaluates its warehouse capacity in relation to expected financing needs.
Note 8 – Term Debt and Other Borrowings, net
The Company maintainsfollowing presents the Company’s term debt and other borrowings, as follows:net:
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Collateral | | Balance at June 30, 2021 | | Balance at December 31, 2020 |
$1.0B MSR Facility | May 2025 | | Mortgage Servicing Rights | | $ | 626.6 | million | | $ | 411.6 | million |
$550M Senior Notes | February 2026 | | | | 550.0 | million | | 0 | million |
$115M Servicing Advance Facility | May 2022 | | Servicing Advances | | 1.0 | million | | 43.2 | million |
$10M Operating Line of Credit | May 2022 | | Mortgage Loans | | 3.3 | million | | 1.0 | million |
Total | | | | | 1,180.9 | million | | 455.8 | million |
Debt issuance costs | | | | | (14.3) | million | | (1.8) | million |
Term debt and other borrowings, net | | | | | $ | 1,166.5 | million | | $ | 454.0 | million |
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Collateral | | June 30, 2022 | | December 31, 2021 |
| | | | | (dollars in thousands) |
$1.0 billion MSR Facility | May 2025 | | MSRs | | $ | 355,000 | | | $ | 685,000 | |
$550 million Senior Notes1 | February 2026 | | Unsecured | | 500,000 | | | 550,000 | |
$85 million Servicing Advance Facility2 | May 2023 | | Servicing Advances | | — | | | 3,250 | |
$35 million Operating Line of Credit | May 2023 | | Mortgage loans | | 1,000 | | | 1,000 | |
Gross | | | | | 856,000 | | | 1,239,250 | |
Debt issuance costs | | | | | (10,469) | | | (12,726) | |
Total | | | | | $ | 845,531 | | | $ | 1,226,524 | |
(1)The Company repurchased and retired $50 million Senior Notes during the six months ended June 30, 2022.
(2)Effective June 9, 2022, the capacity of the Servicing Advance Facility has been reduced from $90 million to $85 million.
The Company maintains a $1.0 billion MSR financing facility (the “MSR Facility”), which is comprised of. On April 29, 2022, the Company entered into an amendment to the MSR facility that, among other things, reduced the committed capacity from $650.0 million of committed capacity and $350.0 million of uncommitted capacity and is collateralized byto $500.0 million. The amendment also replaced the Company’s FNMA, FHLMC, and GNMA mortgage servicing rights. In May 2021, the MSR Facility was increased from $500.0 million to $1.0 billion. Interest on the MSR Facility isLIBOR based on 3-Month LIBORinterest rate with SOFR, plus the applicable interest rate margin, with advance rates generally ranging from 62.5% to 72.5% of the value of the underlying mortgage servicing rights.MSRs. The MSR Facility is collateralized by the Company’s FNMA, FHLMC, and GNMA MSRs. The MSR Facility has a three-year revolving period ending on May 4, 2024 followed by a one-year period during which the balance drawn must be repaid and no further amounts may be drawn down, which ends on May 20, 2025. The MSR Facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of June 30, 2021,2022, the Company was in compliance with all covenants under the MSR Facility.
In January of 2021, the Company issued $550.0 million aggregate principal amount of its 5.0% Senior Notes due 2026 (the “Senior Notes”) in a private placement transaction. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than HPAM and HPMAC. The Senior Notes bear interest at a rate of 5.0% per annum, payable semi-annually in arrears. The Senior Notes will mature on February 1, 2026. The Company repurchased and retired $50 million Senior Notes during the three and six months ended June 30, 2022.
The Indenture governing the Senior Notes contains covenants and restrictions that, among other things and subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries to (i) incur certain additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets. The Indenture governing the Senior Notes does not include any financial maintenance covenants.
The Company has an $115.0a $85.0 million servicing advance facility which is collateralized by all of the Company’s servicing advances. The servicing advance facility’s capacity was increased from $85.0 million to $115.0 million in May 2021. The facility carries an interest rate of 1-month LIBOR plus a margin and an advance rate ranging from 85-95%85.0-95.0%. The servicing advance facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of June 30, 2021,2022, the Company was in compliance with all covenants under the servicing advance facility.
The Company also has a $10.0$35.0 million operating line, with an interest rate based on the Wall Street Journal prime rate.Prime Rate.
AsThe Company had total available capacity of $468.1 million and $28.8 million for its MSR Facility and servicing advance facility, respectively as of June 30, 2021, the2022. The Company had total unusedhas no available capacity for its servicing advance facility and operating line of credit as of $48.7 million and $9.0 million, respectively.
Note 9 – Commitments and Contingencies
Commitments to Extend Credit
The Company’s IRLCsInterest rate lock commitments (“IRLCs”) expose the Company to market risk if interest rates change and the applicable loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the applicable loan is originated and not sold to an investor and the customer does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans were $9.2$3.3 billion and $6.1 billion as of June 30, 20212022 and $16.0 billion as of December 31, 2020.2021, respectively.
Litigation
The Company is subject to various legal proceedings arising out of the ordinary course of business. There were no current or pending claims against the Company which are expected to have a material impact on the Company's condensed consolidated balance sheets, statements of operations, or cash flows.
Regulatory Contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those conducted as part of regulatory oversight of our mortgage origination, servicing, and financing activities. Such audits and examinations could result in additional actions, penalties, or fines by state or federal governmental bodies, regulators, or the courts with respect to our mortgage origination, servicing, and financing activities, which may be applicable generally to the mortgage industry or to the Company in particular. The Company did not pay any material penalties or fines during the six months ended June 30, 2022 and 2021 or 2020 and is not currently required to pay any such penalties or fines.
Note 10 – Regulatory Net Worth Requirements
The Company is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development (“HUD”), which govern non-supervised, direct endorsement mortgagees. The Company is also subject to regulatory capital requirements administered by Ginnie Mae, Fannie Mae, and Freddie Mac, which govern issuers of Ginnie Mae, Fannie Mae, and Freddie Mac securities. Additionally, the Company is required to maintain minimum net worth requirements for many of the states in which it sells and services loans. Each state has its own minimum net worth requirement;requirements; these range from $0 to $1.0 million depending on the state.
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could (i) remove the Company’s ability to sell and service loans to, or on behalf of, the Agencies and (ii) have a direct material effect on the Company’s condensed consolidated financial statements. In accordance with the regulatory capital guidelines, the Company must meet specific quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Further, changesChanges in regulatory and accounting standards, as well as the impact of future events on the Company’s results, may significantly affect the Company’s net worth adequacy.
The Company is subject to the following minimum net worth, minimum capital ratio, and minimum liquidity requirements established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers.issuers:
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 25 basis points of outstanding UPB for total loans serviced.
•Adjusted/Tangible Net Worth, consistsas defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 35 basis points of the issuer’s total single-family effective outstanding obligations.
•Adjusted/Tangible Net Worth, consistsas defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
Minimum Capital Ratio
For Fannie Mae, Freddie Mac, and Ginnie Mae, the Company is also required to hold a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6%6.0%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
•3.5 basis points of total Agency servicing.
•Incremental 200 basis points of total nonperforming Agency servicing, measured as 90 plus day delinquencies, servicing in excess of 6%6.0% of the total Agency servicing UPB.
•Allowable assets for liquidity may include: cash and cash equivalents (unrestricted); available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of Government Sponsored Entities (“GSE”),GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.
The minimum liquidity requirement for Ginnie Mae is defined as follows:
•Maintain liquid assets equal to the greater of $1.0 million or 10 basis points of ourthe Company’s outstanding single-family MBS.
The most restrictive of the minimum net worth and capital requirements require the Company to maintain a minimum adjusted net worth balance of $319.9$218.5 million and $326.3 million as of June 30, 2021. As of June 30,2022 and December 31, 2021, therespectively.
The Company wasis in compliance with this requirement.
The Company met all minimum net worth requirements to which it was subject as of June 30, 2021.2022.
The following presents the Company’s required and actual net worth amounts as of June 30, 2021 (in thousands):15
| | | | | | | | | | | |
Home Point Financial Corporation |
| Adjusted Net Worth | | Net Worth Required |
HUD | $ | 1,155,601 | | | $ | 2,500 | |
Ginnie Mae | $ | 1,155,601 | | | $ | 97,962 | |
Fannie Mae | $ | 1,155,601 | | | $ | 319,862 | |
Freddie Mac | $ | 1,155,601 | | | $ | 319,862 | |
Various States | $ | 1,155,601 | | | $0 - 1,000 |
Home Point Mortgage Acceptance Corporation |
| Adjusted Net Worth | | Net Worth Required |
HUD | $ | 29,242 | | | $ | 2,500 | |
Ginnie Mae | $ | 29,242 | | | $ | 2,791 | |
Fannie Mae | $ | 29,242 | | | $ | 7,620 | |
Freddie Mac | $ | 29,242 | | | $ | 7,620 | |
Various States | $ | 29,242 | | | $0 - 1,000 |
Note 11 – Representation and Warranty Reserve
Certain wholeof the Company’s loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. Additionally, theThe Company has included considerations that it may receive relief of certain representations and warranty obligations on loans sold to FNMA or FHLMC on or after January 1, 2013 if FNMA or FHLMC satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to FNMA or FHLMC.FHLMC, respectively. The current UPB of loans sold by the Company represents the maximum potential exposure to repurchases related to representations and warranties. Reserve levels are a function of expected losses based on historical experience current conditions,and loan volume and reasonable and supportable forecasts.volume. While the amount of repurchases is uncertain, the Company considers the liability to be appropriate.
The following presents the activity of the outstanding reserves for the three and six months ended June 30, 2021 and 2020 (in thousands):repurchase reserve:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Reserve at beginning of period | $ | 23,810 | | | $ | 5,531 | | | $ | 18,080 | | | $ | 3,964 | | |
| | | (dollars in thousands) |
Repurchase reserve at beginning of period | | Repurchase reserve at beginning of period | $ | 24,918 | | | $ | 23,810 | | | $ | 24,577 | | | $ | 18,080 | |
Additions | Additions | 4,411 | | | 12,789 | | | 11,004 | | | 14,247 | | Additions | 38,467 | | | 4,411 | | | 42,418 | | | 11,004 | |
Charge-offs | Charge-offs | (320) | | | (3,616) | | | (1,183) | | | (3,507) | | Charge-offs | (25,084) | | | (320) | | | (28,694) | | | (1,183) | |
Reserve at end of period | $ | 27,901 | | | $ | 14,704 | | | $ | 27,901 | | | $ | 14,704 | | |
Repurchase reserve at end of period | | Repurchase reserve at end of period | $ | 38,301 | | | $ | 27,901 | | | $ | 38,301 | | | $ | 27,901 | |
Note 12 – Fair Value Measurements
The Company uses fair value measurements to record certain assets and liabilities at fair value on a recurring basis, such as MSRs, derivatives, MLHS and mortgageEarly buyout loans held for sale.(“EBOs”). The Company has elected fair value accounting for loans held for sale and MSRs to more closely align the Company’s accounting with its interest rate risk strategies without having to apply the operational complexities of hedge accounting.
The Company groups itsuses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
| | | | | | | | |
Level Input: | | Input Definition: |
| | |
Level 1 | | Unadjusted, quoted prices in active markets for identical assets or liabilities. |
| | |
Level 2 | | Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others. |
| | |
Level 3 | | Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity), unobservable inputs may be used. Unobservable inputs reflect the Company's own assumptions about the factors that market participants would use in pricing the asset or liability and are based on the best information available in the circumstances. |
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the condensed consolidated financial statements.
Fair Value of Certain Assets and Liabilities
The following describes the methods used in estimating the fair values of certain condensed consolidated financial statements items:assets and liabilities:
Mortgage Loans Heldloans held for Sale:sale. The majority of the Company's mortgage loans held for saleMLHS at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of the Company's mortgage loans held for saleMLHS consist of loans repurchased from the GSEsGovernment-Sponsored Enterprises (“GSEs”) that have subsequently been deemed to be non-saleable.non-saleable to GSEs and Ginnie Mae when certain representations and warranties are breached. These loans, however, are saleable to other entities and are classified on the consolidated balance sheets as Mortgage loans held for sale. These repurchased loans are considered Level 3.3 and are valued based on recent sales prices of similar loans.
Derivative Financial InstrumentsInterest rate lock commitments.: The Company estimates the fair value of an IRLCIRLCs based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The Company estimates the fair value of forward sales commitments based on quoted MBS prices. The average pull-through rate for IRLCs was 85% for the six months ended81.0% and 86.1% as of June 30, 20212022 and 73% for the year ended December 31, 2020.2021, respectively. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.
Forward sales and purchase commitments. The Company treats forward mortgage-backed securities purchase and sale commitments that have not settled as derivatives and recognizes them at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized and new originations and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments; therefore,The Company estimates the Company reports the loss in fair value in Gainof forward commitments based on loans, net in the unaudited condensed consolidated statements of operations.quoted MBS prices. These derivatives are classified as Level 2.
MSR-related derivatives represent a combination of derivatives used The Company uses options on swap contracts to offset possible adverse changes in the fair value of MSRs, which include options on swap contracts, interest rate swap contracts, and other instruments. These derivatives are not designated as hedging instruments; therefore,MSRs. The Company estimates the Company reports the loss in fair value in Change in fair value of mortgage servicing rights, net in the condensed consolidated statements of operations. The fair value ofthese MSR-related derivatives is determined using quoted prices for similar instruments. These derivatives are classified as Level 2.
Treasury futures purchase contracts. The Company uses Treasury futures contracts to offset changes in the fair value of MSRs. The Company estimates fair value of these MSR-related derivatives using quoted market prices. These derivatives are classified as Level 1.
Mortgage Servicing Rights: The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The Company obtains valuations from an independent third party on a monthlyquarterly basis to support the reasonableness of the fair value estimate. The keyKey assumptions used in the estimation ofmeasuring the fair value of MSRs include, prepayment speeds,but are not limited to, discount rates default rates,and prepayment speeds. Other assumptions such as delinquencies, and cost to service contractual servicing fees, and escrow earnings,are also considered resulting in a Level 3 classification.
The following presents the major categories of assets and liabilities measured at fair value on a recurring basis (in thousands):basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | 0 | | | $ | 5,366,976 | | | $ | 9,344 | | | $ | 5,376,320 | |
Mortgage loans held for sale – EBO | 0 | | | 0 | | | 36,132 | | | 36,132 | |
Derivative assets (IRLCs) | 0 | | | 0 | | | 56,464 | | | 56,464 | |
Derivative assets (MBS forward trades) | 0 | | | 2,969 | | | 0 | | | 2,969 | |
Derivative assets (MSRs) | 0 | | | 9,206 | | | 0 | | | 9,206 | |
Mortgage servicing rights | 0 | | | 0 | | | 1,267,253 | | | 1,267,253 | |
Total assets | $ | 0 | | | $ | 5,379,151 | | | $ | 1,369,193 | | | $ | 6,748,344 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | |
Derivative liabilities (MBS forward trades) | $ | 0 | | | $ | 19,204 | | | $ | 0 | | | $ | 19,204 | |
Derivative liabilities (MSR) | 0 | | | 2,843 | | | 0 | | | 2,843 | |
Total liabilities | $ | 0 | | | $ | 22,047 | | | $ | 0 | | | $ | 22,047 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | 0 | | | $ | 3,257,321 | | | $ | 3,800 | | | $ | 3,261,121 | |
Mortgage loans held for sale – EBO | 0 | | | 0 | | | 40,574 | | | 40,574 | |
Derivative assets (IRLCs) | 0 | | | 0 | | | 257,785 | | | 257,785 | |
Derivative assets (MBS forward trades) | 0 | | | 2,994 | | | 0 | | | 2,994 | |
Derivative assets (MSRs) | 0 | | | 15,254 | | | 0 | | | 15,254 | |
Mortgage servicing rights | 0 | | | 0 | | | 748,457 | | | 748,457 | |
Total assets | $ | 0 | | | $ | 3,275,569 | | | $ | 1,050,616 | | | $ | 4,326,185 | |
Liabilities: | | | | | | | |
Derivative liabilities (MBS forward trades) | $ | 0 | | | $ | 61,124 | | | $ | 0 | | | $ | 61,124 | |
Total liabilities | $ | 0 | | | $ | 61,124 | | | $ | 0 | | | $ | 61,124 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | — | | | $ | 2,004,714 | | | $ | 13,926 | | | $ | 2,018,640 | |
Interest rate lock commitments | — | | | — | | | 22,622 | | | 22,622 | |
Forward sale contracts | — | | | 13,718 | | | — | | | 13,718 | |
Forward purchase contracts | — | | | 77 | | | — | | | 77 | |
Treasury futures purchase contracts | 2,121 | | | — | | | — | | | 2,121 | |
Mortgage servicing rights | — | | | — | | | 1,419,105 | | | 1,419,105 | |
Total | $ | 2,121 | | | $ | 2,018,509 | | | $ | 1,455,653 | | | $ | 3,476,283 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | $ | — | | | $ | — | | | $ | 6,375 | | | $ | 6,375 | |
Forward sale contracts | — | | | 14,434 | | | — | | | 14,434 | |
Forward purchase contracts | — | | | 3,741 | | | — | | | 3,741 | |
Treasury futures purchase contracts | 698 | | | — | | | — | | | 698 | |
Total | $ | 698 | | | $ | 18,175 | | | $ | 6,375 | | | $ | 25,248 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | — | | | $ | 5,086,943 | | | $ | 20,218 | | | $ | 5,107,161 | |
Interest rate lock commitments | — | | | — | | | 29,887 | | | 29,887 | |
Forward sale contracts | — | | | 6,969 | | | — | | | 6,969 | |
Forward purchase contracts | — | | | 3,031 | | | — | | | 3,031 | |
Interest rate swap futures contracts | — | | | 111 | | | — | | | 111 | |
Treasury futures purchase contracts | 25,313 | | | — | | | — | | | 25,313 | |
Mortgage servicing rights | — | | | — | | | 1,525,103 | | | 1,525,103 | |
Total | $ | 25,313 | | | $ | 5,097,054 | | | $ | 1,575,208 | | | $ | 6,697,575 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | $ | — | | | $ | — | | | $ | 2,843 | | | $ | 2,843�� | |
Forward sale contracts | — | | | 8,242 | | | — | | | 8,242 | |
Forward purchase contracts | — | | | 281 | | | — | | | 281 | |
Interest rate swap futures contracts | — | | | 5,662 | | | — | | | 5,662 | |
Total | $ | — | | | $ | 14,185 | | | $ | 2,843 | | | $ | 17,028 | |
The following presents a reconciliation of Level 3 assets measured at fair value on a recurring basis (in thousands):basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| MSRs | | IRLC | | MLHS | | EBO |
Balance at beginning of period | $ | 1,156,357 | | | $ | 20,193 | | | $ | 6,529 | | | $ | 39,049 | |
Purchases, sales, issuances, contributions and settlements | 283,333 | | | 0 | | | 3,095 | | | (2,680) | |
Change in fair value | (172,437) | | | 36,271 | | | (280) | | | (237) | |
| | | | | | | |
Balance at end of period | $ | 1,267,253 | | | $ | 56,464 | | | $ | 9,344 | | | $ | 36,132 | |
| | | | | | | |
| Six Months Ended June 30, 2021 |
| MSRs | | IRLC | | MLHS | | EBO |
Balance at beginning of period | $ | 748,457 | | | $ | 257,785 | | | $ | 3,800 | | | $ | 40,573 | |
Purchases, sales, issuances, contributions and settlements | 582,507 | | | 0 | | | 6,068 | | | (4,047) | |
Change in fair value | (63,711) | | | (201,321) | | | (524) | | | (394) | |
| | | | | | | |
Balance at end of period | $ | 1,267,253 | | | $ | 56,464 | | | $ | 9,344 | | | $ | 36,132 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
| MSRs | | IRLC | | MLHS | | EBO |
Balance at beginning of period | $ | 475,870 | | | $ | 131,962 | | | $ | 1,228 | | | $ | 916 | |
Purchases, Sales, Issuances, Contributions and Settlements | 101,523 | | | 0 | | | 955 | | | (916) | |
Change in fair value | (77,611) | | | 69,911 | | | (87) | | | 0 | |
| | | | | | | |
Balance at end of period | $ | 499,782 | | | $ | 201,873 | | | $ | 2,096 | | | $ | 0 | |
| | | | | | | |
| Six Months Ended June 30, 2020 |
| MSRs | | IRLC | | MLHS | | EBO |
Balance at beginning of period | $ | 575,035 | | | $ | 25,618 | | | $ | 1,159 | | | $ | 3,094 | |
Purchases, Sales, Issuances, Contributions and Settlements | 196,495 | | | 0 | | | 981 | | | (3,094) | |
Change in fair value | (271,748) | | | 176,255 | | | (44) | | | 0 | |
| | | | | | | |
Balance at end of period | $ | 499,782 | | | $ | 201,873 | | | $ | 2,096 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| MSRs | | IRLC | | MLHS |
| (dollars in thousands) |
Balance at January 1, 2022 | $ | 1,525,103 | | | $ | 29,887 | | | $ | 20,218 | |
Purchases, sales, issuances, contributions, and settlements | (262,915) | | | — | | | (1,564) | |
Change in fair value | 228,036 | | | (17,746) | | | (52) | |
Transfers out(1) | — | | | — | | | (826) | |
Balance at March 31, 2022 | $ | 1,490,224 | | | $ | 12,141 | | | $ | 17,776 | |
Purchases, sales, issuances, contributions, and settlements | (110,125) | | | — | | | (1,147) | |
Change in fair value | 39,006 | | | 10,481 | | | (1,261) | |
Transfers out(1) | — | | | — | | | (1,442) | |
Balance at June 30, 2022 | $ | 1,419,105 | | | $ | 22,622 | | | $ | 13,926 | |
| | | | | | | | | | | | | | | | | |
| MSRs | | IRLC | | MLHS |
| (dollars in thousands) |
Balance at January 1, 2021 | $ | 748,457 | | | $ | 257,785 | | | $ | 44,374 | |
Purchases, sales, issuances, contributions, and settlements | 299,174 | | | — | | | 41 | |
Change in fair value | 108,726 | | | (237,592) | | | (247) | |
Transfers out(1) | — | | | — | | | 1,410 | |
Balance at March 31, 2021 | $ | 1,156,357 | | | $ | 20,193 | | | $ | 45,578 | |
Purchases, sales, issuances, contributions, and settlements | 283,333 | | | — | | | 415 | |
Change in fair value | (172,437) | | | 36,271 | | | (517) | |
Transfers out(1) | — | | | — | | | — | |
Balance at June 30, 2021 | $ | 1,267,253 | | | $ | 56,464 | | | $ | 45,476 | |
(1)Transfers in (out) represents transfers between Levels 2 and 3, and reclassifications to Real estate owned (“REO”), foreclosure or claims.
The following presents an estimatedthe fair value and UPB of mortgage loans held for saleMLHS that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for mortgage loans held for sale as the Company believes fair value best reflects its expected future economic performance (in thousands):performance:
| | | | | | | | | | | | | | | | | |
| Fair Value | | Principal Amount Due Upon Maturity | | Difference(1) |
Balance at June 30, 2021 | $ | 5,376,320 | | | $ | 5,240,399 | | | $ | 135,921 | |
Balance at December 31, 2020 | $ | 3,261,121 | | | $ | 3,117,552 | | | $ | 143,569 | |
| | | | | | | | | | | | | | | | | |
| Fair Value | | Principal Amount Due Upon Maturity | | Difference(1) |
| (dollars in thousands) |
June 30, 2022 | $ | 2,018,640 | | | $ | 2,031,027 | | | $ | (12,387) | |
December 31, 2021 | $ | 5,107,161 | | | $ | 5,005,069 | | | $ | 102,092 | |
(1)Represents the amount of (losses) gains related to changes in fair value of items accounted for using the fair value option included in Gain on loans, net within the condensed consolidated statements of operations.
The Company transferred in $5.7 million of assets to Level 3 during the six months ended June 30, 2021 which consists of loans for which an active market currently does not exist. The Company did not transfer any assets or liabilities between categories during the six months ended June 30, 2020. The Company had no significant assets or liabilities measured at fair value on a nonrecurring basis atas of June 30, 20212022 and December 31, 2020.2021, respectively.
The following is a summary of the key unobservable inputs used in the valuation of the Level 3 assets as of June 30, 2021 and December 31, 2020:assets:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 20212022 |
Asset | Assets: | Key Input | | Range | | Weighted Average |
Mortgage servicing rights | | Discount rate | | 8.6%7.7% - 12.2% | | 9.1%7.9% |
| | Prepayment speeds | | 9.9%5.2% - 14.4%7.9% | | 11.1%6.4% |
Interest rate lock commitments | | Pull-through rate | | 34%44% - 100% | | 85%81.0% |
Mortgage loans held for sale | Investor pricing | | 70.0% - 101.1% | | 83.2% |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 20202021 |
Asset | Assets: | Key Input | | Range | | Weighted Average |
Mortgage servicing rights | | Discount rate | | 9.0%8.6% - 12.2% | | 9.5%8.7% |
| | Prepayment speeds | | 13.8%6.9% - 16.4%11.6% | | 14.4%8.3% |
Interest rate lock commitments | | Pull-through rate | | 16%49.8% - 100%100.0% | | 73%86.1% |
Mortgage loans held for sale | Investor pricing | | 70.0% - 104.1% | | 91.3% |
Fair Value of Other Financial Instruments: As of June 30, 2021 and December 31, 2020, allAll financial instruments were either recorded at fair value or the carrying value approximated fair value.value as of June 30, 2022 and December 31, 2021. For financial instruments that were not recorded at fair value, such as cash and cash equivalents, restricted cash, servicing advances, warehouse and operating lines of credit, and accounts payable, and accrued expenses, their carrying values approximated fair value due to the short-term nature of such instruments. The Senior Notes had a carrying value of $500.0 million and $550.0 million and an estimated fair value of $345.4 million and $506.4 million as of June 30, 2022 and December 31, 2021, respectively. For ourthe Company’s other long-term secured borrowings not recorded at fair value, the carrying value approximated fair value due to the collateralizationvariable interest rate on the borrowings and the re-repricing of such borrowings.collateral.
Note 13 – Stock OptionsEquity-based Compensation
The Company maintains itsOn January 21, 2021, the Company’s board of directors (the “Board”) approved the adoption of the Company’s 2021 Incentive Plan (“2021 Plan”) with aand designated 6.9 million shares of the Company’s authorized common stock that may beavailable for equity-based awards thereunder. The 2021 Plan allows for the assumption and substitution of outstanding options to purchase common units of HPLP granted asunder the Home Point Capital LP (“HPLP”) 2015 Option Plan (the “2015 Option Plan”), which was in place prior to the Company’s IPO. The expiration date of the 2021 Plan is the tenth (10th) anniversary of the effective date of the 2021 Plan, which is January 21, 2031. The 2021 Plan contains both time-vesting service criteria and performance based vesting terms, which are based on the achievement of specified performance criteria outlined in the underlying award agreement.
Prior to the consummation of the merger in connection with the IPO, the 2015 Option Plan governed awards of stock options to key persons conducting business for HPLP and restrictedits direct and indirect subsidiaries, including the Company. The 2015 Option Plan allowed awards in the form of options that are exercisable into common units of HPLP. In connection with the IPO, all outstanding options under the 2015 Option Plan were canceled and “substitute options” were granted under the 2021 Plan. The exercise price and number of shares of common stock of the substitute options result in the same (subject to rounding) intrinsic value as the outstanding options granted under the 2015 Option Plan.
Restricted Stock Units
Restricted stock units (“RSUs”) are awards thereunder.that represent the potential to receive shares of the Company’s common stock at the end of the applicable vesting period, subject to the terms and conditions of the 2021 Plan and the applicable award documents. RSUs awarded under the 2021 Plan are fair valued based upon the fair market value of the Company’s common stock on the grant date. Any person who holds RSUs has no ownership interest in the shares of the Company’s common stock to which such RSUs relate until and unless shares of common stock are delivered to the holder. The RSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following presents the summary of the Company’s RSU activity:
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 367,991 | | | $ | 10.18 | |
Granted | 233,550 | | | 3.85 | |
Vested | (209,093) | | | 10.75 | |
Outstanding at end of period | 392,448 | | | $ | 6.12 | |
The RSUs granted to the Company’s management team will vest in equal annual installments over a three-year period subject to the participants’ continued employment with the Company. The RSUs granted to the non-management members of the Company’s Board who are not affiliated with Stone Point Capital LLC vest at the next annual meeting of stockholders following the grant date. The Company recognized $0.6 million and $1.1 million of compensation expense related to RSUs within Compensation and benefits expense on the consolidated statement of operations for the three and six months ended June 30, 2022, respectively. The Company recognized $0.4 million and $0.6 million of compensation expense related to RSUs for the three and six months ended June 30, 2021, respectively.
Performance Stock Units
Performance stock units (“PSUs”) are fair valued on the date of grant and expensed over the service period using a straight-line method as the awards cliff vest at the end of a three-year performance period. The Company also estimates the number of shares expected to vest, which is based on management’s determination of the probable outcome of the Performance Condition (as defined below), which requires considerable judgment. The Company records a cumulative adjustment in periods in which the Company’s estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the Performance Condition. The PSUs will become earned based on the level of achievement of the Company’s average return on equity over a three-year performance period (the “Performance Condition”). The number of earned PSUs can range from 0% to 150% of the number of PSUs granted, depending on continued service with the Company and the extent to which the Performance Condition has been achieved at the end of the performance period. The PSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following table presents the summary of the Company’s PSU activity:
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Units | | Weighted-Average Grant Date Fair Value |
Outstanding at beginning of period | 238,347 | | | $ | 9.44 | |
Granted | 131,924 | | | 3.79 | |
Outstanding at end of period | 370,271 | | | $ | 7.43 | |
The Company did not recognize any compensation expense related to PSUs for the three and six months ended June 30, 2022 and 2021.
Stock Option Awards
The Company recognizes compensation expense associated with the stock option grants using the straight-line method over the requisite service period. The Company recognized $1.8$0.8 million and $0.3$2.1 million of compensation expense related to stock options for the three months ended June 30, 2021 and 2020, respectively, and $3.5 million and $0.4 million of compensation expense related to stock options for the six months ended June 30, 2021 and 2020, respectively, within Compensation and benefits expense on the unaudited condensed consolidated statements of operations.operations for the three and six months ended June 30, 2022, respectively, and $1.3 million and $2.9 million for the three and six months ended June 30, 2021, respectively. The unrecognized compensation expense related to outstanding and unvested stock options was $11.5$65.3 million as of June 30, 2022, which is expected to vest and get recognized over a weighted-average period of 5.96 years. The number of options vested and exercisable was 2,265,344 and the weighted-average exercise price of the options exercisable was $3.85 as of June 30, 2022.
The following presents the summary of the Company’s stock option activity under the 2021 Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Life (Years) | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 11,751,031 | | | $ | 4.45 | | | 6.87 | | $ | 8.38 | |
Granted | 337,043 | | | 1.81 | | | 4.09 | | 9.79 | |
Exercised | (188,914) | | | 1.86 | | | 3.26 | | 9.81 | |
Forfeited | (255,340) | | | 1.86 | | | 1.17 | | 9.72 | |
Expired | (45,028) | | | 1.74 | | | — | | | 9.45 | |
Outstanding at end of period | 11,598,792 | | | $ | 4.48 | | | 6.18 | | $ | 8.35 | |
The following presents the summary of the Company’s non-vested activity under the 2021 Plan:
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested at beginning of period | 9,627,033 | | | $ | 8.19 | |
Granted | 337,043 | | | 9.79 | |
Vested | (141,346) | | | 8.77 | |
Exercised | (188,914) | | | 9.81 | |
Forfeited | (255,340) | | | 9.72 | |
Expired | (45,028) | | | 9.45 | |
Non-vested at end of period | 9,333,448 | | | $ | 8.25 | |
The following presents assumptions used in the Black-Scholes option valuation model to determine the weighted-average fair value per stock option granted:
| | | | | |
| June 30, 2022 |
Expected life (in years) | 8.25 |
Risk-free interest rate | 0 - 3.0% |
Expected volatility | 24.9% |
Dividend yield | 8.4% |
The expected life of each stock option is estimated based on its vesting and contractual terms. The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was based on an analysis of the historical volatilities of peer companies, adjusted for certain characteristics specific to the Company. The Company applied an estimated forfeiture rate of 0%-10.4% as of June 30, 2022 and December 31, 2021.
Note 14 – Earnings Per Share
(Loss) earnings per share (“EPS”)is calculated and presented in the consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is calculated by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if the Company’s dilutive outstanding stock options and stock awards were issued and exercised.
The following presents the calculation of the basic and diluted (loss) earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands, except share and per share amounts ) |
Net (loss) income | $ | (44,417) | | | $ | (73,213) | | | $ | (32,553) | | | $ | 75,756 | |
| | | | | | | |
Numerator: | | | | | | | |
Net (loss) income attributable to common shareholders | $ | (44,417) | | | $ | (73,213) | | | $ | (32,553) | | | $ | 75,756 | |
Net (loss) income attributable to Home Point - diluted | $ | (44,417) | | | $ | (73,213) | | | $ | (32,553) | | | $ | 75,756 | |
| | | | | | | |
Denominator (in thousands): | | | | | | | |
Weighted average shares of common stock outstanding - basic | 138,459 | | | 138,953 | | | 138,885 | | | 139,019 | |
Dilutive effect of common stock equivalents | — | | | — | | | — | | | 1,221 | |
Weighted average shares of common stock outstanding - diluted | 138,459 | | | 138,953 | | | 138,885 | | | 140,240 | |
| | | | | | | |
(Loss) earnings per share of common stock outstanding - basic | $ | (0.32) | | | $ | (0.53) | | | $ | (0.23) | | | $ | 0.54 | |
(Loss) earnings per share of common stock outstanding - diluted | $ | (0.32) | | | $ | (0.53) | | | $ | (0.23) | | | $ | 0.54 | |
| | | | | | | |
As a result of the net loss from continuing operations for the three and six months ended June 30, 2022 and three months ended June 30, 2021, which is expected to vest and be recognized over a weighted-average periodthe effect of 4.96 years.
The following presentscertain dilutive securities was excluded from the activitycomputation of weighted average diluted shares outstanding, as inclusion would have resulted in antidilution. Inclusion of these securities would not impact the Company’s stock options:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2020 | | 0 | | | $ | 0 | |
Granted | | 13,381,516 | | | 8.55 | |
Exercised | | (924,031) | | | 9.80 | |
Forfeited | | (168,788) | | | 9.82 | |
Outstanding at June 30, 2021 | | 12,288,697 | | | $ | 8.44 | |
The following presents a summary of the Company’s non-vested activity:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested at beginning of period | 0 | | | $ | 0 | |
Granted | 13,381,516 | | | 8.55 | |
Vested | (1,925,853) | | | 9.19 | |
Exercised | (924,031) | | | 9.80 | |
Forfeited | (168,788) | | | 9.82 | |
Non-vested at June 30, 2021 | 10,362,844 | | | $ | 8.31 | |
disclosed EPS amounts.
Note 1415 – Shareholders’ Equity and Equity Method Investment
Common Stock Repurchases
On February 24, 2022, the Company’s Board approved the repurchase of shares of the Company’s common stock, par value $0.0000000072 per share (the “Common Stock”), in an aggregate amount not to exceed $8.0 million, from time to time through and including December 31, 2022 (the “Stock Repurchase Program”). Repurchases under the Stock Repurchase Program may be made from time to time pursuant to one or more plans adopted under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The Company repurchased 718,106 and 1,179,796 shares of Common Stock at an aggregate price of $2.3 million and $3.8 million, including commissions and fees, through market purchase transactions under the Stock Repurchase Program during the three and six months ended June 30, 2022, respectively. Shares repurchased under the program have been subsequently retired.
Equity Method Investment
The Company holds an equity method investment in Longbridge Financial, LLC (“Longbridge”) through a 49.6% voting ownership interest, which is the only equity method investment held by the Company. The investment was initially recognized at cost and is adjusted for HPC’s share of Longbridge’s earnings or losses, contributions or distributions. HPC had a net investment of $50.7 million and $63.7 million in Longbridge as of June 30, 2022 and December 31, 2021, respectively. The Company entered into a definitive agreement in February of 2022 to sell its investment in Longbridge, subject to customary closing adjustments (the “Longbridge Transaction”). The Longbridge Transaction is subject to the satisfaction of closing conditions, including regulatory approvals and notices, which have not yet been satisfied. The Company’s investment in Longbridge is classified as Assets Held for Sale as of June 30, 2022 and December 31, 2021.
The following presents condensed financial information of Longbridge:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (dollars in thousands) |
Total assets | $ | 7,547,293 | | | $ | 6,727,807 | |
Total liabilities | 7,455,460 | | | 6,604,351 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Revenue | $ | (73,766) | | | $ | 61,700 | | | $ | (131,507) | | | $ | 100,236 | |
Net (loss) income | (24,014) | | | 19,186 | | | (34,665) | | | 31,712 | |
Net (loss) income attributable to the Company | (9,144) | | | 13,198 | | | (14,416) | | | 17,361 | |
Note 16 – Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Income (loss) before income taxes | $ | (113,620) | | $ | 226,658 | | $ | 81,303 | | $ | 210,305 |
Total provision (benefit) from income taxes | (27,209) | | 59,501 | | 22,908 | | 56,012 |
Effective tax provision rate | 23.9% | | 26.3% | | 28.2% | | 26.6% |
The Company’s effective income tax rate was 28.2%28.6% and 26.6%35.1% for the three and six months ended June 30, 20212022, respectively and 2020,23.9% and 28.2% for the three and six months ended June 30, 2021, respectively, compared to the statutory rate of 21%21.0%. The Company calculated the provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income and adjusted for discrete items that occurred during the period. Several factors influence the effective tax rate, including the impact of equity investments,investment, state taxes, and permanent disallowed deductions for tax such as officer's compensation limitations applicable to a public entity, equity-based compensation, and non-deductible transaction costs.
Note 1517 – Segments
Management has organized the Company into 2 reportable segments based primarily on its services as follows: (1) Origination and (2) Servicing. The key factors used to identify theseEach reportable segments is howsegment has discrete financial information evaluated regularly by the chief operating decision maker (“CODM”) monitorsin monitoring performance, allocatesallocating capital and makesmaking strategic and operational decisions that alignsalign with the Company and Company'sits internal operations. The Origination segment consists of a combination of retail and third-party loan production options. The Servicing segment performs loan servicing for both newly originated loans the Company is holding for sale and loans the Company services for others.
Origination
In the Origination segment, the Company originates and sells residential real estate mortgage loans in the United StatesU.S. through itsthe consumer direct third party originations, and prior to its sale, which was completed on June 1, 2022, the correspondent channel. The Company’s origination channels that offer a variety of loan programs that support the financial needs of the borrowers. In each of the channels, the Company’s primary source of revenue is the difference between the cost of originating or purchasing the loan and the price at which the loan is sold to investors as well as the fair value of originated MSRs and hedging gains and losses. Loan origination fees and interest income earned on loans held pendingfor sale or securitization are also included in the revenuesrevenue for this segment.
Servicing
In the Servicing segment, the Company generates revenue through contractual fees earned by performing daily administrative and management activities for mortgage loans. These activities include collecting loan payments, remitting payments to investors, sending monthly statements, managing escrow accounts, servicing delinquent loan work-outs, and managing and disposing of foreclosed properties. Servicing of the Company’s customers iswas primarily conducted in-house.in-house as of June 30, 2022. In February 2022, the Company entered into an agreement with ServiceMac, LLC (“ServiceMac”), a wholly owned subsidiary of First American Financial Corporation, pursuant to which ServiceMac will subservice all mortgage loans underlying the Company’s MSRs. ServiceMac began subservicing loans for the Company in the second quarter of 2022.
Other Information About the Company’s Segments
The Company's CODM evaluates performance, makes operating decisions, and allocates resources based on the Company's contribution margin. Contribution margin is the Company’s measure of profitability for its 2 reportable segments. Contribution margin is defined as revenue from Gain on loans, net, Loan fee income, Loan servicing fees, Change in fair value of MSRs, Interest income, and Other income (which includes Income from equity method investment) adjusted for the change in fair value attributable to valuation assumptions of MSRs and less directly attributable expenses. The accounting policies applied by the Company’s segments are the same as those described in Note 2 – Basis of Presentation and Significant Accounting Policies, and the decrease in MSRs due to valuation assumptions is consistent with the changes described in Note 4 - Mortgage Servicing Rights. Directly attributable expenses include salaries, commissions and associate benefits, general and administrative expenses, and other expenses, such as servicing costs and origination costs. Direct operating expenses incurred in connection withdriven by the activities of the segments are included in the respective segments.
The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting. In addition,Additionally, the Company does not enter into transactions between its reportable segments.
The Company also reports an “All Other” category that includes unallocated corporate expenses, such as IT, finance, and human resources. These operations are neither significant individually or in aggregate and therefore do not constitute a reportable segment.
The following tables presentpresents the key operating data for our business segments for the three and six months ended June 30, 2021 and 2020 (in thousands). Starting with the three months ended March 31, 2021, the Company changed how contribution margin is calculated. Contribution margin is calculated as Total U.S. GAAP Revenue less directly attributable expenses. The Company previously calculated the contribution margin by excluding the Change in MSRs due to valuation assumptions, net of hedge. The updated calculation of the contribution margin presented herein aligns with how management and the CODM view the contribution margin for the Servicing segment. The Company commenced using such presentation for the three months ended March 31, 2021 and intends to use such presentation on a go-forward basis; previous periods have been revised to conform with this new calculation.segments:
| | | Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2022 |
| | Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciliation Item(1) | | Total Consolidated | | Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
Revenue | | | | | | | | | | | | | | |
| | | (dollars in thousands) |
Revenue: | | Revenue: | |
Gain on loans, net | Gain on loans, net | $ | 75,004 | | | $ | 17 | | | $ | 75,021 | | | $ | 8 | | | $ | 75,029 | | | $ | 0 | | | $ | 75,029 | | Gain on loans, net | $ | 13,234 | | | $ | — | | | $ | 13,234 | | | $ | — | | | $ | 13,234 | | | $ | — | | | $ | 13,234 | |
Loan fee income | Loan fee income | 39,500 | | | 0 | | | 39,500 | | | 0 | | | 39,500 | | | 0 | | | 39,500 | | Loan fee income | 15,255 | | | — | | | 15,255 | | | — | | | 15,255 | | | — | | | 15,255 | |
Loan servicing fees | Loan servicing fees | 0 | | | 85,584 | | | 85,584 | | | 0 | | | 85,584 | | | 0 | | | 85,584 | | Loan servicing fees | — | | | 62,872 | | | 62,872 | | | — | | | 62,872 | | | — | | | 62,872 | |
Change in FV of MSRs, net | 0 | | | (106,905) | | | (106,905) | | | 0 | | | (106,905) | | | 0 | | | (106,905) | | |
Interest income (loss), net | 2,697 | | | 417 | | | 3,114 | | | (12,602) | | | (9,488) | | | 0 | | | (9,488) | | |
Change in fair value of mortgage servicing rights | | Change in fair value of mortgage servicing rights | — | | | (29,887) | | | (29,887) | | | — | | | (29,887) | | | — | | | (29,887) | |
Interest income (expense), net | | Interest income (expense), net | 8,641 | | | 1,429 | | | 10,070 | | | (11,457) | | | (1,387) | | | — | | | (1,387) | |
Other income | Other income | 0 | | | 50 | | | 50 | | | 13,800 | | | 13,850 | | | (13,198) | | | 652 | | Other income | 55 | | | — | | | 55 | | | 722 | | | 777 | | | 9,144 | | | 9,921 | |
Total U.S. GAAP Revenue | 117,201 | | | (20,837) | | | 96,364 | | | 1,206 | | | 97,570 | | | (13,198) | | | 84,372 | | |
Total | | Total | $ | 37,185 | | | $ | 34,414 | | | $ | 71,599 | | | $ | (10,735) | | | $ | 60,864 | | | $ | 9,144 | | | $ | 70,008 | |
Contribution margin | Contribution margin | $ | (20,785) | | | $ | (39,605) | | | $ | (60,390) | | | $ | (40,032) | | | $ | (100,422) | | | $ | 0 | | | $ | 0 | | Contribution margin | $ | (29,857) | | | $ | 20,023 | | | $ | (9,834) | | | $ | (48,704) | | | $ | (58,538) | | | 0 | | 0 |
| | Three Months Ended June 30, 2020 | |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciliation Item(1) | | Total Consolidated | |
Revenue | | | | | | | | | | | | | | |
Gain on loans, net | $ | 356,871 | | | $ | 0 | | | $ | 356,871 | | | $ | 0 | | | $ | 356,871 | | | $ | 0 | | | $ | 356,871 | | |
Loan fee income | 20,394 | | | 0 | | | 20,394 | | | 0 | | | 20,394 | | | 0 | | | 20,394 | | |
Loan servicing fees | (1,656) | | | 43,965 | | | 42,309 | | | 0 | | | 42,309 | | | 0 | | | 42,309 | | |
Change in FV of MSRs, net | 0 | | | (72,249) | | | (72,249) | | | 0 | | | (72,249) | | | 0 | | | (72,249) | | |
Interest income (loss), net | 960 | | | 1,269 | | | 2,229 | | | (4,791) | | | (2,562) | | | 0 | | | (2,562) | | |
Other income | 0 | | | 58 | | | 58 | | | 2,067 | | | 2,125 | | | (1,864) | | | 261 | | |
Total U.S. GAAP Revenue | 376,569 | | | (26,957) | | | 349,612 | | | (2,724) | | | 346,888 | | | (1,864) | | | 345,024 | | |
Contribution margin | $ | 304,041 | | | $ | (42,419) | | | $ | 261,622 | | | $ | (33,101) | | | $ | 228,522 | | | $ | 0 | | | $ | 0 | | |
| | Six Months Ended June 30, 2021 | |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciliation Item(1) | | Total Consolidated | |
Revenue | | | | | | | | | | | | | | |
Gain on loans, net | $ | 376,232 | | | $ | 17 | | | $ | 376,249 | | | $ | 8 | | | $ | 376,257 | | | $ | 0 | | | $ | 376,257 | | |
Loan fee income | 83,615 | | | 0 | | | 83,615 | | | 0 | | | 83,615 | | | 0 | | | 83,615 | | |
Loan servicing fees | (8) | | | 155,930 | | | 155,922 | | | 0 | | | 155,922 | | | 0 | | | 155,922 | | |
Change in FV of MSRs, net | 0 | | | (94,057) | | | (94,057) | | | 0 | | | (94,057) | | | 0 | | | (94,057) | | |
Interest income (loss), net | 3,985 | | | 669 | | | 4,654 | | | (21,500) | | | (16,846) | | | 0 | | | (16,846) | | |
Other income | 0 | | | 176 | | | 176 | | | 18,638 | | | 18,814 | | | (17,361) | | | 1,453 | | |
Total U.S. GAAP Revenue | 463,824 | | | 62,735 | | | 526,559 | | | (2,854) | | | 523,705 | | | $ | (17,361) | | | $ | 506,344 | | |
Contribution margin | $ | 166,484 | | | $ | 25,247 | | | $ | 191,730 | | | $ | (93,063) | | | $ | 98,664 | | | $ | 0 | | | $ | 0 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 58,638 | | | $ | — | | | $ | 58,638 | | | 0 | | $ | 58,638 | | | 0 | | $ | 58,638 | |
Loan fee income | 35,159 | | | — | | | 35,159 | | | 0 | | 35,159 | | | 0 | | 35,159 | |
Loan servicing fees | — | | | 143,936 | | | 143,936 | | | 0 | | 143,936 | | | 0 | | 143,936 | |
Change in fair value of mortgage servicing rights | — | | | (12,704) | | | (12,704) | | | 0 | | (12,704) | | | 0 | | (12,704) | |
Interest income (expense), net | 16,097 | | | 2,135 | | | 18,232 | | | (25,637) | | | (7,405) | | | 0 | | (7,405) | |
Other income (expense) | 55 | | | — | | | 55 | | | (3,916) | | | (3,861) | | | 14,416 | | | 10,555 | |
Total | $ | 109,949 | | | $ | 133,367 | | | $ | 243,316 | | | $ | (29,553) | | | $ | 213,763 | | | $ | 14,416 | | | $ | 228,179 | |
Contribution margin | $ | (38,247) | | | $ | 103,257 | | | $ | 65,010 | | | $ | (107,361) | | | $ | (42,351) | | | 0 | | 0 |
(1)The Company includes the income(income) loss from its equity method investment in the All Other segment. Therefore, it must be removed to reconcile to Total revenue, net on the condensed consolidated statements of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 75,011 | | | $ | 18 | | | $ | 75,029 | | | $ | — | | | $ | 75,029 | | | $ | — | | | $ | 75,029 | |
Loan fee income | 39,500 | | | — | | | 39,500 | | | — | | | 39,500 | | | — | | | 39,500 | |
Loan servicing fees | — | | | 85,584 | | | 85,584 | | | — | | | 85,584 | | | — | | | 85,584 | |
Change in fair value of mortgage servicing rights | — | | | (106,905) | | | (106,905) | | | — | | | (106,905) | | | — | | | (106,905) | |
Interest income (expense), net | 2,698 | | | 416 | | | 3,114 | | | (12,602) | | | (9,488) | | | — | | | (9,488) | |
Other income | — | | | 48 | | | 48 | | | 13,802 | | | 13,850 | | | (13,198) | | | 652 | |
Total | $ | 117,209 | | | $ | (20,839) | | | $ | 96,370 | | | $ | 1,200 | | | $ | 97,570 | | | $ | (13,198) | | | $ | 84,372 | |
Contribution margin | $ | (20,850) | | | $ | (39,596) | | | $ | (60,446) | | | $ | (39,975) | | | $ | (100,421) | | | 0 | | 0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 376,239 | | | $ | 18 | | | $ | 376,257 | | | $ | — | | | $ | 376,257 | | | $ | — | | | $ | 376,257 | |
Loan fee income | 83,615 | | | — | | | 83,615 | | | — | | | 83,615 | | | — | | | 83,615 | |
Loan servicing fees | — | | | 155,922 | | | 155,922 | | | — | | | 155,922 | | | — | | | 155,922 | |
Change in fair value of mortgage servicing rights | — | | | (94,057) | | | (94,057) | | | — | | | (94,057) | | | — | | | (94,057) | |
Interest income (expense), net | 3,986 | | | 668 | | | 4,654 | | | (21,500) | | | (16,846) | | | — | | | (16,846) | |
Other income | — | | | 176 | | | 176 | | | 18,638 | | | 18,814 | | | (17,361) | | | 1,453 | |
Total | $ | 463,840 | | | $ | 62,727 | | | $ | 526,567 | | | $ | (2,862) | | | $ | 523,705 | | | $ | (17,361) | | | $ | 506,344 | |
Contribution margin | $ | 166,412 | | | $ | 25,248 | | | $ | 191,660 | | | $ | (92,996) | | | $ | 98,664 | | | 0 | | 0 |
(1)The Company includes the (income) loss from its equity method investments in the All Other category.segment. In order to reconcile to Total revenue, net revenue on the condensed consolidated statements of operations, it must be removed as is presented above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciliation Item(1) | | Total Consolidated |
Revenue | | | | | | | | | | | | | |
Gain on loans, net | $ | 459,434 | | | $ | 0 | | | $ | 459,434 | | | $ | 0 | | | $ | 459,434 | | | $ | 0 | | | $ | 459,434 | |
Loan fee income | 32,425 | | | 0 | | | 32,425 | | | 0 | | | 32,425 | | | 0 | | | 32,425 | |
Loan servicing fees | (2,218) | | | 87,773 | | | 85,555 | | | 0 | | | 85,555 | | | 0 | | | 85,555 | |
Change in FV of MSRs, net | 0 | | | (163,776) | | | (163,776) | | | 0 | | | (163,776) | | | 0 | | | (163,776) | |
Interest income (loss), net | 1,486 | | | 6,533 | | | 8,019 | | | (10,645) | | | (2,626) | | | 0 | | | (2,626) | |
Other income | 0 | | | 117 | | | 117 | | | 5,704 | | | 5,821 | | | (4,180) | | | 1,641 | |
Total U.S. GAAP Revenue | 491,127 | | | (69,353) | | | 421,774 | | | (4,941) | | | 416,833 | | | (4,180) | | | 412,653 | |
Contribution margin | $ | 366,513 | | | $ | (98,082) | | | $ | 268,431 | | | $ | (53,947) | | | $ | 214,485 | | | $ | 0 | | | $ | 0 | |
(1)The Company includes the income from its equity method investments in the All Other segment. In order to reconcile to Total net revenue on the condensed consolidated statements of operations, it must be removed as is presented above.
The following table presents a reconciliation of contribution margin to consolidated U.S. GAAP Income (loss)Loss (income) before income tax (in thousands):tax:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Income (loss) before income tax | $ | (113,620) | | | $ | 226,658 | | | $ | 81,303 | | | $ | 210,305 | |
Income from equity method investment | 13,198 | | | 1,864 | | | 17,361 | | | 4,180 | |
Contribution margin | $ | (100,422) | | | $ | 228,522 | | | $ | 98,664 | | | $ | 214,485 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
(Loss) income before income tax | $ | (49,394) | | | $ | (113,620) | | | $ | (27,935) | | | $ | 81,303 | |
(Loss) income from equity method investment | (9,144) | | | 13,198 | | | (14,416) | | | 17,361 | |
Contribution margin | $ | (58,538) | | | $ | (100,422) | | | $ | (42,351) | | | $ | 98,664 | |
Note 1618 – Related Parties
The Company has entered into transactions and agreements to purchase various services and products from certain affiliates of our sponsor, Stone Point Capital LLC. The services range frominclude valuation services of mortgage servicing rights, mortgage related services,MSRs, insurance brokerage services, and loan review and tax payment services for certain loan originations. The Company incurred expenses of $3.8recorded $4.7 million and $0.2$20.8 million infor the three months ended June 30, 2021 and 2020, respectively, and $10.1 million and $0.4 million for the six months ended June 30, 20212022, respectively,and$3.8 million and 2020,$10.1 million for the three and six months ended June 30, 2021, respectively, for products, services, and other transactions which are included in Loan expense, Loan servicing expense, Production technology, General and administrative and Other expenses in the unauditedcondensed consolidated statements of operations.
Note 19 – Sale of The Correspondent Channel
On June 1, 2022 (the “Closing Date”), HPF completed the previously announced sale of certain assets of HPF’s delegated Correspondent channel to Planet Home Lending, LLC (“Planet”). The sale of the correspondent channel reduces the Company’s expenses and enables reallocation of resources to our Wholesale channel.
The purchase price for such assets was $2.5 million in cash, plus an earnout payment based on certain of Planet’s correspondent origination volume during the two-year period commencing on the Closing Date. The Company records the earnout payment when the consideration is determined to be realizable. The sale resulted in a $0.4 million loss in Other expenses in the condensed consolidated statements of operations.
Note 1720 – Subsequent Events
The Company has evaluated all subsequent events through the date these condensed consolidated financial statements were issued.
Dividend PaymentCredit Suisse Warehouse Facility Amendment
On August 10, 2021,8, 2022, the Company announced thatamended $1.2 billion warehouse facility with Credit Suisse. The amendment reduced the capacity of this warehouse facility to $300 million.
HPMAC
On August 9, 2022, HPC entered into a definitive agreement with MS Investorco, LLC to sell its board of directors declared a dividend of $0.15 per shareequity interests in HPAM for the estimated tangible book value of the Acquired Companies (as defined below) plus an immaterial cash amount (the “HPAM Transaction”). HPAM is the owner of 100% of the outstanding and issued shares of capital stock in HPMAC (each of HPAM and HPMAC, an “Acquired Company”, and collectively the “Acquired Companies”). The HPAM Transaction is expected to close in the second quarterhalf of 20212022, subject to stockholders of record at the close of business on August 20, 2021, payable on or about August 26, 2021.
customary closing conditions, including regulatory approvals and notices.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis supplements our management’s discussion and analysis for the year ended December 31, 20202021 as contained in our 20202021 Annual Report, and presumes that readers have read or have access to such discussion and analysis. The following discussion and analysis should also be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Report. This discussion contains forward-looking statements that reflect our plans and strategy for our business, and involve risks and uncertainties. You should review the “Risk Factors” section of our 20202021 Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read “Cautionary Note on Forward-Looking Statements” in this Report.Report .
Data as of and for the three and six months ended June 30, 20212022 and June 30, 2020,2021, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this Report.
Overview
We are a leading residential mortgage originator and servicer withdriven by a mission to create financially healthy, happy homeowners. We do this by delivering scale, efficiency and savings to our partners and customers. Our business model is focused on growing originations through highly leverageable partner networks supported by at-scale operations, and managing the customer experience through our in-house servicing operation and proprietary Home Ownership Platform. We partner withleveraging a nationwide network of more than 6,700partner relationships to drive sustainable origination growth. We support our origination operations through a robust operational infrastructure and a highly responsive customer experience. We then leverage our servicing platform to manage the customer experience. We believe that the complementary relationship between our origination and servicing businesses allows us to provide a best-in-class experience to our customers throughout their homeownership lifecycle.
Our primary focus is our Wholesale channel, which is a business-to-business-to-customer distribution model in which we utilize our relationships with 8,744 partnering independent mortgage brokerages or(“Broker Partners”) to reach our end-borrower customers. In the second quarter of 2022, we had 3,573 active broker partners. Through our Wholesale channel, we propel the success of our Broker Partners and provide in marketthrough a combination of full service, localized sales coverage, and an efficient and scaled loan fulfillment process throughsupported by our fully integrated technology platform. We also source customersOn June 1, 2022, the Company completed the previously announced sale of the Correspondent channel, through nearly 640which we purchased closed and funded mortgages from a trusted network of 670 correspondent sellers or(“Correspondent Partners”). For additional information refer to Note 19 – Sale of The Correspondent Channel. In our Correspondent Partners.Direct channel, we originate residential mortgages primarily for existing servicing customers who are seeking new financing options.
WeWhile we initiate our customer relationships at the time the mortgage is originated, we maintain ongoing connectivity with our approximately 450,000320 thousand servicing customers, throughwith the ultimate objective of securing them as a Customer for Life. In February 2022, we announced an agreement with ServiceMac, pursuant to which ServiceMac will subservice all mortgage loans underlying MSRs we hold. ServiceMac began subservicing newly originated agency loans for us in the second quarter of 2022. The balance of the agency portfolio and all of the Ginnie Mae portfolio will transition to ServiceMac in the third quarter of 2022. ServiceMac will perform servicing functions on the Company’s behalf, but we will continue to hold the MSRs. We expect that our relationship with ServiceMac will allow us to maintain a leaner cost structure with a greater variable component and will provide greater flexibility when strategically selling certain non-core MSRs. The number of our servicing platform.portfolio customers was 320 thousand and 426 thousand, while the unpaid principal balance (“UPB”) was $92.2 billion and $133.9 billion as of June 30, 2022 and December 31, 2021, respectively.
According to Inside Mortgage Finance, we are the third largest wholesale lender by origination volume for the year ended December 31, 2021.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Summary
We generated $70.0 million of total revenue, net for the three months ended June 30, 2022 compared to $84.4 million of total revenue, net for the three months ended June 30, 2021. We had $44.4 million of net loss for the three months ended June 30, 2022 compared to $73.2 million of net loss for the three months ended June 30, 2021. We generated $57.4 million of Adjusted revenue for the three months ended June 30, 2022 compared to $126.8 million for the three months ended June 30, 2021. We had $46.9 million of Adjusted net loss for the three months ended June 30, 2022 compared to $51.0 million Adjusted net loss for the three months ended June 30, 2021. Refer to “Non-GAAP Financial Measures” for further information regarding our use of Adjusted revenue and Adjusted net income, including limitations related to such non-GAAP measures and a reconciliation of such measures to net income, the nearest comparable financial measure calculated and presented in accordance with U.S. GAAP.
We originated $9.3 billion of mortgage loans for the three months ended June 30, 2022 compared to $25.5 billion for the three months ended June 30, 2021, representing a decrease of $16.2 billion or 63.5%. Our MSR Servicing isPortfolio was $90.5 billion as of June 30, 2022 compared to $124.3 billion as of June 30, 2021. Year-over-year decreases were due to rising interest rates and increased competition in the industry. Our gain on sale margins decreased 16 basis points for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Additionally, according to the Mortgage Bankers Association Mortgage Finance Forecast, average 30-year mortgage rates increased by approximately 210 basis points from June 30, 2021 to June 30, 2022. An increase of this nature generally results in our Origination volume declining as refinance opportunities decrease, which also increases competition, resulting in lower gain on sale margins. However, when rates increase, we experience lower prepayment speeds and a strategic cornerstonesubsequent upward adjustment to the fair value of our business and centralMSRs for the loans that still exist in our portfolio.
Six Months Ended June 30, 2022 Compared to our strategy. Retaining our servicing and managingSix Months Ended June 30, 2021 Summary
We generated $228.2 million of total revenue, net for the servicing platform in-house gives ussix months ended June 30, 2022 compared to $506.3 million of total revenue, net for the opportunitysix months ended June 30, 2021. We had $32.6 million of net loss for the six months ended June 30, 2022 compared to establish a deeper relationship with$75.8 million of net income for the six months ended June 30, 2021. We generated $144.1 million of Adjusted revenue for the six months ended June 30, 2022 compared to $450.9 million for the six months ended June 30, 2021. We had $77.8 million of Adjusted net loss for the six months ended June 30, 2022 compared to $23.4 million Adjusted net income for the six months ended June 30, 2021. Refer to “Non-GAAP Financial Measures” for further information regarding our customers that personalizes the experience for borrowers through the use of Adjusted revenue and Adjusted net income, including limitations related to such non-GAAP measures and a reconciliation of such measures to net income, the nearest comparable financial measure calculated and presented in accordance with U.S. GAAP.
We originated $21.8 billion of mortgage loans for the six months ended June 30, 2022 compared to $54.9 billion for the six months ended June 30, 2021, representing a decrease of $33.1 billion or 60.2%. As noted above, our Home Ownership Platform’s customized dashboardsMSR Servicing Portfolio was $90.5 billion as of June 30, 2022 compared to $124.3 billion as of June 30, 2021. Year-over-year decreases were due to rising interest rates and increased competition in the industry. Our gain on sale margins also decreased 50 basis points for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Additionally, as noted above, average 30-year mortgage rates increased by approximately 210 basis points from June 30, 2021 to June 30, 2022. As noted above, an increase of this nature generally results in lower Origination volume and lower gain on sale margins. However, the higher rates result in an upward adjustment to the fair value of our MSRs for the loans that deliver critical information about borrowers’ accounts such as payment deadlines, forbearance status and escrow distributions and customized offerings through other third-party financial products such as insurance policies and home equity loans.still exist in our portfolio.
Segments
Our operations are organized into two separate reportable segments: Origination and Servicing.
In our Origination segment, we source loans through three distinct production channels: Direct, Wholesale and Correspondent. The Direct channel provides the Company’s existing servicing customers with various financing options. At the same time, it supports the servicing assets in the ecosystem by retaining existing servicing customers who may otherwise refinance their existing mortgage loans with a competitor. The Wholesale channel consists of mortgages originated through oura nationwide network of 8,744 Broker Partners. The Correspondent channel consists of closed and funded mortgages that we purchase from a trusted network of Correspondent Partners. Once a loan is locked, it becomes channel agnostic. As discussed in Note 19 – Sale of The Correspondent Channel above, on June 1, 2022, the Company completed the previously announced sale of the Correspondent channel. The channels in our Origination segment function in unison through the following activities: hedging, funding, and production. Our Origination segment generated contribution margin of $(29.9) million and $(38.2) million for the three and six months ended June 30, 2022, respectively and $(20.9) million and $166.4 million for the three and six months ended June 30, 2021, respectively.
Our Servicing segment consists primarily of servicing loans that were produced in our Originations segment where the Company retained the servicing rights. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio in compliance with state and federal regulations. We also strategically buy and sell servicing rights.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Summary
ForMSRs. Our Servicing segment generated Contribution margins of $20.0 million and $103.3 million for the three and six months ended June 30, 2021, we originated $25.5 billion of mortgage loans compared to $11.8 billion for the three months ended June 30, 2020, representing an increase of $13.7 billion or 116%. We generated $84.42022, respectively and $(39.6) million of revenue for the three months ended June 30, 2021 compared to $345.0and $25.2 million for the three months ended June 30, 2020. We incurred $73.2 million of net loss for the three months ended June 30, 2021 compared to a net income of $169.0 million for the three months ended June 30, 2020. We generated $126.8 million of Adjusted revenue for the three months ended June 30, 2021 compared to $378.0 million for the three months ended June 30, 2020. We incurred $51.0 million of Adjusted net loss for the three months ended June 30, 2021 compared to $192.0 million of Adjusted net income for the three months ended June 30, 2020. Refer to “Non-GAAP Financial Measures” for further information regarding our use of Adjusted revenue and Adjusted net income, including limitations related to such non-GAAP measures and a reconciliation of such measures to net income (loss), the nearest comparable financial measure calculated and presented in accordance with U.S. GAAP.
The above-described decrease in revenue, net income, Adjusted revenue and Adjusted net income was primarily due to the decrease in Gain on loans, net of $281.8 million which was driven by significant competitive and market pricing pressure for the three months ended June 30, 2021. Gain on sale margins decreased by 222 basis points or 79% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 Summary
For the six months ended June 30, 2021, we originated $54.9 billion of mortgage loansrespectively.
We believe that maintaining both an Origination segment and a Servicing segment provides us with a more balanced business model in both rising and declining interest rate environments, as compared to $19.9 billion for the six months ended June 30, 2020, representing an increase of $35.0 billion or 175%. We generated $506.3 million of revenue for the six months ended June 30, 2021 compared to $412.7 million for the six months ended June 30, 2020. We generated $75.8 million of net income for the six months ended June 30, 2021 compared to a net income of $158.5 million for the six months ended June 30, 2020. We generated $450.9 million of Adjusted revenue for the six months ended June 30, 2021 compared to $503.3 million for the six months ended June 30, 2020. We generated $23.4 million of Adjusted net income for the six months ended June 30, 2021 compared to $221.9 million for the six months ended June 30, 2020. Refer to “Non-GAAP Financial Measures” for further information regarding our use of Adjusted Revenue and Adjusted net income, including limitations related to such non-GAAP measures and a reconciliation of such measures to net income (loss), the nearest comparable financial measure calculated and presented in accordance with U.S. GAAP.
The above-described decrease in net income, Adjusted revenue and Adjusted net income was primarily due to the decrease in Gain on loans, net of $83.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease in Gain on loans, net was driven by significant competitive and market pricing pressure for the six months ended June 30, 2021. Gain on sale margins decreased by 184 basis points or 47% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Recent Developments – COVID-19
Business Operations
While the financial markets have demonstrated volatility due to the economic impacts of the COVID-19 pandemic, the adverse impact to the Company has been limited to our MSR Servicing Portfolio. As part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020 in response to the pandemic, borrowers with federally backed loans were able to request a temporary mortgage forbearance. In addition, the federal government announced additional extensions of the eligible forbearance periods for certain federally backed mortgage loans to support the housing market’s orderly transition to post-pandamic operation. The CARES Act imposed various compliance obligations on mortgage servicing activities, including, but not limited to mandatory forbearance offerings, altered credit reporting obligations, and moratoriums on foreclosure actions and late fee assessments. Additionally, federal regulations issued as of June 28, 2021, with an effective date of August 31, 2021, impose several new compliance obligations and extend the foreclosure moratorium until December 31, 2021 for most mortgage loans.
As of June 30, 2021, approximately 6,500, or 1.3%, of the loans in our MSR Servicing Portfolio had elected the forbearance option due to the impact of the COVID-19 pandemic. Of the 1.3% of the loans in our MSR Servicing Portfolioother industry participants that had elected the forbearance option as of June 30, 2021, approximately 77% are 60 days or more delinquent on their June 30, 2021 payments. As a result of the CARES Act forbearance requirements, we have experienced, and expect to continue to experience, increases in delinquencies in our MSR Servicing Portfolio.
As of June 30, 2021, the 60 days or more delinquent rate in our MSR Servicing Portfolio was 1.6%. As a servicer, we may be required to advance principal and interest to the investor for up to four months on Government Sponsored Entity (“GSE”) backed mortgages and longer on other government agency backed mortgages on behalf of borrowers who have entered a forbearance plan. In response to these potential GSE requirements, in May 2021 we amended our servicing advance facility to extend the maturity date to May 2022 and increased the total capacity from $85.0 million to $115.0 million.
We are currently prohibited from collecting certain servicing-related fees, such as late fees, and initiating foreclosure proceedings until the termination of the CARES Act forbearance period. As a result, we expect the effects of the CARES Act forbearance requirements to reduce our servicing income and increase our servicing expenses.
Associate Safety
We are continuing topredominantly focus on protecting the safety and well-beingeither origination or servicing, instead of our associates especially as we make plans to return some of our associates to our physical office locations. A significant number of our associates continue to work in a remote or hybrid arrangement in their respective working locations and we expect to maintain that approach for the foreseeable future.
While the COVID-19 pandemic has not had a material negative impact on our operational performance, financial performance, or liquidity to date, it is difficult to predict what the future impact of a prolonged pandemic will be on the economy and our business.both.
Key Factors Affecting Results of Operations for Periods Presented
Residential Real Estate Market Conditions
Our Origination volume is impacted by broader residential real estate market conditions and the general economy. Housing affordability, availability and general economic conditions influence the demand for our products. Housing affordability and availability are impacted by mortgage interest rates, availability of funds to finance purchases, availability of alternative investment products and the relative relationship of supply and demand. General economic conditions are impacted by unemployment rates, changes in real wages, inflation, consumer confidence, seasonality and the overall economic environment. Recent market conditions, such as lowrising interest rates, high inflation and limited supply of housing, have led to home price appreciation anddue to limited housing supply, have led to a decrease in the affordability index.index and negatively impacted Origination volume. These trends are partially offset by the effects of strong employment market with continuing wage growth.
Changes in Interest Rates
Origination volume is impacted by changes in interest rates. Decreasing interest rates tend to increase the volume of purchase loan origination and refinancing whereas increasing interest rates tend to decrease the volume of purchase loan origination and refinancing.
Changes in interest rates also impact the value of interest rate lock commitments and loans held for sale. Interest rate lock commitments represent an agreement to extend credit to a customer whereby the interest rate is set prior to the loan funding. These commitments bind us to fund the loan at a specified rate. When loans are funded, they are classified as held for sale until they are sold. During the origination and sale process, the value of interest rate lock commitments and loans held for sale inventory rises and fallsfluctuates with changes in interest rates; for example, if we enter into interest rate lock commitments at low interest rates followed by an increase in interest rates in the market, the value of our interest rate lock commitment will decrease.
The fair value of MSRs is also driven primarily by interest rates, which impact the likelihood of loan prepayments. In periods of rising interest rates, the fair value of the MSRs generally increases as prepayments decrease, and therefore the estimated life of the MSRs and related expected cash flows increase. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore the estimated life of the MSRs, and related cash flows, decrease.
WeEarly 2021 had a falling interest rate environment. In the second half of 2021, interest rates started to rise, which continued into the first half of 2022. Because origination volumes tend to increase in declining interest rate environments and decrease in increasing rate environments, we believe that our two principal sources of revenue, mortgage origination and mortgage loan servicing, contribute to a stable business profile by creatingcreate a natural hedge against changes in the interest rate environment. Additionally, to mitigate the interest rate risk impact, we employ economic hedging strategies. Our economic hedging strategies allow us to protect our investment and help us manage our liquidity through forward delivery commitments on mortgage-backed securities or whole loans and options on forward contracts.
Key Performance Indicators
We review several operating metrics, including the following key performance indicators to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and they may be used by investors to help analyze the health of our business.
Our origination metrics enable us to monitor our ability to generate revenue and expand our market share across different channels. In addition, they help us track origination quality and compare our performance against the nationwide originations market and our competitors. We monitor both Origination volume, which represents funded volume, and Fallout Adjusted (“FOA”) lock volume which represents pull through adjusted volume expected from locks taken during the period at the inception of the lock. We also view gain on sale margins by channel which helps us to view the margin drivers that are attributable to the specific channels and those that are attributable to capital markets activities. Other key performance indicators include the number of Broker Partners, andprior to the sale of our Correspondent channel, number of Correspondent Partners, which enable us to monitor key inputs of our business model. As noted above, on June 1, 2022, the Company completed the previously announced sale of the Correspondent channel. For additional information refer to Note 19 – Sale of The Correspondent Channel. Our servicing metrics enable us to monitor the size of our customer base, the characteristics and value of our MSR Servicing Portfolio, and help drive retention efforts.
Origination Segment KPIs
The following summarizes key performance indicators for our business for the three and six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Origination Volume by Channel | | | | | | | | |
Wholesale | | $ | 18,380,041 | | | $ | 7,844,172 | | | $ | 38,046,239 | | | $ | 12,790,717 | |
Correspondent | | 5,695,078 | | | 3,490,965 | | | 13,936,267 | | | 6,416,671 | |
Direct | | 1,390,698 | | | 431,714 | | | 2,904,783 | | | 724,526 | |
Origination volume | | $ | 25,465,817 | | | $ | 11,766,851 | | | $ | 54,887,289 | | | $ | 19,931,914 | |
| | | | | | | | |
FOA Lock Volume by Channel | | | | | | | | |
Wholesale | | $ | 15,566,192 | | | $ | 8,170,570 | | | $ | 31,706,115 | | | $ | 15,133,238 | |
Correspondent | | 3,962,583 | | | 4,694,408 | | | 10,635,642 | | | 7,922,104 | |
Direct | | 835,980 | | | 591,015 | | | 1,575,776 | | | 926,401 | |
FOA Lock Volume | | $ | 20,364,755 | | | $ | 13,455,993 | | | $ | 43,917,533 | | | $ | 23,981,743 | |
| | | | | | | | |
| | Three Months Ended June 30, |
| | 2021 | | 2020 |
Gain on Sale Margin by Channel | | Amount | | bps | | Amount | | bps |
Wholesale | | $ | 114,486 | | | 74 | | $ | 252,534 | | | 309 |
Correspondent | | 9,270 | | 23 | | 50,163 | | 107 |
Direct | | 26,322 | | 315 | | 25,943 | | 439 |
Gain on sale margin attributable to channels | | 150,078 | | | 74 | | 328,640 | | | 244 |
Other gain (loss) on sale(a) | | (32,877) | | | n/a | | 47,929 | | | n/a |
Gain on sale margin (b) | | $ | 117,201 | | | 58 | | $ | 376,569 | | | 280 |
Origination Segment KPIs | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
Gain on Sale Margin by Channel | | Amount | | bps | | Amount | | bps |
Wholesale | | $ | 359,536 | | 225 | | $ | 382,705 | | 496 |
Correspondent | | 31,433 | | 57 | | 71,576 | | 173 |
Direct | | 53,081 | | 677 | | 40,522 | | 874 |
Gain on sale margin attributable to channels | | 444,050 | | 199 | | 494,803 | | 402 |
Other gain (loss) on sale(a) | | 19,774 | | n/a | | (3,676) | | n/a |
Gain on sale margin (b) | | $ | 463,824 | | 205 | | $ | 491,127 | | 389 |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Market Share | | | | | | | | |
Overall share of origination market(c) | | 2.2 | % | | 1.2 | % | | 2.2 | % | | 1.2 | % |
Share of wholesale channel(d) | | 10.4 | % | | 6.2 | % | | 10.4 | % | | 6.2 | % |
| | | | | | | | |
Origination Volume by Purpose | | | | | | | | |
Purchase | | 35.2 | % | | 30.7 | % | | 27.5 | % | | 65.8 | % |
Refinance | | 64.8 | % | | 69.3 | % | | 72.5 | % | | 34.2 | % |
| | | | | | | | |
Third Party Partners | | | | | | | | |
Number of Broker Partners(e) | | 6,738 | | 4,338 | | | 6,738 | | 4,338 |
Number of Correspondent Partners(f) | | 642 | | 580 | | | 642 | | 580 |
The following presents key performance indicators for our business:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Origination Volume by Channel | | | | | | | |
Wholesale | $ | 7,382,358 | | | $ | 18,380,041 | | | $ | 16,700,059 | | | $ | 38,048,305 | |
Correspondent | 1,731,820 | | | 5,695,078 | | | 4,465,121 | | | 13,938,458 | |
Direct | 177,689 | | | 1,390,698 | | | 681,760 | | | 2,904,985 | |
Origination volume | $ | 9,291,867 | | | $ | 25,465,817 | | | $ | 21,846,940 | | | $ | 54,891,748 | |
| | | | | | | |
Fallout Adjusted (“FOA”) Lock Volume by Channel | | | | | | | |
Wholesale | $ | 7,483,278 | | | $ | 15,566,192 | | | $ | 17,046,986 | | | $ | 31,706,115 | |
Correspondent | 1,269,053 | | | 3,962,583 | | | 3,879,896 | | | 10,635,642 | |
Direct | 125,874 | | | 835,980 | | | 540,444 | | | 1,575,776 | |
FOA Lock Volume | $ | 8,878,205 | | | $ | 20,364,755 | | | $ | 21,467,326 | | | $ | 43,917,533 | |
| | | | | | | |
Gain on sale margin by Channel | | | | | | | |
Wholesale | $ | 47,654 | | | $ | 114,486 | | | $ | 110,240 | | | $ | 359,536 | |
Correspondent | 2,002 | | | 9,270 | | | 5,452 | | | 31,432 | |
Direct | 3,214 | | | 26,322 | | | 13,911 | | | 53,080 | |
Gain on sale margin attributable to channels | 52,870 | | | 150,078 | | | 129,603 | | | 444,048 | |
Other (loss) gain on sale(a) | (15,685) | | | (32,869) | | | (19,653) | | | 19,791 | |
Total gain on sale margin(b) | $ | 37,185 | | | $ | 117,209 | | | $ | 109,950 | | | $ | 463,839 | |
| | | | | | | |
Gain on sale margin by Channel (bps) | | | | | | | |
Wholesale | 64 | | 74 | | 65 | | 113 |
Correspondent | 16 | | 23 | | 14 | | 29 |
Direct | 256 | | 315 | | 257 | | 334 |
Gain on sale margin attributable to channels | 60 | | 74 | | 60 | | 101 |
Other (loss) gain on sale(a) | (18) | | (16) | | (9) | | — |
Total gain on sale margin(b) | 42 | | 58 | | 51 | | 101 |
| | | | | | | |
Origination Volume by Purpose | | | | | | | |
Purchase | 71.3 | % | | 35.2 | % | | 55.9 | % | | 20.4 | % |
Refinance | 28.7 | % | | 64.8 | % | | 44.1 | % | | 79.6 | % |
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Market Share | | | |
Overall share of origination market(c) | 1.7 | % | | 2.2 | % |
Share of wholesale channel(d) | 8.3 | % | | 10.2 | % |
| | | |
Third Party Partners | | | |
Number of Broker Partners(e) | 8,744 | | 6,738 |
Number of Correspondent Partners(f) | 670 | | 642 |
(a)Includes loan fee income, interest income (expense), net, realized and unrealized gains (losses) on locks and mortgage loans held for sale, net hedging results, the provision for the representation and warranty reserve and differences between modeled and actual pull-through.
(b)Gain on sale margin calculated as gain on sale divided by Fallout Adjusted Lock volume. Gain on sale includes gain on loans, net, loan fee income, interest income (expense), net, and loan servicing fees (expense) for the Origination segment.
(c)Overall share of origination market share data for June 30, 2022 is as of March 31, 20212022 obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics. The data as of June 30, 20212022 is not yet available from Inside Mortgage Finance as of the date of this filing.
(d)Share of wholesale channel for June 30, 2022 is as of March 31, 20212022 obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics. The data as of June 30, 20212022 is not yet available from Inside Mortgage Finance as of the date of this filing.
(e)Number of Broker Partners with whom the Company sources loans.
(f)Number of Correspondent Partners from whom the Company purchases loans.
purchased loans prior to the completion of the previously announced sale of the Correspondent channel on June 1, 2022.
Servicing Segment KPIs
The following summarizespresents key performance indicators for our business as of June 30, 2021 and 2020:business:
| | | As of June 30, | | June 30, |
($ in thousands) | | 2021 | | 2020 | |
| | | 2022 | | 2021 |
| | | (dollars in thousands) |
Mortgage Servicing | Mortgage Servicing | | | | | Mortgage Servicing | |
MSR Servicing Portfolio - UPB(a) | MSR Servicing Portfolio - UPB(a) | | $ | 124,258,935 | | $ | 66,901,643 | MSR Servicing Portfolio - UPB(a) | $ | 90,516,421 | | $ | 124,258,935 |
MSR Servicing Portfolio - Units(b) | MSR Servicing Portfolio - Units(b) | | 449,029 | | 285,353 | MSR Servicing Portfolio - Units(b) | 320,215 | | 449,029 |
| 60 days or more delinquent(c) | 60 days or more delinquent(c) | | 1.6 | % | | 7.8 | % | 60 days or more delinquent(c) | 0.9 | % | | 1.6 | % |
| MSR Portfolio | MSR Portfolio | | MSR Portfolio | |
MSR multiple(d) | MSR multiple(d) | | 3.69 | | 2.54 | MSR multiple(d) | 5.83 | | 3.69 |
Weighted Average Note Rate (e) | Weighted Average Note Rate (e) | | 3.09 | % | | 3.79 | % | Weighted Average Note Rate (e) | 3.18 | % | | 3.09 | % |
(a)The unpaid principal balance of loans we service on behalf of Ginnie Mae, Fannie Mae, Freddie Mae and others, at period end.
(b)Number of loans in our capitalized servicing portfolio at period end.
(c)Total balances of outstanding loan principals for which installment payments are at least 60 days past due as a percentage of the outstanding loan principal as of a specified date. Includes delinquent loans in COVID-19 pandemic-related forbearance plans provided in the CARES Act.
(d)Calculated as the MSR fair market value as of a specified date divided by the related UPB divided by the weighted average service fee.
(e)Weighted average interest rate of our MSR portfolio at period end.
Non-GAAP Financial Measures
We believe that certain non-GAAP financial measures presented herein,in this Report, including Adjusted revenue and Adjusted net income can provide useful information to investors and others in understanding and evaluating our operating results. These measures are not financial measures calculated in accordance with U.S. GAAP and should not be considered as a substitute for net income, or any other operating performance measure calculated in accordance with U.S. GAAP and may not be comparable to a similarly titled measure reported by other companies.
We believe that the presentation of Adjusted revenue and Adjusted net income provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted revenue and Adjusted net income provide indicators of performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period, and management relies on these measures for planning and forecasting of future periods. The Company measures the performance of the segments primarily on a contribution margin basis. Additionally, these measures allow management to compare our results with those of other companies that have different financing and capital structures. However, other companies may define Adjusted revenue and Adjusted net income differently, and as a result, our measures of Adjusted revenue and Adjusted net income may not be directly comparable to those of other companies.
Adjusted revenuerevenue. . We define Adjusted revenue as Total net revenue net exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs hedge, and adjusted for Income from equity method investment.
Adjusted net incomeincome.. We define Adjusted net income as Net income (loss) exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs economic hedging results.
The non-GAAP information presented below should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the related notes.
The following ispresents a reconciliation of Adjusted revenue and Adjusted net (loss) income to the nearest U.S. GAAP financial measures of Total revenue, net and Net (loss) income, (loss), as applicable:
Reconciliation of Adjusted Revenue to Total Revenue, Net
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (dollars in thousands) |
Total revenue, net | Total revenue, net | | $ | 84,372 | | | $ | 345,024 | | | $ | 506,344 | | | $ | 412,653 | | Total revenue, net | $ | 70,008 | | | $ | 84,372 | | | $ | 228,179 | | | $ | 506,344 | |
Income from equity method investment | | 13,198 | | | 1,864 | | | 17,361 | | | 4,180 | | |
(Loss) income from equity method investment | | (Loss) income from equity method investment | (9,144) | | | 13,198 | | | (14,416) | | | 17,361 | |
Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | | 29,181 | | | 31,111 | | | (72,837) | | | 86,485 | | Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | (3,502) | | | 29,181 | | | (69,635) | | | (72,837) | |
Adjusted revenue | Adjusted revenue | | $ | 126,751 | | | $ | 377,999 | | | $ | 450,868 | | | $ | 503,318 | | Adjusted revenue | $ | 57,362 | | | $ | 126,751 | | | $ | 144,128 | | | $ | 450,868 | |
Reconciliation of Adjusted Net (Loss) Income to Total Net (Loss) Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Total net income (loss) | | $ | (73,213) | | | $ | 169,021 | | | $ | 75,756 | | | $ | 158,473 | |
Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | | 29,181 | | | 31,111 | | | (72,837) | | | 86,485 | |
Income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge(b) | | (6,989) | | | (8,167) | | | 20,523 | | | (23,034) | |
Adjusted net income (loss) | | $ | (51,021) | | | $ | 191,965 | | | $ | 23,442 | | | $ | 221,924 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Net (loss) income | $ | (44,417) | | | $ | (73,213) | | | $ | (32,553) | | | $ | 75,756 | |
Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | (3,502) | | | 29,181 | | | (69,635) | | | (72,837) | |
Income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge(b) | 1,001 | | | (6,988) | | | 24,424 | | | 20,523 | |
Adjusted net (loss) income | $ | (46,918) | | | $ | (51,020) | | | $ | (77,764) | | | $ | 23,442 | |
(a)MSR fair value changes due to valuation inputs and assumptions are measured using a stochastic discounted cash flow model that includes assumptions such as prepayment speeds, delinquencies, discount rates, and effects of changes in market interest rates. Refer to Note 2 – Basis of Presentation and Significant Accounting Policies and Note 4 – Mortgage Servicing Rights to our unaudited condensed consolidated financial statements included elsewhere in this Report. We exclude changes in fair value of MSRs (due to inputs and assumptions), net of hedge from Adjusted revenue as they add volatility and we believe that they are not indicative of the Company’s operating performance or results of operations. This adjustment does not include changes in fair value of MSRs due to realization of cash flows. Realization of cash flows occurs when cash is collected as customers make scheduled payments, partial prepayments of principal, or pay their mortgage in full. The adjustment includes the loss on MSR sales since it is not indicative of the Company’s results of operations.
(b)The income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge is calculated as the MSR valuation change, net of hedge multiplied by the quotient of Income tax expense (benefit) divided by Income (loss) before income tax.
Results of Operations —Three– Three and Six Months Ended June 30, 20212022 and 20202021
Consolidated Results of Operations
The following table sets forthpresents certain consolidated financial data for each of the periods indicated:data:
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | |
($ in thousands) | 2021 | | 2020 | | $ Change | | % Change | |
| | | 2022 | | 2021 | | $ Change | | % Change |
| | | (dollars in thousands) | | | | |
Revenue: | | Revenue: | |
Gain on loans, net | Gain on loans, net | $ | 75,029 | | | $ | 356,871 | | | $ | (281,842) | | | (79.0 | %) | Gain on loans, net | $ | 13,234 | | | $ | 75,029 | | | $ | (61,795) | | | (82.4 | %) |
Loan fee income | Loan fee income | 39,500 | | | 20,394 | | | 19,106 | | | 93.7 | % | Loan fee income | 15,255 | | | 39,500 | | | (24,245) | | | (61.4 | %) |
| Interest income | Interest income | 34,648 | | | 11,811 | | | 22,837 | | | 193.4 | % | Interest income | 27,533 | | | 34,648 | | | (7,115) | | | (20.5 | %) |
Interest expense | Interest expense | (44,136) | | | (14,373) | | | (29,763) | | | 207.1 | % | Interest expense | (28,920) | | | (44,136) | | | 15,216 | | | (34.5 | %) |
Interest expense, net | Interest expense, net | (9,488) | | | (2,562) | | | (6,926) | | | 270.3 | % | Interest expense, net | (1,387) | | | (9,488) | | | 8,101 | | | (85.4 | %) |
Loan servicing fees | Loan servicing fees | 85,584 | | | 42,309 | | | 43,275 | | | 102.3 | % | Loan servicing fees | 62,872 | | | 85,584 | | | (22,712) | | | (26.5 | %) |
Change in fair value of mortgage servicing rights, net | (106,905) | | | (72,249) | | | (34,656) | | | 48.0 | % | |
Change in fair value of mortgage servicing rights | | Change in fair value of mortgage servicing rights | (29,887) | | | (106,905) | | | 77,018 | | | (72.0 | %) |
Other income | Other income | 652 | | | 261 | | | 391 | | | 149.8 | % | Other income | 9,921 | | | 652 | | | 9,269 | | | 1421.6 | % |
Total revenue, net | Total revenue, net | 84,372 | | | 345,024 | | | (260,652) | | | (75.5 | %) | Total revenue, net | 70,008 | | | 84,372 | | | (14,364) | | | (17.0 | %) |
| Expenses: | | Expenses: | | | | | | | |
Compensation and benefits | Compensation and benefits | 127,296 | | | 81,335 | | | 45,961 | | | 56.5 | % | Compensation and benefits | 75,601 | | | 127,296 | | | (51,695) | | | (40.6 | %) |
Loan expense | Loan expense | 17,483 | | | 7,624 | | | 9,859 | | | 129.3 | % | Loan expense | 6,969 | | | 17,483 | | | (10,514) | | | (60.1 | %) |
Loan servicing expense | Loan servicing expense | 7,507 | | | 8,307 | | | (800) | | | (9.6 | %) | Loan servicing expense | 7,121 | | | 7,507 | | | (386) | | | (5.1 | %) |
Production Technology | 8,169 | | | 5,049 | | | 3,120 | | | 61.8 | % | |
Production technology | | Production technology | 4,343 | | | 8,170 | | | (3,827) | | | (46.8 | %) |
General and administrative | General and administrative | 26,549 | | | 11,868 | | | 14,681 | | | 123.7 | % | General and administrative | 16,969 | | | 26,549 | | | (9,580) | | | (36.1 | %) |
Depreciation and amortization | Depreciation and amortization | 2,350 | | | 1,427 | | | 923 | | | 64.7 | % | Depreciation and amortization | 2,627 | | | 2,350 | | | 277 | | | 11.8 | % |
Other expenses | Other expenses | 8,638 | | | 2,756 | | | 5,882 | | | 213.4 | % | Other expenses | 5,772 | | | 8,637 | | | (2,865) | | | (33.2 | %) |
Total expenses | Total expenses | 197,992 | | | 118,366 | | | 79,626 | | | 67.3 | % | Total expenses | 119,402 | | | 197,992 | | | (78,590) | | | (39.7 | %) |
| Income (loss) before income tax | (113,620) | | | 226,658 | | | (340,278) | | | (150.1 | %) | |
Income tax expense (benefit) | (27,209) | | | 59,501 | | | (86,710) | | | (145.7 | %) | |
Income from equity method investment | 13,198 | | | 1,864 | | | 11,334 | | | 608.0 | % | |
Total net income (loss) | $ | (73,213) | | | $ | 169,021 | | | (242,234) | | | (143.3 | %) | |
| | Six Months Ended June 30, | | |
($ in thousands) | 2021 | | 2020 | | $ Change | | % Change | |
Gain on loans, net | $ | 376,257 | | | $ | 459,434 | | | $ | (83,177) | | | (18.1 | %) | |
Loan fee income | 83,615 | | | 32,425 | | | 51,190 | | | 157.9 | % | |
Interest income | 60,225 | | | 27,660 | | | 32,565 | | | 117.7 | % | |
Interest expense | (77,071) | | | (30,286) | | | (46,785) | | | 154.5 | % | |
Interest expense, net | (16,846) | | | (2,626) | | | (14,220) | | | (541.5 | %) | |
Loan servicing fees | 155,922 | | | 85,555 | | | 70,367 | | | 82.2 | % | |
Change in fair value of mortgage servicing rights, net | (94,057) | | | (163,776) | | | 69,719 | | | (42.6 | %) | |
Other income | 1,453 | | | 1,641 | | | (188) | | | (11.5) | % | |
Total revenue, net | 506,344 | | | 412,653 | | | 93,691 | | | 22.7 | % | |
| Compensation and benefits | 280,938 | | | 134,285 | | | 146,653 | | | 109.2 | % | |
Loan expense | 35,178 | | | 12,953 | | | 22,225 | | | 171.6 | % | |
Loan servicing expense | 15,600 | | | 16,260 | | | (660) | | | (4.1 | %) | |
Production Technology | 17,455 | | | 8,162 | | | 9,293 | | | 113.9 | % | |
General and administrative | 52,786 | | | 22,768 | | | 30,018 | | | 131.8 | % | |
Depreciation and amortization | 5,111 | | | 2,926 | | | 2,185 | | | 74.7 | % | |
Other expenses | 17,973 | | | 4,994 | | | 12,979 | | | 259.9 | % | |
Total expenses | 425,041 | | | 202,348 | | | 222,693 | | | 110.1 | % | |
| Income before income tax | 81,303 | | | 210,305 | | | (129,002) | | | 61.3 | % | |
Income tax expense | 22,908 | | | 56,012 | | | (33,104) | | | 59.1 | % | |
Income from equity method investment | 17,361 | | | 4,180 | | | 13,181 | | | 315.3 | % | |
Total net income | $ | 75,756 | | | $ | 158,473 | | | (82,717) | | | 52.2 | % | |
Loss before income tax | | Loss before income tax | (49,394) | | | (113,620) | | | 64,226 | | | (56.5 | %) |
Income tax benefit | | Income tax benefit | 14,121 | | | 27,209 | | | (13,088) | | | (48.1 | %) |
(Loss) income from equity method investment | | (Loss) income from equity method investment | (9,144) | | | 13,198 | | | (22,342) | | | (169.3 | %) |
Net (loss) income | | Net (loss) income | $ | (44,417) | | | $ | (73,213) | | | $ | 54,972 | | | (75.1 | %) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Gain on loans, net | $ | 58,638 | | | $ | 376,257 | | | $ | (317,619) | | | (84.4 | %) |
Loan fee income | 35,159 | | | 83,615 | | | (48,456) | | | (58.0 | %) |
| | | | | | | |
Interest income | 54,610 | | | 60,225 | | | (5,615) | | | (9.3 | %) |
Interest expense | (62,015) | | | (77,071) | | | 15,056 | | | (19.5 | %) |
Interest expense, net | (7,405) | | | (16,846) | | | 9,441 | | | (56.0 | %) |
Loan servicing fees | 143,936 | | | 155,922 | | | (11,986) | | | (7.7 | %) |
Change in fair value of mortgage servicing rights | (12,704) | | | (94,057) | | | 81,353 | | | (86.5 | %) |
Other income | 10,555 | | | 1,453 | | | 9,102 | | | 626.4 | % |
Total revenue, net | 228,179 | | | 506,344 | | | (278,165) | | | (54.9 | %) |
Expenses: | | | | | | | |
Compensation and benefits | 165,033 | | | 280,938 | | | (115,905) | | | (41.3 | %) |
Loan expense | 15,984 | | | 35,178 | | | (19,194) | | | (54.6 | %) |
Loan servicing expense | 12,867 | | | 15,600 | | | (2,733) | | | (17.5 | %) |
Production technology | 9,208 | | | 17,455 | | | (8,247) | | | (47.2 | %) |
General and administrative | 36,640 | | | 52,786 | | | (16,146) | | | (30.6 | %) |
Depreciation and amortization | 5,314 | | | 5,111 | | | 203 | | | 4.0 | % |
Other expenses | 11,068 | | | 17,973 | | | (6,905) | | | (38.4 | %) |
Total expenses | 256,114 | | | 425,041 | | | (168,927) | | | (39.7 | %) |
(Loss) income before income tax | (27,935) | | | 81,303 | | | (109,238) | | | (134.4 | %) |
Income tax benefit (expense) | 9,798 | | | (22,908) | | | 32,706 | | | (142.8 | %) |
(Loss) income from equity method investment | (14,416) | | | 17,361 | | | (31,777) | | | (183.0 | %) |
Net (loss) income | $ | (32,553) | | | $ | 75,756 | | | $ | (173,721) | | | (229.3 | %) |
Consolidated results are further analyzed in our segment disclosure below.
Origination Segment
The decrease in Net incomefollowing presents certain financial data for the three and six months ended June 30, 2021 was primarily the resultOrigination segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Gain on loans, net | $ | 13,234 | | | $ | 75,011 | | | $ | (61,777) | | | (82.4) | % |
Loan fee income | 15,255 | | | 39,500 | | | (24,245) | | | (61.4) | % |
| | | | | | | |
Interest income | 26,104 | | | 33,903 | | | (7,799) | | | (23.0) | % |
Interest expense | (17,463) | | | (31,205) | | | 13,742 | | | (44.0) | % |
Interest income, net | 8,641 | | | 2,698 | | | 5,943 | | | 220.3 | % |
Other income | 55 | | | — | | | 55 | | | N/A |
Total origination revenue, net | 37,185 | | | 117,209 | | | (80,024) | | | (68.3) | % |
Expenses: | | | | | | | |
Compensation and benefits | 48,094 | | | 98,806 | | | (50,712) | | | (51.3) | % |
Loan expense | 6,969 | | | 17,277 | | | (10,308) | | | (59.7) | % |
Loan servicing expense | — | | | 20 | | | (20) | | | (100.0) | % |
Production technology | 3,893 | | | 7,613 | | | (3,720) | | | (48.9) | % |
General and administrative | 6,849 | | | 12,053 | | | (5,204) | | | (43.2) | % |
Other expenses | 1,237 | | | 2,290 | | | (1,053) | | | (46.0) | % |
Total origination expenses | 67,042 | | | 138,059 | | | (71,017) | | | (51.4) | % |
Origination net loss | $ | (29,857) | | | $ | (20,850) | | | $ | (9,007) | | | 43.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Gain on loans, net | $ | 58,638 | | | $ | 376,239 | | | $ | (317,601) | | | (84.4) | % |
Loan fee income | 35,159 | | | 83,615 | | | (48,456) | | | (58.0) | % |
| | | | | | | |
Interest income | 52,475 | | | 58,894 | | | (6,419) | | | (10.9) | % |
Interest expense | (36,378) | | | (54,908) | | | 18,530 | | | (33.7) | % |
Interest income, net | 16,097 | | | 3,986 | | | 12,111 | | | 303.8 | % |
Other income | 55 | | | — | | | 55 | | | N/A |
Total origination revenue, net | 109,949 | | | 463,840 | | | (353,891) | | | (76.3) | % |
Expenses: | | | | | | | |
Compensation and benefits | 106,489 | | | 219,384 | | | (112,895) | | | (51.5) | % |
Loan expense | 15,984 | | | 34,672 | | | (18,688) | | | (53.9) | % |
Loan servicing expense | — | | | 319 | | | (319) | | | (100.0) | % |
Production technology | 8,000 | | | 16,511 | | | (8,511) | | | (51.5) | % |
General and administrative | 15,136 | | | 21,901 | | | (6,765) | | | (30.9) | % |
Other expenses | 2,587 | | | 4,641 | | | (2,054) | | | (44.3) | % |
Total origination expenses | 148,196 | | | 297,428 | | | (149,232) | | | (50.2) | % |
Origination net (loss) income | $ | (38,247) | | | $ | 166,412 | | | $ | (204,659) | | | (123.0) | % |
TotalOrigination Revenue, net
Gain on loans, net
The following presents components of Gain on loans, net is driven by volume (FOA locks), our gain on sale margin within each channel of our Origination segment, and other for each of the periods presented:net:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (dollars in thousands) |
FOA Lock Volume by Channel | FOA Lock Volume by Channel | | | | | | | | | FOA Lock Volume by Channel | |
Wholesale | Wholesale | | $ | 15,566,192 | | | $ | 8,170,570 | | | $ | 31,706,115 | | | $ | 15,133,238 | | Wholesale | $ | 7,483,278 | | | $ | 15,566,192 | | $ | 17,046,986 | | | $ | 31,706,115 |
Correspondent | Correspondent | | 3,962,583 | | | 4,694,408 | | | 10,635,642 | | | 7,922,104 | | Correspondent | 1,269,053 | | | 3,962,583 | | 3,879,896 | | | 10,635,642 |
Direct | Direct | | 835,980 | | | 591,015 | | | 1,575,776 | | | 926,401 | | Direct | 125,874 | | | 835,980 | | 540,444 | | | 1,575,776 |
FOA Lock Volume | FOA Lock Volume | | $ | 20,364,755 | | | $ | 13,455,993 | | | $ | 43,917,533 | | | $ | 23,981,743 | | FOA Lock Volume | $ | 8,878,205 | | | $ | 20,364,755 | | | $ | 21,467,326 | | | $ | 43,917,533 | |
| | Three Months Ended June 30, | |
| 2021 | | 2020 | |
Gain on Sale Margin by Channel | | Amount | | bps | | Amount | | bps | |
Gain on sale margin by Channel | | Gain on sale margin by Channel | |
Wholesale | Wholesale | | $ | 114,486 | | | 74 | | $ | 252,534 | | | 309 | Wholesale | $ | 47,654 | | | $ | 114,486 | | | $ | 110,240 | | | $ | 359,536 | |
Correspondent | Correspondent | | 9,270 | | 23 | | 50,163 | | 107 | Correspondent | 2,002 | | | 9,270 | | | 5,452 | | | 31,432 | |
Direct | Direct | | 26,322 | | 315 | | 25,943 | | 439 | Direct | 3,214 | | | 26,322 | | | 13,911 | | | 53,080 | |
Gain on sale margin attributable to channels | Gain on sale margin attributable to channels | | 150,078 | | | 74 | | 328,640 | | | 244 | Gain on sale margin attributable to channels | 52,870 | | | 150,078 | | | 129,603 | | | 444,048 | |
Other gain (loss) on sale(a) | | (32,877) | | | n/a | | 47,929 | | | n/a | |
Gain on sale margin (b) | | $ | 117,201 | | | 58 | | $ | 376,569 | | | 280 | |
Other (loss) gain on sale(a) | | Other (loss) gain on sale(a) | (15,685) | | | (32,869) | | | (19,653) | | | 19,791 | |
Total gain on sale margin(b) | | Total gain on sale margin(b) | $ | 37,185 | | | $ | 117,209 | | | $ | 109,950 | | | $ | 463,839 | |
| | Six Months Ended June 30, | |
| 2021 | | 2020 | |
Gain on Sale Margin by Channel | | Amount | | bps | | Amount | | bps | |
Gain on sale margin by Channel (bps) | | Gain on sale margin by Channel (bps) | |
Wholesale | Wholesale | | $ | 359,536 | | 225 | | $ | 382,705 | | 496 | Wholesale | 64 | | | 74 | | | 65 | | | 113 | |
Correspondent | Correspondent | | 31,433 | | 57 | | 71,576 | | 173 | Correspondent | 16 | | | 23 | | | 14 | | | 29 | |
Direct | Direct | | 53,081 | | 677 | | 40,522 | | 874 | Direct | 256 | | | 315 | | | 257 | | | 334 | |
Gain on sale margin attributable to channels | Gain on sale margin attributable to channels | | 444,050 | | 199 | | 494,803 | | 402 | Gain on sale margin attributable to channels | 60 | | | 74 | | | 60 | | | 101 | |
Other gain (loss) on sale(a) | | 19,774 | | n/a | | (3,676) | | n/a | |
Gain on sale margin (b) | | $ | 463,824 | | 205 | | $ | 491,127 | | 389 | |
Other (loss) gain on sale(a) | | Other (loss) gain on sale(a) | (18) | | | (16) | | | (9) | | | — | |
Total gain on sale margin(b) | | Total gain on sale margin(b) | 42 | | | 58 | | | 51 | | | 101 | |
|
(a)Includes loan fee income, interest income (expense), net, realized and unrealized gains (losses) on locks and mortgage loans held for sale, net hedging results, the provision for the representation and warranty reserve, and differences between modeled and actual pull-through.
(b)Gain on sale margin calculated as gain on sale divided by Fallout Adjusted Lock volume. Gain on sale includes gain on loans, net, loan fee income, interest income (expense), net, and loan servicing fees (expense) for the Origination segment.
In addition, the table below providesThe following presents details of the characteristics of our mortgage loan production for each of the periods presented:production:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Origination volume | $ | 9,291,867 | | $ | 25,465,817 | | $ | 21,846,940 | | $ | 54,891,748 |
Originated MSR UPB | 9,730,325 | | 26,284,323 | | 23,793,090 | | 54,306,349 |
Gain on sale margin (a) | 0.42% | | 0.58% | | 0.51% | | 1.01% |
Retained servicing (UPB)(b) | 97.3% | | 95.8% | | 97.3% | | 97.1% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Origination volume | $ | 25,465,817 | | $ | 11,766,851 | | $ | 54,887,289 | | $ | 19,931,914 |
Originated MSR - UPB | $ | 26,284,323 | | $ | 11,568,411 | | $ | 54,306,349 | | $ | 19,316,893 |
Retained servicing (UPB)(a) | 95.8% | | 99.9% | | 97.1% | | 98.8% |
(a)Represents the percentage of our Includes loan sales UPBs for which we retained the underlying servicing UPB during the period.
For the three months ended June 30, 2021 compared to the three months ended June 30, 2020, the decrease in Gain on loans,fee income, interest income (expense), net, was due to a decrease of $259.4 million, or 69% in gain on sale margin.
For the six months ended June 30, 2021 compared to the six months ended June 30, 2020, the decrease in Gain on loans, net was due to a decrease of $27.3 million, or 6% in gain on sale margin.
Although we experienced increases in FOA lock volume across all of our origination channels primarily due to an increase in our overall share of the origination market, which increased to 2.2% from 1.2% and our share of the wholesale channel which increased to 10.4% from 6.2%, we saw a significant decrease in gain on sale margins due to significant competitive and market pricing pressure during the three months ended June 30, 2021, which also significantly impacted our results for the period six months ended June 30, 2021. The decrease in Gain on loans, net was also due to a $80.8 million unfavorable change in Other gain on sale for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Other gain on sale includes unhedgeable market activity, other capital markets activity,realized and unrealized gains/gains (losses) on locks and mortgage loans held for sale, net hedging results, the provision for the representation and warranty reserve and differences between modeled and actual pull-through. The $80.8 million unfavorable change in Other gain on Sale
(b) Represents the percentage of our loan sales UPBs for which we retained the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was attributable to adverse Agency pricing actions, and interest rate volatilityunderlying servicing UPB during the three months ended June 30, 2021 and higher realized gains on loans, combined with higher than modeled pull-through during the three months ended June 30, 2020. The decrease in gainperiod.
Gain on loans, net for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 included an unfavorable change to Other gain on sale increase of $23.5decreased by $61.8 million, primarily due to interest rate volatilityor 82.4% and adverse Agency pricing actions that occurred during the six months ended June 30, 2021.
Loan fee income
The increase in Loan fee income was primarily driven by an increase in Origination volume discussed above.
Loan servicing fees
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Retained servicing fees, net of guarantee fees | $ | 77,615 | | | $ | 43,521 | | | $ | 145,098 | | | $ | 86,426 | |
Late fees and other | 7,969 | | | (1,212) | | | 10,824 | | | (871) | |
Loan servicing fees | $ | 85,584 | | | $ | 42,309 | | | $ | 155,922 | | | $ | 85,555 | |
The table below provides details of the characteristics of our mortgage loan servicing portfolio for each of the periods presented:
| | | | | | | | | | | |
| As of June 30, |
($ in thousands) | 2021 | | 2020 |
MSR Servicing Portfolio - UPB | $ | 124,258,935 | | $ | 66,901,643 |
Average MSR Servicing Portfolio - UPB | $ | 106,268,092 | | $ | 59,751,095 |
MSR Servicing Portfolio – units | 449,029 | | 285,353 |
MSRs Fair Value Multiple (x) | 3.7x | | 2.5x |
Delinquency Rates (%) | 1.6% | | 7.8% |
Weighted average credit score | 746 | | 725 |
Weighted average servicing fee, net (bps) | 27.7 | | 31.3 |
The increase in loan servicing fees$317.6 million, or 84.4% for the three and six months ended June 30, 2021 compared to three and six months ended June 30, 2020 was primarily driven by an increase in Origination volume which increased Retained Servicing fees, net of guarantee fees due to an increase in the Average MSR Servicing Portfolio of $46.5 billion, or 77.9%.
Change in fair value of MSRs
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Realization of cash flows | $ | (77,724) | | | $ | (41,137) | | | $ | (166,894) | | | $ | (77,290) | |
Valuation inputs and assumptions | (94,713) | | | (36,474) | | | 103,183 | | | (194,458) | |
Hedge | 65,532 | | | 5,362 | | | (30,346) | | | 107,973 | |
Change in fair value of MSRs | $ | (106,905) | | | $ | (72,249) | | | $ | (94,057) | | | $ | (163,776) | |
The decrease in Change in fair value of MSRs for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily driven by the Valuation inputs and assumptions loss recorded for the three months ended June 30, 2021 that was driven by a decrease in interest rates during the period, as well as by an increase in loss from realization of cash flows due to an increase in actual prepayments, combined with higher scheduled payments collected on loans in our MSR portfolio as a result of a 77.9% increase in our average servicing portfolio, compared to the three months ended June 30, 2020. Valuation inputs and assumptions losses are offset by our economic hedging activities designed to offset the effects of changes in interest rates on valuation input and assumptions.
The increase in Change in fair value of MSRs for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily driven by the Valuation inputs and assumptions gain recorded for the six months ended June 30, 2021 that was driven by an increase in loss from realization of cash flows due to an increase in actual prepayments, combined with higher scheduled payments collected on loans in our MSR portfolio as a result of a 77.9% increase in our average servicing portfolio, compared to the three months ended June 30, 2020. Valuation inputs and assumptions losses are offset by our economic hedging activities designed to offset the effects of changes in interest rates on valuation input and assumptions.
Interest expense, net
The components for Interest expense, net for the periods presented were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Interest income | $ | 34,648 | | | $ | 11,811 | | | $ | 60,225 | | | $ | 27,660 | |
Interest expense | $ | (44,136) | | | (14,373) | | | $ | (77,071) | | | (30,286) | |
Interest expense, net | $ | (9,488) | | | $ | (2,562) | | | $ | (16,846) | | | $ | (2,626) | |
The increase in interest expense, net for the three and six months ended June 30, 20212022 compared to the three and six months ended June 30, 20202021, respectively. The decrease was primarily due to an increasedecreases of $80.0 million and $353.9 million or 68.3% and 76.3% in average warehouse borrowings outstanding asgain on sale margin for the respective periods.
We experienced a resultdecrease in FOA lock volume and Origination volume across all of our increased origination volume combined with an increase in our term debt interest expense as a result of the Senior Notes (as defined below) issued during the first quarter of 2021. The increase in interest expense was partially offset by an increase in interest income from higher interest earned on mortgage loans held for salechannels primarily due to an increaserising interest rates. Additionally, we saw a significant decrease in average mortgage loans held forgain on sale margins due to the increasecompetitive environment during the three and six months ended June 30, 2022 compared to the prior year. As mortgage interest rates rise, the origination market contracts, primarily due to a decline in Origination volume.refinance volume, which generally leads to increased competition and lower gain on sale margins. Our origination market share decreased from 2.2% to 1.7% and our share of the wholesale channel decreased from 10.2% to 8.3% compared to the prior year.
ExpensesLoan fee income
Increase in total expenses for theLoan fee income decreased by $24.2 million and $48.5 million, or 61.4% and 58.0%, for the three and six months ended June 30, 20212022 compared to the three and six months ended June 30, 20202021. The decrease was consistent with the decrease in Origination volume.
Interest expense, net
Interest income, net increased by $5.9 million and $12.1 million for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The increase in interest income, net was driven by a decrease in warehouse borrowing and related fees due to the decrease in origination volume. Interest income decreased $7.9 million and $6.9 million for the respective three and six months periods due to lower loans held for sale balance partially offset by the impact of the rising interest rates.
Expenses
Total expenses decreased by $71.0 million and $149.2 million, or 51.4% and 50.2%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by an increasedecreases in Compensationcompensation and benefits expense, loan expense, production technology expense, and Generalgeneral and administrative expense due to an increase in Origination volume.expenses.
Compensation and benefits expense expense increaseddecreased by $46.0$50.7 million and $112.9 million, or 51.3% and 51.5%, for the three and six months ended June 30, 20212022 compared to the three and six months ended June 30, 20202021. The decrease in the respective three and six months periods was primarily driven by an increasea decrease of $49.9$27.9 million and $54.7 million in salary and benefits expense largely driven by an 89% increasedue to a decrease in employee headcount to support our increasedand a $22.9 million and $58.5 million decrease in variable compensation resulting from the decrease in Origination volume as well as to supportand the growthsale of our servicing portfolio. As a percentage of volume,the Correspondent channel. Compensation and benefits expense was 0.5% and 0.7% of Origination volume for the three months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 compared to2022 and 0.5% and 0.4% for the three and six months ended June 30, 2020, the Compensation and benefits expense increased by $146.7 million driven by increase of $35.5 million in commissions and bonuses resulting from an increase in Origination volume, as well as an increase of $111.2 million in salary and benefits expense largely driven by the increase in employee headcount mentioned above.2021.
Loan expense increasedecreased by $10.3 million and $18.7 million, or 59.7% and 53.9%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was consistent with the increasedecrease in Origination volume.
Production technology expense increaseddecreased by $3.7 million and $8.5 million, or 48.9% and 51.5%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven bylower variable expenses associated with the Company’s origination systems as a result of the decline in origination volume, combined with the investment the Company made in improving and upgrading the Company’s origination technologies in 2021.
General and administrative expenses decreased $5.2 million and $6.8 million, or 43.2% and 30.9%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by decrease in outsourced loan review services due to the decline in origination volume, as well as lower expenses as a result of cost-saving initiatives implemented in the second half of 2021 and continuing during the first half of 2022.
Servicing Segment
The following presents certain financial data for the Servicing segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Gain on loans, net | $ | — | | | $ | 18 | | | $ | (18) | | | (100.0) | % |
Loan servicing fees | 62,872 | | | 85,584 | | | (22,712) | | | (26.5) | % |
Change in fair value of mortgage servicing rights | (29,887) | | | (106,905) | | | 77,018 | | | (72.0) | % |
| | | | | | | |
Interest income | 1,429 | | | 746 | | | 683 | | | 91.6 | % |
Interest expense | — | | — | | (330) | | | 330 | | | (100.0) | % |
Interest income, net | 1,429 | | | 416 | | | 1,013 | | | 243.5 | % |
Other income | — | | | 48 | | | (48) | | | (100.0) | % |
Total servicing revenue, net | 34,414 | | | (20,839) | | | 55,253 | | | (265.1) | % |
Expenses: | | | | | | | |
Compensation and benefits | 5,201 | | | 7,580 | | | (2,379) | | | (31.4) | % |
Loan expense | — | | | 206 | | | (206) | | | (100.0) | % |
Loan servicing expense | 7,121 | | | 7,487 | | | (366) | | | (4.9) | % |
Production technology | 450 | | | 556 | | | (106) | | | (19.1) | % |
General and administrative | 1,597 | | | 2,986 | | | (1,389) | | | (46.5) | % |
Other expenses | 22 | | | (58) | | | 80 | | | (137.9) | % |
Total servicing expenses | 14,391 | | | 18,757 | | | (4,366) | | | (23.3) | % |
Servicing net income | $ | 20,023 | | | $ | (39,596) | | | $ | 59,619 | | | (150.6) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Gain on loans, net | $ | — | | | $ | 18 | | | $ | (18) | | | (100.0) | % |
Loan servicing fees | 143,936 | | | 155,922 | | | (11,986) | | | (7.7) | % |
Change in fair value of mortgage servicing rights | (12,704) | | | (94,057) | | | 81,353 | | | (86.5) | % |
| | | | | | | |
Interest income | 2,135 | | | 1,332 | | | 803 | | | 60.3 | % |
Interest expense | — | | | (664) | | | 664 | | | (100.0) | % |
Interest income, net | 2,135 | | | 668 | | | 1,467 | | | 219.6 | % |
Other income | — | | | 176 | | | (176) | | | (100.0) | % |
Total servicing revenue, net | 133,367 | | | 62,727 | | | 70,640 | | | 112.6 | % |
Expenses: | | | | | | | |
Compensation and benefits | 12,885 | | | 15,160 | | | (2,275) | | | (15.0) | % |
Loan expense | — | | | 506 | | | (506) | | | (100.0) | % |
Loan servicing expense | 12,867 | | | 15,281 | | | (2,414) | | | (15.8) | % |
Production technology | 1,206 | | | 944 | | | 262 | | | 27.8 | % |
General and administrative | 3,084 | | | 5,348 | | | (2,264) | | | (42.3) | % |
Other expenses | 68 | | | 240 | | | (172) | | | (71.7) | % |
Total servicing expenses | 30,110 | | | 37,479 | | | (7,369) | | | (19.7) | % |
Servicing net income | $ | 103,257 | | | $ | 25,248 | | | $ | 78,009 | | | 309.0 | % |
| | | | | | | |
Servicing Revenue, Net
Loan servicing fees
The following presents certain characteristics of our mortgage loan servicing portfolio:
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
| (dollars in thousands) |
MSR Servicing Portfolio (UPB) | $ | 90,516,421 | | | $ | 124,258,935 | |
Average MSR Servicing Portfolio (UPB) | $ | 96,250,600 | | | $ | 106,268,092 | |
MSR Servicing Portfolio (Loan Count) | 320,215 | | | 449,029 | |
MSRs Fair Value Multiple (x) | 5.83 | | | 3.69 | |
Delinquency Rates (%) | 1.7 | % | | 1.6 | % |
Weighted average credit score | 747 | | | 746 | |
Weighted average servicing fee, net (bps) | 26.9 | | | 27.7 | |
Loan servicing fees decreased by $22.7 million and $12.0 million, or 26.5% and 7.7%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease for the respective three and six month periods was primarily driven by $7.7 million and $10.3 million lower ancillary servicing income due to lower loan modification fees earned on GNMA loans as a result of the Company selling 77% of its GNMA MSR portfolio during the fourth quarter of 2021. Additionally, a decrease in servicing fees of $15.0 million and $1.7 million was due to a decrease in the Average MSR Servicing Portfolio of $10.0 billion, or 9.4%, as of June 30, 2022 compared to June 30, 2021.
Change in fair value of MSRs
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Realization of cash flows | $ | (33,389) | | | $ | (77,724) | | | $ | (82,339) | | | $ | (166,894) | |
Valuation inputs and assumptions | 72,395 | | | (94,713) | | | 349,381 | | | 103,183 | |
Economic hedging results | (68,893) | | | 65,532 | | | (279,746) | | | (30,346) | |
Change in fair value of MSRs | $ | (29,887) | | | $ | (106,905) | | | $ | (12,704) | | | $ | (94,057) | |
Change in fair value of MSRs presented losses for both three and six months ended June 30, 2022 and 2021. Fair value losses decreased by $77.0 million, or 72.0% and $81.4 million, or 86.5% for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The change was primarily driven by the changes in valuation inputs and assumptions net of hedge that were favorably affected by an increase in interest rates during the period. The change in fair value of MSRs was also attributable to a decrease in loss from realization of cash flows resulting from a decrease in prepayments due to higher interest rates and higher scheduled payments collected on loans in our MSR portfolio. These favorable changes were partially offset by $21.4 million and $77.5 million MSR sale losses for the three and six months ended June 30, 2022.
Expenses
Total expenses decreased by $4.4 million and $7.4 million, or 23.3% and 19.7% for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by decreases in compensation and benefits expense, loan servicing expense, and general and administrative expenses.
Compensation and benefits expense decreased by$2.4 million and $2.3 million, or 31.4% and 15.0% for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by the salary expense decreases due to employee headcount reductions and efficiencies gained from the subservicing to ServiceMac.
Loan servicing expense decreased by $0.4 million and $2.4 million, or 4.9% and 15.8%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease for the respective three and six month periods was primarily due to $1.5 million and $3.1 million reduction in the provision for servicing advance reserves resulting from the sale of MSRs partially offset by $1.0 million and $1.1 million increase in subservicing fee due to outsourcing of the servicing to ServiceMac.
General and administrative expenses decreased $1.4 million and $2.3 million, or 46.5% and 42.3%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by a decrease in professional services and consulting fees resulting from the Company’s cost savings initiatives.
Corporate
The following presents certain corporate financial data:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Interest expense | $ | (11,457) | | | $ | (12,602) | | | $ | 1,145 | | | (9.1) | % |
Interest expense, net | (11,457) | | | (12,602) | | | 1,145 | | | (9.1) | % |
Other income | 722 | | | 13,802 | | | (13,080) | | | (94.8) | % |
Total corporate revenue, net | (10,735) | | | 1,200 | | | (11,935) | | | (994.6) | % |
Expenses: | | | | | | | |
Compensation and benefits | 22,306 | | | 20,910 | | | 1,396 | | | 6.7 | % |
Production technology | — | | | — | | | — | | | N/A |
General and administrative | 8,523 | | | 11,510 | | | (2,987) | | | (26.0) | % |
Depreciation and amortization | 2,804 | | | 2,350 | | | 454 | | | 19.3 | % |
Other expenses | 4,336 | | | 6,405 | | | (2,069) | | | (32.3) | % |
Total corporate expenses | 37,969 | | | 41,175 | | | (3,206) | | | (7.8) | % |
Corporate net loss | $ | (48,704) | | | $ | (39,975) | | | $ | (8,729) | | | 21.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue: | | | | | | | |
Interest expense | $ | (25,637) | | | $ | (21,500) | | | $ | (4,137) | | | 19.2 | % |
Interest expense, net | (25,637) | | | (21,500) | | | (4,137) | | | 19.2 | % |
Other income | (3,916) | | | 18,638 | | | (22,554) | | | (121.0) | % |
Total corporate revenue, net | (29,553) | | | (2,862) | | | (26,691) | | | 932.6 | % |
Expenses: | | | | | | | |
Compensation and benefits | 45,659 | | | 46,394 | | | (735) | | | (1.6) | % |
Production technology | 2 | | | — | | | 2 | | | N/A |
General and administrative | 18,420 | | | 25,537 | | | (7,117) | | | (27.9) | % |
Depreciation and amortization | 5,491 | | | 5,111 | | | 380 | | | 7.4 | % |
Other expenses | 8,236 | | | 13,092 | | | (4,856) | | | (37.1) | % |
Total corporate expenses | 77,808 | | | 90,134 | | | (12,326) | | | (13.7) | % |
Corporate net loss | $ | (107,361) | | | $ | (92,996) | | | $ | (14,365) | | | 15.4 | % |
Total Corporate Revenue
Interest expense, net
Interest expense, net decreased by $1.1 million, or 9.1% and increased $4.1 million, or 19.2%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021, respectively. The decrease in interest expense for the three month period was driven by the reduction in the Company’s outstanding debt during the three months ended June 30, 2021 compared2021.The increase in expense for the six months was driven by an increase in corporate debt interest due to issuance of the Senior Notes in January 2021.
Other income
Other income decreased by $13.1 million and $22.6 million for the three months ended June 30, 2020 and $9.3 million for the six months ended June 30, 20212022 compared to the three and six months ended June 30, 2020,2021. The decrease was primarily driven by an increase$22.3 million and $31.8 million decrease in equipmentincome from our equity method investment for the respective three and information technology associated expensesix month periods, partially offset by $9.3 million debt extinguishment gain related to the repurchase and retirement of $50 million Senior Notes during the three and six months ended June 30, 2022.
Expenses
Total expenses decreased by $3.2 million and $12.3 million, or 7.8% and 13.7%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by our increased headcount due to higher Origination volumedecreases in compensation and the increased size of our servicing portfolio.benefits, general and administrative, and other expenses.
GeneralCompensation and administrativebenefits expense increased by $14.7$1.4 million, or 6.7%, for the three months ended June 30, 20212022 compared to the three months ended June 30, 20202021. The increase was primarily driven by an increase in severance expense due to headcount reduction resulting from the decrease in Origination volume and $30.0variable compensation, partially offset by $2.5 million lower salary expense. Compensation and benefits expense decreased by $0.7 million, or 1.6%, for the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021. The decrease was primarily driven by an increasea $3.0 million decrease in salaries, partially offset by $2.2 million higher severance pay due to headcount reductions.
General and administrative expense decreased $3.0 million and $7.1 million, or 26.0% and 27.9%, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The decrease was primarily driven by a decrease in professional services fees of $10.1$2.7 million and $7.3 million for the three and six months periods respectively, as a result of increased costs in 2021 associated with the Company’s IPO.
Other expenses decreased $2.1 million, or 32.3% and $4.9 million, or 37.1% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and $22.7 million for the six months ended June 30, 20212022 compared to the three and six months ended June 30, 20202021. The decrease was driven by $1.1 million and $2.6 million reduction in employee related tocosts for the increaserespective three and six month periods as well as $1.2 million reduction in Origination volume and increaseloss on asset disposal. The decrease in headcount.other expense was partially offset by the $0.4 million loss from the sale of the Correspondent channel.
Income Tax Benefit (Expense)
Income tax expensebenefit (expense) is recognized for the entire company rather than on continuing operationsa segment basis. Income tax benefit decreased by $13.1 million and increased by $32.7 million for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The change is primarily due to a decreasethe change in pre-tax income.(loss) income before income tax. Our overall effective tax rate of 23.9%28.6% and 26.3%35.1% for the three months ended June 30, 2021 and 2020, respectively, and 28.2% and 26.6% for the six months ended June 30, 20212022, respectively and 2020,23.9% and 28.2% for the three and six months ended June 30, 2021, respectively, differed from the U.S. statutory rate of 21.0% primarily due to the impact of income fromthe equity method investment, and state incomes taxes, in both years. In addition, in 2021, the difference from the statutory rate was also attributable to non-deductible transaction costs related to our initial public offering (the “IPO”) and limitations on the tax deductibility of officers’ compensation applicable to a public entity.
Summary Results by Segment forentity in both periods, equity-based compensation, and non-deductible transaction costs in 2021 associated with the Three and Six Months Ended June 30, 2021 and 2020
We have two segments:
•Company’s IPO.Our Origination segment consists of a combination of retail and third-party loan production operations. The increase in revenues for the Origination segment was primarily driven by an increase in loan Origination volume.
•Our Servicing segment consists of servicing loans the Company had initially originated and subsequently sold, for which the Company retained servicing rights as well as MSRs the Company occasionally purchases from others. The increase in revenues for the Servicing segment was primarily driven by an increase in servicing fees due to increase in our servicing portfolio and a gain we recorded in the Change in fair value of mortgage servicing rights, net due to an increase in interest rates that resulted in lower modeled prepayment speeds.
Origination
The table below presents details of Revenue and Contribution margin for the Origination segment for the three and six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Gain on loans, net | $ | 75,004 | | | $ | 356,871 | | | $ | 376,232 | | | $ | 459,434 | |
Loan fee income | 39,500 | | | 20,394 | | | 83,615 | | | 32,425 | |
Loan servicing fees | — | | | (1,656) | | | (8) | | | (2,218) | |
Interest income | 2,697 | | | 960 | | | 3,985 | | | 1,486 | |
Total Origination segment revenue | 117,201 | | | 376,569 | | | 463,824 | | | 491,127 | |
Directly attributable expense | 137,986 | | | 72,528 | | | 297,340 | | | 124,614 | |
Contribution margin | $ | (20,785) | | | $ | 304,041 | | | $ | 166,484 | | | $ | 366,513 | |
Servicing
The table below presents details of Revenue and Contribution margin for the Servicing segment for the three and six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Gain on loans, net | $ | 17 | | | $ | — | | | $ | 17 | | | $ | — | |
Loan servicing fees | 85,584 | | | 43,965 | | | 155,930 | | | 87,773 | |
Interest income | 417 | | | 1,269 | | | 669 | | | 6,533 | |
Other income | 50 | | | 58 | | | 176 | | | 117 | |
Total Servicing segment revenue | 86,068 | | | 45,292 | | | 156,792 | | | 94,423 | |
Directly attributable expense | 18,768 | | | 15,463 | | | 37,488 | | | 28,729 | |
Primary margin | 67,300 | | | 29,829 | | | 119,304 | | | 65,694 | |
Change in MSR fair value: amortization | (77,724) | | | (41,137) | | | (166,894) | | | (77,290) | |
Adjusted contribution margin | (10,424) | | | (11,308) | | | (47,590) | | | (11,596) | |
Change in MSR fair value: mark-to-market, net of hedge | (29,181) | | | (31,111) | | | 72,837 | | | (86,485) | |
Contribution margin | $ | (39,605) | | | $ | (42,419) | | | $ | 25,247 | | | $ | (98,082) | |
| | | | | | | |
Liquidity and Capital Resources
Sources and Uses of Cash
Historically, our primary sources of liquidity have included:
•Borrowings, including under our warehouse funding facilities and other secured and unsecured financing facilities
•Cash flow from our operations, including:
•Sale of mortgage loans held for sale
•Loan origination fees
•Servicing fee income
•Interest income on loans held for sale, and
•Cash and marketable securities on hand
Historically, our primary uses of funds have included:
•Origination of loans
•Payment of interest expense
•Repayment of debt
•Payment of operating expenses, and
•Changes in margin requirements for derivative contracts
We are also subject to contingencies which may have a significant impact on the use of our cash.
Summary of Certain Indebtedness
To originate and aggregate loans for sale into the secondary market, we use our own working capital and borrow on a short-term basis primarily through committed and uncommitted mortgage warehouse lines of credit that we have established with different large global and regional banks and financial institutions. Our loan funding facilities are primarily in the form of master repurchase agreements and participation agreements. New loan originations that are financed under these facilities are generally financed at approximately 95% to 100% of the principal balance of the loan (although certain types of loans are financed at lower percentages of the principal balance of the loan).
At the time of either the funding or purchase, mortgage loans are pledged as collateral for borrowings on mortgage warehouse lines of credit. In most cases, loans will remain on one of the warehouse lines of credit facilities for only a short time, generally
less than one month, until the loans are pooled and sold. During the time the loans are held for sale, we earn Interest income from the borrower on the underlying mortgage loan. This income is partially offset by the interest and fees we have to pay under the mortgage warehouse lines of credit.
When we sell a pool of loans in the secondary market, the proceeds received from the sale of the loans are used to pay back the amounts we owe on the mortgage warehouse lines of credit. We rely on the cash generated from the sale of loans to fund future loans and repay borrowings under our mortgage warehouse lines of credit. Delays or failures to sell loans in the secondary market could have an adverse effect on our liquidity position.
As of June 30, 2021, weWe held mortgage warehouse lines of credit arrangements with 11 separate financial institutions with a total maximum borrowing capacity of $7.1$6.0 billion and an unused borrowing capacity of $2.0 billion. Some$4.1 billion as of our warehouse lines of credit are scheduled to mature in September of 2021. We are currently in active discussions with the lenders of such warehouse lines of credit and expect to renew the facilities prior to their respective maturity dates.June 30, 2022. Refer to Note 7 – Warehouse Lines of Credit of our unaudited condensed consolidated financial statements.
As of June 30, 2021, weWe maintained a servicing advance financing facility, MSR financing facility and an operating line of credit with total combined maximum borrowing capacity of $902.7$632.7 million and unused borrowing capacity of $271.8 million.$496.9 million as of June 30, 2022. Refer to Note 8 – Term Debt and Other Borrowings, net of our unaudited condensed consolidated financial statements.
The amount owed and outstanding on our loan funding facilities fluctuates significantly based on our originationOrigination volume and the amount of time it takes us to sell the loans we originate, and the amount of loans being self-funded with cash.originate.
Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit generally will result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement relative to the available financing and offsetting hedges. Upon notice from the applicable lender, we generally will be required to satisfy the margin call on the day of such notice or the following business day.
The warehouse facilities and other lines of credit require maintenance of certain operating and financial covenants, and the availability of funds under these facilities is subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining a certain minimum tangible net worth, minimum liquidity, minimum profitability levels, and ratio of indebtedness to tangible net worth, among others. A breach of these covenants can result in an event of default under these facilities following which the lenders would be able to pursue certain remedies against us. In addition, each of these facilities includes cross-default or cross- accelerationcross-acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility.
In January, of 2021, wethe Company issued $550.0 million aggregate principal amount of our 5.0%its Senior Notes due 2026 (the “Senior Notes”) in a private placement transaction. InterestThe Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than HPAM and HPMAC. The Senior Notes is payablebear interest at a rate of 5.0% per annum, payable semi-annually on February 1 and August 1 of each year, beginning August 1, 2021.in arrears. The Senior Notes will mature on February 1, 2026.
The Indenture governing the Senior Notes (the “Indenture”) contains customary covenants and eventsrestrictions that, among other things and subject to certain exceptions, limit the ability of default.the Company and its restricted subsidiaries to (i) incur certain additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets. The Indenture governing the Senior Notes does not include any financial maintenance covenants. Refer to Note 8 – Term Debt and Other Borrowings, net of our condensed consolidated financial statements.
In June 2021, the Company’s warehouse lines that contain profitability covenants were amended to the extent necessary to allow for a net loss under such covenants for the three months ended June 30, 2021. As of June 30, 2021, theThe Company was in compliance with all warehouse facility covenants and with all covenants under the Indenture governingindenture and our warehouse facilities and other lines of credit as of June 30, 2022.
The Company may, at any time and from time to time, seek to retire or purchase the Company’s outstanding Senior Notes.
Cash Flows
OurNotes through cash flows forpurchases in the form of open-market purchases, privately negotiated transactions, or otherwise. Such repurchases, if any, will be upon such terms and at such prices as the Company may determine, and will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. The Company repurchased $50 million Senior Notes during the six months ended June 30, 2022.
Summary of Mortgage Loan Participation Agreement
In November, 2021, we entered into a Mortgage Loan Participation Sale Agreement (the “Gestation Agreement”) with JPMorgan Chase Bank, National Association, as purchaser (the “Gestation Purchaser”). Subject to compliance with the terms and June 30, 2020 are summarized below.
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
($ in thousands) | | 2021 | | 2020 |
Net cash used in operating activities | | $ | (2,384,211) | | | $ | (176,495) | |
Net cash used in investing activities | | (25,452) | | | (5,707) | |
Net cash provided by financing activities | | 2,465,644 | | | 276,700 | |
Net increase in Cash and cash equivalents and restricted cash | | 55,981 | | | 94,498 | |
Cash and cash equivalents and restricted cash at end of period | | $ | 252,874 | | | $ | 176,229 | |
conditions of the Gestation Agreement, including the affirmative and negative covenants contained therein, the Gestation Agreement permits the Gestation Purchaser to purchase from us from time to time during the term of the Gestation Agreement participation certificates evidencing a 100% undivided beneficial ownership interest in designated pools of fully amortizing first
Netlien residential mortgage loans that are intended to ultimately be included in MBS issued or guaranteed, as applicable, by Fannie Mae, Freddie Mac, and Ginnie Mae.
The aggregate purchase price of participation certificates owned by the Gestation Purchaser at any given time for which the Gestation Purchaser has not been paid the purchase price for the related MBS by the applicable takeout investor as specified in the applicable takeout commitment cannot exceed $1.5 billion. The Gestation Agreement expires on November 2, 2022.
The Gestation Agreement and certain ancillary agreements thereto contain various financial and non-financial covenants, including financial covenants relating to the maintenance of tangible net worth, liquidity, and a ratio of total indebtedness to tangible net worth. The Company was in compliance with these covenants as of June 30, 2022.
Cash Flows
The following presents the summary of the Company’s cash usedflows:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| (dollars in thousands) |
Net cash provided by (used for) operating activities | $ | 2,551,017 | | | $ | (2,384,211) | |
Net cash provided by (used for) investing activities | 609,828 | | | (25,452) | |
Net cash (used for) provided by financing activities | (3,205,727) | | | 2,465,644 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (44,882) | | | 55,981 | |
Cash, cash equivalents and restricted cash at end of period | $ | 162,908 | | | $ | 252,874 | |
Our Cash and cash equivalents and restricted cash as of June 30, 2022 decreased by $90.0 million from June 30, 2021.
Operating Activities
Our Cash flows from operating activities are primarily influenced by changes in the levels of our inventory of loans held for sale as shown below:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from: | (dollars in thousands) |
Mortgage loans held for sale | $ | 2,463,815 | | | $ | (2,339,287) | |
Gain on loans, net | (58,638) | | | (376,257) | |
Decrease in fair value of derivative assets | 25,105 | | | 209,106 | |
Other operating sources | 120,735 | | | 122,227 | |
Net cash provided by (used for) operating activities | $ | 2,551,017 | | | $ | (2,384,211) | |
Cash provided by operating activities increased by $2.2 billion$4,935.2 million for the six months ended June 30, 20212022 compared to the cash used for operating activities for the six months ended June 30, 2020.2021. The increase provided by operating activities is primarily driven by increasedecrease in the level of our inventory of loans held for sale as a result of increasea decrease in origination volume.
Cash used in investing activities increased by $19.7 million primarily due to purchasing of mortgage servicing rights of $18.7 million duringOrigination volume for the six months ended June 30, 2021. Additionally, the Company increased purchase of IT equipment as a result of the increased headcount in the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021.
Investing Activities
Cash provided by financinginvesting activities increased by $2.2 billion$635.3 million primarily due to an increase in warehouse borrowings to be utilized for funding our increased loan origination volumeproceeds from sale of MSRs of $630.6 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020. Additionally, we issued $550 million2021.
Financing Activities
Our Cash flows from financing activities are primarily influenced by changes in Warehouse borrowings as shown below:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from: | (dollars in thousands) |
Warehouse borrowings, net | $ | (2,808,263) | | | $ | 2,052,175 | |
Distributions to parent, net (a) | — | | | (294,897) | |
Other financing sources | (397,464) | | | 708,366 | |
Net cash (used for) provided by financing activities | $ | (3,205,727) | | | $ | 2,465,644 | |
(a) distributions to HPLP, our direct parent prior to the consummation of the merger consummated in connection with the IPO. |
Cash used for financing activities increased for the six months ended June 30, 2022 compared to the cash provided by financing activities for the six months ended June 30, 2021. IncreasesThe increase in cash provideduse was primarily driven by the financing activities were offset by approximately $295 milliondecrease in proceeds, net of distributions paidpayments, on warehouse borrowings due to HPLP, our direct parent prior to the consummation of the merger consummateda decrease in connection with the IPO, during the six months ended June 30, 2021 compared to $63.8 million of contribution from HPLP recorded during the six months ended June 30, 2020.Origination volume.
Contractual Obligations and Other Commitments
For a discussion of our contractual obligations, refer to “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operations - Contractual Obligations and Other Commitments” in our 20202021 Annual Report. There have not been any material changes to our contractual obligations since December 31, 2020.2021.
Repurchase and Indemnification Obligations
In the ordinary course of business, we are exposed to liability with respect to certain representations and warranties that we make to the investors who purchase the loans that we originate. Under certain circumstances, we may be required to repurchase mortgage loans, or indemnify the purchaser of such loans for losses incurred, if there has been a breach of these representations and warranties, or in the case of early payment defaults. In addition, in the event of an early payment default, we are contractually obligated to refund certain premiums paid to us by the investors who purchased the related loan. Refer to Note 11 – Representation and Warranty Reserve to our unaudited condensed consolidated financial statements for additional information.
Off Balance Sheet ArrangementsSuspension of Dividend
ReferOur Board has determined not to declare a dividend on our common stock for the three month period ended June 30, 2022. Note 9 – Commitments and ContingenciesThe Board’s determination reflects our desire to maintain a strong liquidity position to support operations in the current macroeconomic environment, including rising interest rates and inflationary pressure, and the potential impact on our unaudited condensed consolidatedresults of operations and financial statements included elsewhere in this form.condition.
The Board intends to reassess the payment of cash dividends on a quarterly basis. Future determinations to declare and pay cash dividends, if any, will be made at the discretion of the Board and will depend on a variety of factors, including general macroeconomic, business and financial market conditions; applicable laws; our financial condition, results of operations, contractual restrictions, capital requirements, and business prospects; and other factors the Board may deem relevant at the time.
New Accounting Pronouncements Not Yet Effective
Refer to Note 2 – Basis of Presentation and SignificantNew Accounting PoliciesPronouncements to our unaudited condensed consolidated financial statements for a discussion of recent accounting developments and the expected effect on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, asAs a mortgage lender,smaller reporting company, we are subjectnot required to a variety of risks which can affect our operations and profitability. We broadly define these areas of risk as interest rate risk, credit risk, and risk related to the COVID-19 pandemic.
Our 2020 Annual Report provides a detailed discussion of the market risks affecting our operations. No material change has occurred in our market risks since the disclosure contained in our 2020 Annual Report.
provide information for this item.
Item 4. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of June 30, 2021.2022.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our “Legal Proceedings,” refer to Note 9 – Commitments and Contingencies of our unaudited condensed consolidated financial statements included elsewhere in this Report.
Item 1A. Risk Factors
We have disclosed the risk factors affecting our business, financial condition and operating results in the section entitled “Risk Factors” in our 20202021 Annual Report. There have been no material changes from the risk factors previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Equity Securities
None.
Issuer Repurchases of Equity Securities
None.The following table summarizes the Company’s common stock repurchase activity for the three months ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
ISSUER REPURCHASES OF COMMON STOCK |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs(a) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs(a) |
April 1, 2022 - April 30, 2022 | 487,808 | | | $ | 3.07 | | | 487,808 | | | $ | 4,997,630 | |
May 1, 2022 - May 31, 2022 | 230,298 | | | 3.17 | | | 230,298 | | | 4,250,020 | |
June 1, 2022 - June 30, 2022 | — | | | — | | | — | | | 4,250,020 | |
Total for the three months ended June 30, 2022 | 718,106 | | | $ | 3.13 | | | 718,106 | | | $ | 4,250,020 | |
(a) On February 24, 2022, we announced a stock repurchase program whereby we may repurchase up to a total of $8.0 million of our issued and outstanding common stock from time to time until the program’s expiration on December 31, 2022 on the open market or in privately negotiated transactions. The timing and amount of stock repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. Repurchases under the stock repurchase program may also be made from time to time pursuant to one or more plans adopted under Rule 10b5-1 of the Exchange Act. The program does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program are subsequently retired.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | |
Exhibit Number | | Description |
3.1 | | |
3.2 | | |
10.1*+ | | Third Amendment to Second Amended and Restated Credit Agreement, dated as of May 4, 2021,April 29, 2022, by and among Home Point Financial Corporation, as borrower, Home Point Capital Inc., as guarantor, Goldman Sachs Bank USA, as administrative agent, and the lenders party thereto. |
10.2*10.2 | | |
10.3*+ | | |
10.3.1*+ | | |
10.4*+ | | |
10.5* | | |
10.6*+ | | Eighth Amendment to the Amended and Restated Master Repurchase Agreement and Amended and Restated Pricing Letter, dated as of June 29, 2022, by and among Home Point Financial Corporation, as seller, TIAA, FSB, formerly known as EverBank, as administrative agent and buyer, and Capital One, National Association, as buyer. |
10.7*+ | | Amendment No. 8 to the Master Repurchase Agreement, dated as of AprilJune 30,, 2021, by and among Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, Credit Suisse AG, acting through its Cayman Islands Branch, as buyer, Alpine Securitization LTD, as buyer, and Home Point Financial Corporation, as seller. |
10.3* | | Amendment No. 3 to the Master Repurchase Agreement, dated as of June 16, 2021, 2022, by and among Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, Credit Suisse AG, acting through its Cayman Islands Branch, as buyer, Alpine Securitization LTD, as buyer, and Home Point Financial Corporation, as seller. |
10.4*10.8*+ | | Amendment No. 4 to the Master Repurchase Agreement, dated as of June 30, 2021, by and among Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, Credit Suisse AG, acting through its Cayman Islands Branch, as buyer, Alpine Securitization LTD, as buyer, and Home Point Financial Corporation, as seller. |
10.5+ | | |
10.6*+ | | |
10.7*+ | | Amendment No. 610 to Master Repurchase Agreement and Securities Contract, dated as of June 29, 2021,30, 2022, by and between Home Point Financial Corporation, as seller, Morgan Stanley Bank, N.A., as buyer, and Morgan Stanley Mortgage Capital Holdings LLC, as agent. |
10.8+ | | |
10.9+ | | |
10.10 | | |
31.1* | | |
31.2* | | |
32.1* | | |
101.INS* | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith.
† Compensatory arrangements for director(s) and/or executive officer(s).
+ Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the Securities and Exchange Commission upon its request.
++ Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of such schedules and exhibits to the Securities and Exchange Commission upon its request.
The agreements and other documents filed as exhibits to this Report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | HOME POINT CAPITAL INC. |
| | | |
| | | |
Dated: August 11, 20212022 | | By: | /s/ William A. Newman |
| | Name: | William A. Newman |
| | Title: | President and Chief Executive Officer (Principal Executive Officer) |
| | | |
Dated: August 11, 20212022 | | By: | /s/ Mark E. Elbaum |
| | Name: | Mark E. Elbaum |
| | Title: | Chief Financial Officer (Principal Financial Officer) |