MR. COOPER GROUP INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
FORM
10-Q
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For the quarterly period ended
September 30, 2023
or
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For the transition period from _______ to _______
Commission file number:
001-14667
________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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____________________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
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x | Accelerated Filer | ☐ | ||||||||
| Non-Accelerated Filer | ¨ | Smaller reporting company |
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| Emerging growth company |
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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.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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Number of shares of common stock, $0.01 par value, outstanding as of October 20, 2023 was
65,860,343
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MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
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Condensed Consolidated Balance Sheets as of
September 30, 2023 (unaudited) and December 31, 2022
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Condensed Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended September 30, 2023 and 2022
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Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for
the Three and Nine Months Ended September 30, 2023 and 2022
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Condensed Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 2023 and 2022
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1
7
. Segment I
nformation
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| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
PART I. Financial Information
Item 1. Financial Statements
MR. COOPER GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
| September 30, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Restricted cash |
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| Mortgage servicing rights at fair value |
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Advances and other receivables, net of reserves of $
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| Mortgage loans held for sale at fair value |
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Property and equipment, net of accumulated depreciation of $
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| Deferred tax assets, net |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and Stockholders’ Equity | |||||||||||
| Unsecured senior notes, net | $ |
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$ |
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| Advance, warehouse and MSR facilities, net |
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| Payables and other liabilities |
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| MSR related liabilities - nonrecourse at fair value |
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| Total liabilities |
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| Commitments and contingencies (Note 16) |
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Common stock at $
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| Additional paid-in-capital |
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| Retained earnings |
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Treasury shares at cost -
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(
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(
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity | $ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
3
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Service related, net | $ |
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$ |
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$ |
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$ |
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| Net gain on mortgage loans held for sale |
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| Total revenues |
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| Expenses: | |||||||||||||||||||||||
| Salaries, wages and benefits |
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| General and administrative |
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| Total expenses |
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| Interest income |
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| Interest expense |
(
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(
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(
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(
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| Other income (expense), net |
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(
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| Total other income (expense), net |
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(
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| Income before income tax expense |
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| Less: Income tax expense |
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| Net income | $ |
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$ |
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$ |
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$ |
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| Earnings per share | |||||||||||||||||||||||
| Basic | $ |
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$ |
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$ |
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$ |
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| Diluted | $ |
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$ |
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$ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
4
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Shares
(in thousands) |
Amount | Additional Paid-in Capital | Retained Earnings | Treasury Share Amount | Total Mr. Cooper Stockholders’ Equity | Non-controlling Interests |
Total Stockholders’
Equity |
|||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Shares issued / (surrendered) under incentive compensation plan |
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— |
(
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— |
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(
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— |
(
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| Share-based compensation | — | — |
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— | — |
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— |
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| Dividends paid to noncontrolling interests | — | — | — | — | — | — |
(
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(
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| Repurchase of common stock |
(
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— | — | — |
(
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(
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— |
(
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| Net income | — | — | — |
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— |
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| Balance at September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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|||||||||||||||||||||||||||||||||||
| Shares issued / (surrendered) under incentive compensation plan |
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— |
(
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— |
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— |
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||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — |
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— | — |
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— |
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| Repurchase of common stock |
(
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— | — | — |
(
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(
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— |
(
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| Net income | — | — | — |
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— |
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| Balance at September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
5
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
(in thousands) |
Amount | Additional Paid-in Capital | Retained Earnings | Treasury Share Amount | Total Mr. Cooper Stockholders’ Equity | Non-controlling Interests |
Total Stockholders’
Equity |
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| Balance at January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Shares issued / (surrendered) under incentive compensation plan |
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— |
(
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— |
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(
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— |
(
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| Share-based compensation | — | — |
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— | — |
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— |
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| Dividends paid to noncontrolling interests | — | — | — | — | — | — |
(
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(
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| Repurchase of common stock |
(
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— | — | — |
(
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(
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— |
(
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| Net income | — | — | — |
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— |
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| Balance at September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Balance at January 1, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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| Shares issued / (surrendered) under incentive compensation plan |
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— |
(
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— |
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(
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— |
(
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| Share-based compensation | — | — |
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— | — |
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— |
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| Repurchase of common stock |
(
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— | — | — |
(
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(
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— |
(
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| Net income | — | — | — |
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— |
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| Balance at September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
6
MR. COOPER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ |
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$ |
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| Adjustments to reconcile net income to net cash attributable to operating activities: | |||||||||||
| Deferred tax expense |
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| Net gain on mortgage loans held for sale |
(
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(
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| Provision for servicing and non-servicing reserves |
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| Fair value changes in mortgage servicing rights |
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(
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| Fair value changes in MSR related liabilities |
(
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| Depreciation and amortization for property and equipment and intangible assets |
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| Gain on disposition of assets |
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(
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| Bargain purchase gain |
(
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| Loss on MSR hedging activities |
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| (Gain) loss on MSR sales |
(
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| Other operating activities |
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| Repurchases of loan assets out of Ginnie Mae securitizations |
(
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(
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| Mortgage loans originated and purchased for sale, net of fees |
(
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(
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| Sales proceeds and loan payment proceeds for mortgage loans held for sale |
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| Changes in assets and liabilities: | |||||||||||
| Advances and other receivables |
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| Other assets |
(
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| Payables and other liabilities |
(
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(
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| Net cash attributable to operating activities |
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| Investing Activities | |||||||||||
| Acquisitions of business, net of cash acquired |
(
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| Acquisition of assets |
(
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| Property and equipment additions, net of disposals |
(
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(
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| Purchase of mortgage servicing rights |
(
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(
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| Proceeds on sale of mortgage servicing rights and excess yield |
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| Other investing activities |
(
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| Net cash attributable to investing activities |
(
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(
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| Financing Activities | |||||||||||
| Increase (decrease) in advance, warehouse and MSR facilities |
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(
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| Settlements and repayment of excess spread financing |
(
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(
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| Repurchase of common stock |
(
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(
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| Other financing activities |
(
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(
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| Net cash attributable to financing activities |
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(
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| Net increase (decrease) in cash, cash equivalents, and restricted cash |
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(
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| Cash, cash equivalents, and restricted cash - beginning of period |
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Cash, cash equivalents, and restricted cash - end of period
(1)
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$ |
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$ |
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| Supplemental Disclosures of Non-cash Investing Activities | |||||||||||
| Equity consideration received from disposition of assets | $ |
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$ |
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| Purchase of mortgage servicing rights | $ |
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$ |
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| Mortgage servicing rights sales price holdback | $ |
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$ |
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(1)
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheets.
| September 30, 2023 | September 30, 2022 | ||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Restricted cash |
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| Total cash, cash equivalents, and restricted cash | $ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
7
MR COOPER GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, except per share data, or unless otherwise stated)
1. Nature of Business and Basis of Presentation
Nature of Business
Mr. Cooper Group Inc., collectively with its consolidated subsidiaries, (“Mr. Cooper,” the “Company,” “we,” “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan servicers and originators in the country focused on delivering a variety of servicing and lending products, services and technologies. The Company’s corporate website is located at
www.mrcoopergroup.com
. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in Item 2,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, of this Form 10-Q.
Basis of Presentation
The interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, macro-economic uncertainty, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers and such differences could be material.
Reclassifications
Certain reclassifications have been made in the 2022 condensed consolidated statement of cash flows to conform to 2023 presentation. Such reclassifications were not material and did not affect total revenues or net income.
8
2. Acquisitions
Acquisition of Assets
During the second quarter of 2023, the Company acquired certain assets and liabilities of Rushmore Loan Management Services, LLC (“Rushmore”) for a total purchase price of $
34
(the “Rushmore Transaction”). Assets acquired were recorded in the Servicing segment and primarily included subservicing contracts and related servicing advances and receivables. The Company accounted for the transaction as an asset acquisition in accordance with Accounting Standard Codification Topic 805,
Business Combinations (“ASC 805”)
, whereby the purchase price represents relative fair value of assets and liabilities acquired.
Acquisition of Roosevelt Management Company and Affiliated Companies
In July 2023, the Company acquired all the equity interests of Roosevelt Management Company, LLC (“Roosevelt”), an investment management firm, and its affiliated subsidiaries including Rushmore Loan Management Services, LLC and other entities, for a total purchase price of $
28
(“Roosevelt Transaction”). The Company accounted for the transaction as a business combination in accordance with ASC 805 using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess of the purchase price over those fair values allocated to goodwill. The Company recorded $
4
of intangible assets and $
21
of goodwill based on preliminary purchase price allocation. $
5
and $
16
of the goodwill is assigned to Servicing segment and Corporate/Other segment, respectively. The goodwill will be deductible for tax purposes. During the three and nine months ended September 30, 2023, the Company incurred $
8
of acquisition costs related to the Roosevelt Transaction. The financial results of Rushmore and Roosevelt were included in Servicing segment and Corporate/Other segment, respectively.
Acquisition of Home Point Capital Inc.
In May 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) and a mortgage servicing rights purchase and sale agreement with Home Point Capital Inc.(“Home Point”), a Delaware corporation. Per the Merger Agreement, the Company agreed to commence a tender offer to acquire all of the outstanding shares of common stock of Home Point, other than certain excluded shares. The Home Point transaction closed in the third quarter of 2023 for total consideration of approximately $
658
. The transaction was executed in two steps. The first step was a bulk purchase of a portion of Home Point’s mortgage servicing rights (“MSR”) portfolio for $
335
. The second step of the transaction was the tender offer to acquire outstanding shares of common stock of Home Point, which included the benefit of the cash paid in the bulk purchase of Home Point’s MSR portfolio. The net consideration paid for the two steps of the transaction was $
323
, or $
2.33
per share.
3. Dispositions
Sale of Mortgage Servicing Platform
On March 31, 2022, the Company completed the sale of certain assets and liabilities of its servicing and subservicing technology platform for performing and non-performing mortgage loans (the “Mortgage Servicing Platform”) to Sagent M&C, LLC (“Sagent”), in exchange for Class A-1 Common Units equal to
19.9
% ownership of Sagent, and the sale of certain tangible personal property of the Company used in the conduct of the Mortgage Servicing Platform in exchange for $
9.9
in cash, for total consideration of $
260
(the “Sagent Transaction”). In connection with the Sagent Transaction, the Company recorded a gain of $
223
, which was included in “other income (expense), net” within the condensed consolidated statements of operations, and recorded $
4
transaction costs during the nine months ended September 30, 2022.
No
transaction costs were recorded in the three months ended September 30, 2022. The net carrying amount of assets and liabilities transferred in connection with the Sagent Transaction was $
31
and reported under Corporate/Other.
9
4. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s MSR and the related liabilities. In estimating the fair value of all mortgage servicing rights and related liabilities, the impact of the current environment was considered in the determination of key assumptions.
| MSRs and Related Liabilities | September 30, 2023 | December 31, 2022 | |||||||||
| MSRs - fair value | $ |
|
$ |
|
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| Excess spread financing at fair value | $ |
|
$ |
|
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| Mortgage servicing rights financing at fair value |
|
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|||||||||
| MSR related liabilities - nonrecourse at fair value | $ |
|
$ |
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Mortgage Servicing Rights
The following table sets forth the activities of MSRs:
| Nine Months Ended September 30, | |||||||||||
| MSRs - Fair Value | 2023 | 2022 | |||||||||
| Fair value - beginning of period | $ |
|
$ |
|
|||||||
| Additions: | |||||||||||
| Servicing retained from mortgage loans sold |
|
|
|||||||||
| Purchases and acquisitions of servicing rights |
|
|
|||||||||
| Dispositions: | |||||||||||
| Sales of servicing assets and excess yield |
(
|
(
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|||||||||
| Changes in fair value: | |||||||||||
| Changes in valuation inputs or assumptions used in the valuation model (MSR MTM) |
|
|
|||||||||
| Changes in valuation due to amortization |
(
|
(
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|||||||||
|
Other changes
(1)
|
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|
|||||||||
| Fair value - end of period | $ |
|
$ |
|
|||||||
(1)
Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
During the nine months ended September 30, 2023 and 2022, the Company sold $
23,789
and $
20,723
in unpaid principal balance (“UPB”) of MSRs, of which $
22,640
and $
19,692
were retained by the Company as subservicer, respectively.
During the nine months ended September 30, 2023, certain agencies entered into agreements with the Company to purchase excess servicing cash flows (“excess yield”) on certain agency loans with a total UPB of approximately $
41,958
for total proceeds of $
294
. The Company recorded a gain of $
33
through the mark-to-market adjustments within “revenues - service related, net” in the condensed consolidated statements of operations.
10
MSRs are segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. Agency investors primarily consist of government sponsored enterprises (“GSE”), such as the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of UPB and fair value for the Company’s MSRs:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| MSRs - UPB and Fair Value Breakdown by Investor Pools | UPB | Fair Value | UPB | Fair Value | |||||||||||||||||||
| Agency | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Non-agency |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Refer to
Note 14, Fair Value Measurements
, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of MSRs.
The following table shows the hypothetical effect on the fair value of the Company’s MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
|
Option Adjusted Spread
(1)
|
Total Prepayment Speeds
|
Cost to Service per Loan | |||||||||||||||||||||||||||||||||
| MSRs - Hypothetical Sensitivities |
100 bps
Adverse
Change
|
200 bps
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
|||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Mortgage servicing rights | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
| Discount Rate |
Total Prepayment Speeds
|
Cost to Service per Loan | |||||||||||||||||||||||||||||||||
| MSRs - Hypothetical Sensitivities |
100 bps
Adverse
Change
|
200 bps
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
|||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Mortgage servicing rights | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
(1)
Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread (“OAS”) instead of a static discount rate. Refer to
Note 14, Fair Value Measurements
, for further discussion.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Excess Spread Financing - Fair Value
The Company had excess spread financing liability of $
446
and $
509
, with UPB of $
76,732
and $
83,706
as of September 30, 2023 and December 31, 2022, respectively. Refer to
Note 14, Fair Value Measurements
, for key weighted-average inputs and assumptions used in the valuation of excess spread financing liability.
11
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
|
Option Adjusted Spread
(1)
|
Prepayment Speeds
|
||||||||||||||||||||||
| Excess Spread Financing - Hypothetical Sensitivities |
100 bps
Adverse
Change
|
200 bps
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
|||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||
| Excess spread financing | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Discount Rate |
Prepayment Speeds
|
||||||||||||||||||||||
| Excess Spread Financing - Hypothetical Sensitivities |
100 bps
Adverse
Change
|
200 bps
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
|||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Excess spread financing | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Beginning in the second quarter of 2023, the Company valued excess spread financing using a stochastic OAS instead of a static discount rate. Refer to
Note 14, Fair Value Measurements
, for further discussion.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
The Company had MSR financing liability of $
21
and $
19
as of September 30, 2023 and December 31, 2022, respectively. Refer to
Note 14, Fair Value Measurements
, for key weighted-average inputs and assumptions used in the valuation of the MSR financing liability.
12
Revenues - Service Related, net
The following table sets forth the items comprising total “revenues - service related, net”:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Revenues - Service Related, net | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
|
Contractually specified servicing fees
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Other service-related income
(1)
|
|
|
|
|
|||||||||||||||||||
|
Incentive and modification income
(1)
|
|
|
|
|
|||||||||||||||||||
|
Servicing late fees
(1)
|
|
|
|
|
|||||||||||||||||||
| Mark-to-market adjustments - Servicing | |||||||||||||||||||||||
| MSR MTM |
|
|
|
|
|||||||||||||||||||
| Loss on MSR hedging activities |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| (Loss) gain on MSR sales |
(
|
(
|
|
(
|
|||||||||||||||||||
|
Reclassifications
(2)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Excess spread / MSR financing MTM |
(
|
(
|
|
(
|
|||||||||||||||||||
| Total mark-to-market adjustments - Servicing |
|
|
|
|
|||||||||||||||||||
| Amortization, net of accretion | |||||||||||||||||||||||
| MSR amortization |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Excess spread accretion |
|
|
|
|
|||||||||||||||||||
| Total amortization, net of accretion |
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Originations service fees
(3)
|
|
|
|
|
|||||||||||||||||||
| Corporate/Xome related service fees |
|
|
|
|
|||||||||||||||||||
|
Other
(4)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total revenues - Service Related, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues. Amounts also include servicing fees from loans sold with servicing retained of $
175
and $
172
for the three months ended September 30, 2023 and 2022, respectively, and $
528
and $
488
for the nine months ended September 30, 2023 and 2022, respectively.
(2)
Reclassifications include the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio.
(3)
Amounts include fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and include loan application, underwriting, and other similar fees.
(4)
Other represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements, portfolio runoff and the payments made associated with MSR financing arrangements.
5. Advances and Other Receivables
Advances and other receivables, net, consists of the following:
| Advances and Other Receivables, Net | September 30, 2023 | December 31, 2022 | |||||||||
|
Servicing advances, net of $
|
$ |
|
$ |
|
|||||||
|
Receivables from agencies, investors and prior servicers, net of $
|
|
|
|||||||||
| Reserves |
(
|
(
|
|||||||||
| Total advances and other receivables, net | $ |
|
$ |
|
|||||||
13
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Reserves for Advances and Other Receivables | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Provision |
|
|
|
|
|||||||||||||||||||
|
Reclassifications
(1)
|
|
|
|
|
|||||||||||||||||||
| Write-offs |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Reclassifications represent required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
Purchase Discount for Advances and Other Receivables
The following tables set forth the activities of the purchase discounts for advances and other receivables:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Purchase Discount for Advances and Other Receivables | Servicing Advances | Receivables from Agencies, Investors and Prior Servicers | Servicing Advances | Receivables from Agencies, Investors and Prior Servicers | |||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Addition from acquisition
(1)
|
|
|
|
|
|||||||||||||||||||
| Utilization of purchase discounts |
(
|
|
(
|
(
|
|||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Purchase Discount for Advances and Other Receivables | Servicing Advances | Receivables from Agencies, Investors and Prior Servicers | Servicing Advances | Receivables from Agencies, Investors and Prior Servicers | |||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Addition from acquisition
(1)
|
|
|
|
|
|||||||||||||||||||
| Utilization of purchase discounts |
(
|
|
(
|
(
|
|||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
In connection with the acquisition of Home Point during the third quarter of 2023, the Company recorded the acquired advances and other receivables at estimate fair value as of the acquisition date, which resulted in a purchase discount of $4. Refer to
Note 2, Acquisitions
, for discussion of the Home Point acquisition.
Credit Loss for Advances and Other Receivables
As of September 30, 2023, the total
current expected credit loss (“CECL”) reserve
was $
36
, of which $
29
and $
7
were recorded in reserves and purchase discount for advances and other receivables, respectively. As of September 30, 2022
, the total CECL reserve was $
34
, of which $
27
and $
7
were recorded in reserves and purchase discount for advances and other receivables, respectively. There were no
material changes to CECL reserves
during th
e three and nine months ended September 30, 2023 and 2022.
The Company determined that the credit-related risk associated with applicable financial instruments typically increases with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of
39
months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
14
6. Mortgage Loans Held for Sale
Mortgage loans held for sale are recorded at fair value as set forth below:
| Mortgage Loans Held for Sale | September 30, 2023 | December 31, 2022 | |||||||||
| Mortgage loans held for sale – UPB | $ |
|
$ |
|
|||||||
|
Mark-to-market adjustment
(1)
|
(
|
(
|
|||||||||
| Total mortgage loans held for sale | $ |
|
$ |
|
|||||||
(1)
The mark-to-market adjustment includes net change in unrealized gain/loss, premium on correspondent loans and fees on direct-to-consumer loans. The mark-to-market adjustment is recorded in “revenues - net gain on mortgage loans held for sale” in the condensed consolidated statements of operations.
The following table sets forth the activities of mortgage loans held for sale:
| Nine Months Ended September 30, | |||||||||||
| Mortgage Loans Held for Sale | 2023 | 2022 | |||||||||
| Balance - beginning of period | $ |
|
$ |
|
|||||||
| Loans sold and loan payments received |
(
|
(
|
|||||||||
| Mortgage loans originated and purchased, net of fees |
|
|
|||||||||
|
Repurchase of loans out of Ginnie Mae securitizations
(1)
|
|
|
|||||||||
| Net change in unrealized gain (loss) on retained loans held for sale |
|
(
|
|||||||||
|
Net transfers of mortgage loans held for sale
(2)
|
(
|
|
|||||||||
| Balance - end of period | $ |
|
$ |
|
|||||||
(1)
The Company has the optional right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased in connection with loan modifications and loan resolution activity, with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale.
(2)
Amounts reflect transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net, for claims made on certain government insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing.
For the nine months ended September 30, 2023 and 2022, the Company recorded a total realized gain of $
42
and loss of $
208
from total sales proceeds of $
10,990
and $
30,185
, respectively, on the sale of mortgage loans held for sale.
The total UPB and fair value of mortgage loans held for sale on non-accrual status was as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Mortgage Loans Held for Sale | UPB | Fair Value | UPB | Fair Value | |||||||||||||||||||
|
Non-accrual
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Non-accrual UPB includes $
32
and $
90
of UPB related to Ginnie Mae repurchased loans as of September 30, 2023 and December 31, 2022, respectively.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was
$
26
an
d $
65
as of September 30, 2023 and December 31, 2022, respectively.
15
9. Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to interest rate risks related to mortgage loans held for sale and IRLCs (“the pipeline”) and the MSR portfolio. The Company economically hedges the pipeline separately from the MSR portfolio primarily using third-party derivative instruments. Such derivative instruments utilized by the Company include IRLCs, LPCs, forward MBS and Treasury futures. The changes in value on the derivative instruments associated with pipeline hedging are recorded in earnings as a component of “revenues - net gain on mortgage loans held for sale” on the condensed consolidated statements of operations and condensed consolidated statement of cash flows, while changes in the value of derivative instruments associated with the MSR portfolio fair value are recorded in
“revenues - service related, net”
on the condensed consolidated statements of operations and in “(gain) loss on MSR hedging activities” on the condensed consolidated statements of cash flows.
16
The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments. Gains/(losses) include both realized and unrealized gains/(losses) of each derivative financial instrument.
| September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||
| Derivative Financial Instruments |
Expiration
Dates |
Outstanding
Notional |
Fair
Value |
Gains/(Losses) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||
| Loan sale commitments | 2023 | $ |
|
$ |
|
$ |
(
|
||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2023 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| LPCs | 2023 |
|
|
|
|||||||||||||||||||
| Forward MBS trades | 2023 |
|
|
|
|||||||||||||||||||
| Treasury futures | 2023 |
|
|
|
|||||||||||||||||||
| Total derivative financial instruments - assets | $ |
|
$ |
|
$ |
|
|||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2023 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| LPCs | 2023 |
|
|
|
|||||||||||||||||||
| Forward MBS trades | 2023 |
|
|
(
|
|||||||||||||||||||
| Treasury futures | 2023 |
|
|
(
|
|||||||||||||||||||
| Total derivative financial instruments - liabilities | $ |
|
$ |
|
$ |
(
|
|||||||||||||||||
| September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||
| Derivative Financial Instruments |
Expiration
Dates |
Outstanding
Notional |
Fair
Value |
Gains/(Losses) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||
| Loan sale commitments | 2022 | $ |
|
$ |
(
|
$ |
(
|
||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2022 | $ |
|
$ |
|
$ |
(
|
||||||||||||||||
| LPCs | 2022 |
|
|
(
|
|||||||||||||||||||
| Forward MBS trades | 2022 |
|
|
|
|||||||||||||||||||
| Treasury futures | 2022 |
|
|
|
|||||||||||||||||||
| Total derivative financial instruments - assets | $ |
|
$ |
|
$ |
|
|||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2022 | $ |
|
$ |
|
$ |
(
|
||||||||||||||||
| LPCs | 2022 |
|
|
(
|
|||||||||||||||||||
| Forward MBS trades | 2022 |
|
|
(
|
|||||||||||||||||||
| Treasury futures | 2022 |
|
|
(
|
|||||||||||||||||||
| Total derivative financial instruments - liabilities | $ |
|
$ |
|
$ |
(
|
|||||||||||||||||
17
10. Indebtedness
Advance, Warehouse and MSR Facilities
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Maturity Date | Collateral | Capacity Amount | Outstanding | Collateral Pledged | Outstanding | Collateral Pledged | ||||||||||||||||||||||||||||||||||||||
| Advance Facilities | ||||||||||||||||||||||||||||||||||||||||||||
| $350 advance facility | October 2024 | Servicing advance receivables | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||
|
$250 advance facility
(1)
|
November 2024 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $250 advance facility | January 2024 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $75 advance facility | December 2023 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| Advance facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| Warehouse Facilities | ||||||||||||||||||||||||||||||||||||||||||||
| $1,500 warehouse facility | June 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $750 warehouse facility | June 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $750 warehouse facility | October 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | June 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$500 warehouse facility
(2)
|
August 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $300 warehouse facility | November 2023 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$250 warehouse facility
(3)
|
September 2025 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $200 warehouse facility | December 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $200 warehouse facility | January 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $100 warehouse facility | April 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $100 warehouse facility | April 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $75 warehouse facility | December 2023 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $1 warehouse facility | December 2023 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| Warehouse facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| MSR Facilities | ||||||||||||||||||||||||||||||||||||||||||||
|
$1,500 warehouse facility
(1)
|
November 2024 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $1,500 warehouse facility | April 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$750 warehouse facility
(3)
|
September 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | June 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | April 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | June 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $50 warehouse facility | November 2024 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| MSR facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| Advance, warehouse and MSR facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| Unamortized debt issuance costs |
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||
| Advance, warehouse and MSR facilities, net | $ |
|
$ |
|
||||||||||||||||||||||||||||||||||||||||
(1)
Total capacity for this facility is $
1,750
, of which $
250
is internally allocated for advance financing and $
1,500
is internally allocated for MSR financing; capacity is fully fungible and is not restricted by these allocations.
(2)
In October 2023, the Company decreased the capacity to $
350
.
(3)
The capacity amount for this facility is $
1,000
, of which $
750
is a sublimit for MSR financing.
18
The weighted average interest rate for advance facilities was
7.8
% and
4.5
% for the three months ended September 30, 2023 and 2022, respectively, and
7.6
% and
3.4
% for the nine months ended September 30, 2023 and 2022, respectively. The weighted average interest rate for warehouse and MSR facilities was
7.8
% and
4.6
% for the three months ended September 30, 2023 and 2022, respectively, and
7.4
% and
3.3
% for the nine months ended September 30, 2023 and 2022, respectively.
Unsecured Senior Notes
Unsecured senior notes consist of the following:
| Unsecured Senior Notes | September 30, 2023 | December 31, 2022 | |||||||||
|
$
|
$ |
|
$ |
|
|||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
| Unsecured senior notes principal amount |
|
|
|||||||||
|
Purchase discount
(1)
and unamortized debt issuance costs
|
(
|
(
|
|||||||||
| Unsecured senior notes, net | $ |
|
$ |
|
|||||||
(1)
In connection with the Home Point transaction in the third quarter of 2023, the Company assumed an unsecured senior note with a principal balance of $
500
and recorded a purchase discount of $
32
on the acquisition date, of which $
2
has been accreted in the nine months ended September 30, 2023. See
Note 2, Acquisitions,
for further details.
The indentures provide that on or before certain fixed dates, the Company may redeem up to
40
% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates.
No
n
otes were repurchased or redeemed during th
e nine months ended September 30, 2023 and 2022.
As of September 30, 2023, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:
| Year Ending December 31, | Amount | |||||||
| 2023 through 2025 | $ |
|
||||||
| 2026 |
|
|||||||
| 2027 |
|
|||||||
| Thereafter |
|
|||||||
| Total unsecured senior notes principal amount | $ |
|
||||||
Interest Expense
Interest expense primarily includes interest incurred on advance, warehouse and MSR facilities, unsecured senior notes, excess spread financing and compensating bank balances, as well as bank fees. The Company incurred interest expense related to advance, warehouse and MSR facilities, unsecured senior notes and excess spread financing of $
131
and $
342
for the three and nine months ended September 30, 2023, respectively, and $
90
and $
266
for the three and nine months ended September 30, 2022, respectively.
Financial Covenants
The Company’s credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at the Company’s operating subsidiary, Nationstar Mortgage LLC. The Company was in compliance with its required financial covenants as of September 30, 2023.
19
11. Securitizations and Financings
Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.
The Company has determined that the SPEs created in connection with certain advance facilities trusts should be consolidated as the Company is the primary beneficiary of each of these entities.
A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s condensed consolidated balance sheets is presented below:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Consolidated Transactions with VIEs |
Transfers
Accounted for as Secured Borrowings |
Transfers
Accounted for as Secured Borrowings |
|||||||||
| Assets | |||||||||||
| Restricted cash | $ |
|
$ |
|
|||||||
| Advances and other receivables, net |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities | |||||||||||
|
Advance facilities, net
(1)
|
$ |
|
$ |
|
|||||||
| Payables and other liabilities |
|
|
|||||||||
| Total liabilities | $ |
|
$ |
|
|||||||
(1)
Refer to advance facilities in
Note 10, Indebtedness
, for additional information.
The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company:
| Unconsolidated Securitization Trusts | September 30, 2023 | December 31, 2022 | |||||||||
| Total collateral balances - UPB | $ |
|
$ |
|
|||||||
| Total certificate balances | $ |
|
$ |
|
|||||||
The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of September 30, 2023 and December 31, 2022. Therefore, it does not have a significant maximum exposure to loss related to these unconsolidated VIEs.
A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below:
| Principal Amount of Transferred Loans 60 Days or More Past Due | September 30, 2023 | December 31, 2022 | |||||||||
| Unconsolidated securitization trusts | $ |
|
$ |
|
|||||||
20
12. Earnings Per Share
Basic earnings per share of common stock is computed by dividing net income by the weighted average number of common stock outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the sum of the weighted average number of shares of common stock and any dilutive securities outstanding during the period. The Company’s potentially dilutive securities are share-based awards. The Company applies the treasury stock method to determine the dilutive weighted average number of shares of common stock outstanding based on the outstanding share-based awards. As of September 30, 2023 and December 31, 2022, the Company had
10
million preferred shares authorized at par value of $
0.00001
per share, with
zero
shares issued and outstanding and aggregate liquidation preference of
zero
dollars.
The following table sets forth the computation of basic and diluted net income per common share (amounts in millions, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Computation of Earnings Per Share | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Weighted average shares of common stock outstanding (in thousands): | |||||||||||||||||||||||
| Basic |
|
|
|
|
|||||||||||||||||||
| Dilutive effect of stock awards |
|
|
|
|
|||||||||||||||||||
| Diluted |
|
|
|
|
|||||||||||||||||||
| Earnings per common share | |||||||||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
13. Income Taxes
The effective tax rate for operations was
21.7
% and
22.3
% for the three and nine months ended September 30, 2023, and
26.4
% and
24.7
% for the three and nine months ended September 30, 2022, respectively. The effective tax rates differed from the statutory federal rate of 21% primarily due to state income taxes and nondeductible executive compensation.
The change in effective rate during the three and nine months ended September 30, 2023 as compared to 2022 is primarily attributable to the impact of quarterly discrete tax items relative to income before taxes for the respective period, including the excess tax benefit from stock-based compensation.
14. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
There have been no significant changes to the valuation techniques and inputs used by the Company in estimating fair values of Level 2 and Level 3 assets and liabilities as disclosed in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2022, with the exception of the following:
21
Mortgage Servicing Rights – Fair Value (Level 3)
– The Company estimates the fair value of its MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread (OAS) instead of a static discount rate. OAS is the incremental spread added to the risk-free rate to reflect embedded (prepayment) optionality and other risk inherent in the MSRs to discount cash flows. The cash flow assumptions used in the discounted cash flow model incorporate prepayment speeds, OAS, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions, with the key assumptions being mortgage prepayment speeds, OAS, and cost to service. The cash flow assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See
Note 4, Mortgage Servicing Rights and Related Liabilities
, for more information.
Excess Spread Financing (Level 3)
– The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. Beginning in the second quarter of 2023, the Company valued excess spread financing using a stochastic OAS instead of a static discount rate. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and OAS. Quarterly, management obtains a third-party valuation to assess the reasonableness of the fair value calculations provided by the internal cash flow model. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the condensed consolidated balance sheets.
The following tables present the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:
| September 30, 2023 | |||||||||||||||||||||||
| Recurring Fair Value Measurements | |||||||||||||||||||||||
| Fair Value - Recurring Basis | Total Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Mortgage loans held for sale | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|||||||||||||||||||
| Equity investments |
|
|
|
|
|||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs |
|
|
|
|
|||||||||||||||||||
| LPCs |
|
|
|
|
|||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| LPCs |
|
|
|
|
|||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| Treasury futures |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights financing |
|
|
|
|
|||||||||||||||||||
| Excess spread financing |
|
|
|
|
|||||||||||||||||||
22
| December 31, 2022 | |||||||||||||||||||||||
| Recurring Fair Value Measurements | |||||||||||||||||||||||
| Fair Value - Recurring Basis | Total Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Mortgage loans held for sale | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|||||||||||||||||||
| Equity investments |
|
|
|
|
|||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs |
|
|
|
|
|||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| LPCs |
|
|
|
|
|||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| LPCs |
|
|
|
|
|||||||||||||||||||
| Treasury futures |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights financing |
|
|
|
|
|||||||||||||||||||
| Excess spread financing |
|
|
|
|
|||||||||||||||||||
The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Assets | Liabilities | ||||||||||||||||||||||||||||||||||
| Fair Value - Level 3 Assets and Liabilities | Mortgage servicing rights | Mortgage loans held for sale | Equity investments | IRLCs | Excess spread financing | Mortgage servicing rights financing | |||||||||||||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Changes in fair value included in earnings |
(
|
|
(
|
|
(
|
|
|||||||||||||||||||||||||||||
|
Purchases/additions
(1)
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Issuances |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Sales/dispositions
(2)
|
(
|
(
|
|
|
|
|
|||||||||||||||||||||||||||||
| Repayments |
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Settlements |
|
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Other changes |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
23
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Assets | Liabilities | ||||||||||||||||||||||||||||
| Fair Value - Level 3 Assets and Liabilities | Mortgage servicing rights | Equity investments | IRLCs | Excess spread financing | Mortgage servicing rights financing | ||||||||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Changes in fair value included in earnings |
|
(
|
(
|
|
|
||||||||||||||||||||||||
| Purchases |
|
|
|
|
|
||||||||||||||||||||||||
| Issuances |
|
|
|
|
|
||||||||||||||||||||||||
| Sales |
(
|
|
|
|
|
||||||||||||||||||||||||
| Repayments |
|
|
|
(
|
|
||||||||||||||||||||||||
| Settlements |
|
|
|
(
|
|
||||||||||||||||||||||||
| Other changes |
|
|
|
|
|
||||||||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
(1)
Additions for mortgages loans held for sale include loans that are purchased or transferred in.
(2)
Dispositions for mortgage loans held for sales include loans that are sold or transferred out.
The Company had immaterial LPCs assets and liabilities as of September 30, 2023 and 2022. No transfers were made in or out of Level 3 fair value assets and liabilities for the Company during the nine months ended September 30, 2023 and 2022.
24
The table below presents the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities.
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Level 3 Inputs | Min | Max | Min | Max | |||||||||||||||||||||||||||||||
|
MSRs
(1)
|
|||||||||||||||||||||||||||||||||||
|
Option adjusted spread
(2)
|
|
% |
|
% |
|
% | N/A | N/A | N/A | ||||||||||||||||||||||||||
| Discount rate | N/A | N/A | N/A |
|
% |
|
% |
|
% | ||||||||||||||||||||||||||
| Prepayment speed |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
Cost to service per loan
(3)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
|
Average life
(4)
|
|
|
|||||||||||||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||||||||||||||
| Market pricing |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| IRLCs | |||||||||||||||||||||||||||||||||||
| Value of servicing (reflected as a percentage of loan commitment) |
|
% |
|
% |
|
% |
(
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
Excess spread financing
(1)
|
|||||||||||||||||||||||||||||||||||
|
Option adjusted spread
(2)
|
|
% |
|
% |
|
% | N/A | N/A | N/A | ||||||||||||||||||||||||||
| Discount rate | N/A | N/A | N/A |
|
% |
|
% |
|
% | ||||||||||||||||||||||||||
| Prepayment speed |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
Average life
(4)
|
|
|
|||||||||||||||||||||||||||||||||
| Mortgage servicing rights financing | |||||||||||||||||||||||||||||||||||
| Advance financing and counterparty fee rates |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Annual advance recovery rates |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
(1)
The inputs are weighted by investor.
(2)
OAS represents incremental spread above a risk-free rate (one-month SOFR), which is an observable input. See discussion on methodology above.
(3)
Presented in whole dollar amounts.
(4)
Average life is included for informational purposes.
25
The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments not carried at fair value:
| September 30, 2023 | |||||||||||||||||||||||
|
Carrying
Amount |
Fair Value | ||||||||||||||||||||||
| Financial Instruments | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Restricted cash |
|
|
|
|
|||||||||||||||||||
| Advances and other receivables, net |
|
|
|
|
|||||||||||||||||||
| Loans subject to repurchase from Ginnie Mae |
|
|
|
|
|||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| Unsecured senior notes, net |
|
|
|
|
|||||||||||||||||||
| Advance, warehouse and MSR facilities, net |
|
|
|
|
|||||||||||||||||||
| Liability for loans subject to repurchase from Ginnie Mae |
|
|
|
|
|||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
|
Carrying
Amount |
Fair Value | ||||||||||||||||||||||
| Financial Instruments | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Restricted cash |
|
|
|
|
|||||||||||||||||||
| Advances and other receivables, net |
|
|
|
|
|||||||||||||||||||
| Loans subject to repurchase from Ginnie Mae |
|
|
|
|
|||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| Unsecured senior notes, net |
|
|
|
|
|||||||||||||||||||
| Advance, warehouse and MSR facilities, net |
|
|
|
|
|||||||||||||||||||
| Liability for loans subject to repurchase from Ginnie Mae |
|
|
|
|
|||||||||||||||||||
15. Capital Requirements
Fannie Mae, Freddie Mac, Ginnie Mae and certain private label mortgage investors require the Company to maintain minimum net worth (“capital”) requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to approve large servicing transfers. To the extent that these requirements are not met, the Company’s secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company’s selling and servicing agreements, which would prohibit the Company from further originating or securitizing these specific types of mortgage loans or being an approved servicer. The Company’s various capital requirements related to its outstanding selling and servicing agreements are measured based on the Company’s primary operating subsidiary, Nationstar Mortgage LLC, as well as Rushmore Loan Management Services, LLC, which was acquired during the third quarter of 2023 in connection with the Roosevelt Transaction. As of September 30, 2023, the Company was in compliance with its selling and servicing capital requirements.
26
16. Commitments and Contingencies
Litigation and Regulatory
The Company and its subsidiaries are routinely and currently involved in a number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. While it is not possible to predict the outcome of any of these matters, based on the Company’s assessment of the facts and circumstances, it does not believe any of these matters, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flows of the Company. However, actual outcomes may differ from those expected and could have a material effect on our financial position, results of operations, or cash flows in a future period.
The Company will continue to monitor legal matters for further developments that could affect the amount of the accrued liability that has been previously established. Legal-related expenses for the Company include legal settlements and the fees paid to external legal service providers and are included in general and administrative expenses on the condensed consolidated statements of operations. The Company recorded legal-related expenses, net of recoveries, which includes legal settlements and fees paid to external legal service providers, of $
8
and $
29
during the three and nine months ended September 30, 2023, respectively, and $
7
and $
15
for the three and nine months ended September 30, 2022, respectively, which are included in “expenses - general and administrative” on the unaudited condensed consolidated statements of operations. Management currently believes the aggregate range of reasonably possible loss is $
2
to $
3
in exce
ss of the accrued liability (if any) related to those matters as of September 30, 2023. This estimated range of possible loss i
s based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate.
Other Loss Contingencies
As part of the Company’s ongoing operations, it acquires servicing rights of mortgage loan portfolios that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. As of September 30, 2023, the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no evidence suggests additional reserves are warranted.
As a seller of mortgage loans to Agencies and other third parties, the Company may be required to indemnify or repurchase mortgage loans that fail to meet certain customary representations and warranties made in conjunction with sales of mortgage loans. The repurchase reserve liability related to such customary representations and warranties was $
81
and $
22
as of September 30, 2023 and December 31, 2022, respectively, which are included in “payables and other liabilities” within the condensed consolidated balance sheets.
Loan and Other Commitments
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. The Company also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See
Note 9, Derivative Financial Instruments
, for more information.
17. Segment Information
The Company’s segments reflect the internal reporting the chief operating decision maker uses to evaluate operating performance and are based upon the Company’s organizational structure, which focuses primarily on the services offered. A brief description of our current business segments is as follows:
Servicing:
This segment performs operational activities on behalf of investors or owners of the underlying mortgages and mortgage servicing rights, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
During the three months ended September 30, 2023, the Company collapsed a securitization with a bond balance of $
82
, secured by mortgage loans with an approximate UPB of $
207
. The loans were sold to a third party. A net gain on sale of $
67
was recorded on the transaction, which was included in “gain on mortgage loans held for sale”, within the condensed statements of operations and reported under Servicing.
27
Originations
: This segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent channel, which purchases or originates loans from mortgage bankers.
Corporate/Other
: Functional expenses are allocated to individual segments based on the actual cost of services performed, direct resource utilization, or headcount percentage for shared services. During the fourth quarter of 2022, the Company began allocating shared services based on headcount instead of an estimate of percentage use as it changed its segment measures provided to and used by the chief operating decision maker. As a result, all costs for shared services are allocated to individual segments based on headcount. The Company recast segment information for the historical periods presented herein to reflect the allocation method change and to conform to the current presentation. The change affects total expenses for Servicing and Originations segments and Corporate/Other, but had no effect on condensed consolidated statements of operations. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to the Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties. Eliminations are included in Corporate/Other, including the eliminations related to intersegment hedge fair value changes.
The following tables present financial information by segment:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Financial Information by Segment | Servicing | Originations | Corporate/Other | Consolidated | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service related, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net gain on mortgage loans held for sale |
|
|
|
|
|||||||||||||||||||
| Total revenues |
|
|
|
|
|||||||||||||||||||
| Total expenses |
|
|
|
|
|||||||||||||||||||
| Interest income |
|
|
|
|
|||||||||||||||||||
| Interest expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other income, net |
|
|
|
|
|||||||||||||||||||
| Total other income (expenses), net |
|
(
|
|
|
|||||||||||||||||||
| Income (loss) before income tax expense | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Financial Information by Segment | Servicing | Originations | Corporate/Other | Consolidated | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service related, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net (loss) gain on mortgage loans held for sale |
(
|
|
|
|
|||||||||||||||||||
| Total revenues |
|
|
|
|
|||||||||||||||||||
| Total expenses |
|
|
|
|
|||||||||||||||||||
| Interest income |
|
|
|
|
|||||||||||||||||||
| Interest expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other expense, net |
|
|
(
|
(
|
|||||||||||||||||||
| Total other income (expenses), net |
|
|
(
|
(
|
|||||||||||||||||||
| Income (loss) before income tax expense | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
28
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Financial Information by Segment | Servicing | Originations | Corporate/Other | Consolidated | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service related, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net gain on mortgage loans held for sale |
|
|
|
|
|||||||||||||||||||
| Total revenues |
|
|
|
|
|||||||||||||||||||
| Total expenses |
|
|
|
|
|||||||||||||||||||
| Interest income |
|
|
|
|
|||||||||||||||||||
| Interest expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other income, net |
|
|
|
|
|||||||||||||||||||
| Total other income (expenses), net |
|
(
|
(
|
|
|||||||||||||||||||
| Income (loss) before income tax expense | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Financial Information by Segment | Servicing | Originations | Corporate/Other | Consolidated | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service related, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net (loss) gain on mortgage loans held for sale |
(
|
|
|
|
|||||||||||||||||||
| Total revenues |
|
|
|
|
|||||||||||||||||||
| Total expenses |
|
|
|
|
|||||||||||||||||||
| Interest income |
|
|
|
|
|||||||||||||||||||
| Interest expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other income, net |
|
|
|
|
|||||||||||||||||||
| Total other (expenses) income, net |
(
|
|
|
|
|||||||||||||||||||
| Income (loss) before income tax expense | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
29
CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely,” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
•
macroeconomic and U.S. residential real estate market conditions;
•
changes in prevailing interest rates and/or changes in home prices;
•
our ability to maintain or grow the size of our servicing portfolio;
•
our ability to maintain or grow our originations volume and profitability;
•
our ability to recapture voluntary prepayments related to our existing servicing portfolio;
•
our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
•
delays in our ability to collect or be reimbursed for servicing advances;
•
our ability to obtain sufficient liquidity and capital to operate our business;
•
disruptions in the secondary home loans market;
•
our ability to successfully implement our strategic initiatives and hedging strategies;
•
our ability to realize anticipated benefits of our previous acquisitions;
•
our ability to use net operating loss carryforwards and other tax attributes;
•
changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•
third-party credit, servicer and correspondent risks;
•
our ability to pay down debt;
•
our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•
health pandemics, hurricanes, earthquakes, fires, floods and other natural catastrophic events;
•
our ability to prevent cyber intrusions and mitigate cyber risks; and
•
our ability to maintain our various licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements, or our objectives and plans will be achieved. Please refer to
Risk Factors
and
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2022 for further information on these and other risk factors affecting us.
30
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.
| Overview | ||
We are a leading servicer of residential mortgage loans. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to $937 billion as of September 30, 2023. We believe this track record reflects our strong operating capabilities, which include a low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology.
Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on tangible equity of 12% or higher. Key strategic priorities include the following:
•
Strengthen our balance sheet by building capital and liquidity, and managing interest rate and other forms of risk;
•
Improve efficiency by driving continuous improvement in unit costs for our Servicing and Originations segments, as well as by taking corporate actions to eliminate costs throughout the organization;
•
Grow our servicing portfolio to $1 trillion in UPB by acquiring new customers and retaining existing customers;
•
Achieve and sustain a refinance recapture rate of 60%;
•
Delight our customers and keep Mr. Cooper a great place for our team members to work;
•
Reinvent the customer experience by acting as the customer’s advocate and by harnessing technology to deliver digital solutions that are personalized and friction-less;
•
Sustain the talent of our people and the culture of our organization; and
•
Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.
Anticipated Trends
In the third quarter of 2023, our Servicing segment generated income before income tax expense of $361, and our servicing portfolio grew to $937 billion, bringing us very close to our $1 trillion UPB target. We anticipate achieving this target early next year, as we expect MSR bulk purchases and boarding of subservicing customers in the fourth quarter of 2023 and early 2024. We continue to expect a favorable market for acquisitions and bulk purchases due to macro-economic conditions. Overall, we expect our Servicing segment to continue generating strong earnings over time as our servicing portfolio grows with acquisitions and bulk purchases.
In the third quarter of 2023, our Originations segment generated income before income tax expense of $29 on funded volume of $3,412. With mortgage rates above 7% at the end of the third quarter of 2023, and considering the seasonality of Originations, which is weakest during the fourth quarter due to the day count shortened by the holidays, we expect the Originations segment to operate at lower levels of profitability in the fourth quarter of 2023 and early next year.
31
While the recent inflation rate increase appears to have subsided, the inflation rate remains relatively high. Inflationary pressures may limit a borrower’s disposable income, which can decrease a borrowers’ ability to enter into mortgage transactions. Inflationary pressures may also increase our operating costs. However, historically changes in interest rates have a greater impact on our financial results than changes in inflation. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or extent as the inflation rate.
Results of Operations
|
Table 1. Consolidated Operations
|
||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
|
Revenues - operational
(1)
|
$ | 511 | $ | 386 | $ | 125 | $ | 1,325 | $ | 1,284 | $ | 41 | |||||||||||||||||||||||
| Revenues - mark-to-market | 63 | 124 | (61) | 65 | 877 | (812) | |||||||||||||||||||||||||||||
| Total revenues | 574 | 510 | 64 | 1,390 | 2,161 | (771) | |||||||||||||||||||||||||||||
| Total expenses | 301 | 316 | (15) | 840 | 982 | (142) | |||||||||||||||||||||||||||||
| Total other income (expense), net | 79 | (41) | 120 | 35 | 45 | (10) | |||||||||||||||||||||||||||||
| Income before income tax expense | 352 | 153 | 199 | 585 | 1,224 | (639) | |||||||||||||||||||||||||||||
| Less: Income tax expense | 77 | 40 | 37 | 131 | 302 | (171) | |||||||||||||||||||||||||||||
| Net income | $ | 275 | $ | 113 | $ | 162 | $ | 454 | $ | 922 | $ | (468) | |||||||||||||||||||||||
(1)
Revenues - operational consists of total revenues, excluding mark-to-market.
Income before income tax expense increased during the three months ended September 30, 2023 as compared to 2022 primarily due to an increase in total revenues and the change in total other income (expense), net. Revenues increased in 2023 primarily due to an increase in operational revenues in our Servicing segment largely driven by bulk MSR purchases and acquisitions in 2023, and a gain from the sale of loans that were acquired in connection with the collapse of a securitization trust due to over-collateralization. The change in other income (expense), net in 2023 as compared to 2022 was primarily due to a preliminary bargain purchase gain of $96 recorded in 2023 upon completion of the Home Point Transaction, partially offset by a loss of $35 related to fair value changes in certain equity investments.
Income before tax expense decreased during the nine months ended September 30, 2023 as compared to 2022 primarily due to a decrease in total revenues, partially offset by lower total expenses. The decrease in revenue in 2023 was primarily attributable to lower favorable MTM adjustment as the increase in mortgage rates was greater in 2022 compared to 2023. The MTM adjustment was partially offset by the increase in operational revenue in our Servicing segment driven by a larger servicing UPB portfolio in 2023, partially offset by decreased origination revenues due to lower origination volumes. The decrease in total expenses during the three and nine months ended September 30, 2023, was primarily driven by lower salaries, wages and benefits in our Originations segment due to lower headcount in both the direct-to-consumer and correspondent channels as a result of reducing headcount commensurate with lower origination volumes in 2022.
The effective tax rate during the three months ended September 30, 2023, was 21.7% as compared to 26.4% in 2022, and the effective tax rate during the nine months ended September 30, 2023 was 22.3% as compared to 24.7% in 2022. The changes in effective rate are primarily attributable to the impact of quarterly discrete tax items relative to income before taxes for the respective period, including the excess tax benefit from stock-based compensation.
32
| Segment Results | ||||||||||||||
Our operations are conducted through two segments: Servicing and Originations.
•
The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages and mortgage servicing rights, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
•
The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent channel, which purchases or originates loans from mortgage bankers.
Refer to
Note 17, Segment Information
, in the Notes to the Condensed Consolidated Financial Statements for a summary of segment results.
| Servicing Segment | ||||||||||||||
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer and subservicer, including our low-cost platform that creates operating leverage, our skill in mitigating losses for investors and clients, our commitment to strong customer service, industry leading compliance management, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive purchase and refinance options. We believe that our operational capabilities are reflected in our strong servicer ratings and recent agency recognition.
|
Table 2. Servicer Ratings
|
||||||||||||||
|
Fitch
(1)
|
Moody’s
(2)
|
S&P
(3)
|
|||||||||||||||
| Rating date | August 2022 | May 2023 | June 2022 | ||||||||||||||
| Residential | RPS2 | SQ2- | Above Average | ||||||||||||||
| Master Servicer | RMS2+ | SQ2+ | Above Average | ||||||||||||||
| Special Servicer | RSS2 | SQ2- | Above Average | ||||||||||||||
| Subprime Servicer | RPS2 | SQ2- | Above Average | ||||||||||||||
|
Rushmore Special
(4)
|
RSS1- | SQ3+ | Above Average | ||||||||||||||
(1)
Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
(2)
Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)
(3)
S&P Rating Scale of Strong to Weak
(4)
During the second quarter of 2023, the Company acquired Rushmore Loan Management Services, LLC, in connection with the Roosevelt Transaction, which is a residential mortgage servicer with services that focuses on special servicing.
33
The following tables set forth the results of operations for the Servicing segment:
|
Table 3. Servicing Segment Results of Operations
|
||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Operational | $ | 561 | 25 | $ | 377 | 18 | $ | 184 | 7 | ||||||||||||||||||||||||||
| Amortization, net of accretion | (160) | (7) | (169) | (8) | 9 | 1 | |||||||||||||||||||||||||||||
| Mark-to-market adjustments - Servicing | 63 | 3 | 124 | 6 | (61) | (3) | |||||||||||||||||||||||||||||
| Total revenues | 464 | 21 | 332 | 16 | 132 | 5 | |||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Salaries, wages and benefits | 87 | 4 | 82 | 4 | 5 | — | |||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||
| Servicing support fees | 29 | 1 | 21 | 1 | 8 | — | |||||||||||||||||||||||||||||
| Corporate and other general and administrative expenses | 52 | 3 | 29 | 2 | 23 | 1 | |||||||||||||||||||||||||||||
| Foreclosure and other liquidation related expenses (recoveries), net | — | — | 9 | — | (9) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 4 | — | 6 | — | (2) | — | |||||||||||||||||||||||||||||
| Total general and administrative expenses | 85 | 4 | 65 | 3 | 20 | 1 | |||||||||||||||||||||||||||||
| Total expenses | 172 | 8 | 147 | 7 | 25 | 1 | |||||||||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||||||||||||||
| Interest income | 157 | 7 | 71 | 3 | 86 | 4 | |||||||||||||||||||||||||||||
| Advance interest expense | (13) | (1) | (8) | — | (5) | (1) | |||||||||||||||||||||||||||||
| Other interest expense | (75) | (3) | (45) | (2) | (30) | (1) | |||||||||||||||||||||||||||||
| Interest expense | (88) | (4) | (53) | (2) | (35) | (2) | |||||||||||||||||||||||||||||
| Total other income, net | 69 | 3 | 18 | 1 | 51 | 2 | |||||||||||||||||||||||||||||
| Income before income tax expense | $ | 361 | 16 | $ | 203 | 10 | $ | 158 | 6 | ||||||||||||||||||||||||||
| Weighted average cost - advance and MSR facilities | 8.2 | % | 5.1 | % | 3.1 | % | |||||||||||||||||||||||||||||
| Weighted average cost - excess spread financing | 8.7 | % | 8.7 | % | — | % | |||||||||||||||||||||||||||||
(1)
Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
34
|
Table 3.1 Servicing - Revenues
|
||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| MSR Operational Revenue | |||||||||||||||||||||||||||||||||||
| Base servicing fees | $ | 382 | 17 | $ | 311 | 15 | $ | 71 | 2 | ||||||||||||||||||||||||||
| Modification fees | 6 | — | 2 | — | 4 | — | |||||||||||||||||||||||||||||
| Late payment fees | 17 | — | 15 | 1 | 2 | (1) | |||||||||||||||||||||||||||||
| Other ancillary revenues | 82 | 4 | (4) | — | 86 | 4 | |||||||||||||||||||||||||||||
| Total MSR operational revenue | 487 | 21 | 324 | 16 | 163 | 5 | |||||||||||||||||||||||||||||
| Subservicing-related revenue | 92 | 4 | 71 | 3 | 21 | 1 | |||||||||||||||||||||||||||||
| Total servicing fee revenue | 579 | 25 | 395 | 19 | 184 | 6 | |||||||||||||||||||||||||||||
| MSR financing liability costs | (7) | — | (4) | — | (3) | — | |||||||||||||||||||||||||||||
| Excess spread payments and portfolio runoff | (11) | — | (14) | (1) | 3 | 1 | |||||||||||||||||||||||||||||
| Total operational revenue | 561 | 25 | 377 | 18 | 184 | 7 | |||||||||||||||||||||||||||||
| Amortization, Net of Accretion | |||||||||||||||||||||||||||||||||||
| MSR amortization | (171) | (7) | (183) | (9) | 12 | 2 | |||||||||||||||||||||||||||||
| Excess spread accretion | 11 | — | 14 | 1 | (3) | (1) | |||||||||||||||||||||||||||||
| Total amortization, net of accretion | (160) | (7) | (169) | (8) | 9 | 1 | |||||||||||||||||||||||||||||
| Mark-to-Market Adjustments - Servicing | |||||||||||||||||||||||||||||||||||
| MSR MTM | 270 | 12 | 239 | 12 | 31 | — | |||||||||||||||||||||||||||||
| Loss on MSR hedging activities | (192) | (9) | (100) | (5) | (92) | (4) | |||||||||||||||||||||||||||||
| Loss on MSR sales | (3) | — | (2) | — | (1) | — | |||||||||||||||||||||||||||||
|
Reclassifications
(2)
|
(8) | — | (10) | (1) | 2 | 1 | |||||||||||||||||||||||||||||
| Excess spread / MSR financing MTM | (4) | — | (3) | — | (1) | — | |||||||||||||||||||||||||||||
| Total mark-to-market adjustments - Servicing | 63 | 3 | 124 | 6 | (61) | (3) | |||||||||||||||||||||||||||||
| Total revenues - Servicing | $ | 464 | 21 | $ | 332 | 16 | $ | 132 | 5 | ||||||||||||||||||||||||||
(1)
Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
(2)
Reclassifications include the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing
- MSR Operational revenue increased during the three months ended September 30, 2023, as compared to 2022 primarily due to an increase in base servicing fees as a result of a larger average servicing UPB portfolio in 2023 and an increase in other ancillary revenues driven by $67 gain on the sale of mortgage loans that were acquired in connection with the collapse of a securitization trust due to over-collateralization.
MSR amortization decreased during the three months ended September 30, 2023, as compared to 2022, primarily due to lower prepayments driven by higher mortgage rates in 2023, partially offset by a higher average MSR UPB.
MSR MTM increased during the three months ended September 30, 2023, compared to 2022, primarily driven by the positive impact of the newly acquired MSRs and less volatility in key assumptions in the valuation model. Loss on MSR hedging activities increased during the three months ended September 30, 2023, compared to 2022, primarily due to larger average servicing portfolio and higher hedge coverage ratio in 2023.
Subservicing
- Subservicing fees increased during the three months ended September 30, 2023, as compared to 2022, primarily due to fees related to the deboarding of a subservicing client in third quarter of 2023 as well as the specialty portfolio acquired as part of the Rushmore Transaction during the second quarter of 2023, which was fully operational for the entire third quarter of 2023.
35
Servicing Segment Expenses
Total expenses increased during the three months ended September 30, 2023 as compared to 2022, primarily driven by an increase in corporate and other general and administrative expenses and servicing support fees, partially offset by a change in foreclosure and other liquidation related expenses (recoveries), net. The increase in both corporate and other general and administrative expenses and servicing support fees were
primarily due to growth in our MSR servicing portfolio and an increase in allocated cost in
2023
primarily due to a higher percentage of total headcount in the Servicing segment following the workforce reduction in the Originations segment in
2022
. The change in foreclosure and other liquidation related expenses (recoveries), net, was primarily driven by non-operating expense accruals and increases in reserves for advances and settlements in
2022
.
Servicing Segment Other Income, net
Total other income, net increased during the three months ended September 30, 2023 as compared to 2022, primarily due to higher interest income attributable to higher interest rates, partially offset by higher interest expense from MSR and advance financing.
|
Table 4. Servicing Segment Results of Operations
|
||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Operational | $ | 1,410 | 22 | $ | 1,136 | 19 | $ | 274 | 3 | ||||||||||||||||||||||||||
| Amortization, net of accretion | (412) | (7) | (570) | (10) | 158 | 3 | |||||||||||||||||||||||||||||
| Mark-to-market adjustments - Servicing | 65 | 1 | 877 | 15 | (812) | (14) | |||||||||||||||||||||||||||||
| Total revenues | 1,063 | 16 | 1,443 | 24 | (380) | (8) | |||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Salaries, wages and benefits | 252 | 4 | 241 | 4 | 11 | — | |||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||
| Servicing support fees | 66 | 1 | 56 | 1 | 10 | — | |||||||||||||||||||||||||||||
| Corporate and other general and administrative expenses | 138 | 2 | 86 | 2 | 52 | — | |||||||||||||||||||||||||||||
| Foreclosure and other liquidation related expenses, net | 19 | — | 13 | — | 6 | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 9 | — | 16 | — | (7) | — | |||||||||||||||||||||||||||||
| Total general and administrative expenses | 232 | 3 | 171 | 3 | 61 | — | |||||||||||||||||||||||||||||
| Total expenses | 484 | 7 | 412 | 7 | 72 | — | |||||||||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||||||||||||||
| Interest income | 343 | 5 | 125 | 2 | 218 | 3 | |||||||||||||||||||||||||||||
| Advance interest expense | (41) | — | (22) | — | (19) | — | |||||||||||||||||||||||||||||
| Other interest expense | (183) | (3) | (146) | (2) | (37) | (1) | |||||||||||||||||||||||||||||
| Interest expense | (224) | (3) | (168) | (2) | (56) | (1) | |||||||||||||||||||||||||||||
| Total other income (expense), net | 119 | 2 | (43) | — | 162 | 2 | |||||||||||||||||||||||||||||
| Income before income tax expense | $ | 698 | 11 | $ | 988 | 17 | $ | (290) | (6) | ||||||||||||||||||||||||||
| Weighted average cost - advance and MSR facilities | 7.8 | % | 3.9 | % | 3.9 | % | |||||||||||||||||||||||||||||
| Weighted average cost - excess spread financing | 8.7 | % | 8.8 | % | (0.1) | % | |||||||||||||||||||||||||||||
(1)
Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
36
|
Table 4.1 Servicing - Revenues
|
||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| MSR Operational Revenue | |||||||||||||||||||||||||||||||||||
| Base servicing fees | $ | 1,054 | 16 | $ | 907 | 15 | $ | 147 | 1 | ||||||||||||||||||||||||||
| Modification fees | 14 | — | 11 | — | 3 | — | |||||||||||||||||||||||||||||
| Late payment fees | 49 | 1 | 45 | 1 | 4 | — | |||||||||||||||||||||||||||||
| Other ancillary revenues | 107 | 2 | 53 | 1 | 54 | 1 | |||||||||||||||||||||||||||||
| Total MSR operational revenue | 1,224 | 19 | 1,016 | 17 | 208 | 2 | |||||||||||||||||||||||||||||
| Subservicing-related revenue | 240 | 3 | 208 | 3 | 32 | — | |||||||||||||||||||||||||||||
| Total servicing fee revenue | 1,464 | 22 | 1,224 | 20 | 240 | 2 | |||||||||||||||||||||||||||||
| MSR financing liability costs | (22) | — | (14) | — | (8) | — | |||||||||||||||||||||||||||||
| Excess spread payments and portfolio runoff | (32) | — | (74) | (1) | 42 | 1 | |||||||||||||||||||||||||||||
| Total operational revenue | 1,410 | 22 | 1,136 | 19 | 274 | 3 | |||||||||||||||||||||||||||||
| Amortization, Net of Accretion | |||||||||||||||||||||||||||||||||||
| MSR amortization | (444) | (7) | (644) | (11) | 200 | 4 | |||||||||||||||||||||||||||||
| Excess spread accretion | 32 | — | 74 | 1 | (42) | (1) | |||||||||||||||||||||||||||||
| Total amortization, net of accretion | (412) | (7) | (570) | (10) | 158 | 3 | |||||||||||||||||||||||||||||
| Mark-to-Market Adjustments - Servicing | |||||||||||||||||||||||||||||||||||
| MSR MTM | 304 | 5 | 1,363 | 23 | (1,059) | (18) | |||||||||||||||||||||||||||||
| Loss on MSR hedging activities | (244) | (4) | (329) | (6) | 85 | 2 | |||||||||||||||||||||||||||||
| Gain (loss) on MSR sales | 29 | — | (1) | — | 30 | — | |||||||||||||||||||||||||||||
|
Reclassifications
(2)
|
(26) | — | (22) | — | (4) | — | |||||||||||||||||||||||||||||
| Excess spread / MSR financing MTM | 2 | — | (134) | (2) | 136 | 2 | |||||||||||||||||||||||||||||
| Total mark-to-market adjustments - Servicing | 65 | 1 | 877 | 15 | (812) | (14) | |||||||||||||||||||||||||||||
| Total revenues - Servicing | $ | 1,063 | 16 | $ | 1,443 | 24 | $ | (380) | (8) | ||||||||||||||||||||||||||
(1)
Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
(2)
Reclassifications include the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing
- MSR Operational revenue increased during the nine months ended September 30, 2023, as compared to 2022 primarily due to an increase in base servicing fees as a result of a larger average servicing UPB portfolio in 2023 and increase in other ancillary revenues as a result of $67 gain from the sale of mortgage loans that were acquired in connection with the collapse of a securitization trust due to over-collateralization.
MSR amortization decreased during the nine months ended September 30, 2023, as compared to 2022, primarily due to lower prepayments driven by higher mortgage rates in 2023, partially offset by a higher average MSR UPB.
MSR MTM and Loss on MSR hedging activities decreased during the nine months ended September 30, 2023, compared to 2022, as the increase in mortgage rates was greater in 2022 compared to 2023, partially offset by an increase in hedge coverage ratio.
Subservicing
- Subservicing fees increased during the nine months ended September 30, 2023, as compared to 2022, primarily due to the specialty UPB portfolio acquired as part of the Rushmore Transaction during the second quarter of 2023, which was fully operational for the entire third quarter of 2023.
37
Servicing Segment Expenses
Total expenses increased during the nine months ended September 30, 2023 as compared to 2022, primarily driven by an increase in corporate and other general and administrative expenses and salaries, wages, and benefits. The increase in corporate and other general and administrative expenses was
primarily due to growth in our MSR servicing portfolio and an increase in allocated cost in
2023
primarily due to a higher percentage of total headcount in Servicing following the workforce reduction in the Originations segment in
2022
. The increase in salaries, wages and benefits was primarily driven by higher headcount due to growth of our MSR servicing portfolio.
Servicing Segment Other Income (Expenses), net
Total other income (expenses), net changed during the nine months ended September 30, 2023 as compared to 2022, primarily due to higher interest income attributable to higher interest rates, partially offset by higher interest expense from MSR and advance financing.
|
Table 5. Servicing Portfolio - Unpaid Principal Balances
|
||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||
| Average UPB | ||||||||||||||||||||||||||||||||||||||
| MSRs | $ | 500,825 | $ | 394,703 | $ | 449,602 | $ | 376,551 | ||||||||||||||||||||||||||||||
|
Subservicing and other
(1)
|
396,673 | 428,423 | 418,942 | 412,925 | ||||||||||||||||||||||||||||||||||
| Total average UPB | $ | 897,498 | $ | 823,126 | $ | 868,544 | $ | 789,476 | ||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||
| UPB | Carrying Amount | bps | UPB | Carrying Amount | bps | |||||||||||||||||||||||||||||||||
| MSRs | ||||||||||||||||||||||||||||||||||||||
| Agency | $ | 501,315 | $ | 8,193 | 163 | $ | 363,637 | $ | 6,068 | 167 | ||||||||||||||||||||||||||||
| Non-agency | 27,009 | 311 | 115 | 31,769 | 340 | 107 | ||||||||||||||||||||||||||||||||
| Total MSRs | 528,324 | 8,504 | 161 | 395,406 | 6,408 | 162 | ||||||||||||||||||||||||||||||||
|
Subservicing and other
(1)
|
||||||||||||||||||||||||||||||||||||||
| Agency | 360,565 | N/A | 434,396 | N/A | ||||||||||||||||||||||||||||||||||
| Non-agency | 48,365 | N/A | 23,884 | N/A | ||||||||||||||||||||||||||||||||||
| Total subservicing and other | 408,930 | N/A | 458,280 | N/A | ||||||||||||||||||||||||||||||||||
| Total ending balance | $ | 937,254 | $ | 8,504 | $ | 853,686 | $ | 6,408 | ||||||||||||||||||||||||||||||
| MSRs UPB Encumbrance | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||||
| MSRs - unencumbered | $ | 451,567 | $ | 309,301 | ||||||||||||||||||||||||||||||||||
|
MSRs - encumbered
(2)
|
76,757 | 86,105 | ||||||||||||||||||||||||||||||||||||
| MSRs UPB | $ | 528,324 | $ | 395,406 | ||||||||||||||||||||||||||||||||||
(1)
Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights.
(2)
Encumbered MSRs consist of residential mortgage loans included within our excess spread financing transactions and MSR financing liability.
38
The following tables provide a rollforward of our MSR and subservicing and other portfolio UPB:
|
Table 6. Servicing and Subservicing and Other Portfolio UPB Rollforward
|
||
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| MSR | Subservicing and Other | Total | MSR | Subservicing and Other | Total | ||||||||||||||||||||||||||||||
| Balance - beginning of period | $ | 459,476 | $ | 422,522 | $ | 881,998 | $ | 397,387 | $ | 406,231 | $ | 803,618 | |||||||||||||||||||||||
| Additions: | |||||||||||||||||||||||||||||||||||
| Originations | 3,419 | — | 3,419 | 5,727 | — | 5,727 | |||||||||||||||||||||||||||||
|
Acquisitions / Increase in subservicing
(1)
|
98,563 | 19,494 | 118,057 | 6,098 | 65,419 | 71,517 | |||||||||||||||||||||||||||||
| Deductions: | |||||||||||||||||||||||||||||||||||
|
Dispositions / Decrease in subservicing
(2)
|
(22,184) | (26,029) | (48,213) | (671) | (2,595) | (3,266) | |||||||||||||||||||||||||||||
| Principal reductions and other | (4,469) | (2,838) | (7,307) | (4,374) | (3,046) | (7,420) | |||||||||||||||||||||||||||||
|
Voluntary reductions
(3)
|
(6,100) | (4,017) | (10,117) | (8,666) | (7,723) | (16,389) | |||||||||||||||||||||||||||||
|
Involuntary reductions
(4)
|
(353) | (202) | (555) | (100) | (6) | (106) | |||||||||||||||||||||||||||||
| Net changes in loans serviced by others | (28) | — | (28) | 5 | — | 5 | |||||||||||||||||||||||||||||
| Balance - end of period | $ | 528,324 | $ | 408,930 | $ | 937,254 | $ | 395,406 | $ | 458,280 | $ | 853,686 | |||||||||||||||||||||||
(1)
Amount for Subservicing and Other UPB includes transfers from MSR for MSRs sold with subservicing rights retained.
(2)
Amount for MSR UPB includes transfers to Subservicing and other for MSRs sold with subservicing rights retained.
(3)
Voluntary reductions are related to loan payoffs by customers.
(4)
Involuntary reductions refer to loan chargeoffs.
|
Table 6.1 Servicing and Subservicing and Other Portfolio UPB Rollforward
|
||
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| MSR | Subservicing and Other | Total | MSR | Subservicing and Other | Total | ||||||||||||||||||||||||||||||
| Balance - beginning of period | $ | 411,382 | $ | 459,053 | $ | 870,435 | $ | 339,208 | $ | 370,520 | $ | 709,728 | |||||||||||||||||||||||
| Additions: | |||||||||||||||||||||||||||||||||||
| Originations | 9,946 | — | 9,946 | 24,131 | — | 24,131 | |||||||||||||||||||||||||||||
|
Acquisitions / Increase in subservicing
(1)
|
160,756 | 89,558 | 250,314 | 98,414 | 159,643 | 258,057 | |||||||||||||||||||||||||||||
| Deductions: | |||||||||||||||||||||||||||||||||||
|
Dispositions / Decrease in subservicing
(2)
|
(23,789) | (116,362) | (140,151) | (20,723) | (28,801) | (49,524) | |||||||||||||||||||||||||||||
| Principal reductions and other | (12,740) | (10,116) | (22,856) | (11,760) | (9,934) | (21,694) | |||||||||||||||||||||||||||||
|
Voluntary reductions
(3)
|
(16,057) | (12,592) | (28,649) | (33,390) | (33,103) | (66,493) | |||||||||||||||||||||||||||||
|
Involuntary reductions
(4)
|
(1,071) | (611) | (1,682) | (317) | (45) | (362) | |||||||||||||||||||||||||||||
| Net changes in loans serviced by others | (103) | — | (103) | (157) | — | (157) | |||||||||||||||||||||||||||||
| Balance - end of period | $ | 528,324 | $ | 408,930 | $ | 937,254 | $ | 395,406 | $ | 458,280 | $ | 853,686 | |||||||||||||||||||||||
(1)
Amount for Subservicing and Other UPB includes transfers from MSR for MSRs sold with subservicing rights retained.
(2)
Amount for MSR UPB includes transfers to Subservicing and other for MSRs sold with subservicing rights retained.
(3)
Voluntary reductions are related to loan payoffs by customers.
(4)
Involuntary reductions refer to loan chargeoffs.
39
The table below summarizes the overall performance of the servicing and subservicing portfolio:
|
Table 7. Key Performance Metrics - Servicing and Subservicing Portfolio
|
||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||
| Loan count | 4,288,683 | 4,086,628 | ||||||||||||||||||||||||
|
Average loan amount
(1)
|
$ | 218,561 | $ | 208,815 | ||||||||||||||||||||||
| Average coupon - agency | 3.8 | % | 3.6 | % | ||||||||||||||||||||||
| Average coupon - non-agency | 4.9 | % | 4.4 | % | ||||||||||||||||||||||
|
60+ delinquent (% of loans)
(2)
|
1.9 | % | 2.5 | % | ||||||||||||||||||||||
|
90+ delinquent (% of loans)
(2)
|
1.6 | % | 2.2 | % | ||||||||||||||||||||||
|
120+ delinquent (% of loans)
(2)
|
1.5 | % | 2.0 | % | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Total prepayment speed (12-month constant prepayment rate) | 5.3 | % | 8.3 | % | 5.0 | % | 11.3 | % | ||||||||||||||||||
(1)
Average loan amount is presented in whole dollar amounts.
(2)
Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. Loan delinquency includes loans in forbearance.
Delinquency is an assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances.
|
Table 8. MSRs Loan Modifications and Workout Units
|
||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
|
Modifications
(1)
|
7,127 | 6,786 | 341 | 18,315 | 37,102 | (18,787) | |||||||||||||||||||||||||||||
|
Workouts
(2)
|
14,332 | 9,719 | 4,613 | 36,348 | 37,622 | (1,274) | |||||||||||||||||||||||||||||
| Total modifications and workout units | 21,459 | 16,505 | 4,954 | 54,663 | 74,724 | (20,061) | |||||||||||||||||||||||||||||
(1)
Modifications consist of agency programs designed to adjust the terms of the loan (e.g., reduced interest rates).
(2)
Workouts consist of other loss mitigation options designed to assist borrowers and keep them in their homes, but do not adjust the terms of the loan.
Both modifications and workouts during the three months ended September 30, 2023 increased compared to 2022, primarily due to the extension of the COVID-19 Recovery Loss Mitigation Options, which expanded the options to include additional eligible borrowers and resulted in an increase in modifications and workouts. Total modifications during the nine months ended September 30, 2023 decreased compared to 2022 primarily due to a decrease in modifications related to loans impacted by the COVID-19 pandemic. Total workouts during the nine months ended September 30, 2023 decreased compared to 2022 primarily due to a decrease in customers who were exiting forbearance plans, as there were fewer customers in forbearance.
40
Servicing Portfolio and Liabilities
The following table sets forth the activities of MSRs:
|
Table 9. MSRs - Fair Value Rollforward
|
||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Fair value - beginning of period | $ | 7,149 | $ | 6,151 | $ | 6,654 | $ | 4,223 | |||||||||||||||
| Additions: | |||||||||||||||||||||||
| Servicing retained from mortgage loans sold | 86 | 120 | 219 | 481 | |||||||||||||||||||
| Purchases and acquisitions of servicing rights | 1,435 | 79 | 2,305 | 1,256 | |||||||||||||||||||
| Dispositions: | |||||||||||||||||||||||
| Sales of servicing assets and excess yield | (275) | (4) | (555) | (293) | |||||||||||||||||||
| Changes in fair value: | |||||||||||||||||||||||
| Due to changes in valuation inputs or assumptions used in the valuation model (MSR MTM): | |||||||||||||||||||||||
| Agency | 255 | 234 | 310 | 1,348 | |||||||||||||||||||
| Non-agency | 15 | 5 | (6) | 15 | |||||||||||||||||||
| Changes in valuation due to amortization: | |||||||||||||||||||||||
| Scheduled principal payments | (64) | (43) | (174) | (132) | |||||||||||||||||||
| Prepayments | |||||||||||||||||||||||
| Voluntary prepayments | |||||||||||||||||||||||
| Agency | (97) | (131) | (245) | (475) | |||||||||||||||||||
| Non-agency | (4) | (8) | (9) | (33) | |||||||||||||||||||
| Involuntary prepayments | |||||||||||||||||||||||
| Agency | (5) | (1) | (15) | (4) | |||||||||||||||||||
| Non-agency | (1) | — | (1) | — | |||||||||||||||||||
|
Other changes
(1)
|
10 | 6 | 21 | 22 | |||||||||||||||||||
| Fair value - end of period | $ | 8,504 | $ | 6,408 | $ | 8,504 | $ | 6,408 | |||||||||||||||
(1)
Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
See
Note 4, Mortgage Servicing Rights and Related Liabilities
and
Note 14, Fair Value Measurements
, in the Notes to the Condensed Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of MSRs as of September 30, 2023 and December 31, 2022.
Excess Spread Financing
As further disclosed in
Note 4, Mortgage Servicing Rights and Related Liabilities
,
in the Notes to the Condensed Consolidated Financial Statements, we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We have utilized these types of arrangements historically as a method for efficiently financing acquired MSRs and the purchase of loans, however we have not done so in recent years due to the availability of lower cost sources of funding.
41
Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to prepayment speeds and option-adjusted spread levels. See
Note 4, Mortgage Servicing Rights and Related Liabilities
and
Note 14, Fair Value Measurements
, in the Notes to the Condensed Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of September 30, 2023 and December 31, 2022.
In June 2022, the Company entered into an assignment agreement to repurchase excess spread liabilities for a total purchase price of $277.
The following table sets forth the change in the excess spread financing:
|
Table 10. Excess Spread Financing - Rollforward
|
||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Fair value - beginning of period | $ | 459 | $ | 532 | $ | 509 | $ | 768 | |||||||||||||||
| Additions: | |||||||||||||||||||||||
| New financings | — | — | — | — | |||||||||||||||||||
| Deductions: | |||||||||||||||||||||||
| Repayments | (1) | (1) | (5) | (293) | |||||||||||||||||||
| Settlements | (18) | (19) | (54) | (80) | |||||||||||||||||||
| Changes in fair value: | |||||||||||||||||||||||
| Agency | 7 | 4 | (1) | 109 | |||||||||||||||||||
| Non-agency | (1) | 3 | (3) | 15 | |||||||||||||||||||
| Fair value - end of period | $ | 446 | $ | 519 | $ | 446 | $ | 519 | |||||||||||||||
| Originations Segment | ||||||||||||||
The strategy of our Originations segment is to originate or acquire new MSRs for our servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance and purchase options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring MSRs at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Our Originations segment is one way that we help underserved consumers access the financial markets. In the nine months ended September 30, 2023, our total originations included loans for 7,296 customers with low FICOs (<660), 8,245 customers with income below the U.S. median household income, 9,705 first-time homebuyers, and 2,417 veterans. During this time period, we originated a total of 11,173 Ginnie Mae loans, which are designed for first-time homebuyers and low- and moderate-income borrowers, comprising $3 billion in total proceeds. Once these loans are originated, the underserved borrowers become our servicing customers.
The Originations segment includes two channels:
•
Our direct-to-consumer (“DTC”) lending channel relies on our call centers, website and mobile apps, specially trained teams of licensed mortgage originators, predictive analytics and modeling utilizing proprietary data from our servicing portfolio to reach our existing customers who may benefit from a new mortgage. Depending on borrower eligibility, we will refinance existing loans into conventional, government or non-agency products. Through lead campaigns and direct marketing, the direct-to-consumer channel seeks to convert leads into loans and ultimately MSRs in a cost-efficient manner.
•
Our correspondent lending channel facilitates the acquisition of MSRs through purchasing newly originated residential mortgage loans that have been underwritten to investor guidelines. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our correspondent lending channel enables us to replenish servicing portfolio run-off typically at a better rate of return than traditional bulk acquisitions.
42
The following tables set forth the results of operations for the Originations segment:
|
Table 11. Originations Segment Results of Operations
|
||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
|
Service related, net - Originations
(1)
|
$ | 18 | $ | 20 | $ | (2) | $ | 45 | $ | 86 | $ | (41) | |||||||||||||||||||||||
| Net gain on mortgage loans held for sale | |||||||||||||||||||||||||||||||||||
|
Net (loss) gain on loans originated and sold
(2)
|
(8) | 22 | (30) | 16 | 151 | (135) | |||||||||||||||||||||||||||||
|
Capitalized servicing rights
(3)
|
78 | 114 | (36) | 204 | 425 | (221) | |||||||||||||||||||||||||||||
| Total net gain on mortgage loans held for sale | 70 | 136 | (66) | 220 | 576 | (356) | |||||||||||||||||||||||||||||
| Total revenues | 88 | 156 | (68) | 265 | 662 | (397) | |||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Salaries, wages and benefits | 37 | 68 | (31) | 107 | 275 | (168) | |||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||
| Loan origination expenses | 7 | 15 | (8) | 23 | 50 | (27) | |||||||||||||||||||||||||||||
| Corporate and other general administrative expenses | 7 | 12 | (5) | 24 | 43 | (19) | |||||||||||||||||||||||||||||
| Marketing and professional service fees | 5 | 11 | (6) | 13 | 28 | (15) | |||||||||||||||||||||||||||||
| Depreciation and amortization | 2 | 5 | (3) | 6 | 14 | (8) | |||||||||||||||||||||||||||||
| Total general and administrative | 21 | 43 | (22) | 66 | 135 | (69) | |||||||||||||||||||||||||||||
| Total expenses | 58 | 111 | (53) | 173 | 410 | (237) | |||||||||||||||||||||||||||||
| Other income (expenses) | |||||||||||||||||||||||||||||||||||
| Interest income | 10 | 12 | (2) | 26 | 44 | (18) | |||||||||||||||||||||||||||||
| Interest expense | (11) | (11) | — | (28) | (33) | 5 | |||||||||||||||||||||||||||||
| Total other (expenses) income, net | (1) | 1 | (2) | (2) | 11 | (13) | |||||||||||||||||||||||||||||
| Income before income tax expense | $ | 29 | $ | 46 | $ | (17) | $ | 90 | $ | 263 | $ | (173) | |||||||||||||||||||||||
| Weighted average note rate - mortgage loans held for sale | 6.8 | % | 5.1 | % | 1.7 | % | 6.4 | % | 4.0 | % | 2.4 | % | |||||||||||||||||||||||
| Weighted average cost of funds - warehouse facilities (excluding facility fees) | 6.9 | % | 4.2 | % | 2.7 | % | 6.6 | % | 2.9 | % | 3.7 | % | |||||||||||||||||||||||
(1)
Service related, net - Originations refers to fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting and other similar fees.
(2)
Net gain on loans originated and sold (excluding capitalized servicing rights) represents the unrealized and realized gains and losses from the origination, purchase, and sale of loans as well as the unrealized and realized gains and losses from related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity which can vary based upon mortgage interest rates.
(3)
Capitalized servicing rights represent the fair value attributed to mortgage servicing rights at the time in which they are retained in connection with the sale of loans during the period.
43
|
Table 12. Originations - Key Metrics
|
||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Key Metrics | |||||||||||||||||||||||||||||||||||
|
Consumer direct lock pull through adjusted volume
(1)
|
$ | 1,578 | $ | 3,179 | $ | (1,601) | $ | 4,627 | $ | 13,409 | $ | (8,782) | |||||||||||||||||||||||
|
Other locked pull through adjusted volume
(1)
|
1,730 | 2,097 | (367) | 5,545 | 8,684 | (3,139) | |||||||||||||||||||||||||||||
| Total pull through adjusted lock volume | $ | 3,308 | $ | 5,276 | $ | (1,968) | $ | 10,172 | $ | 22,093 | $ | (11,921) | |||||||||||||||||||||||
|
Funded volume
(2)
|
$ | 3,412 | $ | 5,741 | $ | (2,329) | $ | 9,973 | $ | 25,081 | $ | (15,108) | |||||||||||||||||||||||
| Volume of loans sold | $ | 3,984 | $ | 6,387 | $ | (2,403) | $ | 10,776 | $ | 29,477 | $ | (18,701) | |||||||||||||||||||||||
|
Recapture percentage
(3)
|
24.2% | 28.4% | (4.2)% | 24.4% | 32.9% | (8.5)% | |||||||||||||||||||||||||||||
|
Refinance recapture percentage
(4)
|
82.7% | 79.6% | 3.1% | 77.9% | 56.2% | 21.7% | |||||||||||||||||||||||||||||
| Purchase as a percentage of funded volume | 54.0% | 42.3% | 11.7% | 55.9% | 31.6% | 24.3% | |||||||||||||||||||||||||||||
| Value of capitalized servicing on retained settlements | 225 bps | 221 bps | 4 bps | 222 bps | 188 bps | 34 bps | |||||||||||||||||||||||||||||
| Originations Margin | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 88 | $ | 156 | $ | (68) | $ | 265 | $ | 662 | $ | (397) | |||||||||||||||||||||||
| Pull through adjusted lock volume | $ | 3,308 | $ | 5,276 | $ | (1,968) | $ | 10,172 | $ | 22,093 | $ | (11,921) | |||||||||||||||||||||||
|
Revenue as a percentage of pull through adjusted lock volume
(5)
|
2.66 | % | 2.96 | % | (0.30) | % | 2.61 | % | 3.00 | % | (0.39) | % | |||||||||||||||||||||||
|
Expenses
(6)
|
$ | 59 | $ | 110 | $ | (51) | $ | 175 | $ | 399 | $ | (224) | |||||||||||||||||||||||
| Funded volume | $ | 3,412 | $ | 5,741 | $ | (2,329) | $ | 9,973 | $ | 25,081 | $ | (15,108) | |||||||||||||||||||||||
|
Expenses as a percentage of funded volume
(7)
|
1.73 | % | 1.92% | (0.19) | % | 1.75 | % | 1.59% | 0.16 | % | |||||||||||||||||||||||||
| Originations Margin | 0.93 | % | 1.04 | % | (0.11) | % | 0.86 | % | 1.41 | % | (0.55) | % | |||||||||||||||||||||||
(1)
Pull through adjusted volume represents the expected funding from locks taken during the period.
(2)
Funded volume for the period may include pull through adjusted lock volume from prior periods.
(3)
Recapture percentage includes new loan originations for both purchase and refinance transactions where borrower retention and/or property retention occur as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(4)
Refinance recapture percentage includes new loan originations for refinance transactions where borrower retention and property retention occurs as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(5)
Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(6)
Expenses include total expenses and total other income (expenses), net.
(7)
Calculated on funded volume as expenses are incurred based on closing of the loan.
Originations Segment Revenues
Total revenues decreased during the three and nine months ended September 30, 2023 compared to 2022 primarily driven by lower originations volume in 2023 that resulted in a decrease in capitalized servicing rights and a decline in net gain on loans originated and sold.
44
Originations Segment Expenses
Total expenses during the three and nine months ended September 30, 2023 decreased when compared to 2022 primarily due to a decline in salaries, wages and benefits expense, and loan origination expenses. Salaries, wages and benefits expense declined in 2023 primarily due to decreased headcount and lower originations volumes in both the direct-to-consumer and correspondent channels. Loan origination expenses declined in 2023 primarily due to cost reduction initiatives in connection with decreased origination volumes.
Originations Segment Other (Expenses) Income, Net
Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans. There were no material changes for other (expenses) income, net, during the three months ended September 30, 2023 as compared to 2022. Due to decreased originations volume, both interest income and interest expense declined, partially offset by higher interest rates, resulting in immaterial changes for total other (expenses) income, net, during the nine months ended September 30, 2023 as compared to 2022.
Originations Margin
The Originations Margin for the three and nine months ended September 30, 2023 decreased as compared to 2022 primarily due to lower revenue as a percentage of pull through adjusted lock volume driven by lower margins from a shift in channel mix from higher margin direct-to-consumer to lower margin correspondent and decline in total revenues as a result of lower originations volume from both the direct-to-consumer and correspondent channels. Direct-to-consumer channel mix was 48% and 60% for the three months ended September 30, 2023, and 2022, and 45% and 61% for the nine months ended September 30, 2023 and 2022, respectively.
| Corporate/Other | ||||||||||||||
Corporate/Other includes the results of Xome’s operations, the Company’s unallocated overhead expenses (which include the costs of executive management and other corporate functions that are not directly attributable to our operating segments), changes in equity investments and interest expense on our unsecured senior notes. In addition, Corporate/Other includes eliminations related to intersegment hedge fair value changes.
The following table set forth the selected financial results for Corporate/Other:
|
Table 13. Corporate/Other Selected Financial Results
|
||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Corporate/Other - Operations | |||||||||||||||||||||||||||||||||||
| Total revenues | $ | 22 | $ | 22 | $ | — | $ | 62 | $ | 56 | $ | 6 | |||||||||||||||||||||||
| Total expenses | 71 | 58 | 13 | 183 | 160 | 23 | |||||||||||||||||||||||||||||
| Interest expense | 47 | 40 | 7 | 126 | 120 | 6 | |||||||||||||||||||||||||||||
| Other income (expense), net | 58 | (20) | 78 | 44 | 197 | (153) | |||||||||||||||||||||||||||||
| Key Metrics | |||||||||||||||||||||||||||||||||||
| Average exchange inventory under management | 27,384 | 21,680 | 5,704 | 26,658 | 18,435 | 8,223 | |||||||||||||||||||||||||||||
Total revenues remained consistent during the three months ended September 30, 2023 as compared to 2022. Total revenues increased during the nine months ended September 30, 2023 as compared to 2022 primarily due to increased revenue from Xome driven by greater sales volume in connection with exchange inventory growth.
Total expenses increased during the three and nine months ended September 30, 2023 primarily due to an increase in allocated costs in 2023, driven by higher percentage of total headcount in Corporate/Other in 2023 following the workforce reduction in the Originations segment in 2022.
Interest expense increased during the three and nine months ended September 30, 2023 as compared to 2022 primarily due to the senior note assumed from the acquisition of Home Point.
45
The change in other income (expense), net, in the three months ended September 30, 2023 as compared to 2022 was primarily due to a preliminary bargain purchase gain of $96 recorded in the third quarter of 2023 upon completion of the Home Point Transaction, partially offset by a loss of $35 related to fair value changes in certain equity investments. The change in other income (expense), net, in the nine months ended September 30, 2023 as compared to 2022 was primarily due to a gain of $223 that was recorded in the first quarter of 2022 upon completion of the Sagent Transaction.
|
Liquidity and Capital Resources
|
||||||||||||||
We measure liquidity by unrestricted cash and availability of collateralized borrowing capacity on our MSR and other debt facilities. We held cash and cash equivalents on hand of $553 as of September 30, 2023 compared to $527 as of December 31, 2022. During the nine months ended September 30, 2023, we generated net cash of $772 from operating activities and bought back 4.3 million shares of our outstanding common stock for a total cost of $204 as part of our stock repurchase program. We have sufficient borrowing capacity to support our operations. As of September 30, 2023, total available borrowing capacity for advance, warehouse, and MSR facilities was $11,451, of which $2,119 was collateralized and immediately available to draw. During the nine months ended September 30, 2023, we increased capacity on our MSR facilities by $2,600.
There have been no significant changes to our sources and uses of cash as disclosed in our Annual Reports on Form 10-K for the year ended December 31, 2022.
Cash Flows
The table below presents cash flows information:
|
Table 14. Cash Flows
|
||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Net cash attributable to: | |||||||||||||||||
| Operating activities | $ | 772 | $ | 3,144 | $ | (2,372) | |||||||||||
| Investing activities | (1,088) | (987) | (101) | ||||||||||||||
|
Financing activities
|
318 | (2,520) | 2,838 | ||||||||||||||
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
$ | 2 | $ | (363) | $ | 365 | |||||||||||
Operating activities
Cash generated from operating activities decreased to $772 during the nine months ended September 30, 2023 from $3,144 in 2022. The decrease was primarily due to a decline of $4,235 in cash generated from originations net sales activities driven by higher mortgage rates, partially offset by a decrease of $1,920 in cash used for the repurchase of loan assets out of Ginnie Mae securitizations.
Investing activities
Cash used in investing activities increased to $1,088 during the nine months ended September 30, 2023 from $987 in 2022. The increase was primarily due to cash used of $522 for acquisitions of business in 2023 related to the Roosevelt Transaction and Home Point Transaction, partially offset by a decrease of $184 in cash used for the purchase of mortgage servicing rights in 2023 and an increase of $276 in cash generated from the proceeds on sale of mortgage servicing rights in 2023.
Financing activities
Our financing activities generated cash of $318 during the nine months ended September 30, 2023 compared to cash used of $2,520 in 2022. The change was primarily due to a net borrowing of $617 in 2023 compared to net repayment of $1,933 in 2022 on our advance, warehouse and MSR facilities.
Capital Resources
Capital Structure and Debt
We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.
46
Financial Covenants
Our credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at our primary operating subsidiary, Nationstar Mortgage LLC, as well as Rushmore Loan Management Services, LLC, which was acquired during the third quarter of 2023 in connection with the Roosevelt Transaction. As of September 30, 2023, we were in compliance with our required financial covenants.
Seller/Servicer Financial Requirements
We are also subject to net worth, liquidity and capital ratio requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac (“Enterprises”) Seller/Servicers, and Ginnie Mae for single family issuers, as summarized below. These requirements apply to our operating subsidiaries, Nationstar Mortgage LLC, and Rushmore Loan Management Services, LLC.
Minimum Net Worth
•
FHFA - a net worth base of $2.5 plus a dollar amount equal to or exceeding the sum of (i) 25 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB, serviced for the Enterprises, plus (ii) 25 basis points of non-agency serviced UPB, plus (iii) 35 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB serviced for Ginnie Mae.
•
Ginnie Mae - a net worth equal to the sum of $2.5, plus (i) 35 basis points of the issuer’s total effective Ginnie Mae single-family outstanding obligations, plus (ii) 25 basis points of the issuer’s total Enterprises single family outstanding servicing portfolio balance, plus (iii) 25 basis points of the issuer’s total non-agency single family servicing portfolio.
Minimum Liquidity
•
FHFA - a base Liquidity of eligible assets equal to or exceeding
:
◦
7 basis points of sellers/servicer’s residential first lien mortgage servicing UPB serviced for the Enterprises, if the seller/servicer remits (or an Enterprise draws) interest or principal, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
◦
3.5 basis points of the sellers/servicer’s residential first lien mortgage servicing UPB serviced for the Enterprises, if the seller/servicer remits (or an Enterprise draws) the interest and principal only as actually collected from the borrower, plus
◦
3.5 basis points of the seller/servicer’s non-agency servicing UPB, plus
◦
10 basis points of the seller/servicer’s residential first lien mortgage servicing UPB serviced for Ginnie Mae.
◦
In addition, an origination liquidity equal to or exceeding 50 basis points of the sum of the following (
effective December 31, 2023
):
i.
Residential first lien mortgages held for sale, at lower of cost or market
ii.
Residential first lien mortgages held for sale, at fair value, plus
iii.
UPB of interest rate lock commitments after fallout adjustments
◦
Supplemental liquidity at all time equal to or exceeding the sum of (
effective December 31, 2023
):
i.
2 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for the Enterprises, plus
ii.
5 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for Ginnie Mae
•
Ginnie Mae – the greater of $1 or the sum of:
◦
10 basis points of the issuer’s outstanding Ginnie Mae single-family servicing UPB, plus
◦
3.5 basis points of the issuer’s outstanding Enterprises single family servicing UPB, if the issuer remits (or the Enterprise draws) the principal and interest only as actually collected from the borrower, plus
◦
7 basis points of the Issuer’s outstanding Enterprises single-family servicing UPB, if the issuer remits (or the Enterprise draws) the principal or interest, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
◦
3.5 basis points of the issuer’s outstanding non-agency single-family servicing UPB.
•
Ginnie Mae - issuers that originated more than $1 billion in UPB of any residential first mortgage in the recent four-quarter period must have liquid assets equal to the greater of at least $1 or the sum of the points listed immediately above, plus (
effective December 31, 2023
):
◦
50 basis points of loans held for sale, plus
◦
50 basis points of the issuer’s UPB of IRLCs after fallout adjustments
47
Minimum Capital Ratio
•
FHFA and Ginnie Mae - a ratio of Tangible Net Worth to Total Assets greater than 6%.
Secured Debt to Gross Tangible Asset Ratio
•
Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
As of September 30, 2023, Nationstar Mortgage, LLC and Rushmore Loan Management Services, LLC were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
In 2022, the FHFA and Ginnie Mae revised its Seller/Servicers and single-family issuers minimum financial eligibility requirements. All revisions are effective in 2023 or 2024, as summarized below. The Company is currently evaluating the impact of the revised requirements and does not anticipate the revised requirements to have significant impact on its ability to meet financial eligibility requirements.
Financial Reporting Requirements (effective December 31, 2023)
•
FHFA – must obtain an assessment of the seller/servicer’s performance and creditworthiness by a qualified, independent third party on an annual basis and meet the following criteria:
◦
One primary servicer rating or master servicer rating, as applicable for large non-depository institutions that have greater than or equal to $50 billion in servicing UPB, and
◦
One primary servicer rating or master servicer rating, as applicable, and one third party long-term senior unsecured debt rating or long-term corporate family rating, for large non-depository institutions that have greater than $100 billion in servicing UPB, and
◦
One primary servicer rating or master servicer rating, as applicable, and issued by two rating agencies, each of which must issue either a third party long-term unsecured debt rating or long-term corporate family rating for large non-depository institutions that have greater than or equal to $150 billion in servicing UPB.
Capital Requirements (effective December 31, 2024)
•
Ginnie Mae – a Risk-based Capital Ratio (“RBCR”) of at least 6%. RBCR is adjusted net worth less excess MSRs divided by total risked-based assets
Since our Ginnie Mae single-family servicing portfolio for Nationstar Mortgage LLC exceeds $75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. We met this requirement for all financial periods presented.
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to
Note 15, Capital Requirements,
in the Notes to the Condensed Consolidated Financial Statements for additional information.
|
Table 15. Debt
|
||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Advance facilities principal amount | $ | 548 | $ | 669 | |||||||
| Warehouse facilities principal amount | 817 | 817 | |||||||||
| MSR facilities principal amount | 2,195 | 1,410 | |||||||||
| Unsecured senior notes principal amount | 3,200 | 2,700 | |||||||||
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As of September 30, 2023, we had a total borrowing capacity of $925, of which we could borrow an additional $377.
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Warehouse and MSR Facilities
Loan origination activities generally require short-term l
iquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. Our MSR facilities provide financing for our servicing portfolio and investments.
As of September 30, 2023
, we had a total borrowing capacity of $5,226 and $5,300 for warehouse and MSR facilities, of which we could borrow an additional $4,409 and $3,105, respectively.
Unsecured Senior Notes
In 2020 and 2021, we completed offerings of unsecured senior notes with maturity dates ranging from 2027 to 2031.
In connection with the Home Point transaction in the third quarter of 2023, we assumed an unsecured senior note with a maturity date in 2026.
We pay interest semi-annually to the holders of these notes at interest rates ranging from
5.000%
to
6.000%
.
For more information regarding our indebtedness, see
Note 10, Indebtedness
, in the Notes to the Condensed Consolidated Financial Statements.
Contractual Obligations
As of September 30, 2023, no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
| Critical Accounting Policies and Estimates | ||||||||||||||
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our condensed consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in
Note 14, Fair Value Measurements
, in the Notes to the Condensed Consolidated Financial Statements and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our condensed consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on our condensed consolidated financial statements, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs primarily include (i) the valuation of MSRs, and (ii) the valuation of excess spread financing. For further information on our critical accounting policies and estimates, please refer to the Company’s Annual Reports on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies and estimates since December 31, 2022.
49
| Other Matters | ||||||||||||||
Recent Accounting Developments
Below lists recently issued accounting pronouncements applicable to us but not yet adopted.
Accounting Standards Update 2020-04, 2021-01 and 2022-06, collectively implemented as Accounting Standards Codification Topic 848 (“ASC 848”), Reference Rate Reform provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedge accounting and other transactions affected by the transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and the London Inter-Bank Offered Rate (“LIBOR”). If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reasons, interest rates on our floating rate loans, obligation derivatives, and other financial instruments tied to LIBOR rates, may be affected and need renegotiation with its lenders. In January 2021, ASU 2021-01 was issued to clarify that all derivative instruments affected by changes to the interest rates used for discounting, margining alignment due to reference rate reform are in scope of ASC 848. In December 2022, ASU 2022-06 was issued to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The guidance was effective upon issuance and may be applied prospectively to contract modifications, existing hedging relationships and other impacted transactions through December 31, 2024. The guidance in ASU 2020-04 and ASU 2021-01 is optional and may be elected over time as reference rate reform activities occur. At present, the Company has limited exposure to LIBOR based index rates. Due to the short-term maturities of the Company’s advance, warehouse and MSR facilities, substantially all the Company’s facilities have matured and transitioned away from LIBOR to alternative reference rates in 2022 when renewed. In addition, our derivative financial instruments are not tied to LIBOR rates. The Company does not expect ASU 2020-04 and ASU 2021-01 to have a material impact on our condensed consolidated financial statements.
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GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility.
A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency.
Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (and collectively, the “
Agencies
”)
Agency Conforming Loan.
A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
Asset-Backed Securities (“ABS”).
A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases.
MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee.
The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Client.
Owner of the underlying mortgage servicing rights on behalf of whom we service loans.
Conventional Mortgage Loans.
A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship.
A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Customer.
Residential mortgage borrower.
Delinquent Loan.
A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”).
The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations (“DTC”).
A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees.
In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread.
MSRs with a third-party co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Excess Yield.
The remaining servicing fees above the minimum servicing fee (“GSE Base Servicing Fee”), as defined by the agencies, whereby the rights to the excess fees are separated, securitized by the GSE’s and sold, while we retain the obligation to service the loan and therefore continue to receive the GSE Base Servicing Fee.
Exchange inventory
. Consists of Xome’s residential real estate inventory ranging from pre-foreclosure to bank-owned properties.
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Federal National Mortgage Association (“Fannie Mae” or “FNMA”).
FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.
Federal Housing Administration (“FHA”).
The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (“FHFA”).
A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).
Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Forbearance.
An agreement between the mortgage servicer or lender and borrower for a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”).
GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”).
Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Interest Rate Lock Commitments (“IRLC”).
Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Investors.
Our investors include agency investors and non-agency investors. Agency investors primarily consist of Government National Mortgage Association (“Ginnie Mae” or “GNMA”) and the GSEs, Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”). Non-agency investors consist of investors in private-label securitizations.
Loan Modification.
Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”).
The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period.
A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation.
The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (“MBS”).
A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (“MSRs”).
The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
52
MSR Facility.
A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower.
Non-Conforming Loan.
A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Option adjusted spread (“OAS”).
The incremental spread added to the risk-free rate to reflect embedded (prepayment) optionality and other risk inherent in the MSRs or excess spread financing used to discount future cash flows for fair value purposes.
Originations.
The process through which a lender provides a mortgage loan to a borrower.
Prepayment Speed.
The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer.
The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan.
Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations.
Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Pull through adjusted lock volume.
Represents the expected funding from locks taken during the period.
Real Estate Owned (”REO”).
Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture.
Voluntarily prepaid loans that are expected to be refinanced by the related servicer.
Refinancing.
The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Servicing.
The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
53
Servicing Advances.
In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I Advances, T&I Advances and Corporate Advances.
(i) P&I Advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I Advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate Advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing Advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Subservicing.
Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”).
The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”).
The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility.
A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
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Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Refer to the discussion included in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in the types of market risks faced by us since December 31, 2022, except that we have increased the target hedge ratio on our MSR hedge position from 25% of the net duration risk in our MSR portfolio at year-end 2022 to a target of 75% as of September 30, 2023, with the goal of mitigating the risk to capital and tangible book value in a declining interest rate environment.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The discounted cash flow model incorporates prepayment speeds, OAS, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speed, OAS and cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs, forward delivery commitments on MBS and treasury futures, we rely on a model in determining the impact of interest rate shifts. In addition, the primary assumption used for IRLCs, is the borrower’s propensity to close their mortgage loans under the commitment.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used September 30, 2023 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
55
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of September 30, 2023 given hypothetical instantaneous parallel shifts in the yield curve. Actual results could differ materially.
|
Table 16. Change in Fair Value
|
||||||||||||||
| September 30, 2023 | |||||||||||
| Down 25 bps | Up 25 bps | ||||||||||
| Increase (decrease) in assets | |||||||||||
| Mortgage servicing rights at fair value | $ | (72) | $ | 64 | |||||||
| Mortgage loans held for sale at fair value | 4 | (4) | |||||||||
| Derivative financial instruments: | |||||||||||
| Interest rate lock commitments | 5 | (5) | |||||||||
| Forward MBS trades | (8) | 12 | |||||||||
| Total change in assets | (71) | 67 | |||||||||
| Increase (decrease) in liabilities | |||||||||||
| Mortgage servicing rights financing at fair value | (2) | 1 | |||||||||
| Excess spread financing at fair value | (2) | 2 | |||||||||
| Derivative financial instruments: | |||||||||||
| Interest rate lock commitments | (2) | 3 | |||||||||
| Forward MBS trades | (12) | 15 | |||||||||
| Treasury futures | (44) | 43 | |||||||||
| Total change in liabilities | (62) | 64 | |||||||||
| Total, net change | $ | (9) | $ | 3 | |||||||
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of September 30, 2023.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2023, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
The Company and its subsidiaries are routinely and currently involved in a number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. While it is not possible to predict the outcome of any of these matters, based on the Company’s assessment of the facts and circumstances, it does not believe any of these matters, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flows of the Company. See
Note 16, Commitments and Contingencies
, of the Notes to the Condensed Consolidated Financial Statements within Part I, Item 1
. Financial Statements
, of this Form 10-Q.
Item 1A.
Risk Factors
There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K filed for the year ended December 31, 2022.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
In October 2022, our Board of Directors authorized a new repurchase plan of $200 million of our outstanding common stock. In July 2023, our Board of Directors authorized an additional $200 million of our outstanding common stock. As of September 30, 2023, $209 million of common stock remain available for repurchase. During the three months ended September 30, 2023, we repurchased shares of our common stock at a total cost of $58 million under our share repurchase program. The number and average price of shares purchased are set forth in the table below:
| Period |
(a) Total Number of Shares (or Units) Purchased
(in thousands) |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(in thousands) |
(d) Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Program (in millions) | ||||||||||||||||||||||
| July 2023 | 219 | $ | 55.99 | 219 | $ | 255 | ||||||||||||||||||||
| August 2023 | 425 | $ | 57.13 | 425 | $ | 231 | ||||||||||||||||||||
| September 2023 | 395 | $ | 54.33 | 395 | $ | 209 | ||||||||||||||||||||
| Total | 1,039 | 1,039 | ||||||||||||||||||||||||
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Employment and Transition Agreement with Chris Marshall
On October 24, 2023, Chris Marshall, our Vice Chairman and President, announced his intention to retire from the Company effective December 31, 2024 (the “Retirement Date”). In connection with his retirement, on October 24, 2023, we entered into an Employment and Transition Agreement (the “Transition Agreement”) with Mr. Marshall to detail his employment terms until his retirement and provide for an orderly and smooth transition of his role and responsibilities.
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Pursuant to the Transition Agreement, until his Retirement Date, Mr. Marshall shall continue to (i) receive his current base salary of $750,000 on an annualized basis, (ii) participate in the Company’s Executive Management Incentive Plan (“EMIP”), its annual cash incentive plan, pursuant to the terms of such plan, (iii) be eligible to be granted annual equity awards, consistent with current grant practices, plans and applicable award agreement(s), with an allocation of no less than sixty percent (60%) of such awards for the Fiscal Years 2023 and 2024 to be time-based and the remainder of such awards for the Fiscal Years 2023 and 2024 to be performance-based. Notwithstanding the foregoing, the Transition Agreement provides that at least fifty percent (50%) of Mr. Marshall’s total compensation earned under the EMIP and his equity awards, as described above, shall be paid in cash. Under the Transition Agreement, Mr. Marshall will continue to be eligible for his current paid time off and entitled to participate in the Company’s health benefit plans.
Pursuant to the Transition Agreement, if Mr. Marshall’s employment with the Company is terminated due to his death, disability or voluntary resignation, he (or his estate) is entitled to receive his accrued payments and benefits to which he is entitled (the “Accrued Obligations”). If the Company terminates Mr. Marshall’s employment for Cause (as defined in his offer letter with the Company (the “Offer Letter”)) Mr. Marshall is entitled to receive his Accrued Obligations but not any annual bonus payment. Under the Transition Agreement, if the Company terminates Mr. Marshall’s employment other than for Cause or Mr. Marshall terminates his employment for Good Reason (as defined in his Offer Letter) then he shall be entitled to (i) his Accrued Obligations and (ii) the “Severance” payments and benefits described in his Offer Letter, contingent upon Mr. Marshall executing and not revoking a release of claims in a form provided by the Company.
The Transition Agreement provides that in the event Mr. Marshall remains continuously employed with the Company through his Retirement Date, he will be considered to have retired under the terms of all outstanding equity awards, irrespective of whether such award contemplates retirement, and will be (i) fully vested in all time-based awards, and (ii) eligible for full vesting of all performance-based awards, based on actual performance. Additionally, after his Retirement Date, or earlier if mutually agreed upon by the parties, Mr. Marshall and the Company intend to negotiate a consulting agreement for Mr. Marshall’s provision of consulting services to the Company and/or its subsidiaries, and to further promote a successful transition of Mr. Marshall’s responsibilities. Subject to further negotiation, the parties have agreed that the consulting agreement is intended to have a term of at least four (4) months and the Company intends to pay to Mr. Marshall a monthly fee of $62,500 per month, plus reimbursement for business and travel expenses required to perform such services.
In exchange for the Company extending to Mr. Marshall the opportunity to vest in his equity awards and providing the other benefits described above, Mr. Marshall agreed in the Transition Agreement extend the length of his post-employment non-competition, non-solicitation and non-hire restrictive covenants running in favor of the Company from 12 months to 24 months, respectively. In addition, the Transition Agreement contains broad confidentiality, inventions and intellectual property, and post-employment cooperation covenants in favor of the Company.
The foregoing summary of the Transition Agreement is qualified in its entirety by reference to the text of the Transition Agreement, which is being filed as Exhibit 10.2 to this report and is incorporated in this report by reference.
Employment and Retention Agreement with Jay Bray & Value-Driver Retention and Performance Award
On October 24, 2023 (the “Effective Date”), we entered into an Employment & Retention Agreement (the “Retention Agreement”) with Jay Bray, our Chairman and CEO, to facilitate the retention of our CEO over the next five years. The term of the Retention Agreement is from the Effective Date through the fifth year following the Effective Date.
The Retention Agreement provides for Mr. Bray’s (i) current base salary of $1,000,000 on an annualized basis, which is subject to review and adjustment, (ii) continued participation in the Company’s EMIP at a target annual incentive opportunity for the 2024 fiscal year at $2,500,000, (iii) continued eligibility to be granted long-term incentive opportunity awards with a target long-term incentive opportunity award for the 2024 fiscal year at $7,250,000. Mr. Bray’s target total compensation, which consists of his base salary, annual incentive opportunity and long-term incentive opportunity, as described above, is set $10,750,000, provided, however, this target total compensation may be subject to review and adjustment by the Company at any time it deems necessary to remain competitive with industry.
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Additionally, the Retention Agreement provides for a Value-Driver Retention and Performance Award on the terms set forth in the grant agreement. In general, the Value-Driver Retention and Performance Award has a target award opportunity of $15,000,000 and is comprised (i) 40% in time-vested restricted stock units, 50% of which will vest on December 31, 2026 and 50% will vest on December 31, 2028, provided that Mr. Bray is still employ as CEO and/or Chairman on the applicable vesting dates and (ii) 60% in performance-based restricted stock units, 50% of which are generally eligible to vest following a three-year performance period and 50% of which are generally eligible to vest following a five-year performance period. The award agreement provides that one-half of the performance-based restricted stock units shall be earned based on the Company’s achievement of Book Value goals set above the standard long-term award targets and the other half of the performance-based restricted stock units are earned based on the Company’s Total Shareholder Return set above the standard long-term award targets. To earn any performance-based restricted stock units, the Company must achieve a positive Total Shareholder Return at the end of the applicable performance period. The Value-Driver Retention and Performance Award does not contain any retirement provisions. In the event of Mr. Bray’s termination due to death or disability, he (or his estate) will retain all restricted stock units and would be eligible to vest in a pro-rata number of performance-based restricted stock units, contingent on actual performance. Absent such circumstances, Mr. Bray will forfeit all unvested restricted stock units and performance-based restricted stock units upon any other termination of employment, whether voluntary or involuntary, for cause or without cause.
Under the Retention Agreement, if Mr. Bray’s employment with the Company is terminated due to his death, disability or voluntary resignation, he (or his estate) is entitled to receive his accrued payments and benefits to which he is entitled (the “Accrued Obligations”). If the Company terminates Mr. Bray’s employment other than for Cause (as defined in the Retention Agreement) or if Mr. Bray terminates his employment for Good Reason (as defined in the Retention Agreement), Mr. Bray is entitled to (i) the Accrued Obligations, (ii) if not previously paid prior to his termination date, his annual cash bonus under the EMIP for the fiscal year prior to the fiscal year in which the termination occurs, (iii) an amount equal to twenty-four (24) months’ worth of his base salary paid in installments over two years, (iv), an amount equal to (A) the greater of (1) the target annual incentive opportunity under the EMIP for the fiscal year in which the termination occurs or (2) the actual annual incentive payment earned for the immediately preceding fiscal year, plus (B) his target annual incentive opportunity for the fiscal year in which the termination without Cause or resignation for Good Reason occurred, payable in a single cash lump sum payment, and (v) a single cash lump sum payment for COBRA benefits for a period of eighteen (18) months. Additionally, the Retention Agreement provides that if Mr. Bray’s employment is terminated other than for Cause or Mr. Bray terminates his employment for Good Reason, such termination shall be considered a “Retirement” for purposes of any outstanding equity awards to the extent the equity award contains a retirement provision. Notwithstanding anything to the contrary contained in the Company’s 2019 Omnibus Incentive Plan (or any successor or replacement plan thereto) or any award agreement granted thereunder other than the Value-Driver Retention and Performance Award, the Retention Agreement provides that Mr. Bray will be considered to have retired under the terms of all outstanding equity awards, irrespective of whether such award contemplates retirement and shall be (1) fully vested in all time-based awards, and (2) eligible for full vesting of all performance-based awards, based on actual performance.
In exchange for the severance protections described above, the Retention Agreement contains a broad array of restrictive covenants in favor of the Company to which Mr. Bray was not previously subject. In particular, the Retention Agreement provides for a non-competition covenant covering Mr. Bray’s employment with the Company and for twenty-four months (24) following his termination of employment for any reason (the “Restricted Period”). Likewise, Mr. Bray is barred from soliciting any of the Company’s customers and prevented from hiring Company employees during his employment and the post-employment Restricted Period. In addition, the Retention Agreement protects the Company’s confidential information, and contains robust inventions and intellectual property covenants running in favor of the Company. Finally, Mr. Bray has agreed that he will provide the Company with any post-employment support and cooperation it should need or require following his departure.
The foregoing summaries of the Retention Agreement and the Value-Driver Retention and Performance Award are qualified in their entirety by reference to the text of the Retention Agreement, which is being filed as Exhibit 10.3 to this report and is incorporated in this report by reference, and the Form of Value-Driver Retention and Performance Award, which is being filed as Exhibit 10.4 to this report and is incorporated in this report by reference.
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Item 6.
Exhibits
| Incorporated by Reference | ||||||||||||||||||||
|
Exhibit
Number |
Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith | ||||||||||||||
| 4.1 | 8-K | 001-14667 | 4.1 | 08/01/2023 | ||||||||||||||||
| 4.2 | 8-K | 001-14667 | 4.2 | 08/01/2023 | ||||||||||||||||
| 4.3 | 8-K | 001-14667 | 4.3 | 08/01/2023 | ||||||||||||||||
| 4.4 | 8-K | 001-14667 | 4.4 | 08/01/2023 | ||||||||||||||||
| 4.5 | 8-K | 001-14667 | 4.5 | 08/01/2023 | ||||||||||||||||
| 4.6 | 8-K | 001-14667 | 4.6 | 08/01/2023 | ||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||
|
Exhibit
Number |
Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith | ||||||||||||||
| 10.1 | X | |||||||||||||||||||
| 10.2** | X | |||||||||||||||||||
| 10.3** | X | |||||||||||||||||||
| 10.4** | X | |||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1 | X | |||||||||||||||||||
| 32.2 | X | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | X | ||||||||||||||||||
+ The schedules and other attachments referenced in this exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or attachment will be furnished supplementary to the Securities and Exchange Commission upon request.
** Management, contract, compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MR. COOPER GROUP INC. | ||||||||
| October 25, 2023 | /s/ Jay Bray | |||||||
| Date |
Jay Bray
Chief Executive Officer (Principal Executive Officer) |
|||||||
| October 25, 2023 | /s/ Kurt Johnson | |||||||
| Date |
Kurt Johnson
Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) |
|||||||
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TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial StatementsprintNote 14, Fair Value MeasurementsprintNote 2, AcquisitionsprintNote 2, Acquisitions,printNote 10, IndebtednessprintNote 4, Mortgage Servicing Rights and Related LiabilitiesprintNote 9, Derivative Financial InstrumentsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintNote 17, Segment InformationprintNote 15, Capital Requirements,printItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintNote 16, Commitments and ContingenciesprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint