UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20182020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35000
Walker&Dunlop, Inc.
(Exact name of registrant as specified in its charter)
Maryland | | 80-0629925 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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7501 Wisconsin Avenue, Suite 1200E | | |
Bethesda, Maryland | | 20814 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (301) (301) 215-5500
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common | | WD | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large |
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Emerging |
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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. ◻☐
Indicate by a check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $1.1$1.0 billion as of the end of the Registrant’s second fiscal quarter (based on the closing price for the common stock on the New York Stock Exchange on June 30, 2018)2020). The Registrant has no non-voting common equity.
As of January 31, 2019,2021, there were 30,259,28231,537,491 total shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Walker & Dunlop, Inc. with respect to its 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to April 30, 20192021 are incorporated by reference into Part III of this report.
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Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K of Walker & Dunlop, Inc. and subsidiaries (the “Company,” “Walker & Dunlop,” “we,” or “us”), may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions.
The forward-looking statements contained in this Annual Report on Form 10-K reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. Statements regarding the following subjects, among others, may be forward looking:
| the future of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), including their existence, relationship to the U.S. federal government, origination capacities, and their impact on our business; |
| the general volatility and global economic disruption caused by the spread of the COVID-19 pandemic (“COVID-19 Crisis” or “Crisis”) and its expected impact on our business operations, financial results and cash flows and liquidity, including due to our principal and interest advance obligations on the Fannie Mae and Government National Mortgage Association (“Ginnie Mae”) loans we service; |
● | changes to and trends in the interest rate environment and its impact on our business; |
| our growth strategy; |
| our projected financial condition, liquidity, and results of operations; |
| our ability to obtain and maintain warehouse and other loan-funding arrangements; |
| our ability to make future dividend payments or repurchase shares of our common stock; |
| availability of and our ability to attract and retain qualified personnel and our ability to develop and retain relationships with borrowers, key principals, and lenders; |
| degree and nature of our competition; |
| changes in governmental regulations and policies, tax laws and rates, and similar matters and the impact of such regulations, policies, and actions; |
| our ability to comply with the laws, rules, and regulations applicable to us; |
| trends in the commercial real estate finance market, commercial real estate values, the credit and capital markets, or the general economy, including demand for multifamily housing and rent growth; and |
| general volatility of the capital markets and the market price of our common stock. |
While forward-looking statements reflect our good-faith projections, assumptions, and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see “Risk Factors.”
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Item 1. BusinessBusiness
General
General
We are one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending.lending, debt brokerage, and property sales. We have been in business for more than 80 years; a Fannie Mae Delegated Underwriting and Servicing™ (“DUS”) lender since 1988, when the DUS program began; a lender with the Government National Mortgage Association (“Ginnie Mae”)Mae and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”) since acquiring a HUD license in 2009; and a Freddie Mac Multifamily Approved Seller/Servicerapproved seller/servicer for Conventional Loans (“Freddie Mac seller/servicer”) since 2009. We originate,
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sell, and service a range of multifamily and other commercial real estate financing products, provide multifamily investmentproperty sales brokerage and appraisal services, and engage in commercial real estate investment management activities. Our clients are owners and developers of multifamily properties and other commercial real estate across the country.country, some of whom are the largest owners and developers in the industry. We originate and sell multifamily loans through the programs of Fannie Mae, Freddie Mac, and HUD (collectively, the “Agencies”). We retain servicing rights and asset management responsibilities on substantially all loans that we originate for the Agencies’ programs. We are approved as a Fannie Mae DUS lender nationally, aan approved Freddie Mac seller/servicer nationally, a Multifamily Optigo® Seller/Servicer (“Freddie Mac targeted affordable housing seller/servicer,lender”) nationally for Conventional, Seniors Housing, Targeted Affordable Housing, and small balance loans, a HUD Multifamily Accelerated Processing (“MAP”) lender nationally, a HUD Section 232 LEAN (“LEAN”) lender nationally, and a Ginnie Mae issuer. We broker, and occasionally service, loans for several life insurance companies, commercial banks, commercial mortgage backed securities (“CMBS”) issuers, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker. We also underwrite, service, and asset-manage interim loans. Most of these interim loans are closed through a joint venture. Those interim loans not closed by the joint venture are originated by us and held for investment and included on our balance sheet.sheet as loans held for investment.
Walker & Dunlop, Inc. is a holding company. We conduct the majority of our operations through Walker & Dunlop LLC, our operating company.
Our Product and Service Offerings
Our product offerings include a range of multifamily and other commercial real estate financing products, including Multifamily Finance, FHA Finance, Capital Markets,Agency Lending, Debt Brokerage, Principal Lending and Bridge Financing.Investing, and Property Sales. We offer a broad range of commercial real estate finance products to our customers, including first mortgage, second trust, supplemental, construction, mezzanine, preferred equity, small-balance, and bridge/interim loans. Our long-established relationships with the Agencies and institutional investors enable us to offer this broad range of loan products and services. We also provide investmentproperty sales brokerage services to owners and developers of multifamily properties and commercial real estate investment management services for various investors. Through a joint venture, we also provide multifamily property appraisals. Each of our product offerings is designed to maximize our ability to meet client needs, source capital, and grow our commercial real estate finance business.
Agency Lending
The sale of each loan through the Agencies’ programs is negotiated prior to rate locking the loan with the borrower. For loans originated pursuant to the Fannie Mae DUS program, we generally are required to share the risk of loss, with our maximum loss capped at 20% of the loan amount at origination. In addition to our risk-sharing obligations, we may be obligated to repurchase loans that are originated for the Agencies’ programs if certain representations and warranties that we provide in connection with such originations are breached. We have never been required to repurchase a loan. We have established a strong credit culture over decades of originating loans and are committed to disciplined risk management from the initial underwriting stage through loan payoff.
Multifamily Finance
We are one of 2523 approved lenders that participate in Fannie Mae’s DUS program for multifamily, manufactured housing communities, student housing, affordable housing, and certain seniors housing properties. Under the Fannie Mae DUS program, Fannie Mae has delegated to us responsibility for ensuring that the loans we originate under the Fannie Mae DUS program satisfy the underwriting and other eligibility requirements established from time to time by Fannie Mae. In exchange for this delegation of authority, we share risk for a portion of the losses that may result from a borrower's default. For loans originated pursuant to the Fannie Mae DUS program, we generally are required to share the risk of loss, with our maximum loss capped at 20% of the loan amount at origination, except for rare instances when we negotiate a cap that may be higher or lower for loans with unique attributes. For more information regarding our risk-sharing agreements with Fannie Mae, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Quality and Allowance for Risk-Sharing Obligations” below. Most of the Fannie Mae loans that we originate are sold in the form of a Fannie Mae-guaranteed security to third-party investors. Fannie Mae contracts us to service and asset-manage all loans that we originate under the Fannie Mae DUS program.
We are one of 2521 lenders approved as a Freddie Mac seller/servicer,lender, where we originate and sell to Freddie Mac multifamily, manufactured housing communities, student housing, affordable housing, and seniors housing loans and small balance loans that satisfy Freddie Mac'sMac’s underwriting and other eligibility requirements. Under Freddie Mac’s programs, we submit our completed loan underwriting package to Freddie Mac and obtain its commitment to purchase the loan at a specified price after
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closing. Freddie Mac ultimately performs its own underwriting of loans that we sell to it. Freddie Mac may choose to hold, sell, or later securitize such loans. We very rarely have any risk-sharing arrangements on loans we sell to Freddie Mac under its program. Freddie Mac contracts us to service and asset-manage all loans that we originate under its program. During 2018, Freddie Mac designated us as one of a select few lenders that is an approved seller/servicer of conventional loans nationally.
Under certain limited circumstances, we may make preferred equity investments in entities controlled by certain of our borrowers that will assist those borrowers in acquiring and repositioning properties. The terms of such investments are negotiated with each investment.
FHA Finance
As an approved HUD MAP and HUD LEAN lender and Ginnie Mae issuer, we provide construction and permanent loans to developers and owners of multifamily housing, affordable housing, seniors housing, and healthcare facilities. We submit our completed loan underwriting
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package to HUD and obtain HUD's approval to originate the loan. We service and asset-manage all loans originated through HUD’s various programs.
HUD-insured loans are typically placed in single loan pools which back Ginnie Mae securities. Ginnie Mae is a United States government corporation in the United States Department of Housing and Urban Development. Ginnie Mae securities are backed by the full faith and credit of the United States, and we very rarely bear any risk of loss on Ginnie Mae securities. In the event of a default on a HUD-insured loan, HUD will reimburse approximately 99% of any losses of principal and interest on the loan, and Ginnie Mae will reimburse the remaining losses. We are obligated to continue to advance principal and interest payments and tax and insurance escrow amounts on Ginnie Mae securities until the Ginnie Mae securities are fully paid.
We may be obligated to repurchase loans that are originated for the Agencies’ programs if certain representations and warranties that we provide in connection with such originations are breached. We have never been required to repurchase a loan.
Capital MarketsDebt Brokerage
We serve as an intermediary in the placement of commercial real estate debt between institutional sources of capital, such as life insurance companies, investment banks, commercial banks, pension funds, CMBS issuers, and other institutional investors, and owners of all types of commercial real estate. A client seeking to finance or refinance a property will seek our assistance in developing different alternativesfinancing solutions and soliciting interest from various sources of capital. We often advise on capital structure, develop the financing package, facilitate negotiations between our client and institutional sources of capital, coordinate due diligence, and assist in closing the transaction. In these instances, we act as a loan broker and do not underwrite or originate the loan and do not retain any interest in the loan. WeFor those brokered loans that we service, some of thesewe collect ongoing servicing fees while those loans remain in our servicing portfolio. The servicing fees we typically earn on brokered loan transactions are substantially lower than the servicing fees we earn for servicing Agency loans.
Over the past five years, the Company has invested approximately $78.2$129.8 million to acquire certain assets and assume certain liabilities of four capital marketssix debt brokerage companies. These acquisitions, along with our recruiting efforts, have expanded our network of loan originators,brokers, broadened our geographical reach, and provided further diversification to our origination platform.
Principal Lending and Investing
Bridge Financing
We currentlyOur “Interim Program” is composed of the loans held by the Interim Program JV and the Interim Loan Program, as described below. Through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., we offer bridgeshort-term, senior secured debt financing to our borrowers through interim loans and preferred equity investments. The interim loansproducts that provide floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing (the “Interim Program”). We underwrite, service, and asset-manage all loans executed through the Interim Program. The ultimate goal of the Interim Program is to provide permanent Agency financing on these transitional properties. The Interim Program has two distinct executions: Interim Program JV loans and loans held for investment.
Interim Program JV Loans
During the second quarter of 2017, we formed a joint venture with an affiliate of Blackstone Mortgage Trust, Inc.
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to originate, hold, and finance loans that meet the criteria of the Interim Program (the “Interim Program JV” or the “joint venture”). The Interim Program JV assumes full riskjoint venture funds its operations using a combination of loss while the loans it originates are outstanding.equity contributions from its owners and third-party credit facilities. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations usingInterim Program JV assumes full risk of loss while the loans it originates are outstanding, while we assume risk commensurate with our 15% ownership interest.
Using a combination of equity contributions from its ownersour own capital and third-party credit facilities.
Loans Held for Investment
warehouse debt financing, we separately offer interim loans that do not meet the criteria of the Interim Program JV (the “Interim Loan Program”). We underwrite, service, and asset-manage all loans executed through the Interim Loan Program. We originate and hold some interimthese Interim Loan Program loans for investment, which are included on our balance sheet. Duringsheet, and during the time that these loans are outstanding, we assume the full risk of loss. We have not experienced any delinquencies or charged off any loans originated and held for investment under The ultimate goal of the Interim Program. PriorLoan Program is to June 30, 2017, all loans originated through the Interim Program were held for investment. Many of the loans originated since the formation of the joint venture have been Interim Program JV loans. As of December 31, 2018, we had 14 loans held for investment under the Interim Program with an aggregate outstanding unpaid principal balance of $503.5 million.provide permanent Agency financing on these transitional properties.
Preferred Equity Investments
Under certain limited circumstances, we may make preferred equity investments in entities controlled by certain of our borrowers that will assist those borrowers to acquire and reposition multifamily properties. These borrowers are large, experienced, and well-capitalized and have a well-established relationship with us. The terms of such investments are negotiated with each transaction.investment. We fund these preferred equity investments with our own capital and hold the investments until maturity, during which time we assume the full risk of loss. There were no preferred equity investments outstanding as of December 31, 2020.
During the second quarter of 2018, the Company acquired JCR Capital Investment Sales Brokerage Services
In 2015, we completed our purchase of 75% of certain assetsCorporation and the assumption of certain liabilities of Engler Financial Group, LLC (“EFG”) and contributed the net assets purchased from EFG to a newly formed subsidiary,subsidiaries, now known as Walker & Dunlop Investment Sales, LLCPartners, Inc. (“WDIS”WDIP”), through which we conductthe operator of a private commercial real estate investment adviser focused on the management of debt, preferred equity, and mezzanine equity investments in middle-market commercial real estate funds. The acquisition of WDIP, a wholly owned subsidiary of the Company, is part of our strategy to grow and diversify our operations by growing our investment sales operations. The acquisition allowed usmanagement platform. WDIP’s current assets under management (“AUM”) of $1.3 billion primarily consist of four sources: Fund III, Fund IV and Fund V (collectively, the “Funds”), and separate accounts managed for life insurance companies. AUM for the Funds consists of both unfunded
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commitments and funded investments, and AUM for the separate accounts consist entirely of funded investments. Unfunded commitments are highest during the fund raising and investment phases. WDIP receives management fees based on both unfunded commitments and funded investments. Additionally, with respect to begin offering investmentthe Funds, WDIP receives a percentage of the return above the fund return hurdle rate specified in the fund agreements.
Property Sales
We offer property sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties. Weproperties through our wholly owned subsidiary Walker & Dunlop Investment Sales, LLC (“WDIS”). Through these property sales brokerage services, we seek to maximize proceeds and certainty of closure for our clients using our knowledge of the commercial real estate and capital markets and relying on our experienced transaction professionals. We receive a sales commission for brokering the experiencesale of these multifamily assets on behalf of our transaction professionals. clients. Our investmentproperty sales brokerage services are offered in various regions throughout the United States. We have added several investment sales brokerage teams over the past few years and continue to seek to add other investment sales brokers, with the goal of expanding these brokerage services to cover all major regions throughout the United States.
We consolidate the activities of WDIS and present the portion of WDIS that we do not control as Noncontrolling interests in the Consolidated Balance Sheets and Net income from noncontrolling interests in the Consolidated Statements of Income.Appraisal Services
Investment Management
During the second quarter of 2018,2019, we formed a joint venture branded Apprise by Walker & Dunlop with an international technology services company to offer automated multifamily appraisal services (“Appraisal JV”). The Appraisal JV leverages technology and data science to dramatically improve the Company acquired JCR Capital Investment Corporation (“JCR”), an operator, registered investment adviser,consistency, transparency, and general partnerspeed of privatemultifamily appraisals in the U.S. through the licensing of our partner’s technology and leveraging of our expertise in the commercial real estate industry. We own a 50% interest in the Appraisal JV and account for the interest as an equity-method investment. The operations of the Appraisal JV for the year ended December 31, 2020 and our investment funds focused onin the management of debt, preferred equity, and mezzanine equity investments in private middle-market commercial real estate funds. JCR is also a registered investment adviser to several insurance company separate accounts for which it originates, underwrites, and asset-manages bridge and permanent loans catering to middle market operators. Investors in JCR’s funds include public pension plans, insurance companies, foundations, fund-of-funds, and wealthy individuals. JCR has closed four funds since its founding in 2006 and raised $745.9 million of capital through those funds. Two of those funds are still operating with assets totaling $571.8 millionAppraisal JV as of December 31, 2018, all of which are managed by JCR.2020 were immaterial.
The acquisition of JCR, a wholly owned subsidiary of the Company, is part of our strategy to grow and diversify the Company by growing our investment management platform. Prior to the JCR acquisition, our investment management activities were limited.
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Direct Loan Originators and Correspondent Network
We originate loans directly through loan originators operating out of 29 offices nationwide. At December 31, 2018, we employed 164 loan originators and investment sales brokers. These individuals have deep knowledge of the commercial real estate lending business and bring with them extensive relationships with some of the largest property owners in the country. They have a thorough understanding of the financial needs and objectives of borrowers, the geographic markets in which they operate, market conditions specific to different types of commercial properties, and how to structure a loan product to meet their borrowers’ needs. These loan originators collect and analyze financial and property information, assist the borrower in submitting information required to complete a loan application and, ultimately, help the borrower close the loan. Our loan originators are paid a salary and commissions based on the fees associated with the loans that they originate.
In addition to our group of loan originators, at December 31, 2018,2020, we had correspondent agreements with 2623 independently owned mortgage bankingloan originating companies across the country with which we have relationships for Agency loan originations. This network of correspondents helps us extend our geographic reach into new and/or smaller markets on a cost-effective basis. In addition to identifying potential borrowers and key principal(s) (the individual or individuals directing the activities of the borrowing entity), our correspondents assist us in evaluating loans, including pre-screening the borrowers, key principal(s), and properties for program eligibility, coordinating due diligence, and generally providing market intelligence. In exchange for providing these services, the correspondent earns an origination fee based on a percentage of the principal amount of the financing arranged and in some cases a fee paid out over time based on the servicing revenues earned over the life of the loan.
Underwriting and Risk Management
We use several toolstechniques to manage our Fannie Mae risk-sharing exposure. These toolstechniques include an underwriting and approval process that is independent of the loan originator; evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals; limiting our geographic, borrower, and key principal exposures; and using modified risk-sharing under the Fannie Mae DUS program. Similar toolstechniques are used to manage our exposure to credit loss on loans originated under the Interim Program.
Our underwriting process begins with a review of suitability for our investors and a detailed review of the borrower, key principal(s), and the property. We review the borrower's financial statements for minimum net worth and liquidity requirements and obtain credit and criminal background checks. We also review the borrower's and key principal(s)’s operating track records, including evaluating the performance of other properties owned by the borrower and key principal(s). We also consider the borrower's and key principal(s)’s bankruptcy and foreclosure history. We believe that lending to borrowers and key principal(s)principals with proven track records as operators mitigates our credit risk.
We review the fundamental value and credit profile of the underlying property, including an analysis of regional economic trends, appraisals of the property, site visits, and reviews of historical and prospective financials. Third-party vendors are engaged for appraisals, engineering reports, environmental reports, flood certification reports, zoning reports, and credit reports. We utilize a list of approved third-party vendors for these reports. Each report is reviewed by our underwriting team for accuracy, quality, and comprehensiveness. All third-party vendors are reviewed periodically for the quality of their work and are removed from our list of approved vendors if the quality or timeliness of the reports is below our standards. This is particularly true for engineering and environmental reports on which we rely to make decisions regarding ongoing replacement reserves and environmental matters.
Fannie Mae’s counterparty risk policies require a full risk-sharing cap for individual In addition, we have concentration limits with respect to our Fannie Mae loans. We limit geographic concentration, focusing on regional employment concentration and trends. We also limit the aggregate amount of loans subject to full risk-sharing for any one borrower. loans, whichloans. Our full risk-sharing is currently set at $200.0limited to loans up to $200 million, for us. Our full-risk sharing cap was increased by Fannie Mae in the second quarter of 2018 from $60.0 millionwhich equates to the current level of $200.0 million. Accordingly, oura maximum loss exposure on
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any one loan is $40.0$40 million (such exposure would occur ifin the event that the underlying
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collateral is determined to be completely without value at the time of loss). However,For loans in excess of $200 million, we receive modified risk-sharing. We also may request modified risk-sharing at the time of origination on loans below $200 million, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fairlyfully compensated for the risks of the transaction. transactions. The full risk-sharing limit in prior years was less than $200 million. Accordingly, loans originated in those prior years were subject to risk-sharing at much lower levels. We also monitor geographic and borrower concentrations in the portfolio as a way to further manage our credit risk.
Servicing and Asset Management
We service nearly all loans we originate for the Agencies and our Interim Program and some of the loans we broker for institutional investors, primarily life insurance companies. We may also occasionally leverage the scale of our servicing operation by acquiring the rights to service and asset-manage loans originated by others through direct portfolio acquisitions or entity acquisitions. We are an approved servicer for Fannie Mae, Freddie Mac, and HUD loans. We are currently a rated primary servicer with Fitch Ratings. Our servicing function includes loan servicing and asset management activities, performing or overseeing the following activities:
| carrying out all cashiering functions relating to the loan, including providing monthly billing statements to the borrower and collecting and applying payments on the loan; |
| administering reserve and escrow funds for repairs, tenant improvements, taxes, and insurance; |
| obtaining and analyzing financial statements of the borrower and performing periodic property inspections; |
| preparing and providing periodic reports and remittances to the GSEs, investors, master servicers, or other designated persons; |
| administering lien filings; and |
| performing other tasks and obligations that are delegated to us. |
Life insurance companies, whose loans we may service, may perform some or all of the activities identified in the list above. We outsource some of our servicing activities to a subservicer.
For most loans we service under the Fannie Mae DUS program, during periods of payment delinquency and default and while the loan is in forbearance, we are currently required to advance the principal and interest payments and tax and insurance escrow amounts for four months. We are reimbursed by Fannie Mae for these advances.
Under the HUD program, we are obligated to advance tax and insurance escrow amounts and principal and interest payments on the Ginnie Mae securities until the Ginnie Mae security is fully paid. In the event of a default on a HUD-insured loan, we can elect to assign the loan to HUD and file a mortgage insurance claim. HUD will reimburse approximately 99% of any losses of principal and interest on the loan, and Ginnie Mae will reimburse substantially all of the remaining losses. In cases where we elect to not assign the loan to HUD, we attempt to mitigate losses to HUD by assisting the borrower to obtain a modification to the loan that will improve the borrower’s likelihood of future performance.
Our Growth Strategy
We believe we are positioned to continue growing and diversifying our business by taking advantage of opportunities in the commercial real estate finance and services market. In 2016, the Company implemented a strategy to reach at least $1 billion of total annual revenues by the end of 2020 by accomplishing the following milestones: (i) at least $30 to $35 billion of annual loan originationdebt financing volume, (ii) annual investmentproperty sales volume of at least $8 to $10 billion, (iii) an unpaid principal balance of at least $100 billion in our servicing portfolio, and (iv) at least $8 to $10 billion of assets under management. To reach theseIn 2020, we achieved the annual revenue goal, with total revenues of $1.1 billion for the year ended December 31, 2020. We also achieved two of the milestones with $35.0 billion of debt financing volume for the year ended December 31, 2020 and a servicing portfolio of $107.2 billion as of December 31, 2020. Our property sales volume was $6.1 billion for the year ended December 31, 2020, a record for us, but short of the goal as investment sales activity was significantly impacted by the COVID-19 Crisis. Our assets under management were $1.8 billion as of December 31, 2020, as this part of our business was the least developed when we will focus onimplemented our strategy and our entry with the following areas:acquisition of WDIP did not occur until 2018.
We believe our success in achieving our 2020 goal of $1 billion in revenues positions us to continue growing and diversifying our business by leveraging our people, brand and technology. In the fourth quarter of 2020, we set new long-term goals to accomplish by the end of 2025 that include:
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If we are successful in achieving all or most of the growth objectives noted above, we believe we can achieve the financial milestones by the end of 2020, generating at least $1 billion of annual revenues.Competition
Competition
We compete in the commercial real estate services industry. We are one of 25 approved lenders that participate in Fannie Mae’s DUS program and one of 25 lenders approved as a Freddie Mac seller/servicer. We face significant competition across our business, including, but not limited to, commercial real estate services subsidiaries of large national commercial banks, privately-held and public commercial real estate service providers, CMBS conduits, public and private real estate investment trusts, private equity, investment funds, and insurance companies, some of which are also investors in loans we originate. Our competitors include, but are not limited to, Wells Fargo, N.A.; CBRE Group, Inc.; Jones Lang LaSalle Incorporated; Marcus & Millichap, Inc.; HFF, Inc.; Eastdil Secured (a subsidiary of Wells Fargo, N.A.);Secured; PNC Real Estate; Northmarq Capital, LLC; Newmark Realty Capital; and Berkadia Commercial Mortgage, LLC. Many of these competitors enjoy advantages over us, including greater name recognition, financial resources, well-established investment management platforms, and access to lower-cost capital. The commercial real estate services subsidiaries of the large
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national commercial banks may have an advantage over us in originating commercial loans if borrowers already have other lending or deposit relationships with the bank.
We compete on the basis of quality of service, the ability to provide useful insights to our borrowers, speed of execution, relationships, loan structure, terms, pricing, and breadth of product offerings, and industry depth. Industry depthofferings. Our ability to provide useful insights to borrowers includes theour knowledge of local and national real estate market conditions, our loan product expertise, our analysis and the abilitymanagement of credit risk and leveraging data and technology to analyze and manage credit risk.bring ideas to our clients. Our competitors seek to compete aggressively on these factors. Our success depends on our ability to offer attractive loan products, provide superior service, demonstrate industry depth, maintain and capitalize on relationships with investors, borrowers, and key loan correspondents, and remain competitive in pricing. In addition, future changes in laws, regulations, and Agency program requirements, increased investment from foreign entities, and consolidation in the commercial real estate finance market could lead to the entry of more competitors.
Regulatory Requirements
Our business is subject to laws and regulations in a number of jurisdictions. The level of regulation and supervision to which we are subject varies from jurisdiction to jurisdiction and is based on the type of business activities involved. The regulatory requirements that apply to our activities are subject to change from time to time and may become more restrictive, making our compliance with applicable requirements more difficult or expensive or otherwise restricting our ability to conduct our business in the manner that it is now conducted. Additionally, as
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we expand into new operations, we likely will face new regulatory requirements applicable to such operations. Changes in applicable regulatory requirements, including changes in their enforcement, could materially and adversely affect us.
Federal and State Regulation of Commercial Real Estate Lending Activities
Our multifamily and commercial real estate lending, servicing, and asset management, businessesand appraisal activities are subject, in certain instances, to supervision and regulation by federal and state governmental authorities in the United States. In addition, these businessesactivities may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, regulate lending activities, regulate conduct with borrowers, establish maximum interest rates, finance charges, and other charges and require disclosures to borrowers. Although most states do not regulate commercial finance, certain states impose limitations on interest rates, as well as other charges on certain collection practices and creditor remedies. Some states also require licensing of lenders, loan brokers, and loan servicers and real estate appraisers as well as adequate disclosure of certain contract terms. We also are required to comply with certain provisions of, among other statutes and regulations, the USA PATRIOT Act, regulations promulgated by the Office of Foreign Asset Control, the Employee Retirement Income Security Act of 1974, as amended, which we refer to as “ERISA,” and federal and state securities laws and regulations.
Requirements of the Agencies
To maintain our status as an approved lender for Fannie Mae and Freddie Mac and as a HUD-approved mortgagee and issuer of Ginnie Mae securities, we are required to meet and maintain various eligibility criteria from time to time established by the Agencies, such as minimum net worth, operational liquidity and collateral requirements, and compliance with reporting requirements. We also are required to originate our loans and perform our loan servicing functions in accordance with the applicable program requirements and guidelines from time to time established by the Agencies. If we fail to comply with the requirements of any of these programs, the Agencies may terminate or withdraw our approval. In addition, the Agencies have the authority under their guidelines to terminate a lender's authority to sell loans to them and service their loans. The loss of one or more of these approvals would have a material adverse impact on us and could result in further disqualification with other counterparties, and we may be required to obtain additional state lender or mortgage banker licensing to originate loans if that status is revoked.
Investment Advisers Act
Under the Investment Advisers Act of 1940, JCRWDIP is required to be registered as an investment adviser with the SEC and follow the various rules and regulations applicable to investment advisers. These rules and regulations cover, among
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other areas, communications with investors, marketing materials provided to potential investors, disclosure and calculation of fees, calculation and reporting of performance information, maintenance of books and records, and custody. Investment advisers are also subject to periodic inspection and examination by the SEC and filing requirements on Form ADV and Form PF. Should JCRWDIP not meet any of the requirements of the Investment Advisers Act, it could face, among other things, fines, penalties, legal proceedings, an order to cease and desist, or revocation of its registration.
Human Capital Resources
Employees
At December 31, 2018,2020, we employed 723 full-time employees. Allhad a total of 988 employees, excepta 20% increase from the prior year, including 205 bankers and brokers. This growth was primarily due to the expansion of our executive officers, are employed bybusiness and our operating subsidiary, Walker & Dunlop, LLC. Our executive officers are employees of Walker & Dunlop, Inc.recruiting efforts in 2020. None of our employees is represented by a union or subject to a collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are exceptional. For example, in 2018, we were ranked onehave not furloughed any employees as a result of the COVID-19 pandemic and currently do not have any plans to furlough any employees as a result of the pandemic.
Our human capital strategy is to create a culture that allows us to attract and retain the very best workplacestalent in our industry, provide competitive pay and benefits, and to ensure that all of our employees are welcome everywhere in our Company. We believe the core values that make up “The Walker Way” represent the inclusive culture that we strive to create: an employee base that is driven, caring, collaborative, insightful, and tenacious. We are committed to building a great place to work for all employees and to be a leader in diversity and inclusion.
Talent
We are committed to recruiting, developing and retaining a diverse workforce. We monitor and evaluate various turnover and attrition metrics. Our voluntary retention rate was 93%, and our average tenure was 4.9 years for the year ended December 31, 2020. As of December 31, 2020, our workforce consists of 36% female and 64% male employees, and women represented 25% of management positions (defined as Assistant Vice President and above). Ethnic diversity represented 20% of our workforce and 11% of management positions.
Through the Company’s Council for Diversity & Inclusion, we offer employee resource groups, including diversity, women’s, veterans and working parents. We are purposeful in our drive to promote an inclusive workplace, where our employees are engaged and can develop
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within the Company. As mentioned in the United States in Fortune’s Great Place to Work® 2018 Best Medium Workplaces list. This is the sixth time in seven years that“Our Growth Strategy” section above, we have received this recognition.set ambitious quantitative 2025 goals related to diversity, equity, and inclusion.
Health and Safety
We are committed to the health, safety, and wellness of our employees. We offer various programs to support the wellbeing of our employees, including flexible working arrangements, a caregiver support program, and a robust wellness program that includes subsidies paid to employees for qualifying wellness activities promoting both physical and mental health. In response to the pandemic, we implemented precautionary policies and significant operational changes to protect and support our employees, including remote working, additional time off to support the family, and a COVID-19 assistance grant program for employees in need. As state and local jurisdictions began lifting COVID restrictions, we implemented new policies and procedures to allow our employees to return to the office on a voluntary basis starting in the second quarter of 2020, including requiring the completion of daily health screenings and the use of personal protective equipment. As of December 31, 2020, substantially all our employees have been able, and continue, to work remotely.
Employee Benefits
To attract and retain the very best in the industry, we are committed to providing a total compensation and benefits package that is highly competitive. We offer competitive wages, healthcare and insurance benefits, paid time off, various leave programs, a service awards program, a 401(k) Company match, wellness benefits, and health savings plans. We also offer paid time off for employees to volunteer in our communities and provide monetary donations to the charity of an employee’s choice as well as a matching fund program where we match employees’ eligible charitable contributions up to a specified amount. In addition, we support the development and advancement of our employees and provide reimbursements for certain professional certifications and higher education.
We have historically granted broad-based restricted stock awards to our employees. Our most-recent restricted stock award was granted in December 2020, on the 10-year anniversary of our initial public offering to our non-production staff, excluding senior management. The grant vests ratably over the next three years.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov.
Our principal Internet website can be found at http://www.walkerdunlop.com. The content within or accessible through our website is not part of this Annual Report on Form 10-K. We make available free of charge, on or through our website, access to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC.
Our website also includes a corporate governance section which contains our Corporate Governance Guidelines (which includes our Director Responsibilities and Qualifications), Code of Business Conduct and Ethics, Code of Ethics for Principal Executive Officer and Senior Financial Officers, Board of Directors’ Committee Charters for the Audit, Compensation, and Nominating and Corporate Governance Committees, Complaint Procedures for Accounting and Auditing Matters, and the method by which interested parties may contact our Ethics Hotline.
In the event of any changes to these charters, codes, or guidelines, changed copies will also be made available on our website. If we waive or amend any provision of our code of ethics, we will promptly disclose such waiver or amendment as required by SEC or New York Stock Exchange (“NYSE”) rules. We intend to promptly post any waiver or amendment of our Code of Ethics for Principal Executive Officer and Senior Financial Officers to our website.
You may request a copy of any of the above documents, at no cost to you, by writing or telephoning us at: Walker & Dunlop, Inc., 7501 Wisconsin Avenue, Suite 1200E, Bethesda, Maryland 20814, Attention: Investor Relations, telephone (301) 215-5500. We will not send exhibits to these reports, unless the exhibits are specifically requested, and you pay a modest fee for duplication and delivery.
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Investing in our common stock involves risks. You should carefully consider the following risk factors, together with all the other information contained in this Annual Report on Form 10-K, before making an investment decision to purchase our common stock. The realization of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations, and the market price and liquidity of our common stock, which could cause you to lose all or a significant part of your investment in our common stock. Some statements in this Annual Report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section titledSee “Forward-Looking Statements.”Statements” for more information.
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Risks Relating to Our Business
The loss of, or changes in, or disruptions to our relationships with the Agencies and institutional investors would adversely affect our ability to originate commercial real estate loans, through the Agencies’ programs, which would materially and adversely affect us.
Currently, we originate a significant percentagemajority of our loans held for sale through the Agencies’ programs. We are approved as a Fannie Mae DUS lender nationwide, a Freddie Mac seller/servicer nationwide,Fannie Mae Multifamily Small Loan lender, a Freddie Mac targeted affordable housing seller/servicer,lender nationally for Conventional, Seniors Housing, Targeted Affordable Housing and Small Balance Loans, a HUD MAP lender nationwide, a HUD Section 232 LEAN lender nationally, and a Ginnie Mae issuer. Our status as an approved lender affords us a number of advantages and may be terminated by the applicable Agency at any time. The loss of such status would, or changes in our relationships could, prevent us from being able to originate commercial real estate loans for sale through the particular Agency, which would materially and adversely affect us. It could also result in a loss of similar approvals from the other Agencies. Additionally, federal budgetary policies also impact our ability to originate loans, particularly if they have a negative impact on the ability of the Agencies to do business with us. Changes in fiscal, monetary, and budgetary policies and the operating status of the U.S. government are beyond our control, are difficult to predict, and could materially and adversely affect us. During periods of limited or no U.S. government operations, our ability to originate HUD loans may be severely constrained. The impact that limited or dormant government operations may have on our HUD lending depends on the duration of such impacted operations.
We also broker loans on behalf of certain life insurance companies, investment banks, commercial banks, pension funds, CMBS conduits, and other institutional investors that directly underwrite and provide funding for the loans at closing. In cases where we do not fund the loan, we act as a loan broker. If these investors discontinue their relationship with us and replacement investors cannot be found on a timely basis, we could be adversely affected.
A change to the conservatorship of Fannie Mae and Freddie Mac and related actions, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. federal government or the existence of Fannie Mae and Freddie Mac, could materially and adversely affect our business.
Currently, we originate a majority of our loans for sale through the GSEs’ programs. Additionally, a substantial majority of our servicing rights are derived fromportfolio represents loans we sellservice through the GSEs’ programs. Changes in the business charters, structure, or existence of one or both of the GSEs could eliminate or substantially reduce the number of loans we originate with the GSEs, which in turn would lead to a reduction in fees related to such loans. These effects would likely cause us to realize significantly lower revenues from our loan originations and servicing fees, and ultimately would have a material adverse impact on our business and financial results.
Conservatorships of the GSEs
In September 2008, the GSEs’ regulator, the Federal Housing Finance Agency, (the “FHFA”) placed each GSE into conservatorship. The conservatorship is a statutory process designed to preserve and conserve the GSEs’ assets and property and put them in a sound and solvent condition. The conservatorships have no specified termination dates and there continues to be significant uncertainty regarding the future of the GSEs, including how long they will continue to exist in their current forms, the extent of their roles in the housing markets and whether or in what form they may exist following conservatorship.
Housing Finance Reform
Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, the GSEs should play. It is unclear at this time what the Trump Administration’s goals are with respect to the future state of the GSEs.
Regulatory Reform
As the primary regulator and the conservator of the GSEs, the FHFA has taken a number of steps during conservatorship to manage the GSEs’ multifamily business activities. InSince 2013, the FHFA has established limits on the volume of new multifamily loans that may be purchased annually by the GSEs.GSEs (“caps”). In November 2018,2020, the FHFA announced thatupdated the GSE’s 2019 multifamily loan purchases would be capped at $35.0origination caps to $70.0 billion for each GSE,the four-quarter period beginning with exceptions for loans in “affordable” and underserved
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market segments. These exemptions allowed Fannie Mae and Freddie Mac’s 2018 lending volumes2021. The new caps apply to reach $65 billion and $78 billion, respectively.
all multifamily business with no exclusions. The current DirectorFHFA also directed that at least 50.0% of the FHFA is serving in an “acting” capacity. A new permanent Director has been appointed by President Trump but has not yet been confirmed by the Senate.GSEs’ multifamily business be mission-driven, affordable housing. We cannot predict whether the acting director or new permanent director, once confirmed,FHFA will implement further regulatory and other policy changes at FHFA that will modify the GSEs’ multifamily businesses.
Legislative Reform
Congress has considered various housing finance reform bills since the GSEs went into conservatorship in 2008. Several of the bills have called for the winding down or receivership of the GSEs. We expect Congress to continue considering housing finance reform in the future, including conducting hearings and considering legislation that wouldcould alter the housing finance system. We cannot predict the prospects
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for the enactment, timing or content of legislative proposals regarding the future status of the GSEs. Additionally, we cannot predict whether the Biden Administration will propose or implement reforms that modify or otherwise impact the GSEs’ multifamily business.
We are subject to risk of loss in connection with defaults on loans, including loans sold under the Fannie Mae DUS program, and could experience significant servicing advance obligations in connection with Fannie Mae and HUD loans we originate, that could materially and adversely affect our results of operations and liquidity.
As a loan servicer, we maintain the primary contact with the borrower throughout the life of the loan and are responsible, pursuant to our servicing agreements with the Agencies and institutional investors, for asset management. We are also responsible, together with the applicable Agency or institutional investor, for taking actions to mitigate losses. Our asset management process may be unsuccessful in identifying loans that are in danger of underperforming or defaulting or in taking appropriate action once those loans are identified. While we can recommend a loss mitigation strategy for the Agencies, decisions regarding loss mitigation are within the control of the Agencies. Previous turmoil in the real estate, credit and capital markets have made this process even more difficult and unpredictable. When loans become delinquent, we may incur additional expenses in servicing and asset managing the loan and are typically required to advance principal and interest payments and tax and insurance escrow amounts. In response to the COVID-19 Crisis, the Agencies implemented new forbearance programs that allow borrowers to forbear payments up to 180 days and repay the forborne payments over a 12- or 24-month period. These forbearance programs may require us to advance up to four months of the deferred payments on Fannie Mae loans that we service. We do not have advance obligations with respect to our Freddie Mac or life insurance servicing agreements. Declining rent collections and a borrower’s inability to make all required payments once the forbearance period is over could lead to an increase in delinquencies and losses beyond what we have experienced.
All of these items discussed above could have a negative impact on our cash flows. Because of the foregoing, a rise in delinquencies could have a material adverse effect on us. Under the Fannie Mae DUS program, we originate and service multifamily loans for Fannie Mae without having to obtain Fannie Mae's prior approval for certain loans, as long as the loans meet the underwriting guidelines set forth by Fannie Mae. In return for the delegated authority to make loans and the commitment to purchase loans by Fannie Mae, we must maintain minimum collateral and generally are required to share risk of loss on loans sold through Fannie Mae. Under the full risk-sharing formula, we are required to absorb the first 5% of any losses on the unpaid principal balance of a loan at the time of loss settlement, and above 5% we are required to share the loss with Fannie Mae, with our maximum loss capped at 20% of the original unpaid principal balance of a loan.loan, except for rare instances when we negotiate a cap at 30% for loans with unique attributes. In addition, Fannie Mae can double or triple our risk-sharing obligations if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae. Fannie Mae also requires us to maintain collateral, which may include pledged securities, for our risk-sharing obligations. As of December 31, 2018,2020, we had pledged securities of $116.3$137.2 million as collateral against future losses under $32.5related to $44.5 billion of loans outstanding that are subject to risk-sharing obligations, as more fully described under “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” which we refer to as our "at risk“at-risk balance."” Fannie Mae collateral requirements may change in the future. As of December 31, 2018,2020, our allowance for risk-sharing as a percentage of the at riskat-risk balance was 0.01%0.17%, or $4.6$75.3 million, and reflects our current estimate of our future expected payouts under our risk-sharing obligations. Additionally, we have a guaranty obligation of $46.9 million as of December 31, 2018. The guaranty obligation and the allowance for risk-sharing obligations as a percentage of the at risk balance was 0.8% as of December 31, 2018. We cannot ensure that our estimate of the allowance for risk-sharing obligations will be sufficient to cover future actual write offs. Other factors may also affect a borrower's decision to default on a loan, such as property, cash flow, occupancy, maintenance needs, and other financing obligations. As of December 31, 2018,2020, there were two loans with an aggregate unpaid principal balance of $11.1$48.5 million in our at risk servicing portfolio that had defaulted representing 0.03% of our at risk servicing portfolio.and been foreclosed on by Fannie Mae and are awaiting ultimate disposition. If loan defaults increase, actual risk-sharing obligation payments under the Fannie Mae DUS program may increase, and such defaults and payments could have a material adverse effect on our results of operations and liquidity. In addition, any failure to pay our share of losses under the Fannie Mae DUS program could result in the revocation of our license from Fannie Mae and the exercise of various remedies available to Fannie Mae under the Fannie Mae DUS program.
The number of delinquent and/or defaulted loans could increase, which could have a material adverse effect on us.
As a loan servicer, we maintain the primary contact with the borrower throughout the life of the loan and are responsible, pursuant to our servicing agreements with the Agencies and institutional investors, for asset management. We are also responsible, together with the applicable Agency or institutional investor, for taking actions to mitigate losses. Our asset management process may be unsuccessful in identifying loans that are in danger of underperforming or defaulting or in taking appropriate action once those loans are identified. While we can recommend a loss mitigation strategy for the Agencies, decisions regarding loss mitigation are within the control of the Agencies. Previous turmoil in the real estate,
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credit and capital markets have made this process even more difficult and unpredictable. When loans become delinquent, we incur additional expenses in servicing and asset managing the loan and are typically required to advance principal and interest payments and tax and insurance escrow amounts. We also could be subject to a loss of our contractual servicing fee and we could suffer losses of up to 20% (or more for loans that do not meet specific underwriting criteria or default within 12 months) of the original unpaid principal balance of a Fannie Mae DUS loan with full risk-sharing. These items could have a negative impact on our cash flows and a negative effect on the net carrying value of the mortgage servicing right (“MSR”) on our balance sheet and could result in a charge to our earnings. Because of the foregoing, a rise in delinquencies could have a material adverse effect on us.
A reduction in the prices paid for our loans and services or an increase in loan or security interest rates required by investors could materially and adversely affect our results of operations and liquidity.
Our results of operations and liquidity could be materially and adversely affected if the Agencies or institutional investors lower the price they are willing to pay to us for our loans or services or adversely change the material terms of their loan purchases or service arrangements with us. Multiple factors determine the price we receive for our loans. With respect to Fannie Mae-related originations, our loans are generally sold as Fannie Mae-insured securities to third-party investors. With respect to HUD related originations, our loans are generally sold as Ginnie Mae securities to third-party investors. In both cases, the price paid to us reflects, in part, the competitive market bidding process for these securities.
We sell loans directly to Freddie Mac. Freddie Mac may choose to hold, sell or later securitize such loans. We believe terms set by Freddie Mac are influenced by similar market factors as those that impact the price of Fannie Mae–insured or Ginnie Mae securities, although the pricing process differs. With respect to loans that are placed with institutional investors, the origination fees that we receive from borrowers are determined through negotiations, competition, and other market conditions.
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Loan servicing fees are based, in part, on the risk-sharing obligations associated with the loan and the market pricing of credit risk. The credit risk premium offered by Fannie Mae for new loans can change periodically but remains fixed once we enter into a commitment to sell the loan. Over the past several years, Fannie Mae loan servicing fees have generally been higher than for other products principally due to the market pricing of credit risk. There can be no assurance that such fees will continue to remain at such levels or that such levels will be sufficient if delinquencies occur.
Servicing fees for loans placed with institutional investors are negotiated with each institutional investor pursuant to agreements that we have with them. These fees for new loans vary over time and may be materially and adversely affected by a number of factors, including competitors that may be willing to provide similar services at lower rates.
A significant portion of our revenue is derived from loan servicing fees, and declines in or terminations of servicing engagements or breaches of servicing agreements, including from non-performancenonperformance by third parties that we engage for back-office loan servicing functions, could have a material adverse effect on us.
We expect that loan servicing fees will continue to constitute a significant portion of our revenues for the foreseeable future. Nearly all of these fees are derived from loans that we originate and sell through the Agencies’ programs or place with institutional investors. A decline in the number or value of loans that we originate for these investors or terminations of our servicing engagements will decrease these fees. HUD has the right to terminate our current servicing engagements for cause. In addition to termination for cause, Fannie Mae and Freddie Mac may terminate our servicing engagements without cause by paying a termination fee. Our institutional investors typically may terminate our servicing engagements at any time with or without cause, without paying a termination fee. We are also subject to losses that may arise from servicing errors, such as a failure to maintain insurance, pay taxes, or provide notices. In addition, we have contracted with a third partythird-party to perform certain routine back-office aspects of loan servicing. If we or this third party fails to perform, or we breach or the third-party causes us to breach our servicing obligations to the Agencies or institutional investors, our servicing engagements may be terminated. Declines or terminations of servicing engagements or breaches of such obligations could materially and adversely affect us.
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If one or more of our warehouse facilities, on which we are highly dependent, are terminated, we may be unable to find replacement financing on favorable terms, or at all, which would have a material adverse effect on us.
We require a significant amount of short-term funding capacity for loans we originate. As of December 31, 2018,2020, we had $2.9$3.6 billion of committed and uncommitted loan funding available through sixfive commercial banks and $1.5 billion of uncommitted funding available through Fannie Mae’s As Soon As Pooled (“ASAP”) program. Additionally, consistent with industry practice, five allof our existing warehouse facilitiesAgency Warehouse Facilities are short-term, requiring annual renewal. If any of our committed facilities are terminated or are not renewed or our uncommitted facilities are not honored, we may be unable to find replacement financing on favorable terms, or at all, and we might not be able to originate loans, which would have a material adverse effect on us. Additionally, as our business continues to expand, we may need additional warehouse funding capacity for loans we originate. There can be no assurance that, in the future, we will be able to obtain additional warehouse funding capacity on favorable terms, on a timely basis, or at all.
If we fail to meet or satisfy any of the financial or other covenants included in our warehouse facilities, we would be in default under one or more of these facilities and our lenders could elect to declare all amounts outstanding under the facilities to be immediately due and payable, enforce their interests against loans pledged under such facilities and restrict our ability to make additional borrowings. These facilities also contain cross-default provisions, such that if a default occurs under any of our debt agreements, generally the lenders under our other debt agreements could also declare a default. These restrictions (and restrictions included in our long-term debt agreement) may interfere with our ability to obtain financing or to engage in other business activities, which could materially and adversely affect us. There can be no assurance that we will maintain compliance with all financial and other covenants included in our warehouse facilities in the future.future.
We are subject to the risk of failed loan deliveries, and even after a successful closing and delivery, may be required to repurchase theloans or indemnify loan or to indemnify the investorpurchasers if there is a breach of a representation or warranty made by us in connection with the sale of loans through the programs of the Agencies, any of which could have a material adverse effect on us.
We bear the risk that a borrower will choose not to close on a loan that has been pre-sold to an investor or that the investor will choose not to take delivery of the loan, including because a catastrophic change in the condition of a property occurs after we fund the loan and prior to the investor purchase date. We also have the risk of serious errors in loan documentation which prevent timely delivery of the loan prior to the investor purchase date. A complete failure to deliver a loan could be a default under the warehouse line used to finance the loan. We can provide no assurance that we will not experience failed deliveries in the future or that any losses will not be material or will be mitigated through property insurance or payment protections.
We must make certain representations and warranties concerning each loan originated by us for the Agencies’ programs. The representations and warranties relate to our practices in the origination and servicing of the loans and the accuracy of the information being provided by us. For example, we are generally required to provide the following, among other, representations and warranties: we are authorized to do business and to sell or assign the loan; the loan conforms to the requirements of the Agencies and certain laws and regulations; the underlying mortgage represents a valid lien on the property and there are no other liens on the property; the loan documents are valid and enforceable; taxes, assessments, insurance premiums, rents and similar other payments have been paid or escrowed; the property is insured, conforms to zoning laws and remains intact; and we do not know of any issues regarding the loan that are reasonably expected to cause the loan to be delinquent or unacceptable for investment or adversely affect its value. We are permitted to satisfy certain of these representations and warranties by furnishing a title insurance policy.
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In the event of a breach of any representation or warranty concerning a loan, investors could, among other things, require us to repurchase the full amount of the loan and seek indemnification for losses from us, or, for Fannie Mae DUS loans, increase the level of risk-sharing on the loan. Our obligation to repurchase the loan is independent of our risk-sharing obligations. The Agencies could require us to repurchase the loan if representations and warranties are breached, even if the loan is not in default. Because the accuracy of many such representations and warranties generally is based on
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our actions or on third-party reports, such as title reports and environmental reports, we may not receive similar representations and warranties from other parties that would serve as a claim against them. Even if we receive representations and warranties from third parties and have a claim against them, in the event of a breach, our ability to recover on any such claim may be limited. Our ability to recover against a borrower that breaches its representations and warranties to us may be similarly limited. Our ability to recover on a claim against any party would also be dependent, in part, upon the financial condition and liquidity of such party. There can be no assurance that we, our employees or third parties will not make mistakes that would subject us to repurchase or indemnification obligations. Any significant repurchase or indemnification obligations imposed on us could have a material adverse effect on us.
We have made preferred equity investments and investments in interim loans and preferred equity investments, both of which are funded with corporate capital. These investments may involve a greater risk of loss than our traditional real estate lending activities.
We have made preferred equity investments in entities owning real estate in the past. Such investments are subordinate to debt financing and are not secured by property. If the issuer of the preferred equity defaults on our investment, in most instances we would only be able to proceed against the entity that issued the equity in accordance with the terms of the investment, and not any property owned by the entity. As a result, we may not recover some or all of our invested capital, which could result in losses to the Company. As of December 31, 2018, we had no preferred equity investments.
Under the Interim Loan Program, we offer short-term, floating-rate loans to borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. Such a borrower under an interim loan often has identified a transitional asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the interim loan, and we bear the risk that we may not recover some or all of the loan balance. In addition, borrowers usually use the proceeds of a long-term mortgage loan to repay an interim loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our interim loan, which could depend on market conditions and other factors. Further, interim loans may be relatively less liquid than loans against stabilized properties due to their short life, their potential unsuitability for securitization, any unstabilized nature of the underlying real estate and the difficulty of recovery in the event of a borrower’s default. This lack of liquidity may significantly impede our ability to respond to adverse changes in the performance of loans in the Interim Program and may adversely affect the fair value of such loans and the proceeds from their disposition. Carrying loans for longer periods of time on our balance sheet exposes us to greater risks of loss than we currently face for loans that are pre-sold or placed with investors, including, without limitation, 100% exposure for defaults and impairment charges, which may adversely affect our profitability. At December 31, 2018, the2020, we held loans with an outstanding principal balance of $503.5$366.3 million of loans held by us under the Interim Program was the largest it has ever been.Loan Program. One loan in the portfolio, totaled $150.0totaling $14.7 million, which is the largest interim loan wecurrently in default.
We have ever made.
Our business is significantly affected by general business, economic and market conditions and cycles, particularlymade preferred equity investments in entities owning real estate in the multifamilypast. Such investments are subordinate to debt financing and commercialare not secured by real estate industry, including changes in government fiscal and monetary policies, and, accordingly, we could be materially harmed inproperty. If the event of a market downturn or changes in government policies or the operating statusissuer of the government.
We are sensitivepreferred equity defaults on our investment, in most instances we would only be able to general business, economicproceed against the entity that issued the equity in accordance with the terms of the investment, and market conditions and cycles, particularly innot any real property owned by the multifamily and commercial real estate industry. These conditions include changes in short-term and long-term interest rates, inflation and deflation, fluctuations in the real estate and debtentity. As a result, we may not recover some or all of our invested capital, markets and developments in national and local economies, unemployment rates, commercial property vacancy rates, and rental rates. Any sustained period of weakness or weakening business or economic conditions in the markets in which we do business or in related markets could result in a decrease inlosses to the demand for our loans and services, which could materially harm us. In addition, the numberCompany. As of borrowers who become delinquent, become subject to bankruptcy or default on their loans could increase, resulting in a decrease in the value of our MSRs, higher levels of servicer advances, and loss on our Fannie Mae loans for whichDecember 31, 2020, we share risk of loss, and could materially and adversely affect us.had no preferred equity investments.
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We also are significantly affected by the fiscal, monetary, and budgetary policies of the U.S. government and its agencies and the operating status of the U.S. government. In particular, we are affected by the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), which regulates the supply of money and credit in the United States. The Federal Reserve’s policies affect interest rates, which can have a significant impact on the demand for multifamily and commercial real estate loans. Significant fluctuations in interest rates as well as protracted periods of increases or decreases in interest rates could adversely affect the operation and income of multifamily and commercial real estate properties, as well as the demand from investors for multifamily and commercial real estate debt in the secondary market. Higher interest rates may decrease the number of loans originated. An increase in interest rates could cause refinancing of existing loans to become less attractive and qualifying for a loan to become more difficult. Budgetary policies also impact our ability to originate loans, particularly if it has a negative impact on the ability of the Agencies to do business with us. During periods of limited or no U.S. government operations, our ability to originate HUD loans may be severely constrained. Changes in fiscal, monetary, and budgetary policies and the operating status of the U.S. government are beyond our control, are difficult to predict, and could materially and adversely affect us.
We are dependent upon the success of the multifamily real estate sector and conditions that negatively impact the multifamily sector may reduce demand for our products and services and materially and adversely affect us.
We provide commercial real estate financial products and services primarily to developers and owners of multifamily properties. Accordingly, the success of our business is closely tied to the overall success of the multifamily real estate market. Various changes in real estate conditions may impact the multifamily sector. Any negative trends in such real estate conditions may reduce demand for our products and services and, as a result, adversely affect our results of operations. These conditions include:
| an oversupply of, or a reduction in demand for, multifamily housing; |
| a change in policy or circumstances that may result in a significant number of current and/or potential residents of multifamily properties deciding to purchase homes instead of renting; |
| rent control, rent forbearance, or stabilization laws, or other laws regulating multifamily housing, which could affect the profitability or values of multifamily developments; |
| changes in the tax code related to investment real estate; |
| increased competition in the multifamily sector based on considerations such as the attractiveness, location, rental rates, amenities, and safety record of various properties; and |
| increased operating costs, including increased real property taxes, maintenance, insurance, and utilities costs. |
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Moreover, other factors may adversely affect the multifamily sector, including general business, economic and market conditions, fluctuations in the real estate and debt capital markets, changes in government fiscal and monetary policies, regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in interest rate levels, the potential liability under environmental and other laws, and other unforeseen events. Any or all of these factors could negatively impact the multifamily sector and, as a result, reduce the demand for our products and services. Any such reduction could materially and adversely affect us.
The loss of our key management could result in a material adverse effect on our business and results of operations.
Our future success depends to a significant extent on the continued services of our senior management, particularly William Walker, our Chairman and Chief Executive Officer. The loss of the services of any of these individuals could have a material adverse effect on our business and results of operations. We maintain “key person” life insurance only on Mr. Walker, and the insurance proceeds from such insurance may be insufficient to cover the cost associated with recruiting a new Chief Executive Officer.
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Our growth strategy relies upon our ability to hire and retain qualified loan originators,bankers and brokers, and if we are unable to do so, our growth could be limited.
We depend on our loan originatorsbankers and brokers to generate borrower clients by, among other things, developing relationships with commercial property owners, real estate agents and brokers, developers and others, which we believe leads to repeat and referral business. Accordingly, we must be able to attract, motivate and retain skilled loan originators.bankers and brokers. The market for loan originatorstalent is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that we will be able to attract or retain qualified loan originators.bankers and brokers. If we cannot attract, motivate or retain a sufficient number of skilled loan originators,bankers and brokers, or if our hiring and retention costs increase significantly, we could be materially and adversely affected.
We have numerous significant competitors and potential future competitors, some of which may have greater resources and access to capital than we do; consequently, we may not be able to compete effectively in the future.
We continue to face significant competition from other commercial real estate service providers, commercial banks, CMBS conduit lenders, and life insurance companies, some of which are also investors in loans we originate. Many of these competitors may enjoy competitive advantages over us, including:
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Commercial banks may have an advantage over us in originating loans if borrowers already have a line of credit or construction financing with the bank. Commercial real estate service providers may have an advantage over us to the extent they also offer a larger or more comprehensive investment sales platform. We compete based on quality of service, relationships, loan structure, terms, pricing, and industry depth. Industry depth includes the knowledge of local and national real estate market conditions, commercial real estate expertise, loan product expertise, and the ability to analyze and manage credit risk. Our competitors seek to compete aggressively on the basis of these factors and our success depends on our ability to offer attractive loan products, provide superior service, demonstrate industry depth, maintain and capitalize on relationships with investors, borrowers and key loan correspondents and remain competitive in pricing. In addition, future changes in laws, regulations, and Agency program requirements and consolidation in the commercial real estate finance market could lead to the entry of more competitors. We cannot guarantee that we will be able to compete effectively in the future, and our failure to do so would materially and adversely affect us.
We have grown our business through corporate acquisitions. We intend to drive a significant portion of our future growth through additional acquisitions.strategic acquisitions or investments in new ventures and new lines of business. If we do not successfully identify, complete and completeintegrate such acquisitions or start-ups, our growth may be limited. Additionally, continued growth and integration in our business may place significant demands on our administrative, operational, and financial resources.resources, and the acquired businesses or new ventures may not perform as we expect them to or become profitable.
We have completed several corporate acquisitions in recent years that have expanded our pre-existing product lines and services, increased our origination capacity, broadened our geographic coverage, and diversified our product offerings. We intend to pursue continued growth by acquiring or starting complementary businesses, but we cannot guarantee such efforts will be successful.successful or profitable. We do not know whether the favorable conditions that have enabled our recentpast growth through acquisitions and strategic investments will continue.
In addition, if our growth continues, it could increase our expenses and place additional demands on our management, personnel, information systems, and other resources. Sustaining our growth could require us to commit additional
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management, operational and financial resources to maintain appropriate operational and financial systems to adequately support expansion. There can be no assurance that we will be able to manage any growth effectively and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could materially and adversely affect us.
The integration of any companies that we may acquire or start up in the future, including investments in new ventures and new lines of business, may be difficult, resulting in high transaction, start-up, and integration costs. Additionally, the integration process may be disruptive to our business, and the acquired businesses or new venture may not perform as we expect.
Our future success depends, in part, on our ability to expand or modify our business in response to changing borrower demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses or investments in new ventures rather than through internal growth.
In the future, we may explore additional strategic acquisitions or investments. The identification of suitable acquisition candidates and new ventures can be difficult, time consuming and costly, and we may not be able to successfully complete identified acquisitions or investments in new ventures on favorable terms, or at all. Furthermore, even if we successfully complete an acquisition or an investment, we may not be able to successfully integrate newly acquired businesses or new investments into our operations, and the process of integration could be expensive and time consuming and may strain our resources.
In addition, if our growth continues, it could increase our expenses and place additional demands on our management, personnel, information systems, and other resources. Sustaining our growth could require us to commit additional management, operational and financial resources to maintain appropriate operational and financial systems to adequately support expansion. Acquisitions or new investments also typically involve significant costs related to integrating information technology, accounting, reporting, and management services and rationalizing personnel levels and may require significant time to obtain new or updated regulatory approvals from the Agencies and other federal and state authorities. Acquisitions or new ventures could divert management's attention from the regular operations of our business and result in the potential loss of our key personnel, and we may not achieve the anticipated benefits of the acquisitions or new investments, any of which could materially and adversely affect us. There can be no assurance that we will be able to manage any growth effectively and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could materially and adversely affect us. In addition, future acquisitions or new investments could result in significantly dilutive issuances of equity securities or the incurrence of substantial debt, contingent liabilities, or expenses or other charges, which could also materially and adversely affect us.
Our future success depends, in part, on our ability to expand or modify our business in response to changing client demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses or investments in new ventures rather than through internal growth.
The COVID-19 Crisis could negatively impact our business and results of operations.
Although the COVID-19 Crisis has not significantly impacted our operations and financial results through the last nine months of 2020, we face uncertainty concerning the future impacts the COVID-19 Crisis may have on the economy and our business that are dependent on future developments that increase uncertainty. The impacts of the COVID-19 Crisis continue to evolve, and any preventative or protective actions that we or our customers may take due to the COVID-19 Crisis may result in a period of disruption, including to our operations and
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financial results and could potentially impact our customers, third-party sources of capital to fund our loans or loans that we broker to third parties, and other third parties with whom we transact. Additionally, the impacts from the COVID-19 Crisis may constrain or reduce our liquidity or result in future credit losses. The effects of the COVID-19 Crisis also may have the effect of heightening our other risk factors disclosed in this Annual Report on Form 10-K.
Risks Relating to Regulatory Matters
If we fail to comply with the numerous government regulations and program requirements of the Agencies, we may lose our approved lender status with these entities and fail to gain additional approvals or licenses for our business. We are also subject to changes in laws, regulations and existing Agency program requirements, including potential increases in reserve and risk retention requirements that could increase our costs and affect the way we conduct our business, which could materially and adversely affect us.
Our operations are subject to regulation by federal, state, and local government authorities, various laws and judicial and administrative decisions, and regulations and policies of the Agencies. These laws, regulations, rules, and policies impose, among other things, minimum net worth, operational liquidity and collateral requirements. Fannie Mae requires us to maintain operational liquidity based on a formula that considers the balance of the loan and the level of credit loss exposure (level of risk-sharing). Fannie Mae requires us to maintain collateral, which may include pledged securities, for our risk-sharing obligations. The amount of collateral required under the Fannie Mae DUS program is calculated at the loan level and is based on the balance of the loan, the level of risk-sharing, the seasoning of the loan, and our rating.
Regulatory authorities also require us to submit financial reports and to maintain a quality control plan for the underwriting, origination and servicing of loans. Numerous laws and regulations also impose qualification and licensing obligations on us and impose requirements and restrictions affecting, among other things: our loan originations; maximum interest rates, finance charges and other fees that we may charge; disclosures to consumers; the terms of secured transactions; debt collection; personnel qualifications; and other trade practices. We also are subject to inspection by the Agencies and regulatory authorities. Our failure to comply with these requirements could lead to, among other things, the loss of a license as an approved Agency lender, the inability to gain additional approvals or licenses, the termination of contractual
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rights without compensation, demands for indemnification or loan repurchases, class action lawsuits and administrative enforcement actions.
Regulatory and legal requirements are subject to change. For example, in 2013, Fannie Mae increased its collateral requirements on loans classified by Fannie Mae as Tier II from 60 basis points to 75 basis points, effective as of January 1, 2013, which applied to a large portion of our outstanding Fannie Mae at risk portfolio. The incremental collateral required for existing loans was funded over a two-year period ending December 31, 2014. The incremental requirement for any newly originated Fannie Mae Tier II loans will be funded over the 48 months subsequent to the sale of the loan to Fannie Mae. Fannie Mae has indicated that it may increase collateral requirements in the future, which may adversely impact us.points.
If we fail to comply with laws, regulations and market standards regarding the privacy, use, and security of customer information, or if we are the target of a successful cyber-attack, we may be subject to legal and regulatory actions and our reputation would be harmed.
We receive, maintain, and store non-public personal information of our loan applicants. The technology and other controls and processes designed to secure our customer information and to prevent, detect, and remedy any unauthorized access to that information were designed to obtain reasonable, not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately. We are not aware of any data breaches, successful hacker attacks, unauthorized access and misuse, or significant computer viruses affecting our networks that may have occurred in the past; however, our controls may not have detected, and may in the future fail to prevent or detect, unauthorized access to our borrower information. In addition, we are exposed to the risks of denial-of-service (“DOS”) attacks and damage to or destruction of our network or other information systems. A successful DOS attack or damage to our systems could result in a delay in the processing of our business, or even lost business. Additionally, we could incur significant costs associated with the recovery from a DOS attack or damage to our systems.
If borrower information is inappropriately accessed and used by a third party or an employee for illegal purposes, such as identity theft, we may be responsible to the affected applicant or borrower for any losses he or she may have incurred as a result of misappropriation. In such an instance, we may be liable to a governmental authority for fines or penalties associated with a lapse in the integrity and security of our customers' information. Additionally, if we are the target of a successful cyber-attack, we may experience reputational harm that could impact our standing with our borrowers and adversely impact our financial results.
We regularly update our existing information technology systems and install new technologies when deemed necessary and provide employee awareness training around phishing, malware, and other cyber risks and physical security to address the risk of cyber-attacks and other security breaches. However, such preventative measures may not be sufficient to prevent future cyber-attacks or a breach of customer information.
Risks Related to Our Common Stock
The trading and market price Additionally, most of our common stockemployees have worked remotely since March of 2020 and will continue to do so for the foreseeable future. While we have designed our controls and processes to operate in a remote working environment, there is a heightened risk such controls and processes may be volatile and could decline substantially.
The stock markets, including the NYSE (on which our common stock is listed), have at times experienced significant price and volume fluctuations. As a result, the trading and market price of our common stock is likely to be similarly volatile and subject to wide fluctuations, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelatednot detect or prevent unauthorized access to our operating performance. The market price of our common stock could decline substantially in response to a number of factors, including (in no particular order):information systems.
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In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their common stock. This type of litigation could result in substantial costs and divert our management's attention and resources, which could have a material adverse effect on our ability to execute our business and growth strategies.
Future issuances of debt securities, which would rank senior to our common stock upon our liquidation, and future issuances of equity securities, which would dilute the holdings of our existing common stockholders and may be senior to our common stock for the purposes of paying dividends, periodically or upon liquidation, may negatively affect the market price of our common stock.
In the future, we may issue debt or equity securities or incur other borrowings. Upon liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to offer any such additional debt or equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities, warrants or options, could dilute our existing common stockholders' ownership in us and such issuances, or the perception that such issuances may occur, may reduce the market price of our common stock. Our preferred stock, if issued, would likely have a preference on dividend payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to pay dividends to common stockholders. Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our other borrowing will negatively affect the market price of our common stock and dilute their ownership in us.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. We will be subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then outstanding voting capital stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five-year prohibition, any business combination between us and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of
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our voting capital stock; and (ii) two-thirds of the votes entitled to be cast by holders of voting capital stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if our common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder.
The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy) entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct and indirect acquisition of ownership or control of issued and outstanding "control shares") have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our personnel who are also our directors.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to adopt certain mechanisms, some of which (for example, a classified board) we do not yet have. These provisions may have the effect of limiting or precluding a third party from making an acquisition proposal for us or of delaying, deferring or preventing a transaction or a change in control of our company under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.control of the Company.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of common or preferred stock that could delay, defer, or prevent a transaction or a change in control of our company that might involve a premium price for shares of our common stock or otherwise be in the best interests of our stockholders.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit our stockholders’ recourse in the event actions are taken that are not in our stockholders’ best interests.
Under Maryland law generally, a director is required to perform his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the Company and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under Maryland law, directors are presumed to have acted with this standard of care. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
| actual receipt of an improper benefit or profit in money, property or services; or |
| active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated. |
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Our charter and bylaws obligate us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. In addition, we are obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and
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officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with companies domiciled in jurisdictions other than Maryland.
Our charter contains limitations on our stockholders’ ability to remove our directors, which could make it difficult for our stockholders to effect changes to our management.
Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of two-thirds of the votes entitled to be cast in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors and may delay, defer, or prevent a change in control of our company that is in the best interests of our stockholders.
We are a holding company with minimal direct operations and rely largely on funds received from our subsidiaries for our cash requirements.
We are a holding company and conduct the majority of our operations through Walker & Dunlop, LLC, our operating company. We do not have, apart from our ownership of this operating company and certain other subsidiaries, any significant independent operations. As a result, we rely on distributions from our operating company to pay any dividends we might declare on shares of our common stock. We also rely largely on distributions from this operating company to meet any of our cash requirements, including our tax liability on taxable income allocated to us and debt payments.
In addition, because we are a holding company, any claims from common stockholders are structurally subordinated to all existing and future liabilities (whether or not for borrowed money) and any preferred equity of our operating company. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating company will be able to satisfy the claims of our common stockholders only after all of our and our operating company's liabilities and any preferred equity have been paid in full.
Risks Related to Our Financial Statements
Our financial statements are based in part on assumptions and estimates which, if wrong, could result in unexpected cash and non-cash losses in the future, and our financial statements depend on our internal control over financial reporting.
Pursuant to U.S. GAAP,generally accepted accounting principles in the United States of America (“GAAP”), we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves and the fair value of MSRs, among other items. We make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment. These and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective as they are based on significant estimation and judgment. Several of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If assumptions or estimates underlying our financial statements are incorrect, losses may be greater than those expectations.
The Sarbanes-Oxley Act requires our management to evaluate our disclosure controls and procedures and its internal control over financial reporting and requires our auditors to issue a report on our internal control over financial reporting. We are required to disclose, in our Annual Report on Form 10-K, the existence of any “material weaknesses” in our internal control over financial reporting. We cannot assure that we will not identify one or more material weaknesses as of the end of any given quarter or year, nor can we predict the effect on our stock price of disclosure of a material weakness.
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Our existing goodwill could become impaired, which may require us to take significant non-cash charges.
Under current accounting guidelines, we evaluate our goodwill for potential impairment annually or more frequently if circumstances indicate impairment may have occurred. In addition to the annual impairment evaluation, we evaluate at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. Any impairment of goodwill as a result of such analysis would result in a non-cash charge against earnings, which charge could materially adversely affect our reported results of operations, stockholders’ equity, and our stock price.
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Any factor described in this filing or in any of our other SEC filings could by itself, or together with other factors, adversely affect our financial results and condition. Refer to our quarterly reports on Form 10-Q filed with the SEC in 20182021 for material changes to the above discussion of risk factors.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
Our principal headquarters are located in Bethesda, Maryland. We currently maintain an additional 28 offices acrossAt the country. Mostend of 2020, we signed a 15-year lease for our offices are small, loan origination and investment sales offices. The majority of our real estate services activity occurs in our corporatenew principal headquarters and our office in Needham, Massachusetts.Bethesda, Maryland that is scheduled to begin in 2022. We believe that our facilities are adequate for us to conduct our present business activities.
All of our office space is leased. The most significant terms of the lease arrangements for our office space are the length of the lease and the amount of the rent. Our leases have terms varying in duration as a result of differences in prevailing market conditions in different geographic locations, with the longest leases generally expiring in 2023. We do not believe that any single office lease is material to us. In addition, we believe there is adequate alternative office space available at acceptable rental rates to meet our needs, although adverse movements in rental rates in some markets may negatively affect our results of operations and cash flows when we execute new leases.
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Item 3. Legal ProceedingsProceedings.
In the ordinary course of business, we may be party to various claims and litigation, none of which we believe is material. We cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and our reputation and business may be impacted. Our management believes that any liability that could be imposed on us in connection with the disposition of any pending lawsuits would not have a material adverse effect on our business, results of operations, liquidity, or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.Securities.
Our common stock trades on the NYSE under the symbol “WD.” In connection with our initial public offering, our common stock began trading on the NYSE on December 15, 2010. As of the close of business on January 31, 2019,2021, there were 1925 stockholders of record. We believe that the number of beneficial holders is much greater.
Dividend Policy
During 2018,2020, our Board of Directors declared, and we paid, four quarterly dividends totaling $1.00$1.44 per share. These dividend payments represent the first such payment of dividends since our initial public offering in December 2010. In February 2019,2021, our Board of Directors declared a dividend for the first quarter of 20192021 of $0.30$0.50 per share, a 20%39% increase over the dividend declared for the fourth quarter of 2018.2020. We expect to make regular quarterly dividend payments for the foreseeable future.
Our current and projected dividends provide a return to shareholders while retaining sufficient capital to continue investing in the growth of our business. Our Term Loan (defined in Item 7 below) contains direct restrictions toon the amount of dividends we may pay, and our warehouse debt facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly restrict the amount of dividends we may pay.pay. While the dividend level remains a decision of our Board of Directors, it is subject to these direct and indirect restrictions, and will continue to be evaluated in the context of future business performance. We currently believe that we can support future annualcomparable quarterly dividend payments, barring significant unforeseen events.
Stock Performance Graph
The following chart graphs our performance in the form of a cumulative five-year total return to holders of our common stock since December 31, 20132015 in comparison to the Standard and Poor’s (“S&P”) 500 and the S&P 600 Small Cap Financials Index for that same five-year period. We believe that the S&P 600 Small Cap Financials Index is an appropriate index to compare us with other companies in our industry and that it is a widely recognized and used index for which components and total return information are readily accessible to our security holders to assist in their understanding of our performance relative to other companies in our industry.
2519
The comparison below assumes $100 was invested on December 31, 20132015 in our common stock and in each of the indices shown and assumes that all dividends were reinvested. Our stock price performance shown in the following graph is not indicative of future performance or relative performance in comparison to the indices.
Issuer Purchases of Equity Securities
Under the 20152020 Equity Incentive Plan, subject to the Company’s approval, grantees have the option of electing to satisfy minimum tax withholding obligations at the time of vesting or exercise by allowing the Company to withhold and purchase the shares of stock otherwise issuable to the grantee. For the quarter and year ended December 31, 2018, 2020, we purchased 1512 thousand shares and 228278 thousand shares, respectively, to satisfy grantee tax withholding obligations. Additionally, we purchased 244 thousand shares on share-vesting events. We announced a share repurchase program in the first quarter of 2018 as part of a share2020. The repurchase program that began in 2017 and ended in February 2018. In February 2018,authorized by our Board of Directors authorized thepermits us to repurchase ofup to $50.0 million of shares of our common stock over a 12-month period as part of the share repurchase program. The Companyended February 10, 2021. We purchased 459 thousand shares under this program and had $4.4$23.9 million of authorized share repurchase capacity remaining as of December 31, 2018. 2020.
20
The following table provides information regarding common stock repurchases for the quarter and year ended December 31, 2018:2020:
|
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|
|
|
|
|
|
|
|
| |||||||||||
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|
|
|
|
| Total Number of |
| Approximate |
| |||||||||||||
|
|
|
|
|
|
| Shares Purchased as |
| Dollar Value |
| ||||||||||||
|
| Total Number |
| Average |
| Part of Publicly |
| of Shares that May |
| |||||||||||||
|
| of Shares |
| Price Paid |
| Announced Plans |
| Yet Be Purchased Under |
| |||||||||||||
| | | | | | | | | | | | |||||||||||
| | | | | | Total Number of | | Approximate | | |||||||||||||
| | | | | | | Shares Purchased as | | Dollar Value | | ||||||||||||
| | Total Number | | Average | | Part of Publicly | | of Shares that May | | |||||||||||||
|
| of Shares |
| Price Paid |
| Announced Plans |
| Yet Be Purchased Under | | |||||||||||||
Period |
| Purchased |
| per Share |
| or Programs |
| the Plans or Programs |
| | Purchased | | per Share | | or Programs | | the Plans or Programs | | ||||
1st Quarter |
| 435,607 |
| $ | 49.12 |
| 243,865 |
|
|
|
| | 380,098 | | $ | 70.33 | | 160,712 | | | | |
2nd Quarter |
| — |
| $ | N/A |
| — |
|
|
|
| | 10,897 | | $ | 37.09 | | — | | | | |
3rd Quarter |
| 96,690 |
| $ | 54.35 |
| 74,994 |
|
|
|
| | 290,550 | | $ | 52.94 | | 254,414 | | | | |
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|
|
|
|
|
|
|
|
|
|
| |||||||||||
October 1-31, 2018 |
| — |
| $ | — |
| — |
|
|
|
| |||||||||||
November 1-30, 2018 |
| 469,529 |
|
| 46.30 |
| 465,000 |
|
|
|
| |||||||||||
December 1-31, 2018 |
| 474,858 |
|
| 43.01 |
| 464,846 |
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
October 1-31, 2020 | | 46,873 | | $ | 53.10 | | 43,871 | | $ | | | |||||||||||
November 1-30, 2020 | | — | | | — | | — | | | | | |||||||||||
December 1-31, 2020 | | 8,971 | | | 84.70 | | — | | | | | |||||||||||
4th Quarter |
| 944,387 |
| $ | 44.65 |
| 929,846 |
| $ | 4,413,003 |
|
| 55,844 | | $ | 58.18 | | 43,871 | | $ | 23,943 | |
Total |
| 1,476,684 |
|
|
|
| 1,248,705 |
|
|
|
|
| 737,389 | | | | | 458,997 | | | | |
| | | | | | | | | | | |
26
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our employee stock-based compensation plans, see Part III, Item 12.
Item 6. Selected Financial Data
Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301.
The selected historical financial information as of and for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 has been derived from our audited historical financial statements. The selected historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017, and 2016, and the related notes, all contained elsewhere in this Annual Report on Form 10-K. The significant reduction in the Company’s effective tax rate for the year ended December 31, 2017 and the reduction in the Company’s statutory federal rate for the year ended December 31, 2018 are more fully discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in Item 7 below.
As more fully discussed in NOTES 2 and 12 to the consolidated financial statements, for the years ended December 31, 2017, 2016, and 2015, basic and diluted earnings per share amounts and basic weighted-average and diluted weighted-average shares outstanding have been corrected from amounts previously reported in prior Annual Reports on Form 10-K to properly reflect the two-class method. In addition, the basic and diluted earnings per share amounts and basic weighted-average and diluted weighted-average shares outstanding for December 31, 2018 have been corrected from amounts previously reported in our earnings release on Current Report on Form 8-K dated February 6, 2019 (“2019 8-K”) to properly reflect the two-class method. Basic and diluted EPS for the year ended December 31, 2018 as reported on the 2019 8-K were $0.20 and $0.08 higher, respectively, than the amounts shown below. The correction of the error had no impact to Walker & Dunlop net income, Total equity, or our cash flows as of and for the years ended December 31, 2018, 2017, 2016, and 2015.
27
SELECTED FINANCIAL DATA
|
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|
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|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
| As of and For the Year Ended December 31, |
| |||||||||||||
Statement of Income Data |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 407,082 |
| $ | 439,370 |
| $ | 367,185 |
| $ | 290,466 |
| $ | 221,983 |
|
Servicing fees |
|
| 200,230 |
|
| 176,352 |
|
| 140,924 |
|
| 114,757 |
|
| 98,414 |
|
Net warehouse interest income, loans held for sale |
|
| 5,993 |
|
| 15,077 |
|
| 16,245 |
|
| 14,541 |
|
| 11,343 |
|
Net warehouse interest income, loans held for investment |
|
| 8,038 |
|
| 9,390 |
|
| 7,482 |
|
| 9,419 |
|
| 6,151 |
|
Escrow earnings and other interest income |
|
| 42,985 |
|
| 20,396 |
|
| 9,168 |
|
| 4,473 |
|
| 4,526 |
|
Other |
|
| 60,918 |
|
| 51,272 |
|
| 34,272 |
|
| 34,542 |
|
| 18,355 |
|
Total revenues |
| $ | 725,246 |
| $ | 711,857 |
| $ | 575,276 |
| $ | 468,198 |
| $ | 360,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 297,303 |
| $ | 289,277 |
| $ | 227,491 |
| $ | 184,590 |
| $ | 149,374 |
|
Amortization and depreciation |
|
| 142,134 |
|
| 131,246 |
|
| 111,427 |
|
| 98,173 |
|
| 80,138 |
|
Provision (benefit) for credit losses |
|
| 808 |
|
| (243) |
|
| (612) |
|
| 1,644 |
|
| 2,206 |
|
Interest expense on corporate debt |
|
| 10,130 |
|
| 9,745 |
|
| 9,851 |
|
| 9,918 |
|
| 10,311 |
|
Other operating expenses |
|
| 62,021 |
|
| 48,171 |
|
| 41,338 |
|
| 38,507 |
|
| 34,831 |
|
Total expenses |
| $ | 512,396 |
| $ | 478,196 |
| $ | 389,495 |
| $ | 332,832 |
| $ | 276,860 |
|
Income from operations |
| $ | 212,850 |
| $ | 233,661 |
| $ | 185,781 |
| $ | 135,366 |
| $ | 83,912 |
|
Income tax expense |
|
| 51,908 |
|
| 21,827 |
|
| 71,470 |
|
| 52,771 |
|
| 32,490 |
|
Net income before noncontrolling interests |
| $ | 160,942 |
| $ | 211,834 |
| $ | 114,311 |
| $ | 82,595 |
| $ | 51,422 |
|
Net income (loss) from noncontrolling interests |
|
| (497) |
|
| 707 |
|
| 414 |
|
| 467 |
|
| — |
|
Walker & Dunlop net income |
| $ | 161,439 |
| $ | 211,127 |
| $ | 113,897 |
| $ | 82,128 |
| $ | 51,422 |
|
Basic earnings per share |
| $ | 5.15 |
| $ | 6.72 |
| $ | 3.66 |
| $ | 2.65 |
| $ | 1.60 |
|
Diluted earnings per share |
| $ | 4.96 |
| $ | 6.47 |
| $ | 3.57 |
| $ | 2.62 |
| $ | 1.58 |
|
Cash dividends declared per common share |
| $ | 1.00 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Basic weighted average shares outstanding |
|
| 30,202 |
|
| 30,176 |
|
| 29,768 |
|
| 30,227 |
|
| 32,210 |
|
Diluted weighted average shares outstanding |
|
| 31,384 |
|
| 31,386 |
|
| 30,537 |
|
| 30,497 |
|
| 32,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 90,058 |
| $ | 191,218 |
| $ | 118,756 |
| $ | 136,988 |
| $ | 113,354 |
|
Restricted cash and pledged securities |
|
| 137,152 |
|
| 104,536 |
|
| 94,711 |
|
| 77,496 |
|
| 81,573 |
|
Mortgage servicing rights |
|
| 670,146 |
|
| 634,756 |
|
| 521,930 |
|
| 412,348 |
|
| 375,907 |
|
Loans held for sale, at fair value |
|
| 1,074,348 |
|
| 951,829 |
|
| 1,858,358 |
|
| 2,499,111 |
|
| 1,072,116 |
|
Loans held for investment, net |
|
| 497,291 |
|
| 66,510 |
|
| 220,377 |
|
| 231,493 |
|
| 223,059 |
|
Goodwill |
|
| 173,904 |
|
| 123,767 |
|
| 96,420 |
|
| 90,338 |
|
| 74,525 |
|
Total assets |
|
| 2,782,057 |
|
| 2,208,427 |
|
| 3,052,432 |
|
| 3,514,991 |
|
| 2,009,390 |
|
Warehouse notes payable |
|
| 1,161,382 |
|
| 937,769 |
|
| 1,990,183 |
|
| 2,649,470 |
|
| 1,214,279 |
|
Note payable |
|
| 296,010 |
|
| 163,858 |
|
| 164,163 |
|
| 164,462 |
|
| 169,095 |
|
Total liabilities |
|
| 1,874,865 |
|
| 1,393,446 |
|
| 2,437,358 |
|
| 3,022,642 |
|
| 1,575,939 |
|
Total equity |
|
| 907,192 |
|
| 814,981 |
|
| 615,074 |
|
| 492,349 |
|
| 433,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
| 29 | % |
| 33 | % |
| 32 | % |
| 29 | % |
| 23 | % |
Return on equity |
|
| 19 | % |
| 31 | % |
| 21 | % |
| 19 | % |
| 13 | % |
Total transaction volume |
| $ | 28,047,532 |
| $ | 27,905,831 |
| $ | 19,298,112 |
| $ | 17,758,748 |
| $ | 11,367,706 |
|
Servicing portfolio |
|
| 85,689,262 |
|
| 74,309,991 |
|
| 63,081,154 |
|
| 50,212,264 |
|
| 44,031,890 |
|
Assets under management |
|
| 1,422,735 |
|
| 182,175 |
|
| — |
|
| — |
|
| — |
|
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with “Selected Financial Data” and the historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this Annual Report on Form 10-K.
Business
Business
Walker & Dunlop, Inc. is a holding company, and we conduct the majority of our operations through Walker & Dunlop, LLC, our operating company.
We are one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending.lending, debt brokerage, and property sales. We originate, sell, and service a range of multifamily and other commercial real estate financing products to owners and developers of commercial real estate across the country, provide multifamily investmentproperty sales brokerage and appraisal services in various regions throughout the United States, and engage in commercial real estate investment management activities.activities.
We originate and sell multifamily loans through the programs of Fannie Mae, Freddie Mac, Ginnie Mae, and HUD, with which we have licenses and long-established relationships. We retain servicing rights and asset management responsibilities on nearly all loans that we originate for the Agencies’ programs. We are approved as a Fannie Mae DUS lender nationally, a Freddie Mac seller/servicerlender nationally a Freddie Mac targeted affordable housing seller/servicer,for Conventional, Seniors Housing, Targeted Affordable Housing and Small Balance Loans, a HUD MAP lender nationally, a HUD LEAN lender nationally, and a Ginnie Mae issuer. We broker and service loans for a number ofseveral life insurance companies, CMBS conduits, commercial banks, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker.
We fund loans for the Agencies’ programs, generally through warehouse facility financings, and sell them to investors in accordance with the related loan sale commitment, which we obtain at rate lock. Proceeds from the sale of the loan are used to pay off the warehouse facility. The sale of the loan is typically completed within 60 days after the loan is closed, and we retain the right to service substantially all of these loans. In cases where we do not fund the loan, we act as a loan broker and service some of the loans. Our loan originatorsmortgage bankers who focus on loan brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan. These loans are then funded directly by the institutional lender, andand for those brokered loans we service, we collect ongoing servicing fees while those loans
21
remain in our servicing portfolio. The servicing fees we typically earn on brokered loan transactions are substantially lower than the servicing fees we earn for servicing Agency loans.
We recognize gains from mortgage banking activitiesrevenue when we make simultaneous commitments to originate a loan to a borrower and sell that loan to an investor. The gains from mortgage banking activitiesrevenues earned reflect the fair value attributable to loan origination fees, premiums on the sale of loans, net of any co-broker fees, and the fair value of the expected net cash flows associated with servicing the loans, net of any guaranty obligations retained. We also recognize gains from mortgage banking activitiesrevenue when we receive the origination fee from a brokered loan transaction. Other sources of revenue include (i) net warehouse interest income we earn while the loan is held for sale, through one of our warehouse facilities, (ii) net warehouse interest income from loans held for investment while they are outstanding, (iii) sales commissions for brokering the sale of multifamily properties, and (iv) asset management fees from our investment management activities.
We retain servicing rights on substantially all the loans we originate and sell, and generate revenues from the fees we receive for servicing the loans, from the interest income on escrow deposits held on behalf of borrowers, from late charges, and from other ancillary fees. Servicing fees set at the time an investor agrees to purchase the loan are generally paid monthly for the duration of the loan and are based on the unpaid principal balance of the loan. Our Fannie Mae and
29
Freddie Mac servicing arrangements generally provide for prepayment fees to us in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae and Freddie Mac, we typically do not share in any such payments.have similar prepayment protections.
We are currently not exposed to unhedged interest rate risk during the loan commitment, closing, and delivery process. The sale or placement of each loan to an investor is negotiated prior toconcurrently with establishing the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing. We have agreements in place with the Agencies that specify the cost of a failed loan delivery,, also known as a “pair off fee,” in the event we fail to deliver the loan to the investor. To protect us against such pair off fees, we require a deposit from the borrower at rate lock that is typically more than the potential fee. The deposit is returned to the borrower only once the loan is closed. Any potential loss from a catastrophic change in the property condition while the loan is held for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost. We are also protected contractually from an investor’s failure to purchase the loan. We have experienced an immateriala de minimis number of failed deliveries in our history and have incurred immaterial losses on such failed deliveries.
We have risk-sharing obligations on substantially all loans we originate under the Fannie Mae DUS program. When a Fannie Mae DUS loan is subject to full risk-sharing, we absorb losses on the first 5% of the unpaid principal balance of a loan at the time of loss settlement, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the original unpaid principal balance of the loan (subject to doubling or tripling if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae)., except for rare instances when we negotiate a cap at 30% for loans with unique attributes. We occasionally request modifiedhave had only one loan loss with a 30% cap in our history. Our full risk-sharing based on the size of the loan. During the second quarter of 2018, Fannie Mae increased our risk-sharing cap from $60.0is currently limited to loans up to $200 million, which equates to $200.0 million. Accordingly, oura maximum loss exposure on any oneper loan is $40.0of $40 million (such exposure would occur ifin the event that the underlying collateral is determined to be completely without value at the time of loss). For loans in excess of $200 million, we receive modified risk-sharing. We also may request modified risk-sharing at the time of origination on loans below $200 million, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fairlyfully compensated for the risks of the transaction.transactions. The full risk-sharing limit in prior years was less than $200 million. Accordingly, loans originated in those prior years were subject to risk-sharing at much lower levels. Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive from Fannie Mae for loans with no risk-sharing obligations. We receive a lower servicing fee for modified risk-sharing than for full risk-sharing.
Our Interim Program offers floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. We underwrite, asset-manage, and service all loans executed through the Interim Program. The ultimate goal of the Interim Program is to provide permanent Agency financing on these transitiontransitional properties. The Interim Program has two distinct executions: held by the Interim Program JV and held for investment.the Interim Loan Program.
The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations using a combination of equity contributions from its owners and third-party credit facilities.
Prior to 2017 and during the first six months of 2017, all loans originated through the Interim Program were held for investment. During the third quarter of 2017, we transferred $119.8 million of loans from our loans held for investment portfolio to the joint venture at par. We do not expect to sell additional loans held for investment to the joint venture in the future.
During the year ended December 31, 2018, $350.0 million of the $993.1 million of interim loan originations were executed through the joint venture. As of December 31, 2018, we asset-managed $334.6 million of interim loans on behalf of the Interim Program JV.
We originate and hold somethe Interim Loan Program loans for investment, which are included on our balance sheet. During the time that these loans are outstanding, we assume the full risk of loss. Since we began originating interim loans, we have not experienced any delinquencies or charged off any Interim Program loans. As of December 31, 2018,2020, we had 14
30
18 loans held for investment under the Interim Loan Program with an aggregate outstanding unpaid principal balance of $503.5$366.3 million. One loan with a balance of $14.7 million is currently in default.
During the year ended December 31, 2020, $86.2 million of the $276.0 million of interim loan originations were executed through the joint venture, with the remainder originated through our Interim Loan Program. During the year ended December 31, 2019, $436.1 million of the $757.2 million of interim loan originations were executed through the joint venture. As of December 31, 2020 and 2019, we asset-managed $484.8 million and $670.5 million, respectively, of interim loans on behalf of the Interim Program JV.
22
During the third quarter of 2018, we transferred a $70.1 million portfolio of participating interests in loans held for investment to a third party and accounted for the transfer as a secured borrowing. The balance of the portfolio is presented as loans held for investment with an offsetting amount for the secured borrowing included as account payable as of December 31, 2018.2020. We do not have credit risk related to the transferred loans.During the fourth quarter of 2018, we completed a $150.0 million participation in a subordinated note with a large institutional investor in multifamily loans. The participation was fully funded with corporate cash. The note is collateralized by a portfolio of multifamily loans and other assets, has a term of one year, and has scheduled principal curtailments prior to maturity.
Under certain limited circumstances, we may make preferred equity investments in entities controlled by certain of our borrowers that will assist those borrowers to acquire and reposition multifamily properties. The terms of such investments are negotiated with each investment. As of December 31, 2017, we had preferred equity investments with one borrower totaling $41.7 million, all of which were repaid during the year ended December 31, 2018.
Through WDIS, we offer investmentproperty sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties. Through these investmentproperty sales brokerage services, we seek to maximize proceeds and certainty of closure for our clients using our knowledge of the commercial real estate and capital markets and relying on our experienced transaction professionals. Our investmentproperty sales services are offered in various regions throughout the United States. We have added several investmentproperty sales brokerage teams over the past few years and continue to seek to add other investmentproperty sales brokers, with the goal of expanding these brokerage services to cover all major regions throughout the United States. We consolidate the activities of WDIS and present the portion of WDIS that we do not control as Noncontrolling interests in the Consolidated Balance Sheets and Net income from noncontrolling interests in the Consolidated Statements of Income.
During the second quarter of 2018, the Company acquired JCR, the operator,WDIP, a registered investment adviser, and general partner of private commercial real estate investment funds focused on the management of debt, preferred equity, and mezzanine equity investments in private middle-market commercial real estate funds and separately managed accounts. The acquisition of JCR,WDIP, a wholly owned subsidiary of the Company, is part of our strategy to grow and diversify the company by growing our investment management platform. JCR’sWDIP’s current assets under management (“AUM”) of $1.0$1.3 billion primarily consist of assets held in three sources:managed funds: Fund III, Fund IV and Fund V, and separate accounts managed for life insurance companies. AUM for Fund III and Fund IV consist of both unfunded commitments and funded investments.investments, AUM for Fund V consists of unfunded commitments, and AUM for the separate accountaccounts consist entirely of funded investments. Unfunded commitments are highest during the fund raising and investment phases. AUM fordisclosed in this purposeAnnual Report on Form 10-K may differ from regulatory assets under management disclosed on JCR’sWDIP’s Form ADV. The following table summarizes JCR’s AUM as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
| Unfunded |
| Funded |
|
|
|
| ||
Components of JCR assets under management (in thousands) |
| Commitments |
| Investments |
| Total |
| |||
Fund III |
| $ | 95,172 |
| $ | 162,999 |
| $ | 258,171 |
|
Fund IV |
|
| 248,139 |
|
| 65,473 |
|
| 313,612 |
|
Separate account |
|
| — |
|
| 446,282 |
|
| 446,282 |
|
Total assets under management |
| $ | 343,311 |
| $ | 674,754 |
| $ | 1,018,065 |
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JCRWDIP typically receives management fees based on limited partner capital commitments, unfunded investment commitments, and funded investments. Additionally, with respect to Fund III, Fund IV and Fund IV, JCRV, WDIP receives a percentage of the profits above the fund expenses and preferred return specified in the fund offering agreements.
Over the past three years, we have purchased the rights to service HUD loans with an aggregate $4.3 billion unpaid principal balance from third-party servicers for a total of $52.7 million. The acquisition of these servicing rights substantially increased our HUD servicing portfolio and led to our being one of the largest servicers of HUD commercial real estate loans as of December 31, 2018. We expect the servicing rights acquisitions to have the following benefits:
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As of December 31, 2018,2020, our servicing portfolio was $85.7$107.2 billion, up 15% from December 31, 2017,2019, making it the 78th largest commercial/multifamily primary and master servicing portfolio in the nation according to the Mortgage Bankers’ Association’s (“MBA”) 20182020 year-end survey (the “Survey”). Our servicing portfolio includes $36.0$48.8 billion of loans serviced for Fannie Mae and $30.4$37.1 billion for Freddie Mac, making us the 2nd1st and 3rd4th largest primary and mastercashier servicer of Fannie Mae and Freddie Mac loans in the nation, respectively, according to the Survey. Also included in our servicing portfolio is $9.9$9.6 billion of HUD loans, the 2nd3rd largest HUD primary and master servicing portfolio in the nation according to the Survey.
The average number of our loan originatorsmortgage bankers increased from 130150 during 20172019 to 138161 during 20182020 due to our own organic growth, recruiting and from acquisitions completed in the current year, resulting inacquisition, contributing to an increase of 2%32% in our loan origination volume, from a total of $24.9$26.6 billion during 20172019 to a total of $25.3$35.0 billion during 2018.2020. Fannie Mae recently announced that we ranked as its 2ndlargest DUS lender in 2018,2020, by loan deliveries, and Freddie Mac recently announced that we ranked as its 4th largest seller/servicerFreddie Mac lender in 2018,2020, by loan deliveries. Additionally, we were the third 5th largest multifamily lender for HUD in 20182020 based on MAP initial endorsements.
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries, and all intercompany transactions have been eliminated.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”),GAAP, which requirerequires management to make estimates based on certain judgments and assumptions that are inherently uncertain and affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions.assumptions and the use of different judgments and assumptions may have a material impact on our results. We believe the following critical accounting policiesestimates represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. Additional information about our critical accounting estimates and other significant accounting policies are discussed in NOTE 2 of the consolidated financial statements.
Mortgage Servicing Rights (“MSRs”). MSRs are recorded at fair value at loan sale or upon purchase. The fair value of MSRs acquired through a stand-alone servicing portfolio purchase (“PMSR”) is equal to the purchase price paid. The fair value at loan sale (“OMSR”) is based on estimates of expected net cash flows associated with the servicing rights and takes into consideration an estimate of loan prepayment. Initially, the fair value amount is included as a component of the derivative asset fair value at the loan commitment date. The estimated net
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cash flows from servicing, which includes assumptions for escrow earnings, prepayment, and servicing costs, are discounted at a rate that reflects the credit and liquidity risk of the MSROMSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all MSRs recognized at loan sale OMSRs were between 10-15% and varied based on the loan type. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan.loan and assumptions about loan behaviors around those provisions. Our model for originated MSRsOMSRs assumes no prepayment while the prepayment provisions have not expired and full prepayment of the loan at or near the point where the prepayment provisions have expired. We record an individual MSROMSR asset (or liability) for each loan at loan sale. For purchased stand-alone servicing portfolios,PMSRs, we record and amortize a portfolio-level MSR asset based on the estimated remaining life of the portfolio using the prepayment characteristics of the portfolio. We have had three stand-alone servicing portfolio purchases, one each in 2016, 2017, and 2018.
The assumptions used to estimate the fair value of MSRs at loan salecapitalized OMSRs are based on internal modelsdeveloped internally and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the multifamily MSR market, we have experienced little volatility in the assumptions we useused during the periods presented, including the most-significant assumption – the discount rate. Additionally, weWe do not expect to see muchsignificant volatility in the assumptions
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for the foreseeable future. ManagementWe actively monitorsmonitor the assumptions used and makesmake adjustments to those assumptions when market conditions change or other factors indicate such adjustments are warranted. We carry originated and purchased MSRs at For example, during the lower of amortized cost or fair value and evaluateyear ended December 31, 2020, we adjusted the carrying value for impairment quarterly. We test for impairmentescrow earnings rate assumption twice based on the purchased stand-alone servicing portfolio separatelychanges we saw from our other MSRs. The MSRs from stand-alone portfolio purchases and from loan sales are tested for impairment at the portfolio level. We have never recorded an impairment of MSRs in our history.market participants. We engage a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis.
Gains from mortgage banking activities income is recognized when we record a derivative asset upon the simultaneous commitments to originate a loan with a borrower and sell the loan to an investor. The commitment asset related to the loan origination is recognized at fair value, which reflects Changes in our discount rate assumptions may materially impact the fair value of the contractual loan origination related fees and sale premiums, net of any co-broker fees, and the estimated fair valueMSRs (NOTE 3 of the expected net cash flows associated withconsolidated financial statements details the servicingportfolio-level impact of the loan, net of the estimated net future cash flows associated with any risk-sharing obligations (the “servicing component of the commitment asset”). Upon loan sale, we derecognize the servicing component of the commitment asset and recognize an MSR. All MSRs are amortized into expense using the interest method over the estimated life of the loan and presented as a component of Amortization and depreciationchange in the Consolidated Statements of Income.discount rate).
For MSRs recognized at loan sale, the individual loan-level MSR is written off through a charge to Amortization and depreciation when a loan prepays, defaults, or is probable of default. For MSRs related to purchased stand-alone servicing portfolios,PMSRs, a constant rate of prepayments and defaults is included in the determination of the portfolio’s estimated life (and thus included as a component of the portfolio’s amortization). Accordingly, prepayments and defaults of individual MSRsloans do not change the level of amortization expense recorded for the portfolio unless the pattern of actual prepayments and defaults varies significantly from the estimated pattern. When such a significant difference in the pattern of estimated and actual prepayments and defaults occurs, we prospectively adjust the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed. We have not adjusted the estimated life of our purchased stand-alone servicing portfolios as the actual prepayment experience has not differed materially from the expected prepayment experience. We do not anticipate an adjustmentmade adjustments to the estimated life of two of our PMSRs during 2020 as the portfolios will be necessary inactual experience of prepayments differed materially from the near term due to the characteristics of the portfolios, especially the low weighted-average interest rates and the relatively long remaining periods of prepayment protection.estimated prepayments.
Allowance for Risk-sharingRisk-Sharing Obligations. The allowance This reserve liability (referred to as “allowance”) for risk-sharing obligations relates to our at riskat-risk servicing portfolio and is presented as a separate liability within the Consolidated Balance Sheets. The amount of this allowance considerson our assessmentbalance sheets. We record an estimate of the likelihood of repayment byloss reserve for the borrower or key principal(s),current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio using the risk characteristicsweighted-average remaining maturity method (“WARM”). WARM uses an average annual loss rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual loss rate is applied to the estimated unpaid principal balance over the contractual term, adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below. We currently use one year for our reasonable and supportable forecast period (“forecast period”) as we believe forecasts beyond one year are inherently less reliable. During the forecast period we apply an adjusted loss factor associated with a similar historical period. We revert to the historical loss rate over a one-year period.
One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the future. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. We originate loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate. The runoff rates applied to each vintage and contractual maturity term is determined using historical data; however, changes in prepayment and amortization behavior may significantly impact the loan’s risk rating,estimate.
The weighted-average annual loss rate is calculated using a 10-year look-back period, utilizing the average portfolio balance and settled losses for each year. A 10-year period is used as we believe that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio.
Changes in our expectations and forecasts may materially impact the estimate. At the adoption of the CECL standard on January 1, 2020, projections for the multifamily market and macroeconomic environment were for continued strong performance, and in response, the loss rate applied was one basis point as this represented the historical loss experience, adverse situations affecting individual loans,rate consistent with the estimated disposition valueconditions expected to prevail over the forecast period. Beginning in March 2020, conditions changed significantly due to the COVID-19 Crisis causing global economic contraction, higher unemployment rates, and a recession to ensue. In response to the change in economic conditions, we revised the forecast-period loss rate as of December 31, 2020 upward to six basis points to reflect the underlying collateral, andsignificant economic uncertainty that continues to linger due to the level of risk sharing. Historically, initial loss recognition occurs at or before a loan becomes 60 days delinquent. COVID-19 Crisis.
We regularly monitor the allowance on all applicable loans and update loss estimates as current information is received. Provision (benefit) for credit losses in the Consolidated Statements of Income reflects the income statement impact of changes to both the allowance for risk-sharing obligations and allowance for loan losses.
We perform a quarterly evaluation of all ofevaluate our risk-sharing loans on a quarterly basis to determine whether a loss is probable. Our process for identifying which risk-sharingthere are loans may bethat are probable of loss consists of an assessment of severaldefault. Specifically, we assess a loan’s qualitative and quantitative risk factors, includingsuch as payment status, property financial performance, local real estate market
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conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When we believe a loan is determined to be probable of foreclosure or whendefault based on these factors, we remove the loan is in foreclosure, we record an allowancefrom the WARM calculation and individually assess the loan for that loan (a “specific reserve”). The specific reserve is based on the estimate ofpotential credit loss. This assessment requires certain judgments and assumptions to be made regarding the property fair value less sellingvalues and property preservation costs and considers the loss-sharing requirements detailed below in the “Credit Quality and Allowance for Risk-Sharing Obligations” section. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligations is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value. The allowance for risk-sharing obligations for such loans is updated as any additional information is received until the loss is settled with Fannie Mae. The settlement with Fannie Mae is based on theother factors, that may differ significantly from actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements.results. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial specific
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reserves have not varied significantly from the final settlement. WeGiven the unprecedented nature of the impacts of the Crisis on the domestic economy and commercial real estate in particular, we are uncertain whether such a trendtrends will continue in the future.
In additionWe activity monitor the judgments and assumptions used in our Allowance for Risk-Sharing Obligation estimate and make adjustments to those assumptions when market conditions change, or when other factors indicate such adjustments are warranted. We believe the specific reserves discussed above, we also record an allowancelevel of Allowance for risk-sharing obligations related to all risk-sharing loansRisk-Sharing Obligation is appropriate based on our watch list (“general reserves”). Such loans are not probableexpectations of foreclosure but are probable of loss as the characteristics of these loans indicate that it is probable that these loans include some losses even though the loss cannot be attributed to a specific loan. For all other risk-sharing loans not on our watch list, we continue to carry a guaranty obligation. We calculate the general reserves based on a migration analysisfuture market conditions; however, changes in one or more of the loans on our historical watch lists, adjusted for qualitative factors that are basedjudgments or assumptions used above could have a significant impact on the characteristics of the servicing portfolio and the current market conditions. We have not experienced volatility in the general reserves loss percentage and do not expect to experience significant volatility in the near term.estimate.
When we place a risk-sharing loan on our watch list, we transfer the remaining unamortized balance of the guaranty obligation to the general reserves. If a risk-sharing loan is subsequently removed from our watch list due to improved financial performance, we transfer the unamortized balance of the guaranty obligation back to the guaranty obligation classification on the balance sheet and amortize the remaining unamortized balance evenly over the remaining estimated life. For each loan for which we have a risk-sharing obligation, we record one of the following liabilities associated with that loan as discussed above: guaranty obligation, general reserve, or specific reserve. Although the liability type may change over the life of the loan, at any particular point in time, only one such liability is associated with a loan for which we have a risk-sharing obligation.
Overview of Current Business Environment
The fundamentalsAt the onset of the commercialCOVID-19 Crisis, we saw dramatic increases in unemployment. The Federal Reserve and multifamily real estate market remain strong. Multifamily occupancy ratesthe U.S. Congress (“Congress”) responded with unprecedented levels of economic and effective rents remain strong based upon robust rental market demand while delinquency rates remain at historic lows, allmonetary stimulus, most notably, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act included considerable capital investments and government programs meant to support households, businesses, and the U.S. economy during the recession created by the COVID-19 Crisis.
Specifically, as it relates to our business, nearly $600 billion of aid was allocated to programs, including supplemental unemployment payments, that provided funds necessary to enable many renters to continue meeting monthly obligations. At the end of 2020, Congress enacted the Consolidated Appropriations Act (“CAA”), which aid loan performanceincluded extensions to many of the provisions originally enacted by the CARES Act. The CAA included an extension of the enhanced unemployment benefits and loan origination volumes due$25 billion in emergency assistance to their importancerenters. The CARES Act and the CAA have provided substantial relief and stimulus to the cash flowseconomy, and our business continues to perform well, but there is no guarantee that this will continue as the level of unemployment remains high, and the economy remains in a recession. As a result of the underlying properties. Additionally,continued high level of unemployment, Congress is currently working on passing a third stimulus package in 2021.
In March 2020, the headwinds facing single-family home ownership, including high valuations, higherFederal Reserve brought the Federal Funds Rate to a target of 0% to 0.25% in an emergency cut in response to the pending COVID-19 outbreak. The Federal Reserve indicated in its January 2021 meeting that it intends to keep rates at these low levels for the foreseeable future in order to support an economic recovery. This action by the Federal Reserve, along with the Federal Reserve’s commitment to buy Treasury securities and Agency mortgage-backed securities in amounts necessary to support smooth functioning of markets, has enabled Agency securities to continue trading uninterrupted with little to no change in the credit spreads that drive pricing of Agency mortgage-backed securities and has contributed to very low long-term mortgage interest rates, which form the basis for most of our lending. The low rate environment contributed to the increase in our Agency lending volumes during 2020.
Finally, the Agencies have separately responded to the COVID-19 Crisis by halting the eviction of tenants living in assets they have financed. This has directly influenced borrowers’ ability to manage tenants that are either unable to pay, or elect not to pay, their monthly obligations. In response, numerous multifamily owner-operators are working closely with affected renters to provide economic assistance during this time of need, up to and reduced credit availability,including rent forbearance for those experiencing a financial hardship. The Agencies responded further to the COVID-19 Crisis by offering loan forbearance to borrowers for up to 180 days, provided a borrower is able to show a property is experiencing a financial hardship as a direct result of the COVID-19 Crisis. Under the loan forbearance plan, borrowers will repay the forborne payments over a 12- to 24-month period without penalties. The creation of these two programs may have leda direct impact on our borrowers’ ability to home ownershipmake monthly debt service payments, and in turn, may impact the Company’s obligation to advance funds to bondholders under our servicing agreements with Fannie Mae and HUD. We do not have advance obligations with respect to our Freddie Mac or life insurance servicing agreements. To date, very few of our multifamily borrowers have requested loan forbearance, requiring low levels of advances. Our outstanding advances were immaterial under our Fannie Mae and HUD servicing agreements at or near historic lows. AtDecember 31, 2020. Declining rent collections and a borrower’s inability to make all required payments once the same time, new household formation continuesforbearance period is over could lead to grow, unemployment levels remain at historic lows,an increase in delinquencies and macroeconomic indicatorslosses beyond what we have experienced since the great financial crisis of 2007-2010, although we are strong, all resulting in high demand for multifamily housing.
not experiencing this to date. The Mortgage Bankers’ Association (“MBA”) recently reported thatprolonged nature of the amount of commercial and multifamily mortgage debt outstanding continued to growCrisis could result in the third quarternumber of 2018, reaching $3.3 trillion, an increaseforbearance requests increasing given the current high levels of 1.4%domestic unemployment.
The most immediate impact of the Crisis was felt by our multifamily property sales operations, which saw significant declines beginning in March 2020 because of the COVID-19 Crisis after a strong start to the year. Multifamily property sales volumes rebounded strongly in the second half of 2020 from the endlows of the second quarter of 2018. Multifamily mortgage debt outstanding rose to $1.3 trillion2020, as of the end of the third quarter of 2018, an increase of 2.0% from the end of the second quarter of 2018. The multifamily category with the largest growth in mortgage debt outstanding was Agency lending. The MBA also reported that commercial and multifamily loan originations during the first nine months of 2018 decreased 1% from the first nine months of 2017, while multifamily loan originations grew by 18% year over year.
The increase in rental housing demand and gaps in housing production have led to continued steady rising rents in multifamily properties in most markets. The positive performance has boosted the value of many multifamily properties towards the high end of historical ranges. According to RealPage, a provider of commercial real estate data and analytics, rent growth from the fourth quarter of 2017capital began returning to the fourth quarter of 2018 was 3.3%, pushing 2018’s rent growth above the 2.5% growth for 2017. 2018 also marked the sixth year out of the past eight that rent growth has topped 3%. RealPage also reported that new multifamily housing construction completed during 2018 was 287 thousand units. Despite the significant new construction completions, the multifamily housing market has been able to absorb the new units as evidenced by a decrease in the vacancy rate of 40 basis points from 5.0% at the end of 2017 to 4.6% at the end of the fourth quarter of 2018. RealPage also recently reported 2019 construction completions are forecasted to be 319 thousand units. Wemarket. Long-term, we believe that the market demandfundamentals remain positive for multifamily housing in the upcoming quarters will continue to absorb most of the capacity created by new construction and that vacancy rates will remain near historic lows, continuing to make multifamily properties an attractive investment option.
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In addition to the improved property fundamentals, forsales. Over the last several years, the U.S. commercial and multifamily mortgage market has experienced historically low cost of borrowing, which has further encouraged capital investment into commercial real estate. As borrowers have sought to take advantage of the interest rate environment and improved property fundamentals, the number of investors and amount of capital available to lend have increased. All of these factors have benefited our total transaction volumes over the past several years, especially in 2018, which was a record. Competition for lending on commercial and multifamily real estate among commercial real estate services firms, banks, life insurance companies, and the GSEs remains fierce.
The Federal Reserve raised its targeted Fed Funds Rate by 100 basis points during 2018 and 200 basis points during the past two years. We have not experienced a pronounced or sustained decline in origination volume as a result of the increases in the Fed Funds Rate as (i) long-term mortgage interest rates have remained at relatively low levels due to a flattened yield curve throughout most of the past two years, (ii) there remains a significant number of capital market participants that are investing in commercial real estate and multifamily properties, and (iii) investor spreads have tightened. However, during the second half of 2018, we did experience compression in the servicing fees we received on our loan originations with Fannie Mae due to increased competition for loan originations, combined with the increase in interest rates and the flattening of the yield curve. The decrease in servicing fees on new Fannie Mae loan originations in the second half of 2018 contributed to a decline in the gains from mortgage banking activities from the year ended December 31, 2017months leading up to the year ended December 31, 2018. We cannot be certain that these trends will continue asCOVID-19 Crisis, household formation and a dearth of supply of entry-level single-family homes led to strong demand for rental housing in most geographic areas. Consequently, the number, timing, and magnitude of any future increases by the Federal Reserve, taken together with previous interest rate increases and combined with other macroeconomic and market factors, including increased competition for loan originations, may have a different effect on the commercial real estate market and on us.
We expect to see continued strength in the multifamily market for the foreseeable future due to the underlying fundamentals of the multifamily market were strong entering the COVID-19 Crisis, and when coupled with the
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financial protections put in place by Congress and the Agencies, it is our expectation that market demand for multifamily property sales will continue to recover as labor markets are strong, home ownership remains challenging for many households, and demand increases from new household formation. Additionally,multifamily properties will remain an attractive investment option.
Our non-multifamily focused mortgage brokerage operations have also been impacted by the MBA recently releasedCOVID-19 Crisis. The Crisis had an immediate negative impact on the resultssupply of its 2019 survey ofcapital to commercial real estate, firmsmost noticeably for hospitality, office, and reported that 55%retail assets. Our debt brokerage platform delivered record financing volumes prior to the onset of the firms expect loan originationsCrisis in the U.S. As a result of the Crisis, we saw a decline in brokered financing transactions in the second quarter as transactions were put on hold or cancelled altogether. During the fourth quarter of 2020, we saw capital sources come back into the market, helping to drive a year-over-year increase in our annual debt brokerage volume compared to 2019. We expect non-multifamily debt financing volumes to continue to recover as banks and life insurance companies return to their pre-Crisis origination volumes.
Our Agency multifamily debt financing operations remain very active. The Agencies are countercyclical sources of capital to the multifamily industry and have continued to lend during the COVID-19 Crisis, just as they did during the great financial crisis of 2007-2010. We are a market-leading originator with Fannie Mae and Freddie Mac,the Agencies, and the GSEsAgencies remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency (“FHFA”) 2019 GSE Scorecard (“2019 Scorecard”) established Fannie Mae’sConsequently, we continue to see significant activity in our multifamily lending operations, and Freddie Mac’s 2019 loan origination caps at $35.0 billion each for market-rate apartments (“2019 Caps”), the same as 2018 as the FHFA expects 2019 volumes in the multifamily marketwe continue to besee lending opportunities consistent with those seen in 2018. Affordable housing loans and manufactured housing rental community loans continue to be excluded from the 2019 Caps. Additionally, the definition of the affordable housing loan exclusion continues to encompass affordable housing in high- and very-high cost markets and to allow for an exclusion from the 2018 Caps for the pro-rata portion of any loan on a multifamily property that includes affordable housing units. The 2019 Scorecard provides the FHFA with the flexibility to review the estimated size of the multifamily loan origination market on a quarterly basis and proactively adjust the 2019 Caps upward should the market be larger than expected in 2019. The 2019 Scorecard also provides exclusions for loans to properties located in underserved markets including rural, small multifamily, and senior assisted living and for loans to finance multifamily properties that invest in energy or water efficiency improvements.
The GSEs reported a combined loan origination volume of $142.9 billion during 2018 compared to $139.3 billion during 2017, an increase of 3%. Fannie Mae’s volume decreased 1% year over year, while Freddie Mac’s volume increased 6% year over year. Our loan origination volume with Fannie Mae decreased 1%, while our loan origination volume with Freddie Mac decreased 13%. During 2017, we originated a $1.9 billion portfolio of Freddie Mac loans with no comparable activity in 2018, which significantly impacted the year-over-year Freddie Mac loan origination volume. Excluding the large transaction in 2017, our Freddie Mac loan origination volume increased 15% year over year. We expect the GSEs to maintain their historical market share in a multifamily market that is projected by the MBA to be $309.0 billion in 2019, which is 2% higher than the MBA’s projected 2018 multifamily market volume of $302.0 billion.pre-Crisis levels. We believe our market leadership positions us to be a significant lender with the GSEsAgencies for the foreseeable future.
The FHFA establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In September 2020, FHFA established Fannie Mae’s and Freddie Mac’s 2021 loan origination caps at $70 billion each for all multifamily business. The new caps apply to all multifamily business with no exclusions. In 2020, Fannie Mae and Freddie Mac had multifamily origination volumes of $76.1 billion and $83.1 billion, respectively, up 8.4% and 6.1% from 2019, respectively. In 2020, we saw strong lending activity from our GSE operations and increased our market share with the GSEs to 12.3% from 10.2% in 2019.
Our debt financing operations with HUD grew during 2020, with HUD loans accounting for 6% of our debt financing volumes the year ended December 31, 2020, compared to 3% for the year ended December 31, 2019. The increase in HUD debt financing volumes was partially a result of the government shutdown during the first half of 2019 and partially a result of HUD originations being countercyclical sources of capital, similar to the GSEs.
We expect strength in our Agency operations to continue given the pull back by other capital sources. An additional positive factor influencing multifamily financing volumes is the historically low interest rate environment, which is incentivizing borrowers to refinance their properties in spite of the current challenges. We continue to seek to add resources and scale to our Agency lending platform.
Our originations with the GSEsAgencies are some of our most profitable executions as they provide significant non-cash gains from MSRs andthat turn into significant cash revenue streams
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in the future. from future servicing fees. A decline in our GSEAgency originations would negatively impact our financial results as our non-cash revenues would decrease disproportionately with loan originationdebt financing volume and future servicing fee revenue would be constrained or decline. A new acting director of the FHFA was appointed in early 2019, and we expect a permanent director will be appointed in the first half of 2019. We do not know whether the FHFA will impose stricter limitations on GSE multifamily production volume beyond 2019.
We continue to significantly grow our capital markets platform through hiring and acquisitions to gain greater access to capital, deal flow, and borrower relationships. The apparent appetite for debt funding within the broader commercial real estate market, along with additions of brokered loan originators over the past several years, has resulted in significant growth in our brokered originations as evidenced by the 17% growth in brokered loan originations from 2017 to 2018, which followed 75% growth from 2016 to 2017. From 2016 to 2018, we more than doubled our brokered loan originations. Our outlook for our capital markets platform is positive as we expect continued growth in the commercial real estate and multifamily markets in the near future.
Although our HUD loan origination volume decreased 26% from 2017 to 2018, HUD remains a strong source of capital for new construction loans and healthcare facilities. We expect that HUD will continue to be a meaningful supplier of capital to our borrowers. We continue to seek to add resources and scale to our HUD lending platform, particularly in the area of construction lending, seniors housing, and skilled nursing, where HUD remains an important provider of capital.
Many of our borrowers continue to seek higher returns by identifying and acquiring the transitional properties that the Interim Program is designed to address. We entered into the Interim Program JV to both increase the overall capital available to transitional multifamily properties and to dramatically expand our capacity to originate Interim Program loans. The demand for transitional lending has brought increased competition from lenders, specifically banks, mortgage real estate investment trusts, and life insurance companies. All are actively pursuing transitional properties by leveraging their low costAs it did with other types of lending, the COVID-19 Crisis has resulted in a pullback of capital and desiresources for short-term, floating-rate, high-yield commercial real estate investments. We originated $993.1 million of interim loans during 2018 comparedlending opportunities. In response to $314.4 million during 2017. Of the overall interim loan origination volume for 2018 and 2017, $350.0 million and $231.9 million, respectively, were originated for theCrisis, we paused originations on new Interim Program JV. Included within the origination volumeloans for 2018 is a loan portfolio of $93.5 million, 90% of which we sold to our Interim Program JV partner through a secured borrowing transactionseveral months and recommenced in the third quarter of 2018. Additionally, we originated2020. We continue to maintain a $150.0 million portfolio ofcautious outlook on new originations but have seen an increase in our loan origination pipeline and expect to originate additional interim loans in 2018, the largest transaction we have ever originated throughnear term. Except for one loan that defaulted in early 2019, the loans in our portfolio and in the Interim Program.
We saw decreased activity within our multifamily-focused investment sales business during 2018 comparedProgram JV continue to 2017. We made additions to our investment sales team overperform as agreed, but we could see higher levels of default or requests for forbearance as the past year in 2018 and continue our efforts to expand our investment sales platform more broadly across the United States and to increase the size of our investment sales team to capture what we believe will be strong multifamily investment sales activity over the coming years.
During 2018, Hurricanes Florence and Michael and wildfires in California each caused substantial damage to the affected areas. Located within the affected areas are multiple properties collateralizing loans for which the Company has risk-sharing obligations. Based on its preliminary assessment of these properties, the Company believes that few, if any, of these properties incurred significant damage, and those that did have adequate insurance coverage. Additionally, the Company has not experienced an increase in late payments from risk-sharing loans collateralized by properties in the affected areas. Accordingly, based on information currently available, the natural disasters did not have a material impact on the Allowance for risk-sharing obligations as of December 31, 2018. Additionally, the Company does not believe that these natural disasters will have a material impact on its Allowance for risk-sharing obligations in the future. However, the impact to borrowers from such natural disasters may not be known by us until well after the occurrenceimpacts of the disaster; therefore, over the coming months, we may experience an increase in late payments or defaults of loans for which we have risk-sharing obligations that are collateralized by properties in the affected areas.Crisis linger.
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Factors That May Impact Our Operating Results
We believe that our results are affected by a number of factors, including the items discussed below.
| Performance of Multifamily and Other Commercial Real Estate Related Markets. Our business is dependent on the general demand for, and value of, commercial real estate and related services, which are sensitive to long-term mortgage interest rates and other macroeconomic conditions and the continued existence of the GSEs. Demand for multifamily and other commercial real estate generally increases during stronger economic environments, resulting in increased property values, transaction volumes, and loan origination volumes. During weaker economic environments, multifamily and other commercial real estate may experience higher property vacancies, lower demand and reduced values. These conditions can result in lower property |
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transaction volumes and loan originations, as well as an increased level of servicer advances and losses from our Fannie Mae DUS risk-sharing obligations and our interim lending program. |
| The Level of Losses from Fannie Mae Risk-Sharing Obligations. Under the Fannie Mae DUS program, we share risk of loss on most loans we sell to Fannie Mae. In the majority of cases, we absorb the first 5% of any losses on the loan’s unpaid principal balance at the time of loss settlement, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the loan’s unpaid principal balance on the origination |
| The Price of Loans in the Secondary Market. Our profitability is determined in part by the price we are paid for the loans we originate. A component of our origination related revenues is the premium we recognize on the sale of a loan. Stronger investor demand typically results in larger premiums while weaker demand results in little to no premium. |
| Market for Servicing Commercial Real Estate Loans. Servicing fee rates for new loans are set at the time we enter into a loan sale commitment based on origination fees, competition, prepayment rates, and any risk-sharing obligations we undertake. Changes in servicing fee rates impact the value of our MSRs and future servicing revenues, which could impact our profit margins and operating results immediately and over time. |
| The Percentage of Adjustable Rate Loans Originated and the Overall Loan Origination Mix. The adjustable rate mortgage loans (“ARMs”) we originate typically have less stringent prepayment protection features than fixed rate mortgage loans (“FRMs”), resulting in a shorter expected life for ARMs than FRMs. The shorter expected life for ARMs results in smaller MSRs recorded than for FRMs. Absent an increase in originations, an increase in the proportion of our loans originated that are ARMs could adversely impact the gains from mortgage banking activities we record. Additionally, the loan product mix we originate can significantly impact our overall earnings. For example, an increase in loan origination volume for our two highest-margin products, Fannie Mae and HUD loans, without a change in total loan origination volume would increase our overall profitability, while a decrease in the loan origination volume of these two products without a change in total loan origination volume would decrease our overall profitability, all else equal. |
Revenues
Revenues
Loan Origination and Debt Brokerage Fees, net. Revenue related to the loan origination fee is recognized when we record a derivative asset upon the simultaneous commitments to originate a loan with a borrower and sell to an Gains from Mortgage Banking Activities. Mortgage banking activity incomeinvestor.investor or when a loan that we broker closes with the institutional lender. The commitment asset related to the loan origination fee is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and any sale premiums, net of co-broker fees, the estimated fair value of the expected net cash flows associated with the servicing of the loan, and the estimated fair value of any guaranty obligations to be assumed.fees. Also included in gainsrevenues from mortgage bankingloan origination activities are changes to the fair value of loan commitments, forward sale commitments, and loans held for sale that occur during their respective holding periods. Upon sale of the loans, no gains or losses are recognized as such loans are recorded at fair value during their holding periods. MSRs and guaranty obligations are recognized as assets and liabilities, respectively, upon the sale of the loans.
37
Brokered loans tend to have lower origination fees because they often require less time to execute, there is more competition for brokerage assignments, and because the borrower will also have to pay an origination fee to the institutional lender.
Premiums received on the sale of a loan result when a loan is sold to an investor for more than its face value. There are various reasons investors may pay a premium when purchasing a loan. For example, the fixed rate on the loan may be higher than the rate of return required by an investor or the characteristics of a particular loan may be desirable to an investor. We do not receive premiums on brokered loans.
Fair Value of Expected Net Cash Flows from Servicing, net. Revenue related to expected net cash flows from servicing is recognized at the loan commitment date, similar to the loan origination fees, as described above. The derivative asset is recognized at fair value, which reflects the estimated fair value of the expected net cash flows associated with the servicing of the loan, reduced by the estimated fair value of any guaranty obligations to be assumed. OMSRs and guaranty obligations are recognized as assets and liabilities, respectively, upon the sale of the loans.
MSRsOMSRs are recorded at fair value upon loan sale. The fair value is based on estimates of expected net cash flows associated with the servicing rights. The estimated net cash flows are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the loan.
The “Critical Accounting Policies and Estimates” section above and NOTE 2 of the consolidated financial statements provides additional details of the accounting for these revenues.
27
Servicing Fees. We service nearly all loans we originate and some loans we broker. We earn servicing fees for performing certain loan servicing functions such as processing loan, tax, and insurance payments and managing escrow balances. Servicing generally also includes asset management functions, such as monitoring the physical condition of the property, analyzing the financial condition and liquidity of the borrower, and performing loss mitigation activities as directed by the Agencies.
Our servicing fees on loans we originate provide a stable revenue stream. They are based on contractual terms, are earned over the life of the loan, and are generally not subject to significant prepayment risk. Our Fannie Mae and Freddie Mac servicing agreements provide for make-whole paymentsprepayment fees in the event of a voluntary prepayment. Accordingly, we currently do not hedge our servicing portfolio for prepayment risk. Any make-whole paymentsprepayment fees received are included in Other revenue.revenues.
HUD has the right to terminate our current servicing engagements for cause. In addition to termination for cause, Fannie Mae and Freddie Mac may terminate our servicing engagements without cause by paying a termination fee. Our institutional investors typically may terminate our servicing engagements for brokered loans at any time with or without cause, without paying a termination fee.
Net Warehouse Interest Income, Loans Held for Sale. We earn net interest income on loans funded through borrowings from our warehouse facilities from the time the loan is closed until the loan is sold pursuant to the loan purchase agreement. Each borrowing on a warehouse line relates to a specific loan for which we have already secured a loan sale commitment with an investor. Related interest expense from the warehouse loan funding is netted in our financial statements against interest income. Net warehouse interest income related to loans held for sale varies based on the period of time between the loan closing and the sale of the loan to the investor, the size of the average balance of the loans held for sale, and the net interest spread between the loan coupon rate and the cost of warehouse financing. Loans may remain in the warehouse facility for up to 60 days, but the average time in the warehouse facility is approximately 30 days. As a short-term cash management tool, we may also use excess corporate cash to fund Agency loans on our balance sheet rather than borrowing against a warehouse line. Loans that we broker for institutional investors and other investors are funded directly by them; therefore, there is no warehouse interest income or expense associated with brokered loan transactions. Additionally, the amortization of deferred debt issuance costs related to our Agency warehouse lines is included in net warehouse interest income, loans held for sale.
Net Warehouse Interest Income, Loans Held for Investment. Similar to loans held for sale, we earn net interest income on loans held for investment during the period they are outstanding. We earn interest income on the loan, which is funded partially by an investment of our cash and through one of our interim warehouse credit facilities. The loans originated for investment are typically interest-only, variable-rate loans with terms up to three years. The warehouse credit facilities are variable rate. The interest rate reset date is typically the same for the loans and the credit facility. Related interest expense from the warehouse loan funding is netted in our financial statements against interest income. Net warehouse interest income related to loans held for investment varies based on the period of time the loans are outstanding, the size of the average balance of the loans held for investment, and the net interest spread between the loan coupon rate and the cost of warehouse financing. The net spread has historically not varied much. Additionally, the amortization of deferred
38
fees and costs and the amortization of deferred debt issuance costs related to our interim warehouse lines are included in net warehouse interest income, loans held for investment. Net warehouse interest income from loans held for investment will decrease in the coming years if most, if notor all, of the loans originated through the Interim Program are held by the Interim Program JV.
Escrow Earnings and Other Interest Income. We earn fee income on property-level escrow deposits in our servicing portfolio, generally based on a fixed or variable placement fee negotiated with the financial institutions that hold the escrow deposits. Escrow earnings reflect interest income net of interest paid to the borrower, if required, which generally equals a money market rate. Escrow earnings tend to increase as short-term interest rates increase as they did in 2017 and 2018. We expect this trend to continue for the foreseeable future. Also included with escrow earnings and other interest income are interest earnings from our cash and cash equivalents and interest income earned on our pledged securities. Interest income from pledged securities increased during 2018 as we sold investments in money market funds and invested those proceeds in higher-earning multifamily Agency mortgage-backed securities (“MBS”).
Other.Other income isRevenues. Other revenues are comprised of fees for processing loan assumptions, prepayment fee income, application fees, investmentproperty sales broker fees, income from equity-method investments, income from preferred equity investments, asset management fees, and other miscellaneous revenues related to our operations.
Costs and Expenses
Personnel. Personnel expense includes the cost of employee compensation and benefits, which include fixed and discretionary amounts tied to company and individual performance, commissions, severance expense, signing and retention bonuses, and share-based compensation.
Amortization and Depreciation. Amortization and depreciation is principally comprised of amortization of our MSRs, net of amortization of our guaranty obligations. The MSRs are amortized using the interest method over the period that servicing income is expected to be received. We amortize the guaranty obligations evenly over their expected lives. When the loan underlying an MSROMSR prepays, we write off the remaining unamortized balance, net of any related guaranty obligation, and record the write off to Amortization and depreciation. Similarly, when the loan underlying an MSROMSR defaults, we write the MSROMSR off to Amortization and depreciation. We depreciate property, plant, and equipment ratably over their estimated useful lives.
28
Amortization and depreciation also includes the amortization of intangible assets, principally related to the amortization of the mortgage pipeline and other intangible assets recognized in connection with acquisitions. For the years presented in the Consolidated Statements of Income, the amortization of intangible assets relates primarily to the mortgage pipeline intangible asset recognized in conjunction with acquisitions in 2016, 2017, and 2018. We recognize amortization related to the mortgage pipeline intangible asset when a loan included in the mortgage pipeline intangible asset is rate locked or is no longer probable of rate locking. Also included in amortization and depreciation for the yearyears ended December 31, 2020, 2019 and 2018 is the amortization of intangible assets associated with our acquisition of JCR.WDIP. These intangible assets consisted primarily of asset management contracts, which had an estimated life at acquisition of five years. For the years presented in the Consolidated Statements of Income, the amortization of intangible assets relates primarily to intangible assets associated with our acquisition of WDIP in 2018.
Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses consists of two components: the provision associated with our risk-sharing loans and the provision associated with our loans held for investment. The provision (benefit) for credit losses associated with risk-sharing loans is established at theestimated on a collective basis when a loan level when the borrower has defaultedis sold to Fannie Mae and is based on our current expected credit losses on the current portfolio from loan or is probable of defaulting on the loan or collectively for loans that are not probable of default but on a watch list.sale to maturity. The provision (benefit) for credit losses associated with our loans held for investment is established collectivelyestimated similar to our risk-sharing loans at origination and is based on our current expected credit losses. For both our risk-sharing loans and loans held for loans that are not impairedinvestment, when a loan is probable of default, the loan is taken out of the collective evaluation and individually evaluated for loans that are impaired.credit losses. Our estimates of property fair value are based on appraisals, broker opinions of value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value.
The “Critical Accounting Policies and Estimates” section above and NOTE 2 of the consolidated financial statements provides additional details of the accounting for this expense.
Interest Expense on Corporate Debt. Interest expense on corporate debt includes interest expense incurred and amortization of debt discount and deferred debt issuance costs related to our term noteloan facility.
39
Other Operating Expenses. Other operating expenses include sub-servicing costs, facilities costs, travel and entertainment costs, marketing costs, professional fees, license fees, dues and subscriptions, corporate insurance premiums, and other administrative expenses.
Income Tax Expense. The Company is a C-corporation subject to both federal and state corporate tax. As of December 31, 2018, ourOur estimated combined statutory federal and state tax rate was approximately25.2%, 25.0%, and 25.1% compared to approximately 38.2% as offor the years ended December 31, 2020, 2019, and 2018, respectively. Except for the effects of 2017 Tax Cuts and 38.6% as of December 31, 2016. OurJobs Act (“Tax Reform”), our combined statutory tax rate has historically not varied significantly as the only material difference in the calculation of the combined statutory tax rate from year to year is the apportionment of our taxable income amongst the various states where we are subject to taxation since we do not have foreign operations or significant permanent differences.operations. For example, from the period since we went public in 2010 through 2017, our combined statutory tax rate varied by only 0.7%, with a low of 38.2% and a high of 38.9%. In December 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. Tax Reform significantly reduced the federal income tax rate from 35.0% to 21.0%. Due to the reduced federal statutory rate, our combined statutory tax rate in 2018 declined to approximately 25.1%. Absent additional significant legislative changes to statutory tax rates (particularly the federal tax rate), we expect minimal deviation from the 20182020 combined statutory tax rate for years after 2018.future years. However, we do expect some variability in the effective tax rate going forward due to excess tax benefits recognized and limitations on the deductibility of certain book expenses as a result of Tax Reform, primarily related to executive compensation.
Excess tax benefits recognized in 2016, 2017,2020 and 20182019 reduced income tax expense by $0.6 million, $9.5$7.3 million and $6.8$4.6 million, respectively. The decreaseincrease in the excess tax benefits from 20172019 to 2018 related primarily to2020 largely reflects the aforementioned reductionincrease in the combined statutory tax rate due to Tax Reform. We expectnumber of shares vested and the net reduction to income tax expense due to excess tax benefits in 2019 to be less thanstock price at which the net reductions in 2017 and 2018 given the limitations on the deductibilityshares vested.
29
Results of Operations
Following is a discussion of the comparison of our results of operations for the years ended December 31, 2018, 2017,2020 and 2016.2019. The financial results are not necessarily indicative of future results. Our annual results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest-rate environment, the volume of transactions, business acquisitions, regulatory actions, and general economic conditions. Please refer toDiscussions of our results of operations and comparisons between 2019 and 2018 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the table below, which provides supplemental data regarding our financial performance.year ended December 31, 2019.
SUPPLEMENTAL OPERATING DATA
| | | | | | | |
| | For the year ended December 31, | | ||||
(in thousands; except per share data) | | 2020 |
| 2019 |
| ||
Transaction Volume: | | | | | | | |
Components of Debt Financing Volume | | | | | | | |
Fannie Mae | | $ | 12,803,046 | | $ | 8,045,499 | |
Freddie Mac | |
| 8,588,748 | |
| 6,380,210 | |
Ginnie Mae - HUD | |
| 2,212,538 | |
| 848,359 | |
Brokered(1) | |
| 10,969,615 | |
| 10,363,953 | |
Principal Lending and Investing(2) | |
| 380,360 | |
| 935,941 | |
Total Debt Financing Volume | | $ | 34,954,307 | | $ | 26,573,962 | |
Property Sales Volume | | | 6,129,739 | | | 5,393,102 | |
Total Transaction Volume | | $ | 41,084,046 | | $ | 31,967,064 | |
| | | | | | | |
Key Performance Metrics: | | | | | | | |
Operating margin | | | 30 | % | | 28 | % |
Return on equity | | | 23 | % | | 18 | % |
Walker & Dunlop net income | | $ | 246,177 | | $ | 173,373 | |
Adjusted EBITDA(3) | | $ | 215,849 | | $ | 247,907 | |
Diluted EPS | | $ | 7.69 | | $ | 5.45 | |
| | | | | | | |
Key Expense Metrics (as a percentage of total revenues): | | | | | | | |
Personnel expenses | | | 43 | % | | 42 | % |
Other operating expenses | | | 6 | % | | 8 | % |
| | | | | | | |
Key Revenue Metrics (as a percentage of debt financing volume): | | | | | | | |
Origination related fees(4) | | | 1.04 | % | | 1.00 | % |
Gains attributable to MSRs(5) | | | 1.04 | % | | 0.71 | % |
Gains attributable to MSRs, as a percentage of Agency debt financing volume(6) | | | 1.52 | % | | 1.18 | % |
| | | | | | |
(in thousands; except per share data) | | As of December 31, | ||||
Managed Portfolio: |
| 2020 |
| 2019 | ||
Components of Servicing Portfolio | | | | | | |
Fannie Mae | | $ | 48,818,185 | | $ | 40,049,095 |
Freddie Mac | |
| 37,072,587 | |
| 32,583,842 |
Ginnie Mae - HUD | |
| 9,606,506 | |
| 9,972,989 |
Brokered (7) | |
| 11,419,372 | |
| 10,151,120 |
Principal Lending and Investing (8) | |
| 295,322 | |
| 468,123 |
Total Servicing Portfolio | | $ | 107,211,972 | | $ | 93,225,169 |
Assets under management (9) | | | 1,816,421 | | | 1,958,078 |
Total Managed Portfolio | | $ | 109,028,393 | | $ | 95,183,247 |
| | | | | | |
Key Servicing Portfolio Metrics (end of period): | | | | | | |
Weighted-average servicing fee rate (basis points) | | | 24.0 | | | 23.2 |
Weighted-average remaining servicing portfolio term (years) | | | 9.4 | | | 9.6 |
4030
SUPPLEMENTAL OPERATING DATA (Continued)
The following tables present WDIP’s AUM as of December 31, 2020 and 2019:
| | | | | | | | | | | ||||||||||
| | As of December 31, 2020 | | |||||||||||||||||
| | Unfunded | | Funded | | | | | ||||||||||||
Components of WDIP assets under management (in thousands) |
| Commitments |
| Investments |
| Total |
| |||||||||||||
Fund III | | $ | 37,781 | | | 128,919 | | $ | 166,700 | | ||||||||||
Fund IV | | | 149,979 | | | 123,161 | | | 273,140 | | ||||||||||
Fund V | | | 232,544 | | | 18,384 | | | 250,928 | | ||||||||||
Separate accounts | | | — | | | 567,492 | | | 567,492 | | ||||||||||
Total assets under management | | $ | 420,304 | | $ | 837,956 | | $ | 1,258,260 | | ||||||||||
| | | | | | | | | | | ||||||||||
| | | | | | | | | | |||||||||||
| | As of December 31, 2019 | ||||||||||||||||||
| | Unfunded | | Funded | | | | |||||||||||||
Components of WDIP assets under management (in thousands) |
| Commitments |
| Investments |
| Total | ||||||||||||||
Fund III | | $ | 95,171 | | | 94,222 | | $ | 189,393 | |||||||||||
Fund IVs | | | 174,483 | | | 129,178 | | | 303,661 | |||||||||||
Fund V | | | 193,980 | | | — | | | 193,980 | |||||||||||
Separate accounts | | | — | | | 530,044 | | | 530,044 | |||||||||||
Total assets under management | | $ | 463,634 | | $ | 753,444 | | $ | 1,217,078 | |||||||||||
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||
(in thousands; except per share data) |
| 2018 |
| 2017 |
| 2016 |
| |||
Transaction Volume: |
|
|
|
|
|
|
|
|
|
|
Loan Origination Volume by Product Type |
|
|
|
|
|
|
|
|
|
|
Fannie Mae |
| $ | 7,805,517 |
| $ | 7,894,106 |
| $ | 7,000,942 |
|
Freddie Mac |
|
| 6,972,299 |
|
| 7,981,156 |
|
| 4,234,071 |
|
Ginnie Mae - HUD |
|
| 999,001 |
|
| 1,358,221 |
|
| 879,941 |
|
Brokered (1) |
|
| 8,564,357 |
|
| 7,326,907 |
|
| 4,189,116 |
|
Interim Loans |
|
| 993,053 |
|
| 314,372 |
|
| 419,600 |
|
Total Loan Origination Volume |
| $ | 25,334,227 |
| $ | 24,874,762 |
| $ | 16,723,670 |
|
Investment Sales Volume |
|
| 2,713,305 |
|
| 3,031,069 |
|
| 2,574,442 |
|
Total Transaction Volume |
| $ | 28,047,532 |
| $ | 27,905,831 |
| $ | 19,298,112 |
|
|
|
|
|
|
|
|
|
|
|
|
Key Performance Metrics: |
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
| 29 | % |
| 33 | % |
| 32 | % |
Return on equity |
|
| 19 | % |
| 31 | % |
| 21 | % |
Walker & Dunlop net income |
| $ | 161,439 |
| $ | 211,127 |
| $ | 113,897 |
|
Adjusted EBITDA (2) |
| $ | 220,081 |
| $ | 200,950 |
| $ | 129,928 |
|
Diluted EPS (3) |
| $ | 4.96 |
| $ | 6.47 |
| $ | 3.57 |
|
|
|
|
|
|
|
|
|
|
|
|
Key Expense Metrics (as a percentage of total revenues): |
|
|
|
|
|
|
|
|
|
|
Personnel expenses |
|
| 41 | % |
| 41 | % |
| 40 | % |
Other operating expenses |
|
| 9 | % |
| 7 | % |
| 7 | % |
|
|
|
|
|
|
|
|
|
|
|
Key Revenue Metrics (as a percentage of loan origination volume): |
|
|
|
|
|
|
|
|
|
|
Origination related fees (4) |
|
| 0.96 | % |
| 0.99 | % |
| 1.06 | % |
Gains attributable to MSRs (4) |
|
| 0.71 | % |
| 0.79 | % |
| 1.18 | % |
Gains attributable to MSRs, as a percentage of Agency loan origination volume (5) |
|
| 1.09 | % |
| 1.13 | % |
| 1.59 | % |
|
|
|
|
|
|
|
|
|
|
|
(in thousands; except per share data) |
|
| As of December 31, | |||||||
Managed Portfolio: |
|
| 2018 |
| 2017 |
| 2016 | |||
Servicing Portfolio by Product Type |
|
|
|
|
|
|
|
|
|
|
Fannie Mae |
|
| $ | 35,983,178 |
| $ | 32,075,617 |
| $ | 27,728,164 |
Freddie Mac |
|
|
| 30,350,724 |
|
| 26,782,581 |
|
| 20,688,410 |
Ginnie Mae - HUD |
|
|
| 9,944,222 |
|
| 9,640,312 |
|
| 9,155,794 |
Brokered (6) |
|
|
| 9,127,640 |
|
| 5,744,518 |
|
| 5,286,473 |
Interim Loans |
|
|
| 283,498 |
|
| 66,963 |
|
| 222,313 |
Total Servicing Portfolio |
|
| $ | 85,689,262 |
| $ | 74,309,991 |
| $ | 63,081,154 |
Assets under management |
|
|
| 1,422,735 |
|
| 182,175 |
|
| — |
Total Managed Portfolio |
|
| $ | 87,111,997 |
| $ | 74,492,166 |
| $ | 63,081,154 |
|
|
|
|
|
|
|
|
|
|
|
Key Servicing Portfolio Metrics (end of period): |
|
|
|
|
|
|
|
|
|
|
Weighted-average servicing fee rate (basis points) |
|
|
| 24.3 |
|
| 25.7 |
|
| 26.1 |
Weighted-average remaining servicing portfolio term (years) |
|
|
| 9.8 |
|
| 10.0 |
|
| 10.3 |
41
(2) |
|
(3) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measures.” |
(4) |
|
|
| Excludes the income and |
(5) |
|
(6) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained, as a percentage of Agency |
(7) |
| Brokered loans serviced primarily for life insurance |
(8) | Consists of interim loans not managed for the Interim Program JV. |
(9) | As of December 31, 2020, includes $484.8 million of Interim Program JV managed loans, $73.3 million of loans serviced directly for the Interim Program JV partner, and |
31
Year Ended December 31, 20182020 Compared to Year Ended December 31, 20172019
The following table presents a period-to-period comparison of our financial results for the years ended December 31, 20182020 and 2017.2019.
FINANCIAL RESULTS –2018–2020 COMPARED TO 20172019
| | | | | | | | | | | | | |
| | December 31, | | Dollar | | Percentage |
| | |||||
(dollars in thousands) |
| 2020 |
| 2019 |
| Change |
| Change |
|
| |||
Revenues | | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 359,061 | | $ | 258,471 | | $ | 100,590 | | 39 | % | |
Fair value of expected net cash flows from servicing, net | | | 358,000 | | | 180,766 | | | 177,234 | | 98 | | |
Servicing fees | |
| 235,801 | |
| 214,550 | |
| 21,251 | | 10 | | |
Net warehouse interest income, loans held for sale | | | 17,936 | | | 1,917 | | | 16,019 | | 836 | | |
Net warehouse interest income, loans held for investment | | | 11,390 | | | 23,782 | | | (12,392) | | (52) | | |
Escrow earnings and other interest income | |
| 18,255 | |
| 56,835 | |
| (38,580) | | (68) | | |
Property sales broker fees | | | 38,108 | | | 30,917 | | | 7,191 | | 23 | | |
Other revenues | |
| 45,156 | |
| 49,981 | |
| (4,825) | | (10) | | |
Total revenues | | $ | 1,083,707 | | $ | 817,219 | | $ | 266,488 | | 33 | | |
| | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | |
Personnel | | $ | 468,819 | | $ | 346,168 | | $ | 122,651 | | 35 | % | |
Amortization and depreciation | | | 169,011 | | | 152,472 | | | 16,539 | | 11 | | |
Provision for credit losses | |
| 37,479 | |
| 7,273 | |
| 30,206 | | 415 | | |
Interest expense on corporate debt | |
| 8,550 | |
| 14,359 | |
| (5,809) | | (40) | | |
Other operating expenses | |
| 69,582 | |
| 66,596 | |
| 2,986 | | 4 | | |
Total expenses | | $ | 753,441 | | $ | 586,868 | | $ | 166,573 | | 28 | | |
Income from operations | | $ | 330,266 | | $ | 230,351 | | $ | 99,915 | | 43 | | |
Income tax expense | |
| 84,313 | |
| 57,121 | |
| 27,192 | | 48 | | |
Net income before noncontrolling interests | | $ | 245,953 | | $ | 173,230 | | $ | 72,723 | | 42 | | |
Less: net loss from noncontrolling interests | |
| (224) | |
| (143) | |
| (81) |
| 57 | | |
Walker & Dunlop net income | | $ | 246,177 | | $ | 173,373 | | $ | 72,804 | | 42 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended |
|
|
|
|
|
| |||||
|
| December 31, |
| Dollar |
| Percentage |
|
| |||||
(dollars in thousands) |
| 2018 |
| 2017 |
| Change |
| Change |
|
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 407,082 |
| $ | 439,370 |
| $ | (32,288) |
| (7) | % |
|
Servicing fees |
|
| 200,230 |
|
| 176,352 |
|
| 23,878 |
| 14 |
|
|
Net warehouse interest income, loans held for sale |
|
| 5,993 |
|
| 15,077 |
|
| (9,084) |
| (60) |
|
|
Net warehouse interest income, loans held for investment |
|
| 8,038 |
|
| 9,390 |
|
| (1,352) |
| (14) |
|
|
Escrow earnings and other interest income |
|
| 42,985 |
|
| 20,396 |
|
| 22,589 |
| 111 |
|
|
Investment sales broker fees |
|
| 17,257 |
|
| 19,213 |
|
| (1,956) |
| (10) |
|
|
Other |
|
| 43,661 |
|
| 32,059 |
|
| 11,602 |
| 36 |
|
|
Total revenues |
| $ | 725,246 |
| $ | 711,857 |
| $ | 13,389 |
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 297,303 |
| $ | 289,277 |
| $ | 8,026 |
| 3 | % |
|
Amortization and depreciation |
|
| 142,134 |
|
| 131,246 |
|
| 10,888 |
| 8 |
|
|
Provision (benefit) for credit losses |
|
| 808 |
|
| (243) |
|
| 1,051 |
| (433) |
|
|
Interest expense on corporate debt |
|
| 10,130 |
|
| 9,745 |
|
| 385 |
| 4 |
|
|
Other operating expenses |
|
| 62,021 |
|
| 48,171 |
|
| 13,850 |
| 29 |
|
|
Total expenses |
| $ | 512,396 |
| $ | 478,196 |
| $ | 34,200 |
| 7 |
|
|
Income from operations |
| $ | 212,850 |
| $ | 233,661 |
| $ | (20,811) |
| (9) |
|
|
Income tax expense |
|
| 51,908 |
|
| 21,827 |
|
| 30,081 |
| 138 |
|
|
Net income before noncontrolling interests |
| $ | 160,942 |
| $ | 211,834 |
| $ | (50,892) |
| (24) |
|
|
Less: net income (loss) from noncontrolling interests |
|
| (497) |
|
| 707 |
|
| (1,204) |
| (170) |
|
|
Walker & Dunlop net income |
| $ | 161,439 |
| $ | 211,127 |
| $ | (49,688) |
| (24) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
42
Overview
The slight increase in revenues was primarily attributable tomainly driven by increases in servicing(i) origination fees escrow earnings and other interest income, and other revenues, largely offset by decreases(as defined in gains from mortgage banking activities and net warehouse income from loans held for sale. Thenote 1 to the table below) due to a substantial increase in debt financing volume, (ii) MSR Income (as defined in note 2 to the table below) due primarily to the substantial increase in debt financing volume and a significant increase in the MSR rate (as defined below), (iii) servicing fees was due to an increase in the average servicing portfolio. The substantial increase in escrow earnings and other interest income related to increases in the escrow balances of loans serviced and the escrow earnings rate. Other revenues increased primarily from an increase in investment management fees as we acquired JCR Capital in 2018. The decrease in gains from mortgage banking activities was due primarily to a decrease in Fannie Mae servicing fees, while the decrease inportfolio, (iv) net warehouse interest income from loans held for sale was due to a lowerhigher average balance and a substantial increase in the net spreads, and (v) property sales broker fees driven by growth in our property sales volumes. Partially offsetting the increases in the revenue sources discussed above were decreases in (i) net warehouse interest spread onincome from loans held for sale.investment due to a smaller average balance and lower net spread and (ii) escrow earnings and other interest income due to significant declines in the earnings rate.
The increase in total expenses was due primarily toprincipally driven by increases in (i) personnel expense mostlyexpenses as a result of increases in commissions due to the increase in origination fees, bonus expense due to the Company’s record financial results, and salaries and benefits from an increase in salaries expense resulting from a rise in average headcount, year over year,(ii) amortization and depreciation costsexpense due to an increase in the average MSR balance, and (iii) provision for credit losses due to the adoption of MSRs outstandingCECL. During the prior year, over year, and other operating expenses.our allowances for credit losses were calculated based on an incurred loss methodology, while CECL requires allowances to be calculated based on an expected lifetime credit loss methodology. Partially offsetting these increases was a decrease in interest expense on our corporate debt due to lower short-term interest rates on our long-term debt.
32
Revenues
Revenues
Gains from Mortgage Banking Activities. The following table provides additional information that helps explain changes in gains fromorigination fees and mortgage banking activitiesservicing rights over the past threetwo years:
| | | | | | |
| | Debt Financing Volume by Product Type | | |||
| | For the year ended December 31, | | |||
| | 2020 | | | 2019 | |
Fannie Mae | | 37 | % | | 30 | % |
Freddie Mac | | 25 | | | 24 | |
Ginnie Mae - HUD | | 6 | | | 3 | |
Brokered | | 31 | | | 39 | |
Interim Loans | | 1 | | | 4 | |
| | | | | | | | | | | |
| For the year ended December 31, | | Dollar | | Percentage | | |||||
(dollars in thousands) | 2020 | | 2019 | | Change | | Change | | |||
Origination Fees (1) | $ | 359,061 | | $ | 258,471 | | $ | 100,590 | | 39 | % |
MSR Income (2) | $ | 358,000 | | $ | 180,766 | | $ | 177,234 | | 98 | |
Origination Fee Rate (3) (basis points) | | 104 | | | 100 | | | 4 | | 4 | |
MSR Rate (4) (basis points) | | 104 | | | 71 | | | 33 | | 46 | |
Agency MSR Rate (5) (basis points) | | 152 | | | 118 | | | 34 | | 29 | |
|
|
|
|
|
|
|
|
|
|
|
| Loan Origination Volume by Product Type |
| ||||||
|
| For the year ended December 31, |
| ||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
Fannie Mae |
| 31 | % |
| 32 | % |
| 42 | % |
Freddie Mac |
| 28 |
|
| 32 |
|
| 25 |
|
Ginnie Mae - HUD |
| 4 |
|
| 5 |
|
| 5 |
|
Brokered |
| 33 |
|
| 30 |
|
| 25 |
|
Interim Loans |
| 4 |
|
| 1 |
|
| 3 |
|
|
|
|
|
|
|
|
|
|
|
| Gains from Mortgage Banking Activities Detail |
| |||||||
| For the year ended December 31, |
| |||||||
(dollars in thousands) | 2018 |
| 2017 |
| 2016 |
| |||
Origination Fees | $ | 234,681 |
| $ | 245,484 |
| $ | 174,360 |
|
Dollar Change | $ | (10,803) |
| $ | 71,124 |
|
|
|
|
Percentage Change |
| (4) | % |
| 41 | % |
|
|
|
MSR Income (1) | $ | 172,401 |
| $ | 193,886 |
| $ | 192,825 |
|
Dollar Change | $ | (21,485) |
| $ | 1,061 |
|
|
|
|
Percentage Change |
| (11) | % |
| 1 | % |
|
|
|
Origination Fee Rate (2) (basis points) |
| 96 |
|
| 99 |
|
| 106 |
|
Basis Point Change |
| (3) |
|
| (7) |
|
|
|
|
Percentage Change |
| (3) | % |
| (7) | % |
|
|
|
MSR Rate (3) (basis points) |
| 71 |
|
| 79 |
|
| 118 |
|
Basis Point Change |
| (8) |
|
| (39) |
|
|
|
|
Percentage Change |
| (10) | % |
| (33) | % |
|
|
|
Agency MSR Rate (4) (basis points) |
| 109 |
|
| 113 |
|
| 159 |
|
Basis Point Change |
| (4) |
|
| (46) |
|
|
|
|
Percentage Change |
| (4) | % |
| (29) | % |
|
|
|
(1) |
|
(2) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained. |
(3) |
| Origination fees as a percentage of |
43
(4) |
| MSR |
(5) |
| MSR |
Loan origination and debt brokerage fees, Gains from mortgage banking activities reflect the fair value of loanthe fair value of loan premiums, net of any co-broker fees, and the fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained (“MSR income”). retained. The decreaseincreases in origination fees was largely attributableand MSR Income were related to the change(i) a 32% increase in the mix of loan originationdebt financing volume year over year resulting inand (ii) a declinemore favorable transaction mix, leading to an increase in the origination fee rate. For the year ended December 31, 2018, Agency loan origination volume as a percentage of overall loan origination volume decreased to 63% from 69% for the year ended December 31, 2017. Agency loan originations produce higher loan origination fees than brokered and interim loan originations.
The decreases in MSR income and MSR rate forrates. During 2020, 68% of our total mortgage banking volume related to Agency loans compared to 57% during 2019, leading to increases in the year ended December 31, 2018 are related primarily to a year-over-year decrease of 14% inorigination fee and MSR rates. Additionally, the weighted-average servicing fee rate on new Fannie Mae loan originationsdebt financing volume increased 31% year over year, contributing to the increases in MSR Income, the MSR Rate, and the aforementioned change in the mix of loan origination volume. The decrease in the weighted-average servicing fee rate was due principally to increased competition for new loan originations with Fannie Mae, which resulted in tighter credit spreads and lower servicing fees.Agency MSR Rate.
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in loan origination volumes.debt financing volumes.
Servicing Fees. The increase was primarily attributable to an increase in the average servicing portfolio from 20172019 to 20182020 as shown below due primarily to significantly higher new loan originations in 2020 than in 2019 and relatively few payoffs.only a slight increase in payoffs year over year. Partially offsetting the increase in servicing fees due to an increase in the average servicing portfolio was a decrease in the servicing portfolio’s weighted average servicing fee as shown below primarilybelow. The lower weighted-average servicing fee was related to a trend in lower fees we saw in the second half of 2019. This trend continued into the first half of 2020; however, we saw an upward trend in the servicing portfolio’s weighted-average servicing fee in the second half of 2020 as seen in the supplemental operating data table above. The increase in the second half of 2020 was due to anthe substantial increase in brokered loans as a percentageour Fannie Mae servicing portfolio in the second half of the overall servicing portfolio as well as the aforementioned decrease in the weighted average servicing feeyear.
| | | | | | | | | | | |
| Servicing Fees Details | | |||||||||
| For the year ended December 31, | | Dollar | | Percentage | | |||||
(dollars in thousands) | 2020 | | 2019 | | Change | | Change | | |||
Average Servicing Portfolio | $ | 99,699,637 | | $ | 89,633,210 | | $ | 10,066,427 | | 11 | % |
Average Servicing Fee (basis points) | | 23.4 | | | 23.7 | | | (0.3) | | (1) | |
33
|
|
|
|
|
|
|
|
|
|
| Servicing Fees Details |
| |||||||
| For the year ended December 31, |
| |||||||
(dollars in thousands) | 2018 |
| 2017 |
| 2016 |
| |||
Average Servicing Portfolio | $ | 78,635,979 |
| $ | 67,072,015 |
| $ | 55,540,993 |
|
Dollar Change | $ | 11,563,964 |
| $ | 11,531,022 |
|
|
|
|
Percentage Change |
| 17 | % |
| 21 | % |
|
|
|
Average Servicing Fee (basis points) |
| 25.2 |
|
| 26.2 |
|
| 25.3 |
|
Basis Point Change |
| (1.0) |
|
| 0.9 |
|
|
|
|
Percentage Change |
| (4) | % |
| 4 | % |
|
|
|
Net Warehouse Interest Income, Loans Held for Sale. Sale (“LHFS”). The decreaseincrease waslargely the result of a decreasesignificant increases in the average balance outstanding and a significant decrease in the net spread between the rate on the originated loans and the interest costs associated with the warehouse facility as shown below. The decreaseincrease in the average balance was related to the overall increase in our Agency debt financing volume year over year. The increase in the net spread was the result of a greater increaseslower decrease in the short-term interest rates on which our borrowings are based than in the long-term interest rates on which the majority ofrate we earn from our loans held for sale are based.Ifcompared to the yield curve continuesinterest we pay on our borrowings.
| | | | | | | | | | | |
| Net Warehouse Interest Income Details - LHFS | | |||||||||
| For the year ended December 31, | | Dollar | | Percentage | | |||||
(dollars in thousands) | 2020 | | 2019 | | Change | | Change | | |||
Average LHFS Outstanding Balance | $ | 1,908,381 | | $ | 1,108,945 | | $ | 799,436 | | 72 | % |
LHFS Net Spread (basis points) | | 94 | | | 17 | | | 77 | | 453 | |
Net Warehouse Interest Income, Loans Held for Investment (“LHFI”). The decrease was due to flatten, a tighteningdecline in the average balance of loans held for investment outstanding from 2019 to 2020 and the net spread may continue.
|
|
|
|
|
|
|
|
|
|
| Net Warehouse Interest Income Details - LHFS |
| |||||||
| For the year ended December 31, |
| |||||||
(dollars in thousands) | 2018 |
| 2017 |
| 2016 |
| |||
Average LHFS Outstanding Balance | $ | 1,310,589 |
| $ | 1,613,898 |
| $ | 1,342,928 |
|
Dollar Change | $ | (303,309) |
| $ | 270,970 |
|
|
|
|
Percentage Change |
| (19) | % |
| 20 | % |
|
|
|
LHFS Net Spread (basis points) |
| 46 |
|
| 93 |
|
| 121 |
|
Basis Point Change |
| (47) |
|
| (28) |
|
|
|
|
Percentage Change |
| (51) | % |
| (23) | % |
|
|
|
44
Escrow Earnings and Other Interest Income. The increasedecrease was primarily due to increasessubstantial decreases in bothshort-term interest rates from 2019 to 2020 upon which our escrow earnings are based, slightly offset by an increase in the average balance of escrow accounts and the average earnings rate from 2017 to 2018.accounts. The increase in the average balance was due to an increase in the average servicing portfolio. The increasedecrease in the average earnings rate was due to the increasesubstantial decreases in short-term interest rates, upon which our earnings rates are based, over the past year as discussed above in the “Overview of Current Business Environment” section.section.
Property Sales Broker Fees. The increase in 2020 was the result of an increase in property sales volume due to growth in the average number of property sales brokers over the past year and an overall healthy property sales market in the second half of 2020 as more fully discussed above in the “Overview of Current Business Environment” section.
Other Revenues. The increase isThe decrease was primarily related to a $9.0$4.8 million increasedecrease in investment managementprepayment fees due toas the acquisitionprepayments of JCR as more fully discussed in the “Business” section above and a $1.6 million gain from the sale of an equity-method investment for theGSE loans declined year ended December 31, 2018 with no comparable activity for the year ended December 31, 2017.over year.
Expenses
Expenses
Personnel.$8.8(i) increase in commission costs of $60.8 million due to the increases in origination fees and property sales broker fees detailed above, (ii) increase in subjective bonus expense by $31.3 million due to a 15% increase in average headcount year over year and as a result of our record financial performance, and (iii) increase in salaries and benefits due to acquisitions and hiringthe increase in average headcount to support our growth, resulting in an increase in the average headcount from 599 for the year ended December 31, 2017 to 671 for the year ended December 31, 2018. The increase in salaries and benefits costs was slightly offset by decreases in variable compensation costs.growth.
Amortization and Depreciation. The increase was attributable to loan origination activity and the resulting growth in the average MSR balance outstanding from 20172019 to 2018.2020. During the year ended December 31, 2018,2020, we added $35.4$144.0 million of MSRs, net of amortization and write offs due to prepayment.
Other Operating Expenses. TheProvision for Credit Losses. The increase was primarily attributable to the adoption of CECL in other operating expenses primarily stem from increased office expenses of $2.3 million2020 and travel costs of $2.0 million due to the increase in average headcountexpected losses in the at-risk servicing portfolio as a result of the COVID-19 crisis and the growth in the portfolio. As of December 31, 2020, the CECL reserve was $67.0 million compared to $34.7 million as of the date of the adoption of CECL on January 1, 2020, leading to a substantial increase in the provision for credit losses year over yearyear. The significant increase in our provision for credit losses expense and related CECL reserve during 2020 was principally related to the forecasted economic impacts of the COVID-19 Crisis. As a result of the COVID-19 Crisis, the loss rate for the forecast period increased legal expensesfrom one basis point as of $1.5 million largely in connection with our acquisitions. Additionally, during the year endedJanuary 1, 2020 to six basis points as of December 31, 2018,2020.
Interest Expense on Corporate Debt. The decrease was driven primarily by the aforementioned decrease in short-term interest rates upon which our corporate debt is based in 2020 compared to 2019. Additionally, in December 2019, we incurred a loss onre-priced our corporate debt, reducing the extinguishmentspread by 25 basis points. The effects of debtthis re-pricing were fully reflected in our results in 2020.
34
Income Tax Expense. The increase in income tax expense was primarily due to (i) a decrease in excess tax benefits from stock compensation recognized year over year, (ii) a decrease in the benefit from the enactment of Tax Reform in 2017, and (iii) a $2.8 million expenseis related to a 100% valuation allowance placed on certain deferred tax assets, partially offset by the decrease43% increase in income from operations and a decreasean increase in the federal statutory incomeour effective tax rate from 35.0% for24.8% in 2019 to 25.5% in 2020. The increase in the year ended December 31, 2017 to 21.0% for the year ended December 31, 2018. Excess tax benefits reduced income tax expense by $9.5 million in 2017 compared to $6.8 million in 2018.
As discussed previously, Tax Reform was enacted in December 2017, reducing the federal income tax rate from 35.0% to 21.0%. In connection with the enactment of Tax Reform, we revalued our net deferred tax liabilities using the new federal income tax rate of 21.0%. These net deferred tax liabilities decreased as the future payment of taxes from these liabilities will be less than previously expected, resulting in a decrease to income tax expense of $58.3 million. The significant reductions to income tax expense in 2017 resulted in an effective tax rate of 9.3% comparedrelated primarily to 24.4%an increase in 2018.
Based on the information available as of December 31, 2018, we currently believe that it may be more likely thanexecutive compensation not that the expense associated with certain compensation agreements for our executives will not be deductible for tax purposes in future years. Accordingly, as of December 31, 2018, we recorded a 100% valuation allowance on the associated deferred tax assets, resulting in a $2.8 million charge to tax expense for the year ended December 31, 2018.
45
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table presents a period-to-period comparison of our financial results for the years ended December 31, 2017 and 2016.
FINANCIAL RESULTS – 2017 COMPARED TO 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
| Dollar |
| Percentage |
|
| |||||
(dollars in thousands) |
| 2017 |
| 2016 |
| Change |
| Change |
|
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 439,370 |
| $ | 367,185 |
| $ | 72,185 |
| 20 | % |
|
Servicing fees |
|
| 176,352 |
|
| 140,924 |
|
| 35,428 |
| 25 |
|
|
Net warehouse interest income, loans held for sale |
|
| 15,077 |
|
| 16,245 |
|
| (1,168) |
| (7) |
|
|
Net warehouse interest income, loans held for investment |
|
| 9,390 |
|
| 7,482 |
|
| 1,908 |
| 26 |
|
|
Escrow earnings and other interest income |
|
| 20,396 |
|
| 9,168 |
|
| 11,228 |
| 122 |
|
|
Other |
|
| 51,272 |
|
| 34,272 |
|
| 17,000 |
| 50 |
|
|
Total revenues |
| $ | 711,857 |
| $ | 575,276 |
| $ | 136,581 |
| 24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 289,277 |
| $ | 227,491 |
| $ | 61,786 |
| 27 | % |
|
Amortization and depreciation |
|
| 131,246 |
|
| 111,427 |
|
| 19,819 |
| 18 |
|
|
Provision (benefit) for credit losses |
|
| (243) |
|
| (612) |
|
| 369 |
| (60) |
|
|
Interest expense on corporate debt |
|
| 9,745 |
|
| 9,851 |
|
| (106) |
| (1) |
|
|
Other operating expenses |
|
| 48,171 |
|
| 41,338 |
|
| 6,833 |
| 17 |
|
|
Total expenses |
| $ | 478,196 |
| $ | 389,495 |
| $ | 88,701 |
| 23 |
|
|
Income from operations |
| $ | 233,661 |
| $ | 185,781 |
| $ | 47,880 |
| 26 |
|
|
Income tax expense |
|
| 21,827 |
|
| 71,470 |
|
| (49,643) |
| (69) |
|
|
Net income before noncontrolling interests |
| $ | 211,834 |
| $ | 114,311 |
| $ | 97,523 |
| 85 |
|
|
Less: net income from noncontrolling interests |
|
| 707 |
|
| 414 |
|
| 293 |
| 71 |
|
|
Walker & Dunlop net income |
| $ | 211,127 |
| $ | 113,897 |
| $ | 97,230 |
| 85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
The increase in revenues was primarily attributable to increases in gains from mortgage banking activities, servicing fees, escrow earnings and other interest income, and other revenues. The increase in gains from mortgage banking activities was largely due to the significant increase in loan origination volume from 2016 to 2017. The growth in loan origination volume is primarily due to an increase in the average number of loan originators from 2016 to 2017. The increase in servicing fees was due to an increase in the average servicing portfolio. The substantial increase in escrow earnings and other interest income related to increases in the escrow balances of loans serviced and the escrow earnings rate. Other revenues increased due to increases in investment sales broker fees, preferred equity investment income, prepayment fees, and assumption fees.
The increase in expenses was principally the result of higher personnel, amortization and depreciation, and other operating expenses. Personnel expense increased mostly due to an increase in salaries expense resulting from a rise in average headcount year over year and an increase in commissions costs due to an increase in origination fees driven by the increase in total transaction volume. Headcount increased due to acquisitions and hiring to support the growth of the Company. Amortization and depreciation expense increased as a result of a rise in the average balance of MSRs outstanding year over year as we originated a record amount of loans in 2017. The increase in other operating expenses was largely due to an increase in office expenses due to the increase in average headcount year over year.
46
Revenues
Gains from Mortgage Banking Activities. The following table provides additional information that helps explain changes in gains from mortgage banking activities over the past three years:
|
|
|
|
|
|
|
|
|
|
|
| Loan Origination Volume by Product Type |
| ||||||
|
| For the year ended December 31, |
| ||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
Fannie Mae |
| 32 | % |
| 42 | % |
| 31 | % |
Freddie Mac |
| 32 |
|
| 25 |
|
| 39 |
|
Ginnie Mae - HUD |
| 5 |
|
| 5 |
|
| 4 |
|
Brokered |
| 30 |
|
| 25 |
|
| 25 |
|
Interim Loans |
| 1 |
|
| 3 |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
| Gains from Mortgage Banking Activities Detail |
| |||||||
| For the year ended December 31, |
| |||||||
(dollars in thousands) | 2017 |
| 2016 |
| 2015 |
| |||
Origination Fees | $ | 245,484 |
| $ | 174,360 |
| $ | 156,835 |
|
Dollar Change | $ | 71,124 |
| $ | 17,525 |
|
|
|
|
Percentage Change |
| 41 | % |
| 11 | % |
|
|
|
MSR Income (1) | $ | 193,886 |
| $ | 192,825 |
| $ | 133,631 |
|
Dollar Change | $ | 1,061 |
| $ | 59,194 |
|
|
|
|
Percentage Change |
| 1 | % |
| 44 | % |
|
|
|
Origination Fee Rate (2) (basis points) |
| 99 |
|
| 106 |
|
| 97 |
|
Basis Point Change |
| (7) |
|
| 9 |
|
|
|
|
Percentage Change |
| (7) | % |
| 9 | % |
|
|
|
MSR Rate (3) (basis points) |
| 79 |
|
| 118 |
|
| 83 |
|
Basis Point Change |
| (39) |
|
| 35 |
|
|
|
|
Percentage Change |
| (33) | % |
| 42 | % |
|
|
|
Agency MSR Rate (4) (basis points) |
| 113 |
|
| 159 |
|
| 112 |
|
Basis Point Change |
| (46) |
|
| 47 |
|
|
|
|
Percentage Change |
| (29) | % |
| 42 | % |
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities reflect the fair value of loan origination fees, the fair value of loan premiums, net of any co-broker fees, and the fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained (“MSR income”). The increase in origination fees was largely attributable to the 49% increase in loan origination volume year over year, partially offset by a small decline in the origination fee rate. The small increase in MSR income was driven by the $5.1 billion increase in Agency loan origination volume from 2016 to 2017, almost completely offset by the 29% decrease in the Agency MSR rate. The decline in the Agency MSR rate was driven by (i) an increase in Freddie Mac loan origination volume as a percentage of total Agency volume from 35% in 2016 to 46% in 2017 and (ii) an increase in the large portfolio transactions year over year. The MSR income from Freddie Mac loans is the lowest of the Agency loan products. In addition, we typically receive lower servicing fees on large portfolio transactions, resulting in a lower MSR rate on these loans.
47
Servicing Fees. The increase was primarily attributable to an increase in the average servicing portfolio from 2016 to 2017 as shown below due primarily to record new loan originations and relatively few payoffs. Additionally, the servicing portfolio’s weighted average servicing fee increased as shown below due to an increase in the Fannie Mae servicing portfolio.
|
|
|
|
|
|
|
|
|
|
| Servicing Fees Details |
| |||||||
| For the year ended December 31, |
| |||||||
(dollars in thousands) | 2017 |
| 2016 |
| 2015 |
| |||
Average Servicing Portfolio | $ | 67,072,015 |
| $ | 55,540,993 |
| $ | 47,096,080 |
|
Dollar Change | $ | 11,531,022 |
| $ | 8,444,913 |
|
|
|
|
Percentage Change |
| 21 | % |
| 18 | % |
|
|
|
Average Servicing Fee (basis points) |
| 26.2 |
|
| 25.3 |
|
| 24.3 |
|
Basis Point Change |
| 0.9 |
|
| 1.0 |
|
|
|
|
Percentage Change |
| 4 | % |
| 4 | % |
|
|
|
Escrow Earnings and Other Interest Income. The increase was due to increases in both the average balance of escrow accounts and the average earnings rate from 2016 to 2017. The increase in the average balance was due to the increase in the average servicing portfolio. The increase in the average earnings rate was due to the increase in short-term interest rates during 2017.
Other Revenues. The increase is related to increases in investment sales broker fees, preferred equity investment income, prepayment fees, and assumption fees. Investment sales broker fees increased $5.0 million year over year as a result of the increase in investment sales volume. Preferred equity investment income increased $2.8 million from 2016 to 2017 due to an increase in the average balance of preferred equity investments outstanding. Prepayment fees increased $6.7 million, while assumption fees increased $1.8 million, both as a result of increased activity as our average servicing portfolio continues to grow.
Expenses
Personnel. The increase was principally the result of higher loan originator commission costs and increased salaries expense. Commission costs increased due to the increase in origination fee income attributable to the increase in total transaction volume. Salaries expense increased due to a rise in average headcount from 519 in 2016 to 599 in 2017 as a result of acquisitions and organic growth of the Company.
Amortization and Depreciation. The increase was attributable to loan origination activity and the resulting growth in the average MSR balance outstanding from 2016 to 2017.
Other Operating Expenses. The increase was primarily attributable to a $2.9 million increase in office expenses. These expenses increased as a result of the aforementioned increase in average headcount.
Income Tax Expense. The decrease in income tax expense was primarily due to an increase in excess tax benefits from stock compensation recognized year over year and the enactment of Tax Reform in 2017, partially offset by the increase in income from operations. Excess tax benefits reduced income tax expense by $9.5$11.4 million in 2017 compared2019 to $0.6$21.1 million in 2016.2020.
As discussed previously, Tax Reform was enacted in December 2017, reducing the federal income tax rate from 35.0% to 21.0%. In connection with the enactment of Tax Reform, we revalued our net deferred tax liabilities using the new federal income tax rate of 21.0%. These net deferred tax liabilities decreased as the future payment of taxes from these liabilities will be less than previously expected, resulting in a decrease to income tax expense of $58.3 million. The significant reductions to income tax expense in 2017 resulted in an effective tax rate of 9.3% compared to 38.5% in 2016.
48
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan facility, and amortization and depreciation, adjusted for provision (benefit) for credit losses net of write-offs, stock-based incentive compensation charges, and non-cash revenues such as gains attributable to MSRs. Additionally, adjusted EBITDA further includes or excludes other significant non-cash items that are not partthe fair value of our ongoing operations.expected net cash flows from servicing, net. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.
We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering:
| the ability to make more meaningful period-to-period comparisons of our ongoing operating results; |
| the ability to better identify trends in our underlying business and perform related trend analyses; and |
| a better understanding of how management plans and measures our underlying business. |
We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate our results of operations in conjunction with net income.
Adjusted EBITDA is calculatedreconciled to net income as follows:
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
|
|
|
|
|
|
|
|
|
| |
|
| For the year ended December 31, |
| |||||||
(in thousands) |
| 2018 |
| 2017 |
| 2016 |
| |||
Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA |
|
|
|
| ||||||
Walker & Dunlop Net Income |
| $ | 161,439 |
| $ | 211,127 |
| $ | 113,897 |
|
Income tax expense |
|
| 51,908 |
|
| 21,827 |
|
| 71,470 |
|
Interest expense on corporate debt |
|
| 10,130 |
|
| 9,745 |
|
| 9,851 |
|
Amortization and depreciation |
|
| 142,134 |
|
| 131,246 |
|
| 111,427 |
|
Provision (benefit) for credit losses |
|
| 808 |
|
| (243) |
|
| (612) |
|
Net write-offs |
|
| — |
|
| — |
|
| (1,757) |
|
Stock compensation expense |
|
| 23,959 |
|
| 21,134 |
|
| 18,477 |
|
Gains attributable to mortgage servicing rights (1) |
|
| (172,401) |
|
| (193,886) |
|
| (192,825) |
|
Unamortized issuance costs from early debt extinguishment |
|
| 2,104 |
|
| — |
|
| — |
|
Adjusted EBITDA |
| $ | 220,081 |
| $ | 200,950 |
| $ | 129,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents a period-to-period comparison of our adjusted EBITDA for the years ended December 31, 2018 and 2017:
ADJUSTED EBITDA – 2018 COMPARED TO 2017
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended |
|
|
|
|
|
| ||||
| December 31, |
| Dollar |
| Percentage |
| |||||
(dollars in thousands) | 2018 |
| 2017 |
| Change |
| Change |
| |||
Origination fees | $ | 234,681 |
| $ | 245,484 |
| $ | (10,803) |
| (4) | % |
Servicing fees |
| 200,230 |
|
| 176,352 |
|
| 23,878 |
| 14 |
|
Net warehouse interest income |
| 14,031 |
|
| 24,467 |
|
| (10,436) |
| (43) |
|
Escrow earnings and other interest income |
| 42,985 |
|
| 20,396 |
|
| 22,589 |
| 111 |
|
Other revenues |
| 61,415 |
|
| 50,565 |
|
| 10,850 |
| 21 |
|
Personnel |
| (273,344) |
|
| (268,143) |
|
| (5,201) |
| 2 |
|
Net write-offs |
| — |
|
| — |
|
| — |
| N/A |
|
Other operating expenses |
| (59,917) |
|
| (48,171) |
|
| (11,746) |
| 24 |
|
Adjusted EBITDA | $ | 220,081 |
| $ | 200,950 |
| $ | 19,131 |
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See the table above for the components of the change in adjusted EBITDA. The decrease in origination fees was largely attributable to the change in the mix of loan origination volume year over year. Servicing fees increased principally due to an increase in the average servicing portfolio from 2017 to 2018 as a result of new loan originations, partially offset by a decrease in the average servicing fee. Net warehouse interest income decreased largely as a result of declines in the average balance and the net interest margin on loans held for sale due to a flattening yield curve. Escrow earnings and other interest income increased as a result of increases in the average escrow balance outstanding and the average earnings rate following the increases in short-term interest rates over the past year. Other revenues increased primarily due to an increase in investment management fees. The increase in personnel expense was primarily due to increased salaries and benefits due to a rise in headcount. Other operating expenses increased largely due to increased occupancy and travel costs due to the larger average headcount year over year and increased professional fees due to the JCR and iCap acquisitions.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table presents a period-to-period comparison of our adjusted EBITDA for the years ended December 31, 2017 and 2016:
ADJUSTED EBITDA – 2017 COMPARED TO 2016
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended |
|
|
|
|
|
| ||||
| December 31, |
| Dollar |
| Percentage |
| |||||
(dollars in thousands) | 2017 |
| 2016 |
| Change |
| Change |
| |||
Origination fees | $ | 245,484 |
| $ | 174,360 |
| $ | 71,124 |
| 41 | % |
Servicing fees |
| 176,352 |
|
| 140,924 |
|
| 35,428 |
| 25 |
|
Net warehouse interest income |
| 24,467 |
|
| 23,727 |
|
| 740 |
| 3 |
|
Escrow earnings and other interest income |
| 20,396 |
|
| 9,168 |
|
| 11,228 |
| 122 |
|
Other revenues |
| 50,565 |
|
| 33,858 |
|
| 16,707 |
| 49 |
|
Personnel |
| (268,143) |
|
| (209,014) |
|
| (59,129) |
| 28 |
|
Net write-offs |
| — |
|
| (1,757) |
|
| 1,757 |
| (100) |
|
Other operating expenses |
| (48,171) |
|
| (41,338) |
|
| (6,833) |
| 17 |
|
Adjusted EBITDA | $ | 200,950 |
| $ | 129,928 |
| $ | 71,022 |
| 55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
50
See the table above for the components of the change in adjusted EBITDA. The increase in origination fees was largely attributable to the 49% increase in loan origination volume year over year. Servicing fees increased principally due to an increase in the average servicing portfolio from 2016 to 2017 primarily as a result of record new loan originations and relatively few payoffs. Escrow earnings and other interest income increased largely due to a rise in the average outstanding balances of escrow accounts and an increase in the average earnings rate from 2016 to 2017. Other revenues increased due to increases in investment sales broker fees, preferred equity investment income, prepayment fees, and assumption fees. The increase in personnel expense was principally the result of higher loan originator commission costs due to the increase in origination fees and increased salaries expense due to an increase in average headcount. The increase in other operating expenses was largely due to an increase in office expenses due to the increase in average headcount year over year.
For the year ended December 31, (in thousands) 2020 2019 Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA Walker & Dunlop Net Income $ 246,177 $ 173,373 Income tax expense 84,313 57,121 Interest expense on corporate debt 8,550 14,359 Amortization and depreciation 169,011 152,472 Provision for credit losses 37,479 7,273 Net write-offs — — Stock compensation expense 28,319 24,075 Fair value of expected net cash flows from servicing, net (358,000) (180,766) Adjusted EBITDA $ 215,849 $ 247,907
35
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table presents a period-to-period comparison of the components of our adjusted EBITDA for the year ended December 31, 2020 and 2019:
ADJUSTED EBITDA – 2020 COMPARED TO 2019
| | | | | | | | | | | |
| For the year ended | | | | | |
| ||||
| December 31, | | Dollar | | Percentage |
| |||||
(dollars in thousands) | 2020 |
| 2019 |
| Change |
| Change |
| |||
Origination fees | $ | 359,061 | | $ | 258,471 | | $ | 100,590 | | 39 | % |
Servicing fees |
| 235,801 | |
| 214,550 | |
| 21,251 | | 10 | |
Net warehouse interest income |
| 29,326 | |
| 25,699 | |
| 3,627 | | 14 | |
Escrow earnings and other interest income |
| 18,255 | |
| 56,835 | |
| (38,580) | | (68) | |
Other revenues |
| 83,488 | |
| 81,041 | |
| 2,447 | | 3 | |
Personnel |
| (440,500) | |
| (322,093) | |
| (118,407) | | 37 | |
Net write-offs |
| — | |
| — | |
| — | | N/A | |
Other operating expenses |
| (69,582) | |
| (66,596) | |
| (2,986) | | 4 | |
Adjusted EBITDA | $ | 215,849 | | $ | 247,907 | | $ | (32,058) | | (13) | |
| | | | | | | | | | | |
The increase in origination fees was primarily related to an increase in debt financing volumes year over year. Servicing fees increased due to an increase in the average servicing portfolio period over period as a result of the substantial debt financing volume and relatively few payoffs. The increase in net warehouse interest income was related to increased net interest income from LHFS due to increases in the average balance outstanding and the net spread earned on that balance, partially offset by a decrease in net warehouse interest income from LHFI due to a lower average balance outstanding and a lower net spread earned on that balance. Escrow earnings and other interest income decreased primarily as a result of a decline in the average earnings rate. Other revenues increased primarily due to growth in property sales broker fees, partially offset by a decline in prepayment fees.
The increase in personnel expense was primarily due to increased commissions expense resulting from the increases in origination fees and property sales broker fees, subjective bonus related to the rise in headcount and our record financial performance year over year and salaries and benefits expense due to a rise in headcount.
Financial Condition
Cash Flows from Operating Activities
Our cash flows from operations are generated from loan sales, servicing fees, escrow earnings, net warehouse interest income, investmentproperty sales broker fees, asset investment management fees, and other income, net of loan origination and operating costs. Our cash flows from operations are impacted by the fees generated by our loan originations and investmentproperty sales, the timing of loan closings, assets under management, escrow account balances, the average balance of loans held for investment, and the period of time loans are held for sale in the warehouse loan facility prior to delivery to the investor.
Cash FlowFlows from Investing Activities
We usually lease facilities and equipment for our operations. However, when necessary and cost effective, we invest cash in property and equipment. Our cash flows from investing activities also include the funding and repayment of loans held for investment, and preferred equity investments, the contributioncontributions to and distributiondistributions from the Interim Program JV, the acquisition and disposition of equity-method investments,joint ventures, and the purchase of available-for-sale (“AFS”) securities pledged to Fannie Mae. We opportunistically invest cash for acquisitions and MSR portfolio purchases.
Cash FlowFlows from Financing Activities
We use our warehouse loan facilities and, when necessary, our corporate cash to fund loan closings. We believe that our current warehouse loan facilities are adequate to meet our increasing loan origination needs. Historically, we have used a combination of long-term debt and cash flows from operations to fund acquisitions, repurchase shares, pay cash dividends, and fund a portion of loans held for investment.
We also use warehouse loan facilities and corporate cash to fund COVID-19 forbearance advances.
5136
Years Ended December 31, 20182020 Compared to Years Ended December 31, 20172019
The following table presents a period-to-period comparison of the significant components of cash flows for the yearsyear ended December 31, 20182020 and 2017.2019.
SIGNIFICANT COMPONENTS OF CASH FLOWS – 20182020 COMPARED TO 20172019
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| For the year ended December 31, |
| Dollar |
| Percentage |
| |||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | For the year ended December 31, | | Dollar | | Percentage |
| |||||||||||||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| Change |
| Change |
|
| 2020 |
| 2019 |
| Change |
| Change |
| ||||||
Net cash provided by (used in) operating activities |
| $ | 64,076 |
| $ | 1,067,642 |
| $ | (1,003,566) |
| (94) | % | | $ | (1,411,370) | | $ | 427,561 | | $ | (1,838,931) | | (430) | % |
Net cash provided by (used in) investing activities |
|
| (552,238) |
|
| 97,170 |
|
| (649,408) |
| (668) |
| |
| 115,179 | |
| (79,705) | |
| 194,884 | | (245) | |
Net cash provided by (used in) financing activities |
|
| 321,830 |
|
| (1,089,491) |
|
| 1,411,321 |
| (130) |
| |
| 1,517,627 | |
| (331,638) | |
| 1,849,265 | | (558) | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period ("Total Cash") |
|
| 120,348 |
|
| 286,680 |
|
| (166,332) |
| (58) |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period ("Total cash") | | | 358,002 | | | 136,566 | | | 221,436 | | 162 | | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Cash flows from (used in) operating activities | | | | | | | | | | | | | ||||||||||||
Net receipt (use) of cash for loan origination activity |
| $ | (102,071) |
| $ | 919,491 |
| $ | (1,021,562) |
| (111) | % | | $ | (1,611,627) | | $ | 260,961 | | $ | (1,872,588) | | (718) | % |
Net cash provided by (used in) operating activities, excluding loan origination activity |
|
| 166,147 |
|
| 148,151 |
|
| 17,996 |
| 12 |
| | | 200,257 | | | 166,600 | | | 33,657 | | 20 | |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Proceeds from the sale of equity-method investments |
| $ | 4,993 |
| $ | — |
| $ | 4,993 |
| N/A | % | ||||||||||||
Purchases of pledged available-for-sale securities |
|
| (98,442) |
|
| (6,966) |
|
| (91,476) |
| 1,313 |
| ||||||||||||
Funding of preferred equity investments |
|
| (41,100) |
|
| (16,884) |
|
| (24,216) |
| 143 |
| ||||||||||||
Proceeds from the payoff of preferred equity investments |
|
| 82,819 |
|
| — |
|
| 82,819 |
| N/A |
| ||||||||||||
Capital invested in the Interim Program JV, net |
|
| (4,137) |
|
| (6,342) |
|
| 2,205 |
| (35) |
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Cash flows from (used in) investing activities | | | | | | | | | | | | | ||||||||||||
Distributions from (investments in) joint ventures, net | | | (8,462) | | | (15,944) | | | 7,482 | | (47) | | ||||||||||||
Acquisitions, net of cash received |
|
| (53,249) |
|
| (15,000) |
|
| (38,249) |
| 255 |
| | | (46,784) | | | (7,180) | | | (39,604) | | 552 | |
Purchase of mortgage servicing rights |
|
| (1,814) |
|
| (7,781) |
|
| 5,967 |
| (77) |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Originations of loans held for investment |
| $ | (597,889) |
| $ | (183,916) |
| $ | (413,973) |
| 225 |
| | | (199,153) | | | (362,924) | | | 163,771 | | (45) | |
Total principal collected on loans held for investment |
|
| 161,303 |
|
| 339,266 |
|
| (177,963) |
| (52) |
| |
| 379,491 | |
| 319,832 | |
| 59,659 | | 19 | |
Net payoff of (investment in) loans held for investment |
| $ | (436,586) |
| $ | 155,350 |
| $ | (591,936) |
| (381) | % | | $ | 180,338 | | $ | (43,092) | | $ | 223,430 | | (518) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Cash flows from (used in) financing activities | | | | | | | | | | | | | ||||||||||||
Borrowings (repayments) of warehouse notes payable, net |
| $ | 139,298 |
| $ | (955,040) |
| $ | 1,094,338 |
| (115) | % | | $ | 1,718,470 | | $ | (367,864) | | $ | 2,086,334 | | (567) | % |
Borrowings of interim warehouse notes payable |
|
| 145,043 |
|
| 140,341 |
|
| 4,702 |
| 3 |
| |
| 60,770 | |
| 179,765 | |
| (118,995) | | (66) | |
Repayments of interim warehouse notes payable |
|
| (61,050) |
|
| (237,912) |
|
| 176,862 |
| (74) |
| |
| (167,960) | |
| (67,871) | |
| (100,089) | | 147 | |
Repayments of note payable |
|
| (166,223) |
|
| (1,104) |
|
| (165,119) |
| 14,956 |
| ||||||||||||
Borrowings of note payable |
|
| 298,500 |
|
| — |
|
| 298,500 |
| N/A |
| ||||||||||||
Secured borrowings |
|
| 70,052 |
|
| — |
|
| 70,052 |
| N/A |
| ||||||||||||
Repurchase of common stock |
|
| (68,832) |
|
| (34,899) |
|
| (33,933) |
| 97 |
| | | (45,774) | | | (30,676) | | | (15,098) | | 49 | |
Proceeds from issuance of common stock | | | 14,021 | | | 5,511 | | | 8,510 | | 154 | | ||||||||||||
Purchase of noncontrolling interests | | | (10,400) | | | — | | | (10,400) | | N/A | | ||||||||||||
Cash dividends paid |
|
| (31,445) |
|
| — |
|
| (31,445) |
| N/A |
| | | (45,350) | | | (37,272) | | | (8,078) | | 22 | |
Proceeds from issuance of common stock |
|
| 8,949 |
|
| 3,013 |
|
| 5,936 |
| 197 |
| ||||||||||||
Payment of contingent consideration |
|
| (5,150) |
|
| — |
|
| (5,150) |
| N/A |
| ||||||||||||
Debt issuance costs |
|
| (7,312) |
|
| (3,890) |
|
| (3,422) |
| 88 |
|
The decrease of $166.3 millionincrease in the Total Cashcash balance from December 31, 20172019 to December 31, 20182020 is primarilylargely the result of our investing and financing activities. Substantial increases in purchasesnet cash provided by operating activities, excluding loan origination activity. Net income accounted for a significant portion of pledged AFS securities, the size and numberincrease, partially offset by significant non-cash elements of acquisitions, and investments inthat net income. We also benefitted from a significant inflow of cash from payoffs of loans held for investment, led to the significant amountnet of cash used in investing activity shown above. Additionally, we made significant cash outlays to repurchase common stockoriginations and pay cash dividends. Partially offsetting these cash outlays were substantial increases in net borrowings of note payable and secured borrowings and a decrease in cash repayments of interim warehouse notes payable.
52
Changes in cash flows from operationsoperating activities were driven primarily by loans acquired and sold. Such loans are held for short periods of time, generally less than 60 days, and impact cash flows presented as of a point in time. The decrease in cash flows from operations year over year is primarily attributable to the net use of $0.1 billion for the funding of loan originations, net of sales of loans to third parties during 2018 compared to the net receipt of $0.9 billion during 2017. Excluding cash used for the origination and sale of loans, cash flows provided by operations was $166.1 million during 2018 compared to $148.2 million during 2017. The significant components of the change included a $48.4 million increase in deferred tax expense (a non-cash adjustment) due to Tax Reform and a $21.5 million lower adjustment to net income for gains attributable to the fair value of future servicing rights, partially offset by a $50.9 million decrease in net income before noncontrolling interests.
The reduction in cash provided by (used in) investing activities is primarily attributable to a change in the net payoff of (investment in) loans held for investment and an increase in the purchases of pledged AFS securities, partially offset by an increase in proceeds from the payoff of preferred equity investments. The net investment in loans held for investment during 2018 was $436.6 million compared to net payoff of loans held for investment of $155.4 million during 2017. Of the $436.6 million of the net investment in loans held for investment during 2018, $84.0 million was funded using interim warehouse borrowings (included in cash flows from financing activities), with the other $352.6 million funded using corporate cash. Of the $155.4 million of the net payoff of loans held for investment during 2017, $97.6 million was funded using interim warehouse borrowings, with the other $57.8 million funded using corporate cash. The increase in purchases of pledged AFS securities is due to a Company initiative to invest pledged collateral in AFS securities that began near the end of 2017. The decrease in cash paid for mortgage servicing rights was due to the substantially smaller size of the servicing portfolio purchased in 2018. The increase in cash used to fund preferred equity investments was principally due to a short-term preferred equity investment of $40.0 million in 2018, with no comparable transaction in 2017. The increase in the proceeds from the payoff of preferred equity investments was due to the repayment of the aforementioned $40.0 million short-term preferred equity investment and $41.8 million of preferred equity investments made over the past several years, as expected. Net cash paid for acquisitions increased due to an increase in the size and number of acquisitions year over year. The increase in the proceeds from the sale of equity-method investments was due to the sale of our small investment in a technology company, with no comparable activity in 2017.
The substantial change in cash provided by (used in) financing activities was primarily attributable to the changes in net warehouse borrowings and the change in the repayments of interim warehouse borrowings period to period and an increase in borrowings of note payable, partially offset by increases in repayments of note payable, repurchases of common stock, and cash dividends paid. The change in net borrowings (repayments) of warehouse borrowings in 2018 was due to a smaller increase in the unpaid principal balance of loans held for sale funded by Agency Warehouse Facilities (as defined below) from December 31, 2017 to December 31, 2018 than from December 31, 2016 to December 31, 2017. During 2018, the unpaid principal balance of loans held for sale funded by Agency Warehouse Facilities increased $102.1 million from their December 31, 2017 balance compared to a decrease of $919.5 million during the same period in 2017. Substantially all of the loans held for sale at the end of each period were funded with warehouse borrowings, with some loans held for sale funded with corporate cash.
The significant change in net repayments of interim warehouse notes payable was principally due to the Company’s fully funding more loans in 2018 than in 2017. Most of this funding is expected to be short term. We typically fund a large portion of loans held for investment with interim warehouse borrowings. We refinanced our long-term debt during 2018, substantially increasing our long-term debt outstanding and leading to the increases in proceeds from note payable and repayment of note payable. The secured borrowings in 2018 were the result of a unique transaction in 2018, with no comparable activity in 2017.During the first quarter of 2018, we paid the first cash dividend in our history as a public company and have continued to pay cash dividends since. The increase in the repurchase of common stock was due to our using substantially all of the $50.0 million authorized repurchase capacity in 2018 compared to using much less of the repurchase capacity in 2017 under repurchase programs as more fully discussed below in the “Uses of Liquidity, Cash and Cash Equivalents” section.
53
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table presents a period-to-period comparison of the significant components of cash flows for the years ended December 31, 2017 and 2016.
SIGNIFICANT COMPONENTS OF CASH FLOWS – 2017 COMPARED TO 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
| Dollar |
| Percentage |
| |||||
(dollars in thousands) |
| 2017 |
| 2016 |
| Change |
| Change |
| |||
Net cash provided by (used in) operating activities |
| $ | 1,067,642 |
| $ | 759,464 |
| $ | 308,178 |
| 41 | % |
Net cash provided by (used in) investing activities |
|
| 97,170 |
|
| (66,761) |
|
| 163,931 |
| (246) |
|
Net cash provided by (used in) financing activities |
|
| (1,089,491) |
|
| (693,622) |
|
| (395,869) |
| 57 |
|
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period (“Total Cash”) |
|
| 286,680 |
|
| 211,359 |
|
| 75,321 |
| 36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net receipt (use) of cash for loan origination activity |
| $ | 919,491 |
| $ | 656,650 |
| $ | 262,841 |
| 40 | % |
Net cash provided by (used in) operating activities, excluding loan origination activity |
|
| 148,151 |
|
| 102,814 |
|
| 45,337 |
| 44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of pledged available-for-sale securities |
| $ | (6,966) |
| $ | — |
| $ | (6,966) |
| N/A | % |
Funding of preferred equity investments |
|
| (16,884) |
|
| (24,835) |
|
| 7,951 |
| (32) |
|
Capital invested in Interim Program JV |
|
| (6,342) |
|
| — |
|
| (6,342) |
| N/A |
|
Acquisitions, net of cash received |
|
| (15,000) |
|
| (6,350) |
|
| (8,650) |
| 136 |
|
Purchase of mortgage servicing rights |
|
| (7,781) |
|
| (43,097) |
|
| 35,316 |
| (82) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations of loans held for investment |
|
| (183,916) |
|
| (414,763) |
|
| 230,847 |
| (56) |
|
Total principal collected on loans held for investment |
|
| 339,266 |
|
| 425,820 |
|
| (86,554) |
| (20) |
|
Net payoff of (investment in) loans held for investment |
| $ | 155,350 |
| $ | 11,057 |
| $ | 144,293 |
| 1,305 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) of warehouse notes payable, net |
| $ | (955,040) |
| $ | (649,845) |
| $ | (305,195) |
| 47 | % |
Borrowings of interim warehouse notes payable |
|
| 140,341 |
|
| 325,828 |
|
| (185,487) |
| (57) |
|
Repayments of interim warehouse notes payable |
|
| (237,912) |
|
| (355,738) |
|
| 117,826 |
| (33) |
|
Repurchase of common stock |
|
| (34,899) |
| $ | (12,893) |
|
| (22,006) |
| 171 |
|
The increase of $75.3 million in the Total Cash balance from December 31, 2016 to December 31, 2017 is primarily the result of cash earnings of $148.6 million and the return of cash invested in loans held for investment totaling $57.8 million as a result of the formation of the Interim Program JV in the third quarter of 2017. These increases were partially offset by (i) $58.2 million of investments for acquisitions, purchases of pledged AFS securities, funding of preferred equity investments, the purchase of a servicing portfolio, capital expenditures, and capital invested in the Interim Program JV, and (ii) $34.9 million of cash used to repurchase shares of our own stock.
Changes in cash flows from operations were driven primarily by loans acquiredoriginated and sold. Such loans are held for short periods of time, generally less than 60 days and impact cash flows presented as of a point in time. The increase in cash flows from operations year over yearused in operating activities is primarily attributable to the net receipt of $0.9$1.9 billion forincrease in the funding of loan originations, net of loan sales of loans to third parties during 2017 comparedfrom 2019 to the net receipt of $0.7 billion during 2016.2020. Excluding cash used for the origination and sale of loans, cash flows provided by operations was $148.2$200.3 million during 20172020 compared to $102.8$166.6 million during 2016. The significant components2019. Significant elements of thethis change included a $97.5 million increase
54
ininclude (i) increased net income before noncontrolling interests and an increase of $19.8$72.7 million, in the adjustment to net income for(ii) increased non-cash expenses such as amortization and depreciation, stock compensation, deferred tax expense, and provision for credit losses of $76.1 million, and (iii) an increase in other liabilities of $68.8 million, partially offset by a $68.6$177.2 million decrease in deferred tax expense (a non-cash adjustment) due to Tax Reform. For 2016, deferred tax expense was $37.6 million compared to a benefit of $31.0 million for 2017.
The increase in gains attributable to the fair value of future servicing rights, net of guaranty obligation, a non-cash source of revenue.
The change from cash used in investing activities in 2019 to cash provided by (used in) investing activities in 2020 is primarily attributable to an increaseincreases in the net payoff of loans held for investment and decreasesa decrease in cash used for the purchase of mortgage servicing rights and to fund preferred equity investments in joint ventures, partially offset by increasesan increase in cash paid for acquisitions. The increase in net cash usedpayoffs on loans held for acquisitionsinvestment was due to an increase in payoff activity and cash used to investsignificantly lower origination activity in 2020 as we paused the Interim Program JV. The net payofforiginations of loans held for investment during 2017 was $155.4 million comparedfor several months due to net payoff of loans heldthe COVID-19 Crisis. Cash used for investment of $11.1 million during 2016. Of the $155.4 million of the net payoff of loans held for investment during 2017, $97.6 million was funded using interim warehouse borrowings (includedinvestments in cash flows from financing activities), with the other $57.8 million funded using corporate cash. Of the $11.1 million of the net payoff of loans held for investment during 2016, $29.9 million was funded using interim warehouse borrowings, requiring an additional $18.8 million of corporate cash. The increasejoint ventures decreased primarily due to decreases in purchases of pledged AFS securities isinvestments in our Interim Program JV due to a Company initiative to invest pledged collateralreduction in AFS securities that began near the endnumber of 2017. The decreaseloans originated resulting from the COVID-19 Crisis and repayments of several loans held by the joint venture, partially offset by additional investments in cash paid for mortgage servicing rights was due to the substantially smaller size of the servicing portfolio purchased in 2017. The decrease in cash used to fund preferred equity investments was due to the committed funding amount nearing its cap in 2017. Net cashour Appraisal JV. Cash paid for acquisitions increased due to an increase inby $39.6 million as we increased the size and number of acquisitions year over year. Cash paidcompanies acquired in 2020 compared to invest in the Interim Program JV increased as the Interim Program JV began operations in the third quarter2019.
37
The substantial change in cash provided by (used in) financing activities was primarily attributable to the significant change in net warehouse borrowings period to periodyear over year and an increase in the proceeds from issuance of common stock, partially offset by increases in net repayments of interim warehouse notes payable, repurchases of common stock, cash dividends, and cash used to repurchase and retire sharespurchase of our common stock. noncontrolling interests.
The change in net borrowings (repayments) of warehouse borrowingsnotes payable during 20172020 was due to a largesubstantial increase in the unpaid principal balance of loans held for saleLHFS funded by Agency Warehouse Facilities (as defined below) from December 31, 2016compared to December 31, 2017. During 2017,2019, with the unpaid principal balance of loans held for saleLHFS funded by Agency Warehouse Facilities decreased $919.5 million from theirincreasing $1.9 billion year over year (as seen above in cash used for loan origination activity). Additionally, as of December 31, 2016 balance compared to a decrease2019, we funded $109.0 million of $627.0 million during the same periodLHFS with our own cash, resulting in 2016. lower repayments of warehouse notes payable in 2020 than in 2019.
The change infrom net borrowings of interim warehouse notes payable in 2019 to net repayments in 2020 was principally due to a decreaseinterim loan origination and repayment activity year over year in originations ofour Interim Loan Program. During 2019, we originated several loans held for investmentthat were fully funded with corporate cash and an increase inhad multiple payoffs of loans held for investmentloans. During 2020, we had significantly lower originations and increased payoff activity, leading to a change from net borrowings to net repayments year over year. Both the decreaseThe cash used in originations and increase in payoffsrepurchase of loans held for investment were due to the formationcommon stock increased primarily as a result of the Interim Program JV in the third quarter of 2017. The increase in share repurchase activity was principally related to an increase in the repurchasenumber of shares repurchased during 2020 compared to settle employee tax obligations for restricted and performance-based share awards along with a substantial2019. The increase in cash dividends paid was primarily the fair value of the Company’s stock, which increased the taxable compensation to employees upon vesting. No performance-based awards vested during 2016 compared to 0.6 million shares during 2017. Additionally, we repurchased 0.3 million sharesresult of our own stock underincreasing the dividends paid per share by 20% year over year. The increase in cash used for purchase of noncontrolling interests was a repurchase program. result of our purchase of noncontrolling interests from the members of WDIS during 2020, a unique transaction.
Liquidity and Capital Resources
Uses of Liquidity, Cash and Cash Equivalents
Our significant recurring cash flow requirements consist of (i) short-term liquidity necessary to (i) fund loans held for sale; (ii) liquidity necessary to fund loans held for investment under the Interim Loan Program; (iii) liquidity necessary to pay cash dividends; (iv) liquidity necessary to fund our portion of the equity necessary for the operations of the Interim Program JV;JV, our appraisal JV, and other equity-method investments; (v) meet working capital needs to support our day-to-day operations, including debt service payments, servicing advances and payments for salaries, commissions, and income taxes; and (vi) meet working capital to satisfy collateral requirements for our Fannie Mae DUS risk-sharing obligations and to meet the operational liquidity requirements of Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders.
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the requirements as of December 31, 2018.2020. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. As of December 31, 2018,2020, the net worth requirement was $174.0$228.0 million, and our net worth was $532.7$991.1 million, as measured at our wholly owned operating subsidiary,
55
Walker & Dunlop, LLC. As of December 31, 2018,2020, we were required to maintain at least $34.3$45.2 million of liquid assets to meet our operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, Ginnie Mae and our warehouse facility lenders. As of December 31, 2018,2020, we had operational liquidity of $123.1$370.0 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.
Under certain limited circumstances, we may make preferred equity investments in entities controlled by certain of our borrowers that will assist those borrowers to acquire and reposition properties. The terms of such investments are negotiated with each investment. As of December 31, 2017, we had preferred equity investments with one borrower totaling $41.7 million, all of which were repaid during the year ended December 31, 2018.
Prior to 2018, we retained all earnings for the operation and expansion of our business and therefore did not pay cash dividends on our common stock. However, weWe paid a cash dividend of $0.25$0.30 per share each quarter of 2018.2019 and increased our quarterly dividend by 20% to $0.36 per share each quarter of 2020. In February 2019,2021, the Company’s Board of Directors declared a dividend of $0.30$0.50 per share for the first quarter of 2019.2021, and increase of 39%. The dividend will be paid March 7, 201911, 2021 to all holders of record of our restricted and unrestricted common stock and restricted and deferred stock units as of February 26, 2019.22, 2021. We expect to continue to make regular quarterly dividend payments for the foreseeable future.
Over the past three years, we have returned $115.3$201.7 million to investors in the form of the repurchase of 2.01.8 million shares of our common stock under share repurchase programs for a cost of $83.9$87.5 million and cash dividend payments of $31.4$114.2 million. Additionally, we have invested $142.6$139.3 million in acquisitions and the purchase of MSRs and funded $82.8 million of preferred equity investments. acquisitions. On occasion, we may use cash to fully fund loans held for investment or loans held for sale instead of using our warehouse line. As of December 31, 2018,2020, we used corporate cash to fully fund loans held for investment with an unpaid principal balance of $248.7$232.1 million. We continually seek opportunities to executecomplete additional acquisitions and purchases of MSRs and complete such acquisitions if we believe the economics are favorable.
In February 2018,2020, our Board of Directors approved a new stock repurchase program that permitted the repurchase of up to $50.0 million of shares of our common stock over a 12-month period beginning on February 9, 2018. We11, 2020. In 2020, we repurchased 1.0 million459 thousand shares under the 2018 repurchase program for an aggregate cost of $47.4$26.1 million.In February 2019,2021, our Board of Directors approved a new stock repurchase program that permits the repurchase of up to $50.0$75 million of shares of our common stock over a 12-month period beginning February 12, 2021.
We have contractual obligations to make future cash payments on February 11, 2019.lease agreements on our various offices of $23.9 million as of December 31, 2020. NOTE 14 in the consolidated financial statements contains additional details related to future lease payments. We have contractual obligations to repay short-term and long-term debt. The total principal balance for such debt is $2.8 billion as of December 31, 2020. Most of
38
this balance will be repaid with the proceeds from the sale of loans held for sale and the repayments of loans held for investment. NOTE 6 in the consolidated financial statements contains additional details related to these future debt payments. The interest associated with these debt payments is $11.7 million in 2021, $7.6 million in 2022, $6.2 million in 2023, $6.1 million in 2024, and $6.0 million in 2025. The interest for long-term debt is based on a variable rate. Such interest is calculated based on the effective interest rate as of December 31, 2020.
Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future.future, including any additional servicing advance obligations that may be required under our Fannie Mae and HUD loan servicing agreements due to the impacts of the COVID-19 Crisis.
Restricted Cash and Pledged Securities
Restricted cash consists primarily of good faith deposits held on behalf of borrowers between the time we enter into a loan commitment with the borrower and the investor purchases the loan.
We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program.program, our only off-balance sheet arrangement. We are required to secure this obligation by assigning collateral to Fannie Mae. We meet this obligation by assigning pledged securities to Fannie Mae. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires collateral for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. The restricted liquidity requirements for Tier 3 and Tier 4 loans is substantially less. Collateral held in the form of money market funds holding U.S. Treasuries is discounted 5%, and Agency MBS are discounted 4% for purposes of calculating compliance with the collateral requirements. As of December 31, 2018,2020, we held substantially all of our restricted liquidity in Agency MBS in the aggregate amount of $106.9$119.9 million. Additionally, the majority of the loans for which we have risk sharingrisk-sharing are Tier 2 loans. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital.
56
We are in compliance with the December 31, 20182020 collateral requirements as outlined above. As of December 31, 2018,2020, reserve requirements for the December 31, 20182020 DUS loan portfolio will require us to fund $59.2$65.0 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within our at riskat-risk portfolio. Fannie Mae periodically reassesseshas assessed the DUS Capital Standards in the past and may make changes to these standards in the future. We generate sufficient cash flowflows from our operations to meet these capital standards and do not expect any future changes to have a material impact on our future operations; however, any future changes to collateral requirements may adversely impact our available cash.
Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. We satisfied these requirements as of December 31, 2018.2020.
39
Sources of Liquidity: Warehouse Facilities
The following table provides information related to our warehouse facilities as of December 31, 2018.2020.
| | | | | | | | | | | | | | |
| | December 31, 2020 | | | ||||||||||
(dollars in thousands) |
| Committed |
| Uncommitted | | Total Facility | | Outstanding |
| | ||||
Facility(1) | | Amount | | Amount | | Capacity | | Balance | | Interest rate(2) | ||||
Agency Warehouse Facility #1 | | $ | 425,000 | | $ | — | | $ | 425,000 | | $ | 83,336 |
| 30-day LIBOR plus 1.40% |
Agency Warehouse Facility #2 | |
| 700,000 | |
| 300,000 | |
| 1,000,000 | |
| 460,388 | | 30-day LIBOR plus 1.40% |
Agency Warehouse Facility #3 | |
| 600,000 | |
| 265,000 | |
| 865,000 | |
| 410,546 |
| 30-day LIBOR plus 1.15% |
Agency Warehouse Facility #4 | |
| 350,000 | |
| — | |
| 350,000 | |
| 181,996 |
| 30-day LIBOR plus 1.40% |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 522,507 | | 30-day LIBOR plus 1.45% |
Total National Bank Agency Warehouse Facilities | | $ | 2,075,000 | | $ | 1,565,000 | | $ | 3,640,000 | | $ | 1,658,773 | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | 1,500,000 | | | 725,085 | | |
Total Agency Warehouse Facilities | | $ | 2,075,000 | | $ | 3,065,000 | | $ | 5,140,000 | | $ | 2,383,858 | | |
| | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | 71,572 |
| 30-day LIBOR plus 1.90% |
Interim Warehouse Facility #2 | | | 100,000 | | | — | | | 100,000 | | | 34,000 | | 30-day LIBOR plus 1.65% |
Interim Warehouse Facility #3 | | | 75,000 | | | 75,000 | | | 150,000 | | | 8,861 | | 30-day LIBOR plus 1.75% to 3.25% |
Interim Warehouse Facility #4 | | | 19,810 | | | — | | | 19,810 | | | 19,810 | | 30-day LIBOR plus 3.00% |
Total National Bank Interim Warehouse Facilities | | | 329,810 | | | 75,000 | | | 404,810 | | | 134,243 | | |
Total warehouse facilities | | $ | 2,404,810 | | $ | 3,140,000 | | $ | 5,544,810 | | $ | 2,518,101 | | |
(1) | Agency Warehouse Facilities, including the Fannie Mae repurchase agreement are used to fund loans held for sale, while Interim Warehouse Facilities are used to fund loans held for investment. |
(2) | Interest rate presented does not include the effect of interest rate floors. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 |
|
| ||||||||||
(dollars in thousands) |
| Committed |
| Uncommitted |
| Total Facility |
| Outstanding |
|
| ||||
Facility |
| Amount |
| Amount |
| Capacity |
| Balance |
| Interest rate | ||||
Agency Warehouse Facility #1 |
| $ | 425,000 |
| $ | 200,000 |
| $ | 625,000 |
| $ | 57,572 |
| 30-day LIBOR plus 1.20% |
Agency Warehouse Facility #2 |
|
| 500,000 |
|
| 300,000 |
|
| 800,000 |
|
| 62,830 |
| 30-day LIBOR plus 1.20% |
Agency Warehouse Facility #3 |
|
| 500,000 |
|
| 265,000 |
|
| 765,000 |
|
| 451,549 |
| 30-day LIBOR plus 1.25% |
Agency Warehouse Facility #4 |
|
| 350,000 |
|
| — |
|
| 350,000 |
|
| 225,538 |
| 30-day LIBOR plus 1.20% |
Agency Warehouse Facility #5 |
|
| 30,000 |
|
| — |
|
| 30,000 |
|
| 12,484 |
| 30-day LIBOR plus 1.80% |
Agency Warehouse Facility #6 |
|
| 250,000 |
|
| 100,000 |
|
| 350,000 |
|
| 66,579 |
| 30-day LIBOR plus 1.20% |
Fannie Mae repurchase agreement, uncommitted line and open maturity |
|
| — |
|
| 1,500,000 |
|
| 1,500,000 |
|
| 156,700 |
| 30-day LIBOR plus 1.15% |
Total Agency Warehouse Facilities |
| $ | 2,055,000 |
| $ | 2,365,000 |
| $ | 4,420,000 |
| $ | 1,033,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim Warehouse Facility #1 |
| $ | 85,000 |
| $ | — |
| $ | 85,000 |
| $ | 68,390 |
| 30-day LIBOR plus 1.90% |
Interim Warehouse Facility #2 |
|
| 100,000 |
|
| — |
|
| 100,000 |
|
| 37,899 |
| 30-day LIBOR plus 2.00% |
Interim Warehouse Facility #3 |
|
| 75,000 |
|
| — |
|
| 75,000 |
|
| 23,250 |
| 30-day LIBOR plus 1.90% to 2.50% |
Total Interim Warehouse Facilities |
| $ | 260,000 |
| $ | — |
| $ | 260,000 |
| $ | 129,539 |
|
|
Total warehouse facilities |
| $ | 2,315,000 |
| $ | 2,365,000 |
| $ | 4,680,000 |
| $ | 1,162,791 |
|
|
|
|
|
|
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|
Agency Warehouse Facilities
To provide financing to borrowers under the Agencies’ programs, we have seven warehouse credit facilities that we use to fund substantially all of our loan originations. As of December 31, 2018,2020, we had sixfive warehouse lines of credit in the aggregate amount of $2.9$3.6 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). Consistent with industry practice, five that we use to fund substantially all of our loan originations. Five of these facilities are revolving commitments we expect to renew annually one is a revolving commitment we expect to renew every 18 months,(consistent with industry practice), and the otherFannie Mae facility is provided on an uncommitted basis without a specific maturity date. Our ability to originate mortgage loans depends upon our ability to secure and maintain these types of short-term financing on acceptable terms.
57
During the thirdfirst quarter of 2018,2020, an Agency warehouse line with a $500.0$350.0 million aggregate committed and uncommitted borrowing capacity expired according to its terms. We believe that the sixfive remaining committed and uncommitted credit facilities from national banks, and the uncommitted credit facility from Fannie Mae, and our corporate cash provide the Companyus with sufficient borrowing capacity to conduct itsour Agency lending operations.
Agency Warehouse Facility #1:
We have a warehousing credit and security agreement with a national bank for a $425.0 million committed warehouse line that is scheduled to mature on October 28, 2019.25, 2021. The agreement provides the Companyus with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance and borrowings under this line bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 120140 basis points. In addition to the committed borrowing capacity, the agreement provides $200.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. The agreement contains certain affirmative and negative covenants that are binding on the Company’s operating subsidiary, Walker & Dunlop, LLC (which are in some cases subject to exceptions), including, but not limited to, restrictions on its ability to assume, guarantee, or become contingently liable for the obligation of another person, to undertake certain fundamental changes such as reorganizations, mergers, amendments to the Company’s certificate of formation or operating agreement, liquidations, dissolutions or dispositions or acquisitions of assets or businesses, to cease to be directly or indirectly wholly owned by the Company, to pay any subordinated debt in advance of its stated maturity or to take any action that would cause Walker & Dunlop, LLC to lose all or any part of its status as an eligible lender, seller, servicer or issuer or any license or approval required for it to engage in the business of originating, acquiring, or servicing mortgage loans.
40
In addition, the agreement requires compliance with certain financial covenants, which are measured for the Company and its subsidiaries on a consolidated basis, as follows:
| tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing |
| compliance with the applicable net worth and liquidity requirements of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and |
| liquid assets of the Company of not less than $15.0 |
| maintenance of aggregate unpaid principal amount of all mortgage loans comprising the Company’s consolidated servicing portfolio of not less than $20.0 billion or |
| aggregate unpaid principal amount of Fannie Mae DUS mortgage loans within the Company’s consolidated servicing portfolio which are 60 or more days past due or otherwise in default not to exceed 3.5% of the aggregate unpaid principal balance of all Fannie Mae DUS mortgage loans within the Company’s consolidated servicing |
| maximum indebtedness (excluding warehouse lines) to tangible net worth of 2.25 to |
The agreement contains customary events of default, which are in some cases subject to certain exceptions, thresholds, notice requirements, and grace periods. During the second quarter of 2020, we executed a modification agreement to the warehouse agreement that created a $100.0 million sublimit within the overall committed capacity to fund COVID-19 forbearance advances under the Fannie Mae DUS program. Borrowings under the agreement are collateralized by Fannie Mae’s commitment to repay the advances and are funded at 90% of the principal and interest advanced and bear interest at 30-day LIBOR plus 175 basis points with an interest-rate floor of 25 basis points. We had no borrowings related to the COVID-19 forbearances as of December 31, 2020. During the fourth quarter of 2018, 2020, we executed the firstfifth amendment to the Amendedwarehouse and Restated Warehousing Credit and Security Agreementsecurity agreement that extended the maturity date to October 28, 2019, lowered25, 2021 and increased the interestcommitted borrowing capacity to $425.0 million. Additionally, the amendment increased the borrowing rate to 30-day LIBOR plus 120140 basis points from 30-day LIBOR plus 115 basis points and reduceddid not include an extension of the $200.0 million uncommitted borrowing capacity from $300.0 millionas we allowed the uncommitted capacity to $200.0 million.expire. No other material modifications were made to the agreement during 2018.in 2020.
Agency Warehouse Facility #2:
We have a warehousing credit and security agreement with a national bank for a $500.0$700.0 million committed warehouse line that is scheduled to mature on September 9, 2019.7, 2021. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans.Advances are made at 100% of the loan balance,
58
and borrowings under this line bear interest at 30-day LIBOR plus 120140 basis points. InIn addition to the committed borrowing capacity, the agreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. During the third quarter of 2018,2020, we executed the secondsixth amendment to the Second Amended and Restated Warehousing Credit and Security Agreementwarehouse agreement that extended the maturity date thereunder until September 7, 2021, increased the committed borrowing capacity to September 9, 2019 and lowered$700.0 million. Additionally, the interestamendment increased the borrowing rate to 30-day LIBOR plus 120140 basis points from 30-day LIBOR plus 115 basis points. No other material modifications were made to the agreement in 2018.during 2020.
The negative and financial covenants of the amended and restated warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #2.
Agency Warehouse Facility #3:
We have a $500.0$600.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on April 30, 2019.2021. The committed warehouse facility provides the Companyus with the ability to fund Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 125115 basis points. During the second quarter of 2018,2020, we executed the ninth11th amendment to the warehouse agreement related to this facility that extended the maturity date to April 30, 2019,2021 for the committed borrowing capacity and added $265.0 million in uncommitted borrowing capacity that bears interest at the same rate and has the same maturity date as the committed facility. The amendment also added a 30-day LIBOR floor of 50 basis points. During the third quarter of 2020, we executed the 12th amendment to the warehouse agreement that increased the permanent committed borrowing capacity to $500.0 million, and established additional uncommitted borrowing capacity of $265.0$600.0 million. The uncommitted borrowing capacity expired on January 30, 2019. No other material modifications were made to the agreement during 2018.2020.
The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above.
41
Agency Warehouse Facility #4:#4:
We have a $350.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on October 5, 2019.7, 2021. The committed warehouse facility provides the Companyus with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans and has a sublimit of $75.0 million to fund defaulted HUD and FHA loans. Advances are made at 100% of the loan balance, and thethe borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 120140 basis points. During the fourth quarter of 2018,2020, we executed the fifththird amendment to the warehouse agreement that extendedextends the maturity date of the warehouse agreement to October 5, 2019 and reduced7, 2021, increased the interestborrowing capacity of the defaulted FHA sublimit to $75.0 million, increased the borrowing rate to 30-day LIBOR plus 120140 basis points from 30-day LIBOR plus 115 basis points, and added a 30-day LIBOR floor of 25 basis points. No other material modifications were made to the agreement during 2018.2020.
The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #4.
Agency Warehouse Facility #5: #5:
We have a $30.0 million committed warehouse credit and securitymaster repurchase agreement with a national bank for a $1.0 billion uncommitted advance credit facility that is scheduled to mature on July 12, 2019.August 23, 2021. The committed warehouse facility provides the Companyus with the ability to fund defaultedFannie Mae, Freddie Mac, HUD, and FHA loans. TheAdvances are made at 100% of the loan balance, and the borrowings under the warehouserepurchase agreement bear interest at a rate of 30-day LIBOR plus 180145 basis points. During the firstthird quarter of 2018,2020, we executed the first amendment to the warehouse credit and security agreement that extendedincreased the maturity dateuncommitted borrowing capacity to July 12, 2019. The amendment also provides us with$1.0 billion and increased the unilateral optionborrowing rate to extend30-day LIBOR plus 145 basis points from 30-day LIBOR plus 115 basis points and added a financial covenant related to debt service coverage ratio, as defined, that is similar to the agreement for one additional year. Company’s other warehouse lines. No other material modifications werehave been made to the agreement during 2018.
2020.
The negative and financial covenants of the warehouserepurchase agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leveragea four-quarter rolling EBITDA, as defined, to total debt service ratio covenant, whichof 2.75 to 1.00 that is not included in the warehouse agreement forapplicable to Agency Warehouse Facility #5.
59
Agency Warehouse Facility #6
During the first quarter of 2018, we executed a warehousing and security agreement with a national bank to establish Agency Warehouse Facility #6. The warehouse facility has a committed $250.0 million maximum borrowing amount and is scheduled to mature on January 31, 2020. We can fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 120 basis points. The agreement provides $100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. During the fourth quarter of 2018, we executed the first amendment to the warehouse and security agreement that reduced the interest rate to 30-day LIBOR plus 120 basis points. No other material modifications were made to the agreement during 2018. During the first quarter of 2019, we executed the second amendment to the warehouse and security agreement that extended the maturity date to January 31, 2020.
The negative and financial covenants of the warehouse agreement substantially conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above.
Uncommitted Agency Warehouse Facility:
We have a $1.5$1.5 billion uncommitted facility with Fannie Mae under its ASAP funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay the primary warehouse line. Fannie Mae will advance 99% of the loan balance, and borrowings under this program bear interest at 30-day LIBOR plus 115 basis points, with a minimum 30-day LIBOR rate of 35 basis points.balance. There is no expiration date for this facility. No changes were made to the uncommitted facility during 2018.The uncommitted facility has no specific negative or financial covenants.
Interim Warehouse Facilities
To assist in funding loans held for investment under the Interim Loan Program, we have threefour warehouse facilities with certain national banks in the aggregate amount of $260.0$404.8 million as of December 31, 20182020 (“Interim Warehouse Facilities”). Consistent with industry practice, twothree of these facilities are revolving commitments we expect to renew annually or bi-annually, and one is a revolving commitment we expectthat matures according to renew every two years.the maturity date of the underlying loan it finances. Our ability to originate loans held for investment depends upon our ability to secure and maintain these types of short-term financings on acceptable terms.
Interim Warehouse Facility #1:#1:
We have an $85.0a $135.0 million committed warehouse line agreement that is scheduled to mature on April 30, 2019.2021. The facility provides the Companyus with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company and bear interest at 30-day LIBOR plus 190 basis points.Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. During the second quarter of 2018,2020, we executed the eighth11th amendment to the credit and security agreement related to this facility that extended the maturity date to April 30, 2019.2021 and added a 30-day LIBOR floor of 50 basis points. No other material modifications were made to the agreement during 2018. During the first quarter2020.
42
The facility agreement requires the Company’s compliance with the same financial covenants as Agency Warehouse Facility #1, described above, and also includes the following additional financial covenant:
| minimum rolling four-quarter EBITDA, as defined, to total debt service ratio of 2.00 to 1.00 that is applicable to |
60
Interim Warehouse Facility #2:#1.
Interim Warehouse Facility #2:
We have a $100.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2019. 2021. The agreement provides the Companyus with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. All borrowings originally bear interest at 30-day LIBOR plus 200165 basis points. The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. No material modifications were made to the agreement during 2018.2020.
The credit agreement as amended and restated, requires the borrower and the Company to abide by the same financial covenants as Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Interim Warehouse Facility #2. Additionally, Interim Warehouse Facility #2 has the following additional financial covenants:
| rolling four-quarter EBITDA, as defined, of not less than |
| debt service coverage ratio, as defined, of not less than 2.75 to |
Interim Warehouse Facility #3:#3:
We have a $75.0 million repurchase agreement with a national bank that is scheduled to mature on May 18, 2019. December 20, 2021. The agreement provides the Companyus with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. facility. Borrowings under the facility are full recourse to the Company. The borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 1.90%175 to 2.50%325 basis points (“the spread”). The spread varies according to the type of asset the borrowing finances. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. We allowed the repurchase agreement to mature on May 18, 2020. During the secondfourth quarter of 2018,2020, we executed the thirdfifth amendment to the repurchase agreement that extendedwhich renewed the facility with the previous $75 million committed and $75 million uncommitted borrowing capacity with a maturity date of December 20, 2021. Additionally, the amendment updated the spread to May 18, 2019 and lowered the minimum interest rate30-day LIBOR plus 175 to 325 basis points from 30-day LIBOR plus 200190 to 250 basis points to 30-day LIBOR plus 190 basis points.depending on the type of asset. No other material modifications were made to the agreement during 2018.2020.
The Repurchase Agreement requires the borrower and the Company to abide by the following financial covenants:
| tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing |
| liquid assets of the Company of not less than $15.0 |
| leverage ratio, as defined, of not more than 3.0 to |
| debt service coverage ratio, as defined, of not less than 2.75 to |
Interim Warehouse Facility #4:
During the first quarter of 2019,2020, we executed a warehousingloan and security agreement to establish an additional interimInterim Warehouse Facility #4. The $19.8 million committed warehouse facility.loan and security agreement with a national bank funds one specific loan. The warehouse facility hasagreement provides for a committed $100.0 million maximum borrowing amount and is scheduledmaturity date to mature on April 30, 2019. We can fund certain interim loans to a specific large institutional borrower, andcoincide with the borrowingsmaturity date for the underlying loan. Borrowings under the warehouse agreementfacility are full recourse and bear interest at a rate of 30-day LIBOR plus 175300 basis points, with a floor of 450 basis points. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. The committed warehouse loan and security agreement has only two financial covenants, both of which are similar to the other Interim Warehouse Facilities. We may request additional capacity under the agreement to fund specific loans. No material modifications were made to the agreement during 2020.
The facility agreement has only two financial covenants:
● | tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date; and |
43
● | liquid assets of the Company of not less than $15.0 million; |
During the second quarter of 2020, we allowed an interim warehouse facility with no outstanding borrowings to expire according to its terms. We believe that the four remaining committed and uncommitted interim credit facilities from national banks and our corporate cash provide us with sufficient borrowing capacity to conduct our Interim Loan Program lending operations.
The warehouse agreements above contain cross-default provisions, such that if a default occurs under any of our warehouse agreements, generally the lenders under our other warehouse agreements could also declare a default. As of December 31, 2018,2020, we were in compliance with all of our warehouse line covenants.
We believe that the combination of our capital and warehouse facilities is adequate to meet our loan origination needs.
61
Debt Obligations
On November 7, 2018, we entered into a senior secured credit agreement (the “Credit Agreement”) that amended and restated our prior credit agreement and provided for a $300.0 million term loan (the “Term Loan”). The Term Loan was issued at a 0.5% discount, has a stated maturity date of November 7, 2025, and bears interest at 30-day LIBOR plus 225200 basis points. At any time, we may also elect to request one or more incremental term loan commitments not to exceed $150.0 million, provided that the total indebtedness would not cause the leverage ratio (as defined in the Credit Agreement) to exceed 2.00 to 1.00.
We are obligated to repay the aggregate outstanding principal amount of the term loan in consecutive quarterly installments equal to $0.8$0.7 million on the last business day of each of March, June, September, and December commencing on March 31, 2019.December. The term loan also requires certain other prepayments in certain circumstances pursuant to the terms of the Term Loan Agreement. The final principal installment of the term loan is required to be paid in full on November 7, 2025 (or, if earlier, the date of acceleration of the term loan pursuant to the terms of the Term Loan Agreement) and will be in an amount equal to the aggregate outstanding principal of the term loan on such date (together with all accrued interest thereon). During the second quarter of 2020, we executed the second amendment to the Credit Agreement to amend the definition of Permitted Subsidiary Collateral to include principal and interest forbearance advances funded by the sublimit created under Agency Warehouse Facility #1. No other material modifications were made to the agreement in 2020.
Our obligations under the Credit Agreement are guaranteed by Walker & Dunlop Multifamily, Inc., Walker & Dunlop, LLC, Walker & Dunlop Capital, LLC, and W&D BE, Inc., each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the “Loan Parties”), pursuant to the Amended and Restated Guarantee and Collateral Agreement entered into on November 7, 2018 among the Loan Parties and Wells Fargo Bank, National Association, as administrative agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Credit Agreement, the Company is required to cause any newly created or acquired subsidiary, unless such subsidiary has been designated as an Excluded Subsidiary (as defined in the Credit Agreement) by the Company in accordance with the terms of the Credit Agreement, to guarantee the obligations of the Company under the Credit Agreement and become a party to the Guarantee and Collateral Agreement. The Company may designate a newly created or acquired subsidiary as an Excluded Subsidiary, so long as certain conditions and requirements provided for in the Credit Agreement are met.
The Credit Agreement contains certain affirmative and negative covenants that are binding on the Loan Parties, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Loan Parties to incur indebtedness, to create liens on their property, to make investments, to merge, consolidate or enter into any similar combination, or enter into any asset disposition of all or substantially all assets, or liquidate, wind-up or dissolve, to make asset dispositions, to declare or pay dividends or make related distributions, to enter into certain transactions with affiliates, to enter into any negative pledges or other restrictive agreements, to engage in any business other than the business of the Loan Parties as of the date of the Credit Agreement and business activities reasonably related or ancillary thereto, to amend certain material contracts, or to enter into any sale leaseback arrangements. The Credit Agreement contains only one financial covenant, which requires the Company not to permit its asset coverage ratio (as defined in the Credit Agreement) to be less than 1.50 to 1.00.
The Credit Agreement contains customary events of default (which are, in some cases, subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, non-payment of principal or interest or other amounts, misrepresentations, failure to perform or observe covenants, cross-defaults with certain other indebtedness or material agreements, certain change in control events, voluntary or involuntary bankruptcy proceedings, failure of the Credit Agreements or other loan documents to be valid and binding, certain ERISA events and judgments.
As of December 31, 2018,2020, the outstanding principal balance of the note payable was $300.0$294.8 million.
The note payable and the warehouse facilities are senior obligations of the Company. As of December 31, 2018,2020, we were in compliance
44
62
Credit Quality and Allowance for Risk-Sharing Obligations
The following table sets forth certain information useful in evaluating our credit performance.
| | | | | | | |
|
| As of December 31, | | ||||
(dollars in thousands) |
| 2020 |
| 2019 |
| ||
Key Credit Metrics | | | | | | | |
Risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae Full Risk | | $ | 39,835,534 | | $ | 33,063,130 | |
Fannie Mae Modified Risk | |
| 8,948,472 | |
| 6,939,349 | |
Freddie Mac Modified Risk | |
| 37,018 | |
| 52,817 | |
Total risk-sharing servicing portfolio | | $ | 48,821,024 | | $ | 40,055,296 | |
| | | | | | | |
Non-risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae No Risk | | $ | 34,180 | | $ | 46,616 | |
Freddie Mac No Risk | |
| 37,035,568 | |
| 32,531,025 | |
GNMA - HUD No Risk | |
| 9,606,506 | |
| 9,972,989 | |
Brokered | |
| 11,419,372 | |
| 10,151,120 | |
Total non-risk-sharing servicing portfolio | | $ | 58,095,626 | | $ | 52,701,750 | |
Total loans serviced for others | | $ | 106,916,650 | | $ | 92,757,046 | |
Interim loans (full risk) servicing portfolio | |
| 295,322 | |
| 468,123 | |
Total servicing portfolio unpaid principal balance | | $ | 107,211,972 | | $ | 93,225,169 | |
| | | | | | | |
Interim Program JV Managed Loans (1) | | | 558,161 | | | 741,000 | |
| | | | | | | |
At risk servicing portfolio (2) | | $ | 44,483,676 | | $ | 36,699,969 | |
Maximum exposure to at risk portfolio (3) | |
| 9,032,083 | |
| 7,488,985 | |
Defaulted loans | |
| 48,481 | |
| 48,481 | |
Specifically identified at risk loan balances associated with allowance for risk-sharing obligations | | | 48,481 | | | 48,481 | |
| | | | | | | |
Defaulted loans as a percentage of the at risk portfolio | | | 0.11 | % | | 0.13 | % |
Allowance for risk-sharing as a percentage of the at risk portfolio | | | 0.17 | | | 0.03 | |
Allowance for risk-sharing as a percentage of maximum exposure | | | 0.83 | | | 0.15 | |
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| |||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2016 |
| |||
Key Credit Metrics |
|
|
|
|
|
|
|
|
|
|
Risk-sharing servicing portfolio: |
|
|
|
|
|
|
|
|
|
|
Fannie Mae Full Risk |
| $ | 28,807,241 |
| $ | 24,173,829 |
| $ | 20,669,404 |
|
Fannie Mae Modified Risk |
|
| 7,112,702 |
|
| 7,491,822 |
|
| 6,396,812 |
|
Freddie Mac Modified Risk |
|
| 52,959 |
|
| 53,207 |
|
| 53,368 |
|
Total risk-sharing servicing portfolio |
| $ | 35,972,902 |
| $ | 31,718,858 |
| $ | 27,119,584 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-risk-sharing servicing portfolio: |
|
|
|
|
|
|
|
|
|
|
Fannie Mae No Risk |
| $ | 63,235 |
| $ | 409,966 |
| $ | 661,948 |
|
Freddie Mac No Risk |
|
| 30,297,765 |
|
| 26,729,374 |
|
| 20,635,042 |
|
GNMA - HUD No Risk |
|
| 9,944,222 |
|
| 9,640,312 |
|
| 9,155,794 |
|
Brokered |
|
| 9,127,640 |
|
| 5,744,518 |
|
| 5,286,473 |
|
Total non-risk-sharing servicing portfolio |
| $ | 49,432,862 |
| $ | 42,524,170 |
| $ | 35,739,257 |
|
Total loans serviced for others |
| $ | 85,405,764 |
| $ | 74,243,028 |
| $ | 62,858,841 |
|
Interim loans (full risk) servicing portfolio |
|
| 283,498 |
|
| 66,963 |
|
| 222,313 |
|
Total servicing portfolio unpaid principal balance |
| $ | 85,689,262 |
| $ | 74,309,991 |
| $ | 63,081,154 |
|
|
|
|
|
|
|
|
|
|
|
|
Interim Program JV Managed Loans (1) |
|
| 404,670 |
|
| 182,175 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
At risk servicing portfolio (2) |
| $ | 32,533,838 |
| $ | 28,058,967 |
| $ | 24,072,347 |
|
Maximum exposure to at risk portfolio (3) |
|
| 6,666,082 |
|
| 5,680,798 |
|
| 4,921,802 |
|
Defaulted loans |
|
| 11,103 |
|
| 5,962 |
|
| — |
|
Specifically identified at risk loan balances associated with allowance for risk-sharing obligations |
|
| 11,103 |
|
| 5,962 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted loans as a percentage of the at risk portfolio |
|
| 0.03 | % |
| 0.02 | % |
| 0.00 | % |
Allowance for risk-sharing as a percentage of the at risk portfolio |
|
| 0.01 |
|
| 0.01 |
|
| 0.02 |
|
Allowance for risk-sharing as a percentage of the specifically identified at risk loan balances |
|
| 41.63 |
|
| 63.45 |
|
| N/A |
|
Allowance for risk-sharing as a percentage of maximum exposure |
|
| 0.07 |
|
| 0.07 |
|
| 0.07 |
|
Allowance for risk-sharing and guaranty obligation as a percentage of maximum exposure |
|
| 0.77 |
|
| 0.79 |
|
| 0.73 |
|
(2) |
|
|
63
For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at riskat-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.
(3) |
| Represents the maximum loss we would incur under our risk-sharing obligations if all of the loans we service, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. The maximum exposure is not representative of the actual loss we would incur. |
Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan.
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| | | |
Risk-Sharing Losses |
| ||
| Percentage Absorbed by Us | | |
First 5% of UPB at the time of loss settlement | | 100% | |
Next 20% of UPB at the time of loss settlement | | 25% | |
Losses above 25% of UPB at the time of loss settlement | | 10% | |
Maximum loss |
| 20% of origination UPB | |
Fannie Mae can double or triple our risk-sharing obligation if the loan does not meet specific underwriting criteria or if a loan defaults within 12 months of its sale to Fannie Mae. We may request modified risk-sharing at the time of origination, which reduces our potential risk-sharing obligation from the levels described above.
We use several techniques to manage our risk exposure under the Fannie Mae DUS risk-sharing program. These techniques include maintaining a strong underwriting and approval process, evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals, limiting our geographic market and borrower exposures, and electing the modified risk-sharing option under the Fannie Mae DUS program.
During the second quarterThe “Business” section of 2018, Fannie Mae increased our risk-sharing cap from $60.0 million to $200.0 million. Accordingly, our maximum loss exposure on any one loan is $40.0 million (such exposure would occur if the underlying collateral is determined to be completely without value at the time“Item 7. Management’s Discussion and Analysis of loss). We may request modified risk-sharing at the timeFinancial Condition and Results of origination, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fairly compensated for the risksOperations” contains a discussion of the transaction.
A provision for risk-sharing obligations is recorded, and the allowance for risk-sharing obligations is increased, when it is probable thatcaps we have incurred risk-sharing obligations. with Fannie Mae.
We regularly monitor the credit quality of all loans for which we have a risk-sharing obligation. Loans with indicators of underperforming credit are placed on a watch list, assigned a numerical risk rating based on our assessment of the relative credit weakness, and subjected to additional evaluation or loss mitigation. Indicators of underperforming credit include poor financial performance, poor physical condition, poor management, and delinquency. A specific reserve is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed, and a reserve for estimated credit losses and a guaranty obligation are recorded for all other risk-sharing loans.
The amountcalculated CECL reserve for our at-risk Fannie Mae servicing portfolio as of December 31, 2020, which excludes specific reserves, was $67.0 million compared to $34.7 million as of the provision considers our assessmentdate of adoption of the likelihood of payment byCECL accounting standard on January 1, 2020. The significant increase in the borrower,CECL reserve is principally related to the valueforecasted impacts of the underlying collateral, and the level of risk-sharing. Historically, the loss recognition occurs at or before the loan becoming 60 days delinquent. Our estimates of value are determined considering broker opinions and other sources of market value information relevant to underlying property and collateral. Risk-sharing obligations are written off against the allowance at final settlement with Fannie Mae.COVID-19 Crisis.
As of December 31, 20182020 and 2017, $11.12019, our allowance for risk-sharing obligations was $75.3 million and $6.0$11.5 million, respectively, or 17 basis points and three basis points of ourthe at risk balancesbalance, respectively. The allowance for risk-sharing obligations as of December 31, 2020 was substantially comprised of the aforementioned CECL reserve. At December 31, 2019, the allowance was based primarily on the specific reserves related to two defaulted loans, and a general reserve calculated using the accounting standards in place prior to the adoption of CECL.
As of December 31, 2020, and 2019, two loans with an aggregate UPB of $48.5 million in our at-risk portfolio were more than 60 days delinquent,in default. The specific reserves on these loans were $8.3 million and $6.9 million as of December 31, 2020 and 2019, respectively. For the years ended December 31, 2018, 2017,2020 and 2016,2019, our provisions for risk-sharing obligations were a provision of $0.7 million, a provision of $0.1$33.7 million and a net benefit of $0.1$6.4 million, respectively. The net benefit for the year ended December 31, 2016 was the result of a $0.8 million aggregate recovery related to the losses on two loans previously settled with Fannie Mae.
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As of December 31, 2018 and 2017, our allowance for risk-sharing obligations was $4.6 million and $3.8 million, respectively, or one basis point and one basis point of the at risk balance, respectively. As there were only two defaulted loans in the at risk servicing portfolio as of December 31, 2018, the Allowance for risk-sharing obligations as of December 31, 2018 was based primarily on our collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2018. During the first quarter of 2019, one of the defaulted loans paid off in full with no loss to us.
Similarly, as there was only one defaulted loan in the at risk servicing portfolio as of December 31, 2017, the Allowance for risk-sharing obligations as of December 31, 2017 was based primarily on our collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2017.
For the ten-year period from January 1, 20092010 through December 31, 2018,2020, we recognized net write-offs of risk-sharing obligations of $24.1 million, or an average of less than two basis points annually of the average at risk Fannie Mae portfolio balance.
We have never been required to repurchase a loan.
Off-Balance Sheet Risk
Other than the risk-sharing obligations under the Fannie Mae DUS Program disclosed previously in this Annual Report on Form 10-K, we do not have any off-balance sheet arrangements.
Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. We believe our recurring cash flows from operations and proceeds from loan sales and loan payoffs will provide sufficient cash flows to cover the scheduled payments over the near term related to our contractual obligations outstanding as of December 31, 2018.
Contractual payments due under warehouse facility obligations, long-term debt, and other obligations at December 31, 2018 are as follows:
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| Due after 1 |
| Due after 3 |
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| Due in 1 Year |
| Year through 3 |
| Years through |
| Due after 5 |
| ||||
(in thousands) |
| Total |
| or Less |
| Years |
| 5 Years |
| Years |
| |||||
Long-term debt (1) |
| $ | 394,313 |
| $ | 17,189 |
| $ | 33,930 |
| $ | 33,360 |
| $ | 309,834 |
|
Warehouse facilities (2) |
|
| 1,173,805 |
|
| 1,167,242 |
|
| 6,563 |
|
| — |
|
| — |
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Operating leases |
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| 34,967 |
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| 7,700 |
|
| 15,239 |
|
| 11,938 |
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| 90 |
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Purchase obligations |
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| 29,004 |
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| 19,274 |
|
| 6,416 |
|
| 3,056 |
|
| 258 |
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Total |
| $ | 1,632,089 |
| $ | 1,211,405 |
| $ | 62,148 |
| $ | 48,354 |
| $ | 310,182 |
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New/Recent Accounting Pronouncements
NOTE 2 ofin the consolidated financial statements in Item 15 of Part IV in this Annual Report on Form 10-K contains a description of the accounting pronouncements that the Financial Accounting Standards Board has issued and that have the potential
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to impact us but have not yet been adopted by us. Although we do not believe any of theThere were no other accounting pronouncements listed there willissued during 2020 that have a significantthe potential to impact on our business activities or compliance with our debt covenants, we are still in the process of determining the impact some of the new pronouncements may have on our futureconsolidated financial results and operating activities.statements.
Item 7A. Quantitative and Qualitative DisclosureDisclosures About Market Risk
Interest Rate Risk
For loans held for sale to Fannie Mae, Freddie Mac, and HUD, we are not currently exposed to unhedged interest rate risk during the loan commitment, closing, and delivery processes. The sale or placement of each loan to an investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is typically effectuated within 60 days of closing. The coupon rate for the loan is set at the same time we establish the interest rate with the investor.
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Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows are generally based on LIBOR. 30-day LIBOR as of December 31, 20182020 and 20172019 was 25014 basis points and 156176 basis points, respectively. The following table shows the impact on our annual escrow earnings due to a 100-basis point increase and decrease in 30-day LIBOR based on our escrow balances outstanding at each period end. A portion of these changes in earnings as a result of a 100-basis point increase in the 30-day LIBOR would be delayed several months due to the negotiated nature of some of our escrow arrangements.
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| As of December 31, |
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Change in annual escrow earnings due to (in thousands): |
| 2018 |
| 2017 |
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| | | | | | | | |||||||
(in thousands) | | As of December 31, | | |||||||||||
Change in annual escrow earnings due to: |
| 2020 |
| 2019 |
| |||||||||
100 basis point increase in 30-day LIBOR |
| $ | 23,275 |
| $ | 19,527 |
| | $ | 31,009 | | $ | 26,316 | |
100 basis point decrease in 30-day LIBOR |
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| (23,275) |
|
| (19,527) |
| |
| (4,402) | |
| (26,316) | |
The borrowing cost of our warehouse facilities used to fund loans held for sale and loans held for investment is based on LIBOR. The interest income on our loans held for investment is based on LIBOR. The LIBOR reset date for loans held for investment is the same date as the LIBOR reset date for the corresponding warehouse facility. The following table shows the impact on our annual net warehouse interest income due to a 100-basis point increase and decrease in 30-day LIBOR, based on our warehouse borrowings outstanding at each period end. The changes shown below do not reflect an increase or decrease in the interest rate earned on our loans held for sale.
| | | | | | | |
(in thousands) | | As of December 31, | | ||||
Change in annual net warehouse interest income due to: |
| 2020 |
| 2019 | | ||
100 basis point increase in 30-day LIBOR | | $ | (20,967) | | $ | (12,685) | |
100 basis point decrease in 30-day LIBOR (1) | |
| 1,525 | |
| 12,685 | |
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| As of December 31, |
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Change in annual net warehouse interest income due to (in thousands): |
| 2018 |
| 2017 |
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100 basis point increase in 30-day LIBOR |
| $ | (14,729) |
| $ | (17,491) |
|
100 basis point decrease in 30-day LIBOR |
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| 14,729 |
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| 17,491 |
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All of our corporate debt is based on 30-day LIBOR. Our corporate debt as of December 31, 2017 had a 30-day LIBOR floor of 100 basis points. The following table shows the impact on our annual earnings due to a 100-basis point increase and decrease in 30-day LIBOR based on our note payable balance outstanding at each period end.
| | | | | | | |
(in thousands) | | As of December 31, | | ||||
Change in annual income from operations due to: |
| 2020 |
| 2019 | | ||
100 basis point increase in 30-day LIBOR | | $ | (2,948) | | $ | (2,978) | |
100 basis point decrease in 30-day LIBOR (1) | |
| 422 | |
| 2,263 | |
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| As of December 31, |
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Change in annual earnings due to (in thousands): |
| 2018 |
| 2017 |
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100 basis point increase in 30-day LIBOR |
| $ | (3,000) |
| $ | (1,662) |
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100 basis point decrease in 30-day LIBOR (1) |
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| 3,000 |
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| 931 |
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(1) |
| The decrease |
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Market Value Risk
The fair value of our MSRs is subject to market-value risk. A 100-basis point increase or decrease in the weighted average discount rate would decrease or increase, respectively, the fair value of our MSRs by approximately $26.9$34.6 million as of December 31, 20182020, compared to $26.3$28.5 million as of December 31, 2017.2019. Our Fannie Mae and Freddie Mac servicing engagements provide for make-whole paymentsprepayment fees in the event of a voluntary prepayment prior to the expiration of the prepayment protection period. Our servicing contracts with institutional investors and HUD do not require payment of a make-whole amount.them to provide us with prepayment fees. As of both December 31, 2018 and 2017, 87%2020, 88% of the servicing fees are protected from the risk of prepayment through make-whole requirements;prepayment provisions compared to 86% as of December 31, 2019; given this significant level of prepayment protection, we do not hedge our servicing portfolio for prepayment risk.
London Interbank Offered Rate (“LIBOR”) Transition
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, the regulator for the administration of LIBOR, announced its intention to stop compelling banks to contribute LIBOR data after December 31, 2021. In the U.S., the Federal Reserve Board and the Federal Reserve Bank of New York established the Alternative Reference Rates Committee (“ARRC”) to recommend alternative interest rates. ARRC proposed the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative rate for U.S. financial instruments that are currently indexed to LIBOR. We have exposure to LIBOR mostly related to loans held on our balance sheet, debt (including both warehouse facilities and long-term debt), and earnings from escrows. In addition, we service floating rate loans in our servicing portfolio, most of which are indexed to LIBOR. Beginning in 2020, the GSEs began to issue SOFR-based products. It is expected that legacy LIBOR-based loans will transition to SOFR at the end of 2021. The timing of the transition and any SOFR adjustment factor will be determined by the GSEs. We have been working closely with the GSEs on this matter through our participation on subcommittees and advisory councils. We are updating our borrowers through this transition as information becomes available. We are updating loan agreements and sending out notices to borrowers to include fallback language related to the LIBOR transition. We have also updated our debt agreements with warehouse facility providers and our long-term debt holders to include fallback language governing the transition. We continue to monitor our LIBOR exposure, review legal contracts and assess
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fallback language impacts, engage with our client and other stakeholders, and monitor development associated with LIBOR alternatives.
Item 8.Financial Statements and Supplementary Data.Data.
The consolidated financial statements of Walker & Dunlop, Inc. and subsidiaries and the notes related to the foregoing financial statements, together with the independent registered public accounting firm’s report thereon, listed in Item 15, are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Proceduress.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.2020. Our internal control over financial reporting as of December 31, 20182020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their audit report which is included herein.
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Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.Other Information.
None.
None
PART III
Item 10.Directors, Executive Officers, and Corporate Governance.Governance
The information required by this item regarding directors, executive officers, corporate governance and our code of ethics is hereby incorporated by reference to the material appearing in the Proxy Statement for the Annual Meeting of Stockholders to be held in 20182021 (the “Proxy Statement”) under the captions “BOARD OF DIRECTORS AND CORPORATE GOVERNANCE” and “EXECUTIVE OFFICERS – Executive Officer Biographies.” The information required by this item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is hereby incorporated by reference, if applicable, to the material appearing in the Proxy Statement under the caption “VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT — Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.Reports.” The information required by this Item 10 with respect to the availability of our code of ethics is provided in this Annual Report on Form 10-K. See “Available Information.”
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Item 11.Executive Compensation.
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS,” “COMPENSATION DISCUSSION AND ANALYSIS – Compensation Committee Report” and “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS – Compensation Committee Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under our employee stock-based compensation plans required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS – Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 13 is hereby incorporated by reference to material appearing in the Proxy Statement under the captions “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “BOARD OF DIRECTORS AND CORPORATE GOVERNANCE – Corporate Governance Information – Director Independence.”
Item 14. Principal AccountingAccountant Fees and Services.
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “AUDIT RELATED MATTERS.”
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PART IV
Item 15.Exhibits and Financial Statement Schedules.Schedules
The following documents are filed as part of this report:
(a) |
| Financial Statements |
Walker & Dunlop, Inc. and Subsidiaries Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits
(b) | Exhibits |
| |||
2.1 | | ||
2.2 | | ||
2.3 | | ||
2.4 | | ||
3.1 | |
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3.2 | | ||
4.1 | | ||
4.2 | | ||
4.3 | | ||
4.4 | | ||
4.5 | |
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4.6 | | ||
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10.1 | | ||
10.2† | | ||
10.3† | | ||
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10.10† | | ||
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50
10.16† | | ||
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70
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10.26† | | ||
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10.32† | | ||
10.33† | | ||
10.34† | | ||
10.35† | | ||
10.36† | | ||
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10.38† | | ||
10.39† | | ||
10.40† | | ||
10.41† | | ||
10.42† | | ||
10.43† | |
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10.44† | | ||
10.45† | | ||
10.46† | | ||
10.47† | | ||
10.48† | | ||
10.49† | | ||
10.50† | | ||
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10.61† | | ||
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10.63† | | ||
10.64 | | ||
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10.67 | | ||
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10.69 | | ||
10.70 | | ||
10.71 | | ||
10.72 | | ||
10.73 | | ||
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10.75 | | ||
10.76 | | ||
10.77 | | ||
10.78 | | ||
10.79 | | ||
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72
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10.85 | | ||
10.86 | | ||
21* | | List of Subsidiaries of Walker & Dunlop, Inc. as of December 31, | |
23* | | Consent of KPMG LLP (Independent Registered Public Accounting Firm) | |
31.1* | | Certification of Walker & Dunlop, Inc.'s Chief Executive Offer Pursuant to Rule 13a-14(a) | |
31.2* | | Certification of Walker & Dunlop, Inc.'s Chief Financial Offer Pursuant to Rule 13a-14(a) | |
32** | | ||
| | 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. | |
| | Inline XBRL Taxonomy Extension Schema Document | |
| | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained an Exhibit 101) |
†:Denotes a management contract or compensation plan, contract or arrangement.
*:Filed herewith.
**: Furnished herewith.
Item 16. Information in this Annual Report on Form 10-K Summary.furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Item 16.Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Walker & Dunlop, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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