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
March 31, 2024
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
☐
No
x
Number of shares of common stock, $0.01 par value, outstanding as of April 19, 2024 was
64,720,963
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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
March 31, 2024 (unaudited) and December 31, 2023
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Condensed Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2024 and 2023
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Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for
the Three Months Ended March 31, 2024 and 2023
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Condensed Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 2024 and 2023
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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)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (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 15) |
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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 March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
| Service related, net | $ |
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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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| Other 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 (benefit) |
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| Less: Income tax expense (benefit) |
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(
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| Net income | $ |
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$ |
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| Earnings per share | |||||||||||
| Basic | $ |
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$ |
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| Diluted | $ |
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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 Nationstar Stockholders’
Equity |
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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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| 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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| Repurchase of common stock |
(
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— | — | — |
(
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(
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| Net income | — | — | — |
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— |
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| Balance at March 31, 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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| Balance at January 1, 2024 |
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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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| Repurchase of common stock |
(
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— | — | — |
(
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(
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| Net income | — | — | — |
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— |
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| Balance at March 31, 2024 |
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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 CASH FLOWS
(millions of dollars)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| 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 (benefit) |
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(
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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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| 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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| Loss (gain) on MSR hedging activities |
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(
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| Loss on MSR sales |
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| Other operating activities |
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| Sales proceeds and loan payment proceeds for mortgage loans held for sale |
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| Mortgage loans originated and purchased for sale, net of fees |
(
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(
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| Repurchases of loan assets out of Ginnie Mae securitizations |
(
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(
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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 | |||||||||||
| 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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(
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| Net cash attributable to investing activities |
(
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(
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| Financing Activities | |||||||||||
| (Decrease) increase in advance, warehouse and MSR facilities |
(
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| Settlements and repayment of excess spread financing |
(
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(
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| Issuance of unsecured senior notes |
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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 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 | |||||||||||
| Purchase of mortgage servicing rights holdback | $ |
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$ |
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| Sale of mortgage servicing rights 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.
| March 31, 2024 | March 31, 2023 | ||||||||||
| 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).
6
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®, Xome® and Rushmore Servicing®. Mr. Cooper is one of the largest home loan servicers and originators in the country focused on delivering a variety of servicing and lending products, services and technologies.
The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in Item 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, 2023.
Basis of Consolidation
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, and such differences could be material, due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers.
Recent Accounting Guidance Adopted
7
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 the purchase price allocation. $
5
and $
16
of the goodwill is assigned to Servicing segment and Corporate/Other segment, respectively. The goodwill will be deductible for tax purposes. The financial results of Rushmore and Roosevelt were included in Servicing segment and Corporate/Other segment, respectively. The Company finalized its allocation of fair value of consideration transferred during the three months ended December 31, 2023.
Acquisition of Home Point Capital Inc.
In May 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) and a mortgage servicing rights purchase and sale agreement (“Purchase Agreement”) with Home Point Capital Inc. (“Home Point”), 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 transactions closed in the third quarter of 2023 for total consideration of approximately $
658
. The Purchase Agreement was a bulk purchase of a portion of Home Point’s mortgage servicing rights (“MSR”) portfolio for $
335
. The Merger Agreement 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 transactions was $
323
, or $
2.33
per share.
8
3. 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 | March 31, 2024 | December 31, 2023 | |||||||||
| MSRs - fair value | $ |
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$ |
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| Excess spread financing at fair value | $ |
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$ |
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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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$ |
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Mortgage Servicing Rights
The following table sets forth the activities of MSRs:
| Three Months Ended March 31, | |||||||||||
| MSRs - Fair Value | 2024 | 2023 | |||||||||
| Fair value - beginning of period | $ |
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$ |
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| Additions: | |||||||||||
| Servicing retained from mortgage loans sold |
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| Purchases and acquisitions of servicing rights |
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| Dispositions: | |||||||||||
| Sales of servicing assets and excess yield |
(
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(
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| Changes in fair value: | |||||||||||
| Changes in valuation inputs or assumptions used in the valuation model (MSR MTM) |
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(
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| Changes in valuation due to amortization |
(
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(
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Other changes
(1)
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| Fair value - end of period | $ |
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$ |
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(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 three months ended March 31, 2024 and 2023, the Company sold $
3,144
and $
1,256
in unpaid principal balance (“UPB”) of MSRs, of which $
3,003
and $
271
were retained by the Company as subservicer, respectively.
MSRs are segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. Agency investors consist of Government National Mortgage Association (“Ginnie Mae” or “GNMA”) and the GSEs, Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of UPB and fair value for the Company’s MSRs:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| MSRs - UPB and Fair Value Breakdown by Investor Pools | UPB | Fair Value | UPB | Fair Value | |||||||||||||||||||
| Agency | $ |
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$ |
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$ |
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$ |
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| Non-agency |
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| Total | $ |
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$ |
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$ |
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$ |
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Refer to
Note 13, Fair Value Measurements
, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of MSRs.
9
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 |
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
|
|||||||||||||||||||||||||||||
| March 31, 2024 | |||||||||||||||||||||||||||||||||||
| Mortgage servicing rights | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Mortgage servicing rights | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
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 $
420
and $
437
, with UPB of $
72,397
and $
74,219
as of March 31, 2024 and December 31, 2023, respectively. Refer to
Note 13, Fair Value Measurements
, for key weighted-average inputs and assumptions used in the valuation of excess spread financing liability.
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 |
Prepayment Speeds
|
||||||||||||||||||||||
| Excess Spread Financing - Hypothetical Sensitivities |
100 bps
Adverse
Change
|
200 bps
Adverse
Change
|
10%
Adverse
Change
|
20%
Adverse
Change
|
|||||||||||||||||||
| March 31, 2024 | |||||||||||||||||||||||
| Excess spread financing | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Excess spread financing | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
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 $
35
and $
29
as of March 31, 2024 and December 31, 2023, respectively. Refer to
Note 2, Significant Accounting Policies
, for further discussion on MSR financing, and
Note 13, Fair Value Measurements
, for key weighted-average inputs and assumptions used in the valuation of the MSR financing liability.
10
Revenues - Service Related, net
The following table sets forth the items comprising total “revenues - service related, net”:
| Three Months Ended March 31, | |||||||||||
| Revenues - Service Related, net | 2024 | 2023 | |||||||||
|
Contractually specified servicing fees
(1)
|
$ |
|
$ |
|
|||||||
|
Other service-related income
(1)
|
|
|
|||||||||
|
Incentive and modification income
(1)
|
|
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|||||||||
|
Servicing late fees
(1)
|
|
|
|||||||||
| Mark-to-market adjustments - Servicing | |||||||||||
| MSR MTM |
|
(
|
|||||||||
| (Loss) gain on MSR hedging activities |
(
|
|
|||||||||
| Loss 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 $
185
and $
177
for the three months ended March 31, 2024 and 2023, 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.
4. Advances and Other Receivables
Advances and other receivables, net, consists of the following:
| Advances and Other Receivables, Net | March 31, 2024 | December 31, 2023 | |||||||||
|
Servicing advances, net of $
|
$ |
|
$ |
|
|||||||
|
Receivables from agencies, investors and prior servicers, net of
|
|
|
|||||||||
| Reserves |
(
|
(
|
|||||||||
| Total advances and other receivables, net | $ |
|
$ |
|
|||||||
11
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| Three Months Ended March 31, | |||||||||||
| Reserves for Advances and Other Receivables | 2024 | 2023 | |||||||||
| Balance - beginning of period | $ |
|
$ |
|
|||||||
|
Provision
(1)
|
|
|
|||||||||
|
Reclassifications
(2)
|
|
|
|||||||||
|
Write-offs
(3)
|
(
|
(
|
|||||||||
| Balance - end of period | $ |
|
$ |
|
|||||||
(1)
The Company recorded a provision of
$
6
and
$
9
through the MTM adjustments in “revenues - service related, net” in the consolidated statements of operations during the
three months ended March 31, 2024 and 2023,
respectively.
(2)
Reclassifications represent required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
(3)
Write-offs represent fully reserved items which have been processed in the normal course of business.
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 March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Utilization of purchase discounts |
(
|
(
|
(
|
|
|||||||||||||||||||
| Balance - end of period | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Credit Loss for Advances and Other Receivables
The following table sets forth the activities of the CECL allowance for advances and other receivables:
| Three Months Ended March 31, | |||||||||||
| CECL Allowance for Advances and Other Receivables | 2024 | 2023 | |||||||||
| Balance - beginning of period | $ |
|
$ |
|
|||||||
| Provision |
|
|
|||||||||
|
Write-offs
(1)
|
(
|
|
|||||||||
|
Balance - end of period
(2)
|
$ |
|
$ |
|
|||||||
(1)
Write-offs represent fully reserved items which have been processed in the normal course of business.
(2)
As of March 31, 2024, $
17
was recorded in reserves. As of March 31, 2023, $
31
and $
7
were recorded in reserves and purchase discount for advances and other receivables, respectively.
The Company determined that the credit-related risk associated with applicable financial instruments typically increases with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of
39
months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
12
5. Mortgage Loans Held for Sale
Mortgage loans held for sale are recorded at fair value as set forth below:
| Mortgage Loans Held for Sale | March 31, 2024 | December 31, 2023 | |||||||||
| 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:
| Three Months Ended March 31, | |||||||||||
| Mortgage Loans Held for Sale | 2024 | 2023 | |||||||||
| Balance - beginning of period | $ |
|
$ |
|
|||||||
| Loans sold (at carrying value) 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 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 three months ended March 31, 2024 and 2023, the Company recorded a total realized gain of $
9
and loss of $
9
from total sales proceeds of $
3,162
and $
2,931
, 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:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Mortgage Loans Held for Sale | UPB | Fair Value | UPB | Fair Value | |||||||||||||||||||
|
Non-accrual
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Non-accrual UPB includes $
31
and $
35
of UPB related to Ginnie Mae repurchased loans as of March 31, 2024 and December 31, 2023, respectively.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $
29
and $
30
as of March 31, 2024 and December 31, 2023, respectively.
13
6. Loans Subject to Repurchase from Ginnie Mae
7. Goodwill and Intangible Assets
8. 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 “loss (gain) on MSR hedging activities” on the condensed consolidated statements of cash flows.
14
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.
| March 31, 2024 | Three Months Ended March 31, 2024 | ||||||||||||||||||||||
| Derivative Financial Instruments |
Expiration
Dates |
Outstanding
Notional |
Fair
Value |
Gain/(Loss) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||
| Loan sale commitments | 2024 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2024 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| LPCs | 2024 |
|
|
(
|
|||||||||||||||||||
| Forward MBS trades | 2024 |
|
|
(
|
|||||||||||||||||||
| Treasury futures | 2024 |
|
|
(
|
|||||||||||||||||||
| Total derivative financial instruments - assets | $ |
|
$ |
|
$ |
(
|
|||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| IRLCs | 2024 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| LPCs | 2024 |
|
|
|
|||||||||||||||||||
| Forward MBS trades | 2024 |
|
|
(
|
|||||||||||||||||||
| Treasury futures | 2024 |
|
|
|
|||||||||||||||||||
| Total derivative financial instruments - liabilities | $ |
|
$ |
|
$ |
(
|
|||||||||||||||||
| March 31, 2023 | Three Months Ended March 31, 2023 | ||||||||||||||||||||||
| Derivative Financial Instruments |
Expiration
Dates |
Outstanding
Notional |
Fair
Value |
Gain/(Loss) | |||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
(
|
|||||||||||||||||
15
9. Indebtedness
Advance, Warehouse and MSR Facilities
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Maturity Date | Collateral | Capacity Amount | Outstanding | Collateral Pledged | Outstanding | Collateral Pledged | ||||||||||||||||||||||||||||||||||||||
| Advance Facilities | ||||||||||||||||||||||||||||||||||||||||||||
| $350 advance facility | Oct 2024 | Servicing advance receivables | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||
| $300 advance facility | Sep 2025 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$250 advance facility
(1)
|
Nov 2024 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$50 advance facility
(2)
|
Dec 2024 | Servicing advance receivables |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| Advance facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| Warehouse Facilities | ||||||||||||||||||||||||||||||||||||||||||||
| $1,500 warehouse facility | Jun 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $750 warehouse facility | Jun 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $750 warehouse facility | Oct 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | Jun 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $350 warehouse facility | Aug 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$250 warehouse facility
(3)
|
Sep 2025 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $200 warehouse facility | Dec 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $200 warehouse facility | Jan 2025 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $100 warehouse facility | Jul 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $100 warehouse facility | Apr 2025 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$100 warehouse facility
(2)
|
Dec 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $1 warehouse facility | Dec 2024 | Mortgage loans or MBS |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| Warehouse facilities principal amount |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
| MSR Facilities | ||||||||||||||||||||||||||||||||||||||||||||
|
$1,500 warehouse facility
(4)
|
Apr 2026 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$1,500 warehouse facility
(1)
|
Nov 2024 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
$950 warehouse facility
(3)
|
Sep 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | Jun 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | Apr 2026 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $500 warehouse facility | Jun 2025 | MSR |
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| $50 warehouse facility | Nov 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)
Total capacity for this facility is $
100
, of which $
50
is a sublimit for advance financing.
(3)
The capacity amount for this facility increased from $
1,000
to $
1,200
during the three months ended March 31, 2024. $
950
of the $
1,200
is a sublimit for MSR financing.
(4)
The capacity increased in April 2024 to $
1,750
.
16
The weighted average interest rate for advance facilities was
7.8
% and
7.2
% for the three months ended March 31, 2024 and 2023, respectively. The weighted average interest rate for warehouse and MSR facilities was
7.9
% and
7.0
% for the three months ended March 31, 2024 and 2023, respectively.
Unsecured Senior Notes
Unsecured senior notes consist of the following:
| Unsecured Senior Notes | March 31, 2024 | December 31, 2023 | |||||||||
|
$
|
$ |
|
$ |
|
|||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
|
$
|
|
|
|||||||||
| Unsecured senior notes principal amount |
|
|
|||||||||
|
Purchase discount
and unamortized debt issuance costs
|
(
|
(
|
|||||||||
| Unsecured senior notes, net | $ |
|
$ |
|
|||||||
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio. The incurrence-based covenants limit the issuer(s) and restricted subsidiaries ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the applicable indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.
The indentures provide that on or before certain fixed dates, the Company may redeem up to
40
% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates.
No
n
otes were repurchased or redeemed during th
e three months ended March 31, 2024 and 2023.
As of March 31, 2024, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:
| Year Ending December 31, | Amount | |||||||
| 2024 through 2025 | $ |
|
||||||
| 2026 |
|
|||||||
| 2027 |
|
|||||||
| 2028 |
|
|||||||
| Thereafter |
|
|||||||
| Total unsecured senior notes principal amount | $ |
|
||||||
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 Nationstar Mortgage LLC, the Company’s primary operating subsidiary, and Rushmore Loan Management Services LLC. The Company was in compliance with its required financial covenants as of March 31, 2024.
17
10. 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:
| March 31, 2024 | December 31, 2023 | ||||||||||
| 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 9, Indebtedness
, for additional information.
The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company:
| Unconsolidated Securitization Trusts | March 31, 2024 | December 31, 2023 | |||||||||
| 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 March 31, 2024 and December 31, 2023. 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 | March 31, 2024 | December 31, 2023 | |||||||||
| Unconsolidated securitization trusts | $ |
|
$ |
|
|||||||
18
11. 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 March 31, 2024 and December 31, 2023, 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 March 31, | |||||||||||
| Computation of Earnings Per Share | 2024 | 2023 | |||||||||
| Net income | $ |
|
$ |
|
|||||||
| Weighted average shares of common stock outstanding (in thousands): | |||||||||||
| Basic |
|
|
|||||||||
| Dilutive effect of stock awards |
|
|
|||||||||
| Diluted |
|
|
|||||||||
| Earnings per common share | |||||||||||
| Basic | $ |
|
$ |
|
|||||||
| Diluted | $ |
|
$ |
|
|||||||
12. Income Taxes
For the three months ended March 31, 2024 and 2023, the effective tax rate for operations was
21.9
% and (
5.6
)%, respectively. The effective tax rates differed from the statutory federal rate of 21% primarily due to state income taxes and nondeductible executive compensation.
The effective tax rate increased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to the impact of quarterly discrete tax items relative to income before taxes for the respective period, including the excess tax benefit from share-based compensation.
13. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
There have been no significant changes to the 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, 2023.
19
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:
| March 31, 2024 | |||||||||||||||||||||||
| 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 |
|
|
|
|
|||||||||||||||||||
| Treasury Futures |
|
|
|
|
|||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| Treasury futures |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights financing |
|
|
|
|
|||||||||||||||||||
| Excess spread financing |
|
|
|
|
|||||||||||||||||||
| December 31, 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 | |||||||||||||||||||||||
| Treasury futures |
|
|
|
|
|||||||||||||||||||
| IRLCs |
|
|
|
|
|||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| LPCs |
|
|
|
|
|||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||
| Forward MBS trades |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights financing |
|
|
|
|
|||||||||||||||||||
| Excess spread financing |
|
|
|
|
|||||||||||||||||||
20
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:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| Assets | Liabilities | ||||||||||||||||||||||||||||||||||
| Fair Value - Level 3 Assets and Liabilities | Mortgage servicing rights | Mortgage loans held for sale | Equity investments | IRLCs | Excess spread financing | Mortgage servicing rights financing | |||||||||||||||||||||||||||||
| Balance - beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Changes in fair value included in earnings |
(
|
|
(
|
|
|
|
|||||||||||||||||||||||||||||
|
Purchases/additions
(1)
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Issuances |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Sales/dispositions
(2)
|
(
|
(
|
|
|
|
|
|||||||||||||||||||||||||||||
| 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 March 31, 2024 and 2023. No transfers were made in or out of Level 3 fair value assets and liabilities for the Company during the three months ended March 31, 2024 and 2023.
21
The table below presents the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities.
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Level 3 Inputs | Min | Max | Min | Max | |||||||||||||||||||||||||||||||
|
MSRs
(1)
|
|||||||||||||||||||||||||||||||||||
|
Option adjusted spread
(2)
|
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| 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)
|
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| 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.
(3)
Presented in whole dollar amounts.
(4)
Average life is included for informational purposes.
The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments not carried at fair value:
| March 31, 2024 | |||||||||||||||||||||||
|
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 |
|
|
|
|
|||||||||||||||||||
22
| December 31, 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 |
|
|
|
|
|||||||||||||||||||
14. 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 March 31, 2024, the Company was in compliance with its selling and servicing capital requirements.
15. 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.
23
On November 3, 2023, a putative class action lawsuit was filed against the Company, captioned Cabezas v. Mr. Cooper Group, Inc., No. 23-cv-02453 (“Cabezas”), in the United States District Court for the Northern District of Texas, by plaintiff Jennifer Cabezas purportedly on behalf of a class consisting of those persons impacted by the cybersecurity incident that occurred on October 31, 2023. The class action complaint alleges claims for negligence, negligence per se, breach of express contract, breach of implied contract, invasion of privacy, unjust enrichment, breach of confidence, and breach of fiduciary duty based upon allegations that the Company did not employ reasonable and adequate security measures to protect customer personal information accessed in the cybersecurity incident. The Cabezas complaint seeks damages, declaratory and injunctive relief, and an award of costs, attorney fees and expenses, among other relief. Between November 2023 and January 31, 2024, 25 additional putative class actions were filed against the Company asserting substantially similar claims and allegations as those asserted in the Cabezas action. The Cabezas court consolidated all 25 cases with the Cabezas action, and administratively closed the 25 separate matters. On February 7, 2024, a putative class action lawsuit was filed against the Company, captioned Randles v. Mr. Cooper Group, Inc. (“Randles”), in the United States District Court for the Eastern District of California, purportedly on behalf of persons residing in California who were impacted by the cybersecurity incident. The Randles complaint alleges one claim under the California Consumer Privacy Act, and seeks damages, declaratory and injunctive relief, and an award of litigation expenses and attorneys’ fees. The Company has moved to transfer venue of the Randles action to the same court where the Cabezas action is pending, so the cases can be consolidated.
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 $
12
and $
9
during the three months ended March 31, 2024 and 2023, respectively, which are included in “expenses - general and administrative” on the condensed consolidated statements of operations. Management currently believes the aggregate range of reasonably possible loss is $
1
to $
3
in exce
ss of the accrued liability (if any) related to those matters as of March 31, 2024. 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 March 31, 2024, 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 $
76
and $
79
as of March 31, 2024 and December 31, 2023, 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 8, Derivative Financial Instruments
, for more information.
24
16. Segment Information
The Company’s segments reflect the internal reporting we use to evaluate operating performance and are based upon the Company’s organizational structure, which focuses primarily on the services offered. A brief description of our current business segments is as follows:
Servicing:
This segment performs operational activities on behalf of investors or owners of the underlying mortgages and mortgage servicing rights, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO. In the third quarter of 2023, we expanded our special servicing and subservicing offerings with the acquisition of Rushmore Loan Management Services LLC.
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. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to the Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties. Eliminations are included in Corporate/Other.
The following tables present financial information by segment:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||
| 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 expenses, net |
|
|
(
|
(
|
|||||||||||||||||||
| Total other income (expenses), net |
|
|
(
|
(
|
|||||||||||||||||||
| Income (loss) before income tax expense (benefit) | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
25
| Three Months Ended March 31, 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 expenses, net |
|
|
(
|
(
|
|||||||||||||||||||
| Total other income (expenses), net |
|
(
|
(
|
(
|
|||||||||||||||||||
| Income (loss) before income tax expense (benefit) | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Depreciation and amortization for property and equipment and intangible assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
26
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;
•
our ability to prevent cyber intrusions and mitigate cyber risks;
•
delays in our ability to collect or be reimbursed for servicing advances;
•
our ability to obtain sufficient liquidity and capital to operate our business;
•
disruptions in the secondary home loans market;
•
our ability to successfully implement our strategic initiatives and hedging strategies;
•
our ability to realize anticipated benefits of our previous acquisitions;
•
our ability to use our net operating loss, other tax carry forwards and certain built-in losses or deductions;
•
changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•
third-party credit, servicer and correspondent risks;
•
our ability to pay down debt;
•
our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•
issues related to the development and use of artificial intelligence;
•
health pandemics, hurricanes, earthquakes, fires, floods and other natural catastrophic events; and
•
our ability to maintain our licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements, or our objectives and plans will be achieved. Please refer to
Risk 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, 2023 for further information on these and other risk factors affecting us.
27
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, 2023. 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 residential mortgage servicer and originator 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 (our customers) manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio UPB from $10 billion in 2006 to $1.1 trillion as of March 31, 2024. We believe this track record reflects our strong operating capabilities, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology.
Our strategy is to position the Company for sustained growth, deliver a world-class customer experience, increase our return on tangible equity into the high teens, and act as a trusted partner for our key stakeholders. Key strategic initiatives include the following:
•
Strengthen our balance sheet by building capital and liquidity, and managing interest rate and other forms of risk;
•
Improve efficiency by driving continuous improvement in unit costs for Servicing and Originations segments, as well as by taking corporate actions to eliminate costs throughout the organization;
•
Sustain industry leading refinance recapture rates and grow our purchase recapture rate to a target of at least 25%;
•
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;
•
Use our patented Pyro mortgage-centric AI platform to transform mortgage servicing for the benefit of our customers, clients, team members, and investors;
•
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 first quarter of 2024, our Servicing segment generated income before income tax expense of $313, and our servicing portfolio grew to $1.1 trillion, exceeding our strategic target of $1 trillion in UPB. We expect to board approximately $100 billion of UPB in the second quarter of 2024 split between MSRs and subservicing. Additionally, we expect growth conditions to remain favorable, particularly for bulk MSR purchases.
In the first quarter of 2024, our Originations segment generated income before income tax expense of $32 on funded volume of $2,878. We expect the Originations segment to operate at higher levels of profitability during the second quarter of 2024 and we expect our DTC channel to benefit from the growth in our servicing portfolio.
While the recent inflation rate increase appears to have subsided, 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.
28
Results of Operations
|
Table 1. Consolidated Operations
|
||
| Three Months Ended March 31, | ||||||||||||||||||||
| 2024 | 2023 | Change | ||||||||||||||||||
|
Revenues - operational
(1)
|
$ | 521 | $ | 391 | $ | 130 | ||||||||||||||
| Revenues - mark-to-market | 43 | (61) | 104 | |||||||||||||||||
| Total revenues | 564 | 330 | 234 | |||||||||||||||||
| Total expenses | 317 | 261 | 56 | |||||||||||||||||
| Total other (expense), net | (15) | (34) | 19 | |||||||||||||||||
| Income before income tax expense (benefit) | 232 | 35 | 197 | |||||||||||||||||
| Less: Income tax expense (benefit) | 51 | (2) | 53 | |||||||||||||||||
| Net income | $ | 181 | $ | 37 | $ | 144 | ||||||||||||||
(1)
Revenues - operational consists of total revenues, excluding mark-to-market.
Income before income tax expense (benefit) increased during the three months ended March 31, 2024, as compared to 2023 primarily due to an increase in total revenues partially offset by an increase in total expenses. Revenues increased in 2024 primarily due to an increase in the servicing portfolio and an increase in mortgage rates during the first quarter of 2024, which resulted in a commensurate increase in the MTM revenues primarily related to MSR fair value. Total expenses increased in 2024 due to an increase in general and administrative costs, driven by growth in our MSR servicing portfolio. Total other expenses, net decreased in 2024, as compared to 2023 primarily due to higher interest income attributable to higher interest rates, which was partially offset by an increase in interest expense as a result of the issuance of the 2032 unsecured senior notes in February 2024.
The effective tax rate during the three months ended March 31, 2024, was 21.9% as compared to (5.6)% in 2023. The change in effective rate 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 share-based compensation.
| Segment Results | ||||||||||||||
Our operations are primarily 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 16, Segment Information
, in the Notes to the Condensed Consolidated Financial Statements for a summary of segment results.
29
| 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.
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Table 2. Servicer Ratings
|
||||||||||||||
|
Fitch
(1)
|
Moody’s
(2)
|
S&P
(3)
|
|||||||||||||||
| Rating date | January/February 2024 | May 2023 | January 2024 | ||||||||||||||
| Residential | RPS2 | SQ2- | Above Average | ||||||||||||||
| Master Servicer | RMS2+ | SQ2+ | Above Average | ||||||||||||||
| Special Servicer | RSS2 | SQ2- | Above Average | ||||||||||||||
| Subprime Servicer | RPS2 | SQ2- | Above Average | ||||||||||||||
| Rushmore Special | RSS2 | SQ3+ | Above Average | ||||||||||||||
(1)
Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
(2)
Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)
(3)
S&P Rating Scale of Strong to Weak
30
The following tables set forth the results of operations for the Servicing segment:
|
Table 3. Servicing Segment Results of Operations
|
||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Operational | $ | 577 | 22 | $ | 407 | 19 | $ | 170 | 3 | ||||||||||||||||||||||||||
| Amortization, net of accretion | (170) | (7) | (115) | (5) | (55) | (2) | |||||||||||||||||||||||||||||
| Mark-to-market adjustments - Servicing | 43 | 2 | (61) | (3) | 104 | 5 | |||||||||||||||||||||||||||||
| Total revenues | 450 | 17 | 231 | 11 | 219 | 6 | |||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Salaries, wages and benefits | 85 | 3 | 82 | 4 | 3 | (1) | |||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||
| Servicing support fees | 28 | 1 | 16 | 1 | 12 | — | |||||||||||||||||||||||||||||
| Corporate and other general and administrative expenses | 62 | 3 | 42 | 2 | 20 | 1 | |||||||||||||||||||||||||||||
| Foreclosure and other liquidation related expenses, net | 7 | — | 11 | — | (4) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 3 | — | 2 | — | 1 | — | |||||||||||||||||||||||||||||
| Total general and administrative expenses | 100 | 4 | 71 | 3 | 29 | 1 | |||||||||||||||||||||||||||||
| Total expenses | 185 | 7 | 153 | 7 | 32 | — | |||||||||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||||||||||||||
| Interest income | 146 | 6 | 79 | 4 | 67 | 2 | |||||||||||||||||||||||||||||
| Advance interest expense | (16) | (1) | (14) | (1) | (2) | — | |||||||||||||||||||||||||||||
| Other interest expense | (82) | (3) | (49) | (2) | (33) | (1) | |||||||||||||||||||||||||||||
| Interest expense | (98) | (4) | (63) | (3) | (35) | (1) | |||||||||||||||||||||||||||||
| Total other income, net | 48 | 2 | 16 | 1 | 32 | 1 | |||||||||||||||||||||||||||||
| Income before income tax expense | $ | 313 | 12 | $ | 94 | 5 | $ | 219 | 7 | ||||||||||||||||||||||||||
| Weighted average cost - advance and MSR facilities | 8.1 | % | 7.4 | % | 0.7 | % | |||||||||||||||||||||||||||||
| 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.
31
|
Table 4. Servicing - Revenues
|
||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amt |
bps
(1)
|
Amt |
bps
(1)
|
Amt | bps | ||||||||||||||||||||||||||||||
| MSR Operational Revenue | |||||||||||||||||||||||||||||||||||
| Base servicing fees | $ | 449 | 17 | $ | 327 | 15 | $ | 122 | 2 | ||||||||||||||||||||||||||
| Modification fees | 7 | — | 3 | — | 4 | — | |||||||||||||||||||||||||||||
| Late payment fees | 20 | 1 | 16 | 1 | 4 | — | |||||||||||||||||||||||||||||
| Other ancillary revenues | 20 | 1 | 7 | — | 13 | 1 | |||||||||||||||||||||||||||||
| Total MSR operational revenue | 496 | 19 | 353 | 16 | 143 | 3 | |||||||||||||||||||||||||||||
| Subservicing-related revenue | 98 | 3 | 72 | 3 | 26 | — | |||||||||||||||||||||||||||||
| Total servicing fee revenue | 594 | 22 | 425 | 19 | 169 | 3 | |||||||||||||||||||||||||||||
| MSR financing liability costs | (8) | — | (8) | — | — | — | |||||||||||||||||||||||||||||
| Excess spread payments and portfolio runoff | (9) | — | (10) | — | 1 | — | |||||||||||||||||||||||||||||
| Total operational revenue | 577 | 22 | 407 | 19 | 170 | 3 | |||||||||||||||||||||||||||||
| Amortization, Net of Accretion | |||||||||||||||||||||||||||||||||||
| MSR amortization | (179) | (7) | (125) | (5) | (54) | (2) | |||||||||||||||||||||||||||||
| Excess spread accretion | 9 | — | 10 | — | (1) | — | |||||||||||||||||||||||||||||
| Total amortization, net of accretion | (170) | (7) | (115) | (5) | (55) | (2) | |||||||||||||||||||||||||||||
| Mark-to-Market Adjustments - Servicing | |||||||||||||||||||||||||||||||||||
| MSR MTM | 189 | 7 | (105) | (5) | 294 | 12 | |||||||||||||||||||||||||||||
| (Loss) gain on MSR hedging activities | (122) | (5) | 59 | 2 | (181) | (7) | |||||||||||||||||||||||||||||
| Loss on MSR sales | (12) | — | — | — | (12) | — | |||||||||||||||||||||||||||||
|
Reclassifications
(2)
|
(6) | — | (9) | — | 3 | — | |||||||||||||||||||||||||||||
| Excess spread / financing MTM | (6) | — | (6) | — | — | — | |||||||||||||||||||||||||||||
| Total MTM - Servicing | 43 | 2 | (61) | (3) | 104 | 5 | |||||||||||||||||||||||||||||
| Total revenues - Servicing | $ | 450 | 17 | $ | 231 | 11 | $ | 219 | 6 | ||||||||||||||||||||||||||
(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 and MSR amortization increased during the three months ended March 31, 2024, as compared to 2023, primarily due to a larger average MSR portfolio in 2024.
The change in MSR MTM during the three months ended March 31, 2024, as compared to 2023, was primarily driven by an increase in mortgage interest rates and an increase in the MSR portfolio in 2024, which resulted in an increase in the fair value of the MSR. The change in (Loss) gain on MSR hedging activities during the three months ended March 31, 2024, compared to 2023, was primarily due to an increase in mortgage interest rates and a larger average MSR portfolio in 2024.
Subservicing
- Subservicing-related revenue increased during the three months ended March 31, 2024, as compared to 2023, primarily driven by a larger average subservicing portfolio due to boarding of a large new subservicing client in 2024.
Servicing Segment Expenses
Total expenses increased during the three months ended March 31, 2024, as compared to 2023, primarily driven by an increase in corporate and other general and administrative expenses due to higher corporate allocations driven by increased headcount attributable to the acquisition of Rushmore in 2023, and an increase servicing support fees primarily due to a larger average MSR portfolio in 2024.
32
Servicing Segment Other Income, net
Total other income, net increased during the three months ended March 31, 2024, as compared to 2023, 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
|
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| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||||||||||||||
| Average UPB | ||||||||||||||||||||||||||||||||||||||
| MSRs | $ | 607,539 | $ | 412,777 | ||||||||||||||||||||||||||||||||||
|
Subservicing and other
(1)
|
460,160 | 447,841 | ||||||||||||||||||||||||||||||||||||
| Total average UPB | $ | 1,067,699 | $ | 860,618 | ||||||||||||||||||||||||||||||||||
| March 31, 2024 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||
| UPB | Carrying Amount | bps | UPB | Carrying Amount | bps | |||||||||||||||||||||||||||||||||
| MSRs | ||||||||||||||||||||||||||||||||||||||
| Agency | $ | 604,112 | $ | 9,463 | 157 | $ | 382,368 | $ | 6,258 | 164 | ||||||||||||||||||||||||||||
| Non-agency | 26,621 | 333 | 125 | 30,070 | 308 | 102 | ||||||||||||||||||||||||||||||||
| Total MSRs | 630,733 | 9,796 | 155 | 412,438 | 6,566 | 159 | ||||||||||||||||||||||||||||||||
|
Subservicing and other
(1)
|
||||||||||||||||||||||||||||||||||||||
| Agency | 457,344 | N/A | 419,399 | N/A | ||||||||||||||||||||||||||||||||||
| Non-agency | 48,112 | N/A | 20,712 | N/A | ||||||||||||||||||||||||||||||||||
| Total subservicing and other | 505,456 | N/A | 440,111 | N/A | ||||||||||||||||||||||||||||||||||
| Total ending balance | $ | 1,136,189 | $ | 9,796 | $ | 852,549 | $ | 6,566 | ||||||||||||||||||||||||||||||
| MSRs UPB Encumbrance | March 31, 2024 | March 31, 2023 | ||||||||||||||||||||||||||||||||||||
| MSRs - unencumbered | $ | 558,268 | $ | 331,323 | ||||||||||||||||||||||||||||||||||
|
MSRs - encumbered
(2)
|
72,465 | 81,115 | ||||||||||||||||||||||||||||||||||||
| MSRs UPB | $ | 630,733 | $ | 412,438 | ||||||||||||||||||||||||||||||||||
(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.
33
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 March 31, 2024 | Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||
| MSR | Subservicing and Other | Total | MSR | Subservicing and Other | Total | ||||||||||||||||||||||||||||||
| Balance - beginning of period | $ | 587,942 | $ | 403,778 | $ | 991,720 | $ | 411,382 | $ | 459,053 | $ | 870,435 | |||||||||||||||||||||||
| Additions: | |||||||||||||||||||||||||||||||||||
| Originations | 2,835 | — | 2,835 | 2,731 | — | 2,731 | |||||||||||||||||||||||||||||
|
Acquisitions / Increase in subservicing
(1)
|
54,203 | 112,412 | 166,615 | 8,316 | 20,826 | 29,142 | |||||||||||||||||||||||||||||
| Deductions: | |||||||||||||||||||||||||||||||||||
|
Dispositions / Decrease in subservicing
(2)
|
(3,144) | (2,927) | (6,071) | (1,256) | (31,951) | (33,207) | |||||||||||||||||||||||||||||
| Principal reductions and other | (5,412) | (2,589) | (8,001) | (4,086) | (3,846) | (7,932) | |||||||||||||||||||||||||||||
|
Voluntary reductions
(3)
|
(5,337) | (5,038) | (10,375) | (4,270) | (3,802) | (8,072) | |||||||||||||||||||||||||||||
|
Involuntary reductions
(4)
|
(330) | (180) | (510) | (338) | (169) | (507) | |||||||||||||||||||||||||||||
| Net changes in loans serviced by others | (24) | — | (24) | (41) | — | (41) | |||||||||||||||||||||||||||||
| Balance - end of period | $ | 630,733 | $ | 505,456 | $ | 1,136,189 | $ | 412,438 | $ | 440,111 | $ | 852,549 | |||||||||||||||||||||||
(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.
The table below summarizes the overall performance of the servicing and subservicing portfolio:
|
Table 7. Key Performance Metrics - Servicing and Subservicing Portfolio
|
||
| March 31, 2024 | March 31, 2023 | |||||||||||||||||||||||||
| Loan count | 5,116,552 | 4,078,443 | ||||||||||||||||||||||||
|
Average loan amount
(1)
|
$ | 221,605 | $ | 209,042 | ||||||||||||||||||||||
| Average coupon - agency | 4.0 | % | 3.6 | % | ||||||||||||||||||||||
| Average coupon - non-agency | 4.9 | % | 4.7 | % | ||||||||||||||||||||||
|
60+ delinquent (% of loans)
(2)
|
1.6 | % | 2.4 | % | ||||||||||||||||||||||
|
90+ delinquent (% of loans)
(2)
|
1.3 | % | 2.1 | % | ||||||||||||||||||||||
|
120+ delinquent (% of loans)
(2)
|
1.2 | % | 1.9 | % | ||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Total prepayment speed (12-month constant prepayment rate) | 4.7 | % | 4.1 | % | ||||||||||||||||||||||
(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.
34
|
Table 8. Loan Modifications and Workout Units
|
||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
|
Modifications
(1)
|
7,190 | 5,264 | 1,926 | ||||||||||||||
|
Workouts
(2)
|
17,270 | 11,089 | 6,181 | ||||||||||||||
| Total modifications and workout units | 24,460 | 16,353 | 8,107 | ||||||||||||||
(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 increased during the three months ended March 31, 2024, as compared to 2023, primarily due to the continued expansion of loss mitigation programs offered by FNMA, FHLMC, and FHA, which increased borrower eligibility and resulted in an increase in successful modifications and workouts.
Servicing Portfolio and Liabilities
The following table sets forth the activities of MSRs:
|
Table 9. MSRs - Fair Value Rollforward
|
||||||||
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Fair value - beginning of period | $ | 9,090 | $ | 6,654 | |||||||
| Additions: | |||||||||||
| Servicing retained from mortgage loans sold | 64 | 54 | |||||||||
| Purchases and acquisitions of servicing rights | 663 | 102 | |||||||||
| Dispositions: | |||||||||||
| Sales of servicing assets and excess yield | (42) | (15) | |||||||||
| Changes in fair value: | |||||||||||
| Due to changes in valuation inputs or assumptions used in the valuation model (MSR MTM): | |||||||||||
| Agency | 171 | (86) | |||||||||
| Non-agency | 18 | (19) | |||||||||
| Changes in valuation due to amortization: | |||||||||||
| Scheduled principal payments | (85) | (50) | |||||||||
| Prepayments | |||||||||||
| Voluntary prepayments | |||||||||||
| Agency | (86) | (67) | |||||||||
| Non-agency | (3) | (3) | |||||||||
| Involuntary prepayments | |||||||||||
| Agency | (5) | (5) | |||||||||
| Non-agency | — | — | |||||||||
|
Other changes
(1)
|
11 | 1 | |||||||||
| Fair value - end of period | $ | 9,796 | $ | 6,566 | |||||||
(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 3, Mortgage Servicing Rights and Related Liabilities
and
Note 13, 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 March 31, 2024 and December 31, 2023.
35
Excess Spread Financing
As further disclosed in
Note 3, 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 sell a percentage of the excess fee, as a method for efficiently financing acquired MSRs and the purchase of loans, however we have not done so in recent years due to the availability of lower cost sources of funding.
Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to prepayment speeds and option-adjusted spread levels. See
Note 3, Mortgage Servicing Rights and Related Liabilities
and
Note 13, 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 March 31, 2024 and December 31, 2023.
The following table sets forth the change in the excess spread financing:
|
Table 10. Excess Spread Financing - Rollforward
|
||||||||
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Fair value - beginning of period | $ | 437 | $ | 509 | |||||||
| Additions: | |||||||||||
| New financings | — | — | |||||||||
| Deductions: | |||||||||||
| Repayments | — | (4) | |||||||||
| Settlements | (17) | (18) | |||||||||
| Changes in fair value: | |||||||||||
| Agency | — | 4 | |||||||||
| Non-agency | — | — | |||||||||
| Fair value - end of period | $ | 420 | $ | 491 | |||||||
36
| Originations Segment | ||||||||||||||
The strategy of our Originations segment is to originate or acquire new MSRs for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain or recapture our existing customers by providing them with attractive refinance and purchase options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring MSRs at a more attractive cost than bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Our Originations segment is one way that we help underserved consumers access the financial markets. In the three months ended March 31, 2024, our total originations included loans for approximately 2,700 customers with low FICOs (<660), 2,000 customers with income below the U.S. median household income, 2,800 first-time homebuyers, and 700 veterans. During this time period, we originated approximately 4,200 Ginnie Mae loans, which are designed for first-time homebuyers and low- and moderate-income borrowers, comprising $1.5 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.
37
The following tables set forth the results of operations for the Originations segment:
|
Table 11. Originations Segment Results of Operations
|
||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Revenues | |||||||||||||||||
|
Service related, net - Originations
(1)
|
$ | 16 | $ | 11 | $ | 5 | |||||||||||
| Net gain on mortgage loans held for sale | |||||||||||||||||
|
Net gain on loans originated and sold
(2)
|
16 | 18 | (2) | ||||||||||||||
|
Capitalized servicing rights
(3)
|
60 | 51 | 9 | ||||||||||||||
| Total net gain on mortgage loans held for sale | 76 | 69 | 7 | ||||||||||||||
| Total revenues | 92 | 80 | 12 | ||||||||||||||
| Expenses | |||||||||||||||||
| Salaries, wages and benefits | 34 | 34 | — | ||||||||||||||
| General and administrative | |||||||||||||||||
| Loan origination expenses | 10 | 7 | 3 | ||||||||||||||
| Corporate and other general administrative expenses | 9 | 9 | — | ||||||||||||||
| Marketing and professional service fees | 8 | 4 | 4 | ||||||||||||||
| Depreciation and amortization | 1 | 2 | (1) | ||||||||||||||
| Total general and administrative | 28 | 22 | 6 | ||||||||||||||
| Total expenses | 62 | 56 | 6 | ||||||||||||||
| Other income (expenses) | |||||||||||||||||
| Interest income | 12 | 6 | 6 | ||||||||||||||
| Interest expense | (10) | (7) | (3) | ||||||||||||||
| Total other income (expenses), net | 2 | (1) | 3 | ||||||||||||||
| Income before income tax expense | $ | 32 | $ | 23 | $ | 9 | |||||||||||
| Weighted average note rate - mortgage loans held for sale | 7.9 | % | 6.1 | % | 1.8 | % | |||||||||||
| Weighted average cost of funds - warehouse facilities (excluding facility fees) | 7.0 | % | 6.3 | % | 0.7 | % | |||||||||||
(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.
38
|
Table 12. Originations - Key Metrics
|
||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Key Metrics | |||||||||||||||||
|
DTC locked PTA volume
(1)
|
$ | 1,476 | $ | 1,457 | $ | 19 | |||||||||||
|
Correspondent locked PTA volume
(1)
|
1,537 | 1,588 | (51) | ||||||||||||||
| Total PTA lock volume | $ | 3,013 | $ | 3,045 | $ | (32) | |||||||||||
| DTC funded volume | $ | 1,340 | $ | 1,396 | $ | (56) | |||||||||||
| Correspondent funded volume | 1,538 | 1,343 | 195 | ||||||||||||||
|
Total funded volume
(2)
|
$ | 2,878 | $ | 2,739 | $ | 139 | |||||||||||
| DTC volume of loans sold | $ | 1,567 | $ | 1,393 | $ | 174 | |||||||||||
| Correspondent volume of loans sold | 1,223 | 1,296 | (73) | ||||||||||||||
| Volume of Originations loans sold | $ | 2,790 | $ | 2,689 | $ | 101 | |||||||||||
|
Recapture percentage
(3)
|
23.9% | 24.3% | (0.4)% | ||||||||||||||
|
Refinance recapture percentage
(4)
|
70.3% | 75.8% | (5.5)% | ||||||||||||||
| Purchase as a percentage of funded volume | 54.8% | 52.4% | 2.4% | ||||||||||||||
| Value of capitalized servicing on retained settlements | 232 bps | 214 bps | 18 bps | ||||||||||||||
| Originations Margin | |||||||||||||||||
| Revenue | $ | 92 | $ | 80 | $ | 12 | |||||||||||
| PTA lock volume | $ | 3,013 | $ | 3,045 | $ | (32) | |||||||||||
|
Revenue as a percentage of PTA lock volume
(5)
|
3.05 | % | 2.63 | % | 0.42 | % | |||||||||||
|
Expenses
(6)
|
$ | 60 | $ | 57 | $ | 3 | |||||||||||
| Funded volume | $ | 2,878 | $ | 2,739 | $ | 139 | |||||||||||
|
Expenses as a percentage of funded volume
(7)
|
2.08 | % | 2.08% | — | % | ||||||||||||
| Originations Margin | 0.97 | % | 0.55 | % | 0.42 | % | |||||||||||
(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 increased during the three months ended March 31, 2024 compared to 2023 primarily driven by shift in product mix from conventional to government product in 2024.
39
Originations Segment Expenses
Total expenses during the three months ended March 31, 2024 increased when compared to 2023 primarily due to an increase in marketing and professional service fees, and loan origination expenses. Marketing and professional service fees increased in 2024 primarily due to an increase in advertising related costs. The increase in loan origination expenses in 2024 was primarily driven by higher industry-wide credit costs.
Originations Segment Other Income (Expenses), 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 income (expenses), net, during the three months ended March 31, 2024, as compared to 2023, as both interest income and interest expense increased under the rising interest rate environment, resulting in immaterial changes for total other income (expenses), net.
Originations Margin
The Originations Margin for the three months ended March 31, 2024 increased, as compared to 2023, primarily due to reduced interest rate volatility and higher margins resulting from a shift in product mix from lower margin conventional to higher margin government product.
| 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 March 31, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Corporate/Other - Operations | |||||||||||||||||
| Total revenues | $ | 22 | $ | 19 | $ | 3 | |||||||||||
| Total expenses | 70 | 52 | 18 | ||||||||||||||
| Interest expense | 62 | 40 | 22 | ||||||||||||||
| Other income (expense), net | (3) | (9) | 6 | ||||||||||||||
| Key Metrics | |||||||||||||||||
| Average exchange inventory under management | 28,371 | 25,631 | 2,740 | ||||||||||||||
Total revenues increased during the three months ended March 31, 2024, as compared to 2023, primarily due to an increase in fees earned from Xome Exchange primarily driven by an increase in exchange related sales transactions. Total expenses increased during the three months ended March 31, 2024, as compared to 2023, primarily due to an increase in salaries, wages and benefits, an increase in operating expenses related to Roosevelt, which was acquired in the third quarter of 2023, and higher Xome exchange operating expenses in 2024. The increase in interest expense during the three months ended March 31, 2024, as compared to 2023, was primarily due to the issuance of the 2032 unsecured senior notes in February 2024. For further discussion, refer to
Note 9, Indebtedness
, in the Notes to the Condensed Consolidated Financial Statements.
40
|
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 $578 as of March 31, 2024 compared to $571 as of December 31, 2023. During the three months ended March 31, 2024, we generated net cash of $28 from operating activities. We have sufficient borrowing capacity to support our operations. As of March 31, 2024, total available borrowing capacity for advance, warehouse, and MSR facilities was $11,201, of which $2,743 was collateralized and immediately available to draw. Additionally, on February 1, 2024, we completed an offering of $1,000 7.125% unsecured senior notes due 2032. We repaid a portion of the amounts outstanding on our MSR facilities with the net proceeds of the offering. For more information on our advance, warehouse, and MSR facilities, see
Note 13, Indebtedness
, in the Notes to the Condensed Consolidated Financial Statements.
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, 2023.
Cash Flows
The table below presents cash flows information:
|
Table 14. Cash Flows
|
||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Net cash attributable to: | |||||||||||||||||
| Operating activities | $ | 28 | $ | 160 | $ | (132) | |||||||||||
| Investing activities | (715) | (107) | (608) | ||||||||||||||
|
Financing activities
|
682 | (88) | 770 | ||||||||||||||
|
Net decrease in cash, cash equivalents, and restricted cash
|
$ | (5) | $ | (35) | $ | 30 | |||||||||||
Operating activities
Cash generated from operating activities decreased to $28 during the three months ended March 31, 2024 from $160 in 2023. The decrease is primarily due to an increase of $164 in cash used for the repurchase of loan assets out of Ginnie Mae securitizations, partially offset by an increase of $82 in cash generated from originations net sales activities.
Investing activities
Cash used in investing activities increased to $715 during the three months ended March 31, 2024 from $107 in 2023. The increase was primarily due to additional $626 in cash used for the purchase of mortgage servicing rights in 2024.
Financing activities
Our financing activities generated cash of $682 during the three months ended March 31, 2024 compared to cash used of $88 in 2023. The change was primarily due to an increase in cash generated of $1,000 from the issuance of the 2032 unsecured senior note in 2024, partially offset by cash used for net paydown of $215 in 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.
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 acquisition of Roosevelt. As of March 31, 2024, we were in compliance with our required financial covenants.
41
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:
i.
Residential first lien mortgages held for sale, at lower of cost or market
ii.
Residential first lien mortgages held for sale, at fair value, plus
iii.
UPB of interest rate lock commitments after fallout adjustments
◦
Supplemental liquidity at all time equal to or exceeding the sum of:
i.
2 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for the Enterprises, plus
ii.
5 basis points of the sellers/servicer’s residential mortgage servicing UPB serviced for Ginnie Mae
•
Ginnie Mae – the greater of $1 or the sum of:
◦
10 basis points of the issuer’s outstanding Ginnie Mae single-family servicing UPB, plus
◦
3.5 basis points of the issuer’s outstanding Enterprises single family servicing UPB, if the issuer remits (or the Enterprise draws) the principal and interest only as actually collected from the borrower, plus
◦
7 basis points of the Issuer’s outstanding Enterprises single-family servicing UPB, if the issuer remits (or the Enterprise draws) the principal or interest, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
◦
3.5 basis points of the issuer’s outstanding non-agency single-family servicing UPB.
•
Ginnie Mae - issuers that originated more than $1 billion in UPB of any residential first mortgage in the recent four-quarter period must have liquid assets equal to the greater of at least $1 or the sum of the points listed immediately above, plus:
◦
50 basis points of loans held for sale, plus
◦
50 basis points of the issuer’s UPB of IRLCs after fallout adjustments
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%.
Capital and Liquidity Plan
•
FHFA – Require annual capital and liquidity plan that includes MSR stress tests as part of the plan.
42
As of March 31, 2024, 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 2024, as summarized below. The Company is currently evaluating the impact of the revised requirements.
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 14, Capital Requirements,
in the Notes to the Condensed Consolidated Financial Statements for additional information.
|
Table 15. Debt
|
||||||||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| Advance facilities principal amount | $ | 650 | $ | 682 | |||||||
| Warehouse facilities principal amount | 958 | 822 | |||||||||
| MSR facilities principal amount | 2,495 | 2,814 | |||||||||
| Unsecured senior notes principal amount | 4,200 | 3,200 | |||||||||
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As of March 31, 2024, we had a total borrowing capacity of $950, of which we could borrow an additional $285.
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 March 31, 2024
, we had a total borrowing capacity of $4,801 and $5,500 for warehouse and MSR facilities, of which we could borrow an additional $3,808 and $3,005, respectively.
Unsecured Senior Notes
In 2021, 2022 and 2023, we completed offerings of unsecured senior notes with maturity dates ranging from 2026 to 2031. In connection with the acquisition of Home Point in the third quarter of 2023, we assumed an unsecured senior note with a maturity date in 2026.
In February 2024, we completed an offering of $1,000 unsecured senior notes due in 2032.
We pay interest semi-annually to the holders of these notes at interest rates ranging from
5.000%
to
7.125%
.
For more information regarding our indebtedness, see
Note 9, Indebtedness
, in the Notes to the Condensed Consolidated Financial Statements.
Contractual Obligations
As of March 31, 2024, 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, 2023.
43
| 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 13, 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, 2023. There have been no material changes to our critical accounting policies and estimates since December 31, 2023.
| Other Matters | ||||||||||||||
Recent Accounting Developments
Below provides recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker included within each reported measure of segment profit or loss and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. We are currently evaluating the impact this ASU may have on our financial statement disclosures. The Company does not expect ASU 2023-07 to have a material impact on our condensed consolidated financial statements.
Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information for income taxes paid by jurisdiction. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. We are currently evaluating the impact this ASU may have on our financial statement disclosures. The Company does not expect ASU 2023-09 to have a material impact on our condensed consolidated financial statements.
44
GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility.
A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency.
Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (and collectively, the “
Agencies
”).
Agency Conforming Loan.
A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
Asset-Backed Securities (“ABS”).
A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases.
MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee.
The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Client.
Owner of the underlying mortgage servicing rights on behalf of whom we service loans.
Conventional Mortgage Loans.
A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship.
A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Customer.
Residential mortgage borrower.
Delinquent Loan.
A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”).
The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations (“DTC”).
A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees.
In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread.
MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Excess Yield.
The remaining servicing fees above the minimum servicing fee (“GSE Base Servicing Fee”), as defined by the agencies, whereby the rights to the excess fees are separated, securitized by the GSE’s and sold, while we retain the obligation to service the loan and therefore continue to receive the GSE Base Servicing Fee.
Exchange inventory
. Consists of Xome’s real estate inventory ranging from pre-foreclosure to bank-owned properties.
45
Federal National Mortgage Association (“Fannie Mae” or “FNMA”).
FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.
Federal Housing Administration (“FHA”).
The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (“FHFA”).
A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).
Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Forbearance.
An agreement between the mortgage servicer or lender and borrower for a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”).
GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”).
Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Interest Rate Lock Commitments (“IRLC”).
Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Investors.
Our investors include agency investors and non-agency investors. Agency investors primarily consist of Government National Mortgage Association (“Ginnie Mae” or “GNMA”) and the GSEs, Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”). Non-agency investors consist of investors in private-label securitizations.
Loan Modification.
Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”).
The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period.
A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation.
The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (“MBS”).
A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (“MSRs”).
The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to more than adequately compensate the servicer for performing the servicing.
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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 (“PLS”).
Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Pull-through adjusted (“PTA”) 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.
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Servicing Advances.
In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I Advances, T&I Advances and Corporate Advances.
(i) P&I Advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I Advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate Advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing Advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Servicing Fee.
A servicing fee is the percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, collecting, and making escrow payments, passing principal and interest payments along to the note holder.
Subservicing.
Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”).
The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”).
The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility.
A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
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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, 2023. There have been no material changes in the types of market risks faced by us since December 31, 2023.
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 March 31, 2024 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.
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The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of March 31, 2024 given hypothetical instantaneous parallel shifts in the yield curve. Actual results could differ materially.
|
Table 16. Change in Fair Value
|
||||||||||||||
| March 31, 2024 | |||||||||||
| Down 25 bps | Up 25 bps | ||||||||||
| Increase (decrease) in assets | |||||||||||
| Mortgage servicing rights at fair value | $ | (134) | $ | 120 | |||||||
| Mortgage loans held for sale at fair value | 3 | (3) | |||||||||
| Derivative financial instruments: | |||||||||||
| Interest rate lock commitments | 5 | (5) | |||||||||
| Forward MBS trades | 155 | (164) | |||||||||
| Treasury futures | 68 | (67) | |||||||||
| Total change in assets | 97 | (119) | |||||||||
| Increase (decrease) in liabilities | |||||||||||
| Mortgage servicing rights financing at fair value | (2) | 2 | |||||||||
| Excess spread financing at fair value | (3) | 2 | |||||||||
| Derivative financial instruments: | |||||||||||
| Interest rate lock commitments | (1) | 1 | |||||||||
| Forward MBS trades | 117 | (125) | |||||||||
| Treasury futures | 2 | (2) | |||||||||
| Total change in liabilities | 113 | (122) | |||||||||
| Total, net change | $ | (16) | $ | 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 March 31, 2024.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, 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 March 31, 2024, 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 15, 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, 2023.
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 March 31, 2024, $98 million of common stock remain available for repurchase. During the three months ended March 31, 2024, we repurchased shares of our common stock at a total cost of $39 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) | ||||||||||||||||||||||
| January 2024 | — | $ | — | — | $ | 137 | ||||||||||||||||||||
| February 2024 | 226 | $ | 73.01 | 226 | $ | 121 | ||||||||||||||||||||
| March 2024 | 311 | $ | 72.33 | 311 | $ | 98 | ||||||||||||||||||||
| Total | 537 | 537 | ||||||||||||||||||||||||
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
None.
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Item 6.
Exhibits
| Incorporated by Reference | ||||||||||||||||||||
|
Exhibit
Number |
Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith | ||||||||||||||
| 10.1 | X | |||||||||||||||||||
| 10.2 | X | |||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1 | X | |||||||||||||||||||
| 32.2 | X | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | X | ||||||||||||||||||
+ 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. | ||||||||
| April 24, 2024 | /s/ Jay Bray | |||||||
| Date |
Jay Bray
Chief Executive Officer (Principal Executive Officer) |
|||||||
| April 24, 2024 | /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 13, Fair Value MeasurementsprintNote 2, Significant Accounting PoliciesprintNote 9, IndebtednessprintNote 8, Derivative Financial InstrumentsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintNote 16, Segment InformationprintNote 3, Mortgage Servicing Rights and Related LiabilitiesprintNote 13, IndebtednessprintNote 14, Capital Requirements,printItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintNote 15, 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