MR. COOPER GROUP INC.
MR COOPER GROUP INC.
The consolidated interim financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC.Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2019.2020.
The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities:liabilities. In estimating the fair value of all mortgage servicing rights and related liabilities, the impact of the COVID-19 pandemic was considered in the determination of key assumptions.
The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10%an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at March 31, 2020, no2021, 0 impairment or increased obligation was needed.recorded.
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| | | | | |
| Excess Spread Financing Assumptions | March 31, 2020 | | December 31, 2019 |
| Discount rate | 11.6 | % | | 11.6 | % |
| Prepayment speeds | 12.8 | % | | 12.6 | % |
| Recapture rate | 18.6 | % | | 20.1 | % |
| Average life | 5.7 years |
| | 5.8 years |
|
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Discount Rate | | Prepayment Speeds |
| Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| March 31, 2021 | | | | | | | |
| Excess spread financing | $ | 33 | | | $ | 68 | | | $ | 36 | | | $ | 75 | |
| | | | | | | |
| December 31, 2020 | | | | | | | |
| Excess spread financing | $ | 30 | | | $ | 62 | | | $ | 41 | | | $ | 84 | |
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| | | | | | | | | | | | | | | |
| | Discount Rate | | Prepayment Speeds |
| Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| March 31, 2020 | | | | | | | |
| Excess spread financing | $ | 43 |
| | $ | 89 |
| | $ | 48 |
| | $ | 98 |
|
| | | | | | | | |
| December 31, 2019 | | | | | | | |
| Excess spread financing | $ | 46 |
| | $ | 95 |
| | $ | 46 |
| | $ | 96 |
|
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variationan adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess Spreadspread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
From December 2013 through June 2014, the Company entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer, and, for accounting purposes, ownership of the MSR resides with the Company. Accordingly, the Company records the MSR and anhad MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative$23 and $33 as of March 31, 2021 and December 31, 2020, respectively. Refer to the market participant assumptions contained in the MSR valuation.
The following table sets forth theNote 13, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of the mortgage servicing rightsMSR financing liability:liability.
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| | | | | |
| Mortgage Servicing Rights Financing Assumptions | March 31, 2020 | | December 31, 2019 |
| Advance financing rates | 1.7 | % | | 3.5 | % |
| Annual advance recovery rates | 18.4 | % | | 18.8 | % |
Servicing Segment Revenues
The following table sets forth the items comprising total revenues for the Servicing segment:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| Total Revenues - Servicing | 2021 | | 2020 | | | | |
Contractually specified servicing fees(1) | $ | 276 | | | $ | 297 | | | | | |
Other service-related income(1) | 145 | | | 49 | | | | | |
Incentive and modification income(1) | 14 | | | 10 | | | | | |
Late fees(1) | 18 | | | 27 | | | | | |
| Reverse servicing fees | 5 | | | 6 | | | | | |
Mark-to-market adjustments(2) | 354 | | | (383) | | | | | |
Counterparty revenue share(3) | (83) | | | (76) | | | | | |
Amortization, net of accretion(4) | (153) | | | (76) | | | | | |
| Total revenues - Servicing | $ | 576 | | | $ | (146) | | | | | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues.
(2)Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $12 and $10 during the three months ended March 31, 2021 and 2020, respectively.
(3)Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.
(4)Amortization is net of excess spread accretion of $76 and $68 and MSL accretion of $3 and $8 during the three months ended March 31, 2021 and 2020, respectively.
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| | | | | | | |
| Total Revenues - Servicing | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
Contractually specified servicing fees(1) | $ | 297 |
| | $ | 281 |
|
Other service-related income(1) | 49 |
| | 50 |
|
Incentive and modification income(1) | 10 |
| | 7 |
|
Late fees(1) | 27 |
| | 25 |
|
| Reverse servicing fees | 6 |
| | 9 |
|
Mark-to-market adjustments(2) | (383 | ) | | (293 | ) |
Counterparty revenue share(3) | (76 | ) | | (48 | ) |
Amortization, net of accretion(4) | (76 | ) | | (23 | ) |
| Total revenues - Servicing | $ | (146 | ) | | $ | 8 |
|
| |
(1)
| The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues. |
| |
(2)
| Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows for the Company was $10 and $11 for the three months ended March 31, 2020 and 2019, respectively. |
| |
(3)
| Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements. |
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(4)
| Amortization for the Company is net of excess spread accretion of $68 and $36 and MSL accretion of $8 and $18 for the three months ended March 31, 2020 and 2019, respectively. |
4.3. Advances and Other Receivables Net
Advances and other receivables, net, consists of the following:
| | | | | | | | | | | |
| Advances and Other Receivables, Net | March 31, 2021 | | December 31, 2020 |
| Servicing advances, net of $63 and $72 purchase discount, respectively | $ | 882 | | | $ | 975 | |
Receivables from agencies, investors and prior servicers, net of $20 and $21 purchase discount, respectively | 162 | | | 173 | |
| Reserves | (206) | | | (208) | |
| Total advances and other receivables, net | $ | 838 | | | $ | 940 | |
|
| | | | | | | |
| Advances and Other Receivables, Net | March 31, 2020 | | December 31, 2019 |
| Servicing advances, net of $125 and $131 discount, respectively | $ | 688 |
| | $ | 970 |
|
| Receivables from agencies, investors and prior servicers, net of $21 and $21 discount, respectively | 190 |
| | 193 |
|
| Reserves | (193 | ) | | (175 | ) |
| Total advances and other receivables, net | $ | 685 |
| | $ | 988 |
|
The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral or mortgage insurance claims or the borrower. Reserves for advances and other receivables on loans liquidated or purchased out of the MSR portfolio are established within advances and other receivables.
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| Reserves for Advances and Other Receivables | 2021 | | 2020 |
| Balance - beginning of period | $ | 208 | | | $ | 168 | |
Provision and other additions(1) | 15 | | | 30 | |
| Write-offs | (17) | | | (5) | |
| Balance - end of period | $ | 206 | | | $ | 193 | |
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| | | | | | | |
| Reserves for Advances and Other Receivables | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 168 |
| | $ | 47 |
|
Provision and other additions(1) | 30 |
| | 30 |
|
| Write-offs | (5 | ) | | (6 | ) |
| Balance - end of period | $ | 193 |
| | $ | 71 |
|
(1)The Company recorded a provision of $12 and $10 through the MTM adjustments in revenues - service related, net, in the unaudited condensed consolidated statements of operations during the three months ended March 31, 2021 and 2020, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
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(1)
| The Company recorded a provision of $10 and $11 through the MTM adjustments in revenues - service related, net, in the consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate. |
Purchase Discount for Advances and Other Receivables
In connection with the acquisition of Pacific Union in February 2019, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount of $19. Refer to Note 2, Acquisitions, for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connection with the Merger at estimated fair value as of the acquisition date, which resulted in a purchase discount of $302.
As of March 31, 2020, a total of $175 purchase discount has been utilized, with $146 purchase discount remaining.
The following table setstables set forth the activities of the purchase discounts for advances and other receivables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Purchase Discount for Advances and Other Receivables | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
| Balance - beginning of period | $ | 72 | | | $ | 21 | | | $ | 131 | | | $ | 21 | |
| Utilization of purchase discounts | (9) | | | (1) | | | (6) | | | 0 | |
| Balance - end of period | $ | 63 | | | $ | 20 | | | $ | 125 | | | $ | 21 | |
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| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Purchase Discounts | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
| Balance - beginning of period | $ | 131 |
| | $ | 21 |
| | $ | 205 |
| | $ | 48 |
|
| Addition from acquisition | — |
| | — |
| | 19 |
| | — |
|
| Utilization of purchase discounts | (6 | ) | | — |
| | (55 | ) | | — |
|
| Balance - end of period | $ | 125 |
| | $ | 21 |
| | $ | 169 |
| | $ | 48 |
|
Credit Loss for Advances and Other Receivables
As described in Note 1, Nature of Business and Basis of Presentation, advances and other receivables are within the scope of ASU 2016-13, and the Company modified its accounting policy regarding its assessment of reserves for credit-related losses in accordance with CECL framework. Upon applying ASU 2016-13, the Company reduced its reserve for credit-related losses by $7 as of January 1, 2020. During the three months ended March 31, 2021 and 2020, the Company increased the current expected credit loss (“CECL”) reserve by $1 and $6, respectively. As of March 31, 2021, the total CECL reserve by $6.was $39, of which $22 and $17 were recorded in reserves and purchase discount for advances and other receivables, respectively. As of March 31, 2020, the total CECL reserve was $23.$23, of which $6 and $17 were recorded in reserves and purchase discount for advances and other receivables, respectively.
Based upon the Company’s application of ASU 2016-13, theThe Company determined that the credit-related risk associated with applicable financial instruments typically increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time ofof 39 months. AnyAny projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
5.
4. Reverse Mortgage Interests Net
Reverse mortgage interests, net, consists of the following:
| | | | | | | | | | | |
| Reverse Mortgage Interests, Net | March 31, 2021 | | December 31, 2020 |
| Participating interests in HECM mortgage-backed securities (“HMBS”) | $ | 3,304 | | | $ | 3,471 | |
| Unsecuritized interests | 972 | | | 964 | |
| Other interests securitized | 908 | | | 945 | |
| Purchase discount, net | (93) | | | (127) | |
| Total reverse mortgage interests, net | $ | 5,091 | | | $ | 5,253 | |
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| | | | | | | |
| Reverse Mortgage Interests, Net | March 31, 2020 | | December 31, 2019 |
| Participating interests in HECM mortgage-backed securities (“HMBS”), net of $16 and $10 purchase discount and premium, respectively | $ | 4,027 |
| | $ | 4,292 |
|
| Other interests securitized, net of $44 and $56 purchase discount, respectively | 851 |
| | 938 |
|
| Unsecuritized interests, net of $69 and $68 purchase discount, respectively | 1,080 |
| | 1,052 |
|
| Reserves | (3 | ) | | (3 | ) |
| Total reverse mortgage interests, net | $ | 5,955 |
| | $ | 6,279 |
|
Participating Interests in HMBS
Participating interests in HMBS consist of the Company’s reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated in Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the three months ended March 31, 20202021 and 2019,2020, a total of $33 and $52 and $82 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company, respectively.
In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the three months ended March 31, 2019. There was no such activity during the three months ended March 31, 2020.
Other Interests Securitized
Other interests securitized consist ofThe reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because theyunder other interest securitized have reached 98% of their Max Claim Amount (“MCA”), which is established at origination and in accordance with HMBS program guidelines, requiring a repurchase of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. No such securitizationssecuritization occurred during the three months ended March 31, 20202021 and 2019. The Company sold $20 UPB of Trust 2018-3 during the three months ended March 31, 2019. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.2020.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consist of the following:
| | | | | | | | | | | |
| Unsecuritized Interests | March 31, 2021 | | December 31, 2020 |
| Repurchased HECM loans (exceeds 98% of their Max Claim Amount (“MCA”)) | $ | 699 | | | $ | 665 | |
HECM related receivables(1) | 180 | | | 208 | |
| Funded borrower draws not yet securitized | 77 | | | 72 | |
| Real estate owned (“REO”) related receivables | 16 | | | 19 | |
| Total unsecuritized interests | $ | 972 | | | $ | 964 | |
|
| | | | | | | |
| Unsecuritized interests | March 31, 2020 | | December 31, 2019 |
| Repurchased HECM loans (exceeds 98% MCA) | $ | 782 |
| | $ | 789 |
|
HECM related receivables(1) | 257 |
| | 250 |
|
| Funded borrower draws not yet securitized | 64 |
| | 67 |
|
| Real estate owned (“REO”) related receivables | 46 |
| | 14 |
|
| Purchase discount, net | (69 | ) | | (68 | ) |
| Total unsecuritized interests | $ | 1,080 |
| | $ | 1,052 |
|
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(1)
| (1)HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from the U.S. Department of Housing and Urban Development (“HUD”) on reverse mortgage interests. |
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balanceU.S. Department of the HECM loan is equal to or greater than 98% of the MCA established at originationHousing and in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. Urban Development (“HUD”) on reverse mortgage interests.
The Company repurchased a total of $383$216 and $740$383 of HECM loans out of GNMA HMBS securitizations during the three months ended March 31, 20202021 and 2019,2020, respectively, of which $103$66 and $188$103 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage. The Company assigned a total of $266$137 and $514$266 of HECM loans to HUD during the three months ended March 31, 20202021 and 2019,2020, respectively.
ReservesPurchase Discount, net, for Reverse Mortgage Interests
The Company records reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is primarily determined based on the Company’s ability to meet HUD servicing guidelines and is assessed with respect to both financial and operational exposures.
The following table sets forth the activities of the servicing reserves for reverse mortgage interests:
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| | | | | | | |
| Reserves for reverse mortgage interests | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 3 |
| | $ | 13 |
|
| Provision (release), net | — |
| | — |
|
| Write-offs | — |
| | (5 | ) |
| Balance - end of period | $ | 3 |
| | $ | 8 |
|
Purchase Discount for Reverse Mortgage Interests
In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a purchase premium of $42 for participating interests in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of servicing the loans through foreclosure and collateral liquidation. The premium and discount are amortized and accreted, respectively, based on the effective yield method, whereby the Company updates its prepayment assumptions for actual prepayments on a quarterly basis.
The following table sets forth the activities of the purchase premiums and discounts, net, for reverse mortgage interests:
| | | | | | | | | | | |
| Three Months Ended March 31, |
Purchase Discount, Net, for Reverse Mortgage Interests(1) | 2021 | | 2020 |
| Balance - beginning of period | $ | (127) | | | $ | (114) | |
Utilization of purchase discounts(2) | 35 | | | 10 | |
| Amortization, net of accretion | (1) | | | (25) | |
| Balance - end of period | $ | (93) | | | $ | (129) | |
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| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| Purchase premiums and discounts for reverse mortgage interests | Net Discount for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
| Balance - beginning of period | $ | 10 |
| | $ | (56 | ) | | $ | (68 | ) |
Utilization of purchase discounts(2) | — |
| | 5 |
| | 5 |
|
| (Amortization)/Accretion | (44 | ) | | 17 |
| | 2 |
|
Transfers(3) | 18 |
| | (10 | ) | | (8 | ) |
| Balance - end of period | $ | (16 | ) | | $ | (44 | ) | | $ | (69 | ) |
(1)Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans.
(2)Utilization of purchase discounts on liquidated loans, for which the remaining receivable was written off.
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| | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| Purchase premiums and discounts for reverse mortgage interests | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
| Balance - beginning of period | $ | 58 |
| | $ | (100 | ) | | $ | (122 | ) |
Adjustments(4) | (16 | ) | | (2 | ) | | (6 | ) |
Utilization of purchase discounts(2) | — |
| | 6 |
| | 22 |
|
| (Amortization)/Accretion | (14 | ) | | (15 | ) | | 18 |
|
Transfers(3) | 8 |
| | (1 | ) | | (7 | ) |
| Balance - end of period | $ | 36 |
| | $ | (112 | ) | | $ | (95 | ) |
| |
(1)
| Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans. |
| |
(2)
| Utilization of purchase discounts on liquidated loans, for which the remaining receivable was written-off. |
| |
(3)
| Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics. |
| |
(4)
| Adjustments to premium/(discount) due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger during the measurement period. |
Credit Loss for Reverse Mortgage Interests
As described in Note 1, Nature of Business and Basis of Presentation, reverse mortgage interests are within the scope of ASU 2016-13, requiring an assessment of reserves regarding credit-related losses in accordance with the CECL framework. Upon applying ASU 2016-13, theThe Company determined that credit-related losses are immaterial given the government insured nature of the HECM loan product. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument.Accordingly, no cumulative effect adjustment was required upon adoption of ASU 2016-13CECL related accounting guidance on January 1, 2020 and no additional CECL reserve was recorded as of March 31, 2021 and 2020.
The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s participating interest in reverse mortgage interests wasmortgages was $40 and $62 and $82 forduring the three months ended March 31, 2021 and 2020, and 2019, respectively.
6.
5. Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to GSEs or other third-party investors in the secondary market on a servicing-retained basis. The Company purchases closed loans through its correspondent channel and assists customers currently in the Company’s servicing portfolio with refinancing of loans or new home purchases through its Direct to Consumer channel. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.
Mortgage loans held for sale are recorded at fair value as set forth below:
| | | | | | | | | | | |
| Mortgage Loans Held for Sale | March 31, 2021 | | December 31, 2020 |
| Mortgage loans held for sale – UPB | $ | 6,204 | | | $ | 5,438 | |
Mark-to-market adjustment(1) | 147 | | | 282 | |
| Total mortgage loans held for sale | $ | 6,351 | | | $ | 5,720 | |
|
| | | | | | | |
| Mortgage Loans Held for Sale | March 31, 2020 | | December 31, 2019 |
| Mortgage loans held for sale – UPB | $ | 3,735 |
| | $ | 3,949 |
|
Mark-to-market adjustment(1) | 187 |
| | 128 |
|
| Total mortgage loans held for sale | $ | 3,922 |
| | $ | 4,077 |
|
| |
(1)
| (1)The mark-to-market adjustment includes net change in unrealized gain/loss, premium on correspondent loans and fees on direct-to-consumer loans. The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the consolidated statements of operations. |
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest incomein net gain on mortgage loans held for sale in theunaudited condensed consolidated statements of operations.operations.
The following table sets forth the activities of mortgage loans held for sale:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| Mortgage Loans Held for Sale | 2021 | | 2020 |
| Balance - beginning of period | $ | 5,720 | | | $ | 4,077 | |
| Loans sold | (26,734) | | | (13,510) | |
| Mortgage loans originated and purchased, net of fees | 25,214 | | | 12,375 | |
| Repurchase of loans out of Ginnie Mae securitizations | 2,255 | | | 919 | |
| Net change in unrealized (loss) gain on loans held for sale | (105) | | | 61 | |
Net transfers of mortgage loans held for sale(1) | 1 | | | 0 | |
| Balance - end of period | $ | 6,351 | | | $ | 3,922 | |
(1)Amount reflects transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net, for claims made on certain government insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing.
During the three months ended March 31, 2021 and 2020, the Company received proceeds of $27,152 and $13,724, respectively, on the sale of mortgage loans held for sale, resulting in gains of $418 and $214, respectively.
The total UPB and fair value of mortgage loans held for sale on non-accrual status was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Mortgage Loans Held for Sale | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 67 | | | $ | 54 | | | $ | 64 | | | $ | 54 | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Mortgage Loans Held for Sale | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 33 |
| | $ | 23 |
| | $ | 29 |
| | $ | 22 |
|
(1)Non-accrual UPB includes $48 of UPB related to Ginnie Mae repurchased loans as of March 31, 2021 and December 31, 2020.
| |
(1)
| Non-accrual - UPB includes $28 and $25 of UPB related to Ginnie Mae repurchased loans as of March 31, 2020 and December 31, 2019, respectively. |
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $24$18 and $21$20 as of March 31, 20202021 and December 31, 2019,2020, respectively.
The following table sets forth the activities |
| | | | | | | |
| Mortgage Loans Held for Sale | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 4,077 |
| | $ | 1,631 |
|
| Loans sold | (13,510 | ) | | (6,088 | ) |
Mortgage loans originated and purchased, net of fees(1) | 12,375 |
| | 6,253 |
|
| Repurchase of loans out of Ginnie Mae securitizations | 919 |
| | 364 |
|
| Changes in fair value | 61 |
| | 10 |
|
Net transfers of mortgage loans held for sale(2) | — |
| | — |
|
| Balance - end of period | $ | 3,922 |
| | $ | 2,170 |
|
| |
(1)
| Mortgage loans originated and purchased during the three months ended March 31, 2019 includes $536 of loans held for sale that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion.
|
| |
(2)
| Amount reflects transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net for claims made on certain government insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing. |
For the three months ended March 31, 2020 and 2019, the Company received proceeds of $13,724 and $6,194, respectively, on the sale of mortgage loans held for sale, resulting in gains of $275 and $106, respectively.
The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased in connection with loan modifications and loan resolution activity, with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale.
7. Leases
Operating leases in which the Company is the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets as of March 31, 2020. The Company does not currently have any significant finance leases in which it is the lessee. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in general and administrative expenses in the consolidated statements of operations. The Company’s leases relate primarily to office space and equipment, with remaining lease terms of generally 1 to 9 years. Certain lease arrangements contain extension options, which typically range from 3 to 5 years, at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. As of March 31, 2020, operating lease ROU assets and liabilities were $111 and $125, respectively.
The table below summarizes the Company’s net lease cost:
|
| | | | | | | |
| Net lease cost | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Operating lease cost | $ | 10 |
| | $ | 8 |
|
| Short-term lease cost | — |
| | 1 |
|
| Sublease income | (1 | ) | | — |
|
| Net lease cost | $ | 9 |
| | $ | 9 |
|
The table below summarizes other information related to the Company’s operating leases:
|
| | | | | | | |
| Operating leases | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 10 |
| | $ | 6 |
|
| Leased assets obtained in exchange for new operating lease liabilities | $ | — |
| | $ | 127 |
|
| Weighted average remaining lease term | 5.6 years |
| | 5.5 years |
|
| Weighted average discount rate | 5.0 | % | | 5.0 | % |
Maturities of operating lease liabilities as of March 31, 2020 are as follows:
|
| | | | |
| Year Ending December 31, | | Operating Leases |
2020(1) | | $ | 37 |
|
| 2021 | | 29 |
|
| 2022 | | 20 |
|
| 2023 | | 16 |
|
| 2024 | | 11 |
|
| 2025 and thereafter | | 30 |
|
| Total future minimum lease payments | | 143 |
|
| Less: imputed interest | | 18 |
|
| Total operating lease liabilities | | $ | 125 |
|
| |
(1)
| Excluding the three months ended March 31, 2020. |
8. Other Assets
Other assets consist of the following:
|
| | | | | | | |
| Other assets | March 31, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | $ | 468 |
| | $ | 560 |
|
| Derivative financial instruments | 294 |
| | 153 |
|
| Trade receivables and accrued revenues | 143 |
| | 126 |
|
| Goodwill | 120 |
| | 120 |
|
| Right-of-use assets | 111 |
| | 121 |
|
| Intangible assets | 61 |
| | 74 |
|
| Other | 372 |
| | 236 |
|
| Total other assets | $ | 1,569 |
| | $ | 1,390 |
|
6. Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. The Company, as the issuer of the mortgage backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including payments not being delinquentreceived from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its condensed consolidated balance sheets and establishes a corresponding repurchaserepurchase liability regardless of the Company’s intention to repurchase the loan. The Company had loans subject to repurchase from Ginnie Mae of $5,816 and $6,159 as of March 31, 2021 and December 31, 2020, respectively, which are included in both other assets and payables and other liabilities in the condensed consolidated balance sheets. Loans subject to repurchase from Ginnie Mae as of March 31, 2021 and December 31, 2020 include $5,557 and $5,879 loans in forbearance related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), respectively, whereby no payments have been received from borrowers for greater than 90 days.
Derivative Financial Instruments
See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
7. Goodwill and Intangible Assets
Trade Receivables
The Company had goodwill of $120 as of March 31, 2021 and Accrued Revenues
Trade receivablesDecember 31, 2020. The Company had intangible assets of $30 and accrued revenues$34 as of March 31, 2021 and December 31, 2020, respectively. Goodwill and intangible assets are primarily comprised of trade receivables and service fees earned but not received based upon the terms of the Company’s servicing and subservicing agreements. As described in Note 1, Nature of Business and Basis of Presentation, certain trade receivables and accrued revenues included in other assets are within the scope of ASU 2016-13, requiring an assessment of CECL losses. Upon applying ASU 2016-13, the Company reduced its other assets allowances by $2 as of January 1, 2020. The CECL reserve as of March 31, 2020 was $6.condensed consolidated balance sheets.
The credit-risk characteristics of trade receivables included in other assets and within the scope of ASU 2016-13 do not change with time as they are primarily short-term in nature. However, the Company does monitor the financial status of customers to determine if any specific loss considerations are required.
Goodwill and Intangible Assets
In 2019, the Company recorded goodwill and intangible assets of $40 and $13, respectively, in connection with the acquisition of Pacific Union. See further discussion in Note 2, Acquisitions. The Company recorded a $4 impairment of technology intangible assets within Corporate/Other segment during the three months ended March 31, 2020 in connection with an ancillary business. The impairment charges were included in the general and administrative expenses in the consolidated statements of operations. There was no impairment expense for intangible assets during the three months ended March 31, 2019.
Right-of-Use Assets
See Note 7, Leases, for further details on right-of-use assets.
Other
Other primarily includes prepaid expenses, margin call deposits, REO, tax receivables, receivables related to recent loan transfers and various receivables due from investors. REO, net includes $12 and $11 of REO-related receivables with government insurance as of March 31, 2020 and December 31, 2019, respectively, limiting loss exposure to the Company.
9.8. Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar and Treasury futures and interest rate swap agreements.
Associated with the Company’s derivatives are $178 and $6 in collateral deposits on derivative instruments recorded in other assets on the Company’s consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the consolidated balance sheets.
The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | | | Three Months Ended March 31, 2021 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | | | Gains/(Losses) |
| Assets | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | |
| Loan sale commitments | 2021 | | $ | 2,341 | | | $ | 42 | | | | | $ | (60) | |
| Derivative financial instruments | | | | | | | | | |
| IRLCs | 2021 | | 8,950 | | | 232 | | | | | (182) | |
| LPCs | 2021 | | 1,165 | | | 8 | | | | | (30) | |
| Forward MBS trades | 2021 | | 22,566 | | | 286 | | | | | 249 | |
| Total derivative financial instruments - assets | | | $ | 32,681 | | | $ | 526 | | | | | $ | 37 | |
| Liabilities | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | |
| IRLCs | 2021 | | $ | 240 | | | $ | 1 | | | | | $ | 1 | |
| LPCs | 2021 | | 3,974 | | | 38 | | | | | 37 | |
| Forward MBS trades | 2021 | | 6,341 | | | 76 | | | | | (80) | |
| Swap futures | 2021 | | 60 | | | 1 | | | | | 1 | |
| Total derivative financial instruments - liabilities | | | $ | 10,615 | | | $ | 116 | | | | | $ | (41) | |
| | | | | March 31, 2020 | | Three Months Ended March 31, 2020 | | March 31, 2020 | | Three Months Ended March 31, 2020 |
| Derivative Financial Instruments | Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) | Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Gains/(Losses) |
| Assets | | | | | | | Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | Mortgage loans held for sale | |
| Loan sale commitments | 2020 | | $ | 2,598 |
| | $ | 111 |
| | $ | 79 |
| Loan sale commitments | 2020 | | $ | 2,598 | | | $ | 111 | | | $ | 79 | |
| Derivative financial instruments | | | | | | | Derivative financial instruments | |
| IRLCs | 2020 | | 6,923 |
| | 263 |
| | 128 |
| IRLCs | 2020 | | 6,923 | | | 263 | | | 128 | |
| LPCs | 2020 | | 834 |
| | 25 |
| | 13 |
| LPCs | 2020 | | 834 | | | 25 | | | 13 | |
| Forward MBS trades | 2020 | | 886 |
| | 6 |
| | — |
| Forward MBS trades | 2020 | | 886 | | | 6 | | | 0 | |
| Eurodollar futures | 2020-2021 | | 6 |
| | — |
| | — |
| Eurodollar futures | 2020-2021 | | 6 | | | 0 | | | 0 | |
| Total derivative financial instruments - assets | | $ | 8,649 |
| | $ | 294 |
| | $ | 141 |
| Total derivative financial instruments - assets | | $ | 8,649 | | | $ | 294 | | | $ | 141 | |
| Liabilities | | | | | | | Liabilities | |
| Derivative financial instruments | | | | | | | Derivative financial instruments | |
| IRLCs | 2020 | | $ | 22 |
| | $ | — |
| | $ | — |
| IRLCs | 2020 | | $ | 22 | | | $ | 0 | | | $ | 0 | |
| LPCs | 2020 | | 10 |
| | — |
| | (3 | ) | LPCs | 2020 | | 10 | | | 0 | | | (3) | |
| Forward MBS trades | 2020 | | 10,229 |
| | 223 |
| | 211 |
| Forward MBS trades | 2020 | | 10,229 | | | 223 | | | 211 | |
| Eurodollar futures | 2020-2021 | | 6 |
| | — |
| | — |
| Eurodollar futures | 2020-2021 | | 6 | | | 0 | | | 0 | |
| Total derivative financial instruments - liabilities | | $ | 10,267 |
| | $ | 223 |
| | $ | 208 |
| Total derivative financial instruments - liabilities | | $ | 10,267 | | | $ | 223 | | | $ | 208 | |
As of March 31, 2021, the Company held $2 and $113 in collateral deposits and collateral obligations on derivative instruments, respectively. As of December 31, 2020 the Company held $61 in collateral deposits on derivative instruments. Collateral deposits and collateral obligations are recorded in other assets and payable and other liabilities, respectively, in the Company’s condensed consolidated balance sheets. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the condensed consolidated balance sheets.
9. Indebtedness
Advance and Warehouse Facilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral Pledged |
| Advance Facilities | | | | | | | | | | | | | | | | |
| $875 advance facility | | CP+2.0% to 6.5% | | January 2022 | | Servicing advance receivables | | $ | 875 | | | $ | 140 | | | $ | 165 | | | $ | 168 | | | $ | 195 | |
$640 advance facility(1) | | LIBOR+3.9% | | August 2022 | | Servicing advance receivables | | 640 | | | 231 | | | 299 | | | 235 | | | 305 | |
| $425 advance facility | | LIBOR+1.6% to 6.5% | | October 2021 | | Servicing advance receivables | | 425 | | | 197 | | | 250 | | | 192 | | | 246 | |
| $100 advance facility | | LIBOR+2.5% | | January 2022 | | Servicing advance receivables | | 100 | | | 70 | | | 92 | | | 74 | | | 98 | |
| Advance facilities principal amount | | | | | | 638 | | | 806 | | | 669 | | | 844 | |
| | | | | | | | | | | | | | | | |
| Warehouse Facilities | | | | | | | | | | | | | | | | |
$2,500 warehouse facility(2) | | LIBOR+1.6% to 1.9% | | October 2021 | | Mortgage loans or MBS | | 2,500 | | | 1,442 | | | 1,495 | | | 1,003 | | | 1,037 | |
| $2,000 warehouse facility | | LIBOR+1.6% to 2.0% | | February 2023 | | Mortgage loans or MBS | | 2,000 | | | 940 | | | 1,055 | | | 339 | | | 392 | |
| $1,500 warehouse facility | | LIBOR+1.5% | | June 2021 | | Mortgage loans or MBS | | 1,500 | | | 867 | | | 838 | | | 1,081 | | | 1,028 | |
$1,350 warehouse facility(3) | | LIBOR+1.7% to 3.9% | | September 2022 | | Mortgage loans or MBS | | 1,350 | | | 918 | | | 990 | | | 1,067 | | | 1,128 | |
|
| | | | | | | | | | | | | |
| | | | March 31, 2019 | | Three Months Ended March 31, 2019 |
| Derivative Financial Instruments | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Recorded Gains/(Losses) |
| Assets | | | | | | | |
| Mortgage loans held for sale | | | | | | | |
| Loan sale commitments | 2019 | | $ | 365 |
| | $ | 17 |
| | $ | (9 | ) |
| Derivative financial instruments | | | | | | | |
| IRLCs | 2019 | | 2,557 |
| | 69 |
| | 9 |
|
| LPCs | 2019 | | 216 |
| | 2 |
| | 1 |
|
| Forward MBS trades | 2019 | | 410 |
| | 1 |
| | (1 | ) |
| Eurodollar futures | 2019-2021 | | 7 |
| | — |
| | — |
|
| Total derivative financial instruments - assets | | | $ | 3,190 |
| | $ | 72 |
| | $ | 9 |
|
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| LPCs | 2019 | | $ | 52 |
| | $ | — |
| | $ | — |
|
| Forward MBS trades | 2019 | | 3,804 |
| | 22 |
| | (3 | ) |
| Eurodollar futures | 2019-2021 | | 13 |
| | — |
| | — |
|
| Total derivative financial instruments - liabilities | | | $ | 3,869 |
| | $ | 22 |
| | $ | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral Pledged |
| $1,200 warehouse facility | | LIBOR+1.8% to 3.0% | | November 2021 | | Mortgage loans or MBS | | 1,200 | | | 497 | | | 543 | | | 787 | | | 839 | |
| $750 warehouse facility | | LIBOR+1.8% to 2.3% | | August 2021 | | Mortgage loans or MBS | | 750 | | | 612 | | | 631 | | | 477 | | | 492 | |
| $750 warehouse facility | | LIBOR+1.7% to 2.8% | | October 2021 | | Mortgage loans or MBS | | 750 | | | 535 | | | 549 | | | 562 | | | 574 | |
| $600 warehouse facility | | LIBOR+2.5% | | February 2022 | | Mortgage loans or MBS | | 600 | | | 332 | | | 374 | | | 187 | | | 222 | |
| $500 warehouse facility | | LIBOR+2.5% to 4.0% | | May 2021 | | Mortgage loans or MBS | | 500 | | | 0 | | | 0 | | | 0 | | | 0 | |
| $300 warehouse facility | | LIBOR+1.4% | | January 2022 | | Mortgage loans or MBS | | 300 | | | 129 | | | 130 | | | 163 | | | 164 | |
| $250 warehouse facility | | LIBOR+1.4% to 2.3% | | May 2021 | | Mortgage loans or MBS | | 250 | | | 1 | | | 1 | | | 0 | | | 0 | |
| $200 warehouse facility | | LIBOR+1.8% | | July 2021 | | Mortgage loans or MBS | | 200 | | | 169 | | | 173 | | | 131 | | | 134 | |
| $50 warehouse facility | | LIBOR+1.8% to 4.8% | | June 2021 | | Mortgage loans or MBS | | 50 | | | 36 | | | 43 | | | 37 | | | 42 | |
$30 warehouse facility(4) | | LIBOR+3.3% | | January 2022 | | Mortgage loans or MBS | | 30 | | | 2 | | | 2 | | | 1 | | | 1 | |
| Warehouse facilities principal amount | | 6,480 | | | 6,824 | | | 5,835 | | | 6,053 | |
| | | | | | | | | | | | | | | | |
| MSR Facilities | | | | | | | | | | | | | | | | |
$260 warehouse facility(1) | | LIBOR+3.9% | | August 2022 | | MSR | | 260 | | 260 | | 838 | | 260 | | 668 |
| $200 warehouse facility | | LIBOR+3.5% | | August 2021 | | MSR | | 200 | | 0 | | 471 | | 0 | | 247 |
$150 warehouse facility(3) | | LIBOR+3.8% | | September 2022 | | MSR | | 150 | | 0 | | 438 | | 0 | | 228 |
| $50 warehouse facility | | LIBOR+3.3% | | November 2022 | | MSR | | 50 | | 10 | | 80 | | 10 | | 74 |
| MSR facilities principal amount | | 270 | | 1,827 | | 270 | | 1,217 |
| | | | | | | | | | | | | | | | |
| Advance, warehouse and MSR facilities principal amount | | 7,388 | | | $ | 9,457 | | 6,774 | | | $ | 8,114 | |
| Unamortized debt issuance costs | | | | | | | | (9) | | | | (11) | | | |
| Advance and warehouse facilities, net | | $ | 7,379 | | | | $ | 6,763 | | |
| | | | | | | | | | | | | | | | |
| Pledged Collateral for warehouse and MSR facilities: | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | $ | 5,970 | | | $ | 6,210 | | | $ | 5,330 | | | $ | 5,447 | |
| Reverse mortgage interests | | | | | | | | 510 | | | 614 | | | 505 | | | 606 | |
| MSR | | | | | | | | 270 | | | 1,827 | | | 270 | | | 1,217 | |
(1)Total capacity for this facility is $900, of which $640 is internally allocated for advance financing and $260 is internally allocated for MSR financing; capacity is fully fungible and is not restricted by these allocations.
(2)The capacity amount for this warehouse facility increased from $1,500 to $2,500 in 2021. 10. Indebtedness(3)Total capacity amount for this facility is $1,500, of which $150 is a sublimit for MSR financing.
(4)The capacity amount for this warehouse facility decreased from $40 to $30 in 2021.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | March 31, 2020 | | December 31, 2019 |
| Advance Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral pledged |
$325 advance facility(1) | | LIBOR+1.5% to 6.5% | | August 2021 | | Servicing advance receivables | | $ | 325 |
| | $ | 223 |
| | $ | 283 |
| | $ | 224 |
| | $ | 285 |
|
$250 advance facility(2) | | LIBOR+1.5% to 2.6% | | December 2020 | | Servicing advance receivables | | 250 |
| | 118 |
| | 138 |
| | 98 |
| | 167 |
|
| $200 advance facility | | LIBOR+2.5% | | January 2021 | | Servicing advance receivables | | 200 |
| | 83 |
| | 117 |
| | 63 |
| | 125 |
|
$125 advance facility(3) | | LIBOR+1.5% to 7.4% | | July 2020 | | Servicing advance receivables | | 125 |
| | 66 |
| | 76 |
| | 37 |
| | 88 |
|
| Advance facilities principal amount | | | | | | 490 |
| | $ | 614 |
| | 422 |
| | $ | 665 |
|
| Unamortized debt issuance costs | | | | | | (1 | ) | | | | — |
| | |
| Advance facilities, net | | | | $ | 489 |
|
|
| | $ | 422 |
| |
|
| |
(1)
| The capacity amount was subsequently increased to $425 in April 2020 with a maturity date of October 2021. |
| |
(2)
| This advance facility was subsequently terminated and transferred to another advance facility in April 2020. |
| |
(3)
| The capacity amount was subsequently increased to $875 in April 2020 with a maturity date of April 2021. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | March 31, 2020 | | December 31, 2019 |
| Warehouse Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral pledged | | Outstanding | | Collateral pledged |
| $1,500 warehouse facility | | LIBOR+1.0% | | June 2020 | | Mortgage loans or MBS | | $ | 1,500 |
| | $ | 1,214 |
| | $ | 1,160 |
| | $ | 759 |
| | $ | 733 |
|
| $1,200 warehouse facility | | LIBOR+1.5% to 3.0% | | November 2020 | | Mortgage loans or MBS | | 1,200 |
| | 566 |
| | 602 |
| | 683 |
| | 724 |
|
| $1,000 warehouse facility | | LIBOR+1.4% to 2.3% | | September 2020 | | Mortgage loans or MBS | | 1,000 |
| | 593 |
| | 608 |
| | 762 |
| | 783 |
|
$800 warehouse facility(1) | | LIBOR+2.1% to 3.8% | | April 2021 | | Mortgage loans or MBS | | 800 |
| | 528 |
| | 639 |
| | 589 |
| | 656 |
|
| $750 warehouse facility | | LIBOR+1.4% to 2.8% | | September 2020 | | Mortgage loans or MBS | | 750 |
| | 347 |
| | 355 |
| | 411 |
| | 425 |
|
| $700 warehouse facility | | LIBOR+1.3% to 2.2% | | November 2020 | | Mortgage loans or MBS | | 700 |
| | 628 |
| | 649 |
| | 469 |
| | 488 |
|
| $600 warehouse facility | | LIBOR+2.0% | | February 2021 | | Mortgage loans or MBS | | 600 |
| | 169 |
| | 203 |
| | 174 |
| | 202 |
|
| $500 warehouse facility | | LIBOR+2.0% to 4.0% | | May 2020 | | Mortgage loans or MBS | | 500 |
| | 22 |
| | 23 |
| | 336 |
| | 349 |
|
| $200 warehouse facility | | LIBOR+1.4% | | January 2021 | | Mortgage loans or MBS | | 200 |
| | 100 |
| | 101 |
| | 136 |
| | 136 |
|
| $200 warehouse facility | | LIBOR+1.2% | | April 2021 | | Mortgage loans or MBS | | 200 |
| | 21 |
| | 21 |
| | 27 |
| | 27 |
|
| $200 warehouse facility | | LIBOR+2.0% | | May 2020 | | Mortgage loans or MBS | | 200 |
| | 59 |
| | 83 |
| | 54 |
| | 78 |
|
| $200 warehouse facility | | LIBOR+1.3% | | October 2020 | | Mortgage loans or MBS | | 200 |
| | — |
| | — |
| | — |
| | — |
|
| $50 warehouse facility | | LIBOR+2.0% to 6.0% | | June 2020 | | Mortgage loans or MBS | | 50 |
| | 4 |
| | 6 |
| | 11 |
| | 15 |
|
| $40 warehouse facility | | LIBOR+3.3% | | September 2020 | | Mortgage loans or MBS | | 40 |
| | 6 |
| | 7 |
| | 5 |
| | 6 |
|
| Warehouse facilities principal amount | | 4,257 |
| | 4,457 |
| | 4,416 |
| | 4,622 |
|
| MSR Facility | | | | | | | | | | | | | | | | |
| $400 warehouse facility | | LIBOR+3.5% or 6.1% | | January 2023 | | Mortgage loans or MBS | | 400 |
| | 150 |
| | 836 |
| | 150 |
| | 945 |
|
| $400 warehouse facility | | LIBOR+2.3% | | December 2020 | | Mortgage loans or MBS | | 400 |
| | 75 |
| | 190 |
| | — |
| | 200 |
|
$150 warehouse facility(1) | | LIBOR+2.8% | | April 2021 | | Mortgage loans or MBS | | 150 |
| | 40 |
| | 119 |
| | — |
| | 130 |
|
| $50 warehouse facility | | LIBOR+2.8% | | August 2020 | | Mortgage loans or MBS | | 50 |
| | 30 |
| | 71 |
| | 10 |
| | 84 |
|
| MSR facilities principal amount | | 295 |
| | 1,216 |
| | 160 |
| | 1,359 |
|
| Warehouse and MSR facilities principal amount | | 4,552 |
| | $ | 5,673 |
| | 4,576 |
| | $ | 5,981 |
|
| Unamortized debt issuance costs | | | | | | | | (1 | ) | | | | (1 | ) | | |
| Warehouse facilities, net | | $ | 4,551 |
| | | | $ | 4,575 |
| | |
| | | | | | | | | | | | | | | | | |
| Pledged Collateral: | | | | | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | $ | 3,659 |
| | $ | 3,748 |
| | $ | 3,826 |
| | $ | 3,931 |
|
| Reverse mortgage interests | | | | | | | | 598 |
| | 709 |
| | 590 |
| | 691 |
|
| MSR | | | | | | | | 295 |
| | 1,216 |
| | 160 |
| | 1,359 |
|
| |
(1)
| Total capacity amount for this facility is $800 of which $150 is a sublimit for MSR financing. |
Unsecured Senior Notes
Unsecured senior notes consist of the following:
| | | | | | | | | | | |
| Unsecured Senior Notes | March 31, 2021 | | December 31, 2020 |
| $850 face value, 5.500% interest rate payable semi-annually, due August 2028 | $ | 850 | | | $ | 850 | |
| $650 face value, 5.125% interest rate payable semi-annually, due December 2030 | 650 | | | 650 | |
| $600 face value, 6.000% interest rate payable semi-annually, due January 2027 | 600 | | | 600 | |
| Unsecured senior notes principal amount | 2,100 | | | 2,100 | |
| Unamortized debt issuance costs | (26) | | | (26) | |
| Unsecured senior notes, net | $ | 2,074 | | | $ | 2,074 | |
|
| | | | | | | |
| Unsecured senior notes | March 31, 2020 | | December 31, 2019 |
| $950 face value, 8.125% interest rate payable semi-annually, due July 2023 | $ | 950 |
| | $ | 950 |
|
| $750 face value, 9.125% interest rate payable semi-annually, due July 2026 | 750 |
| | 750 |
|
$600 face value, 6.000% interest rate payable semi-annually, due January 2027(1) | 600 |
| | — |
|
$600 face value, 6.500% interest rate payable semi-annually, due July 2021(2) | — |
| | 492 |
|
$300 face value, 6.500% interest rate payable semi-annually, due June 2022(2) | — |
| | 206 |
|
| Unsecured senior notes principal amount | 2,300 |
| | 2,398 |
|
| Unamortized debt issuance costs, premium and discount | (41 | ) | | (32 | ) |
| Unsecured senior notes, net | $ | 2,259 |
| | $ | 2,366 |
|
| |
(1)
| On January 16, 2020, the Company completed an offering of $600 aggregate principal amount of 6.000% Senior Notes due 2027 (the “2027 notes”). |
| |
(2)
| This note was redeemed in full on February 15, 2020 using the net proceeds of the 2027 notes offering, together with cash on hand. |
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio. The incurrence-based covenants limit the issuer(s) and restricted subsidiaries ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the applicable indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.
The indentures provide that on or before certain fixed dates, the Company may redeem up to 40% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates. No notes were repurchased or redeemed during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company repaid $100$100 in principal of outstanding notes. Additionally, the Company redeemed $598 in principal of outstanding notes during the three months ended March 31, 2020, resulting in a gain of $1. No notes were repurchased or redeemed during the three months ended March 31, 2019.
As of March 31, 2020,2021, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2021 through 2025 | | $ | 0 | |
| Thereafter | | 2,100 | |
| Total unsecured senior notes principal amount | | $ | 2,100 | |
|
| | | | |
| Year Ending December 31, | | Amount |
| 2020 | | $ | — |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 | | 950 |
|
| 2024 | | — |
|
| Thereafter | | 1,350 |
|
| Total unsecured senior notes principal amount | | $ | 2,300 |
|
Other Nonrecourse Debt
Other nonrecourse debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| Other Nonrecourse Debt | Issue Date | | Maturity Date | | Interest Rate | | Class of Note | | Collateral Amount | | Outstanding | | Outstanding |
Participating interest financing(1) | — | | — | | 0.3%-5.6% | | — | | $ | 0 | | | $ | 3,306 | | | $ | 3,473 | |
| Securitization of nonperforming HECM loans | | | | | | | | | | | | | |
| Trust 2020-1 | September 2020 | | September 2030 | | 1.3%-7.5% | | A, M1, M2, M3, M4, M5 | | 489 | | | 471 | | | 490 | |
| Trust 2019-2 | November 2019 | | November 2029 | | 2.3%-6.0% | | A, M1, M2, M3, M4, M5 | | 254 | | | 232 | | | 241 | |
| Trust 2019-1 | June 2019 | | June 2029 | | 2.7%-6.0% | | A, M1, M2, M3, M4, M5 | | 231 | | | 203 | | | 212 | |
| Other nonrecourse debt principal amount | | | | | | | | | | | 4,212 | | | 4,416 | |
| Unamortized premium, net of debt issuance costs and discount | | | | | | | | | | | 9 | | | 8 | |
| Other nonrecourse debt, net | | | | | | | | | | | $ | 4,221 | | | $ | 4,424 | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | March 31, 2020 | | December 31, 2019 |
| Other nonrecourse debt | Issue Date | | Maturity Date | | Class of Note | | Collateral Amount | | Outstanding | | Outstanding |
Participating interest financing(1) | — | | — | | — | | $ | — |
| | $ | 4,045 |
| | $ | 4,284 |
|
| Securitization of nonperforming HECM loans | | | | | | | | | | | |
| Trust 2019-2 | November 2019 | | November 2029 | | A, M1, M2, M3, M4, M5 | | 306 |
| | 297 |
| | 333 |
|
| Trust 2019-1 | June 2019 | | June 2029 | | A, M1, M2, M3, M4, M5 | | 286 |
| | 269 |
| | 302 |
|
| Trust 2018-3 | November 2018 | | November 2028 | | A, M1, M2, M3, M4, M5 | | 209 |
| | 190 |
| | 209 |
|
| Trust 2018-2 | July 2018 | | July 2028 | | A, M1, M2, M3, M4, M5 | | 157 |
| | 137 |
| | 148 |
|
| Other nonrecourse debt principal amount | | | | | | | | | 4,938 |
| | 5,276 |
|
| Unamortized debt issuance costs, premium and discount | | | | | | | | | 7 |
| | 10 |
|
| Other nonrecourse debt, net | | | | | | | | | $ | 4,945 |
| | $ | 5,286 |
|
| |
(1)
| (1)Amounts represent the Company’s participating interest in GNMA HMBS securitized portfolios. |
Participating Interest Financing
Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Company issues HMBS in connection with the securitization of borrower draws and accrues interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a “participating interest”) in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate with a range of 1.8% to 5.6%.securitized portfolios.
Securitizations of Nonperforming HECM Loans
From time to time, the Company securitizes its interests in non-performing reverse mortgages. The transactions provide investors with the ability to invest in a pool of both non-performing HECM loans secured by one-to-four-family residential properties and a pool of REO properties acquired through foreclosure of a deed in lieu of foreclosure in connection with HECM loans that are covered by FHA insurance. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.3% to 6.0% on the outstanding securitized notes and recorded as interest expense in consolidated statements of operations. The HECM securitizations are callable with expected weighted average lives of less than one to three years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.
Financial Covenants
The Company’s credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at the Company’s operating subsidiary, Nationstar Mortgage LLC. The Company was in compliance with its required financial covenants as of March 31, 2020.2021.
11. Payables and Other Liabilities
Payables and other liabilities consist of the following:
|
| | | | | | | |
| Payables and other liabilities | March 31, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | $ | 468 |
| | $ | 560 |
|
| Payables to servicing and subservicing investors | 407 |
| | 423 |
|
| Derivative financial instruments | 223 |
| | 15 |
|
| Payable to GSEs and securitized trusts | 148 |
| | 182 |
|
| Operating lease liabilities | 125 |
| | 135 |
|
| Other liabilities | 594 |
| | 701 |
|
| Total payables and other liabilities | $ | 1,965 |
| | $ | 2,016 |
|
Loans Subject to Repurchase Right from Ginnie Mae
Payables to Servicing and Subservicing Investors and Payables to GSEs and Securitized Trusts
Payables to servicing and subservicing investors, GSEs and securitized trusts represent amounts due to investors, GSEs and securitized trusts in connection with loans serviced that are paid from collections of the underlying loans, insurance proceeds or proceeds from property disposal.
Derivative Financial Instruments
See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
Operating Lease Liabilities
See Note 7, Leases, for further details on operating lease liabilities.
MSR Purchases Payable Including Advances
MSR purchases payable including advances represents the amounts owed to the seller in connection with the purchase of MSRs.
Other Liabilities
Other liabilities primarily include accrued bonus and payroll, accrued interest, accrued legal expenses, payables to insurance carriers and insurance cancellation reserves, repurchase reserves, accounts payable and other accrued liabilities. Payables to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third-party investors on liquidated loans.
The following table sets forth the activities of the repurchase reserves:
|
| | | | | | | |
| Repurchase Reserves | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 25 |
| | $ | 8 |
|
| Provisions | 5 |
| | 8 |
|
| Releases | (1 | ) | | — |
|
| Balance - end of period | $ | 29 |
| | $ | 16 |
|
The provision for repurchases represents an estimate of losses to be incurred on the repurchase of loans or indemnification of purchaser’s losses related to forward loans. Certain sale contracts and GSE standards require the Company to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties with respect to underwriting standards.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant factors including economic conditions. Current loss rates have significantly declined attributable to stronger underwriting standards and due to the falloff of loans underwritten prior to the mortgage loan crisis period prior to 2008. The Company believes its reserve balance as of March 31, 2020 is sufficient to cover loss exposure associated with repurchase contingencies.
12.10. Securitizations and Financings
Variable Interest Entities (VIE)
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.
The Company has determined that the SPEs created in connection with the (i) Nationstar Mortgage Advance Receivables Trust (NMART), (ii) Nationstar Agency Advance Financing Trust (NAAFT) and (iii) Nationstar Advance Agency Receivables Trust (NAART)certain advance facilities trusts should be consolidated as the Company is the primary beneficiary of each of these entities. Also, the Company consolidated fourcertain reverse mortgage SPEs as it is the primary beneficiary of each of these entities. These SPEs include the Nationstar HECM Loan Trusts.
A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s condensed consolidated financial statementsbalance sheets is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Consolidated Transactions with VIEs | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings |
| Assets | | | | | | | |
| Restricted cash | $ | 80 | | | $ | 27 | | | $ | 47 | | | $ | 23 | |
| Advances and other receivables, net | 415 | | | 0 | | | 441 | | | 0 | |
Reverse mortgage interests, net(1) | 0 | | | 4,159 | | | 0 | | | 4,356 | |
| Total assets | $ | 495 | | | $ | 4,186 | | | $ | 488 | | | $ | 4,379 | |
| | | | | | | |
| Liabilities | | | | | | | |
Advance facilities(2) | $ | 337 | | | $ | 0 | | | $ | 358 | | | $ | 0 | |
| Payables and other liabilities | 0 | | | 0 | | | 1 | | | 0 | |
| Participating interest financing | 0 | | | 3,306 | | | 0 | | | 3,473 | |
| HECM Securitizations (HMBS) | | | | | | | |
| Trust 2020-1 | 0 | | | 471 | | | 0 | | | 490 | |
| Trust 2019-2 | 0 | | | 232 | | | 0 | | | 241 | |
| Trust 2019-1 | 0 | | | 203 | | | 0 | | | 212 | |
| Total liabilities | $ | 337 | | | $ | 4,212 | | | $ | 359 | | | $ | 4,416 | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Consolidated transactions with VIEs | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings |
| Assets | | | | | | | |
| Restricted cash | $ | 53 |
| | $ | 43 |
| | $ | 66 |
| | $ | 42 |
|
Reverse mortgage interests, net(1) | — |
| | 4,878 |
| | — |
| | 5,230 |
|
| Advances and other receivables, net | 498 |
| | — |
| | 540 |
| | — |
|
| Total assets | $ | 551 |
| | $ | 4,921 |
| | $ | 606 |
| | $ | 5,272 |
|
| | | | | | | | |
| Liabilities | | | | | | | |
Advance facilities(2) | $ | 407 |
| | $ | — |
| | $ | 359 |
| | $ | — |
|
| Payables and other liabilities | — |
| | 1 |
| | 1 |
| | 1 |
|
| Participating interest financing | — |
| | 4,045 |
| | — |
| | 4,284 |
|
| HECM Securitizations (HMBS) | | | | | | | |
| Trust 2019-2 | — |
| | 297 |
| | — |
| | 333 |
|
| Trust 2019-1 | — |
| | 269 |
| | — |
| | 302 |
|
| Trust 2018-3 | — |
| | 190 |
| | — |
| | 209 |
|
| Trust 2018-2 | — |
| | 137 |
| | — |
| | 148 |
|
| Total liabilities | $ | 407 |
| | $ | 4,939 |
| | $ | 360 |
| | $ | 5,277 |
|
(1)Amounts include net purchase discount of $53 and $61 as of March 31, 2021 and December 31, 2020, respectively.
| |
(1)
| Amounts include net purchase discount of $60 and $46 as of March 31, 2020 and December 31, 2019, respectively. |
| |
(2)
| Amounts include the Nationstar agency advance financing facility and notes payable recorded by the Nationstar Mortgage Advance Receivable Trust, and the Nationstar Agency Advance Receivables Trust. Refer to Notes Payable in Note 10, Indebtedness, for additional information.
|
(2)Refer to advance facilities in Note 9, Indebtedness, for additional information.
The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company:
| | | | | | | | | | | |
| Unconsolidated Securitization Trusts | March 31, 2021 | | December 31, 2020 |
| Total collateral balances - UPB | $ | 1,283 | | | $ | 1,326 | |
| Total certificate balances | $ | 1,281 | | | $ | 1,329 | |
|
| | | | | | | |
| Unconsolidated securitization trusts | March 31, 2020 | | December 31, 2019 |
| Total collateral balances - UPB | $ | 1,460 |
| | $ | 1,503 |
|
| Total certificate balances | $ | 1,467 |
| | $ | 1,512 |
|
The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of March 31, 20202021 and December 31, 20192020 and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs.
A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below:
| | | | | | | | | | | |
| Principal Amount of Transferred Loans 60 Days or More Past Due | March 31, 2021 | | December 31, 2020 |
| Unconsolidated securitization trusts | $ | 147 | | | $ | 154 | |
|
| | | | | | | |
| Principal Amount of Transferred Loans 60 Days or More Past Due | March 31, 2020 | | December 31, 2019 |
| Unconsolidated securitization trusts | $ | 184 |
| | $ | 193 |
|
13. Stockholders' Equity
Equity-based awards under the 2019 Omnibus Incentive Plan (the “2019 Plan”) include (i) restricted stock units (“RSUs”) granted to employees of the Company, consultants, and non-employee directors and (ii) performance stock units (“PSUs”) granted to certain executive officers. The RSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 Plan. The PSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 Plan and a Monte Carlo simulation model. During the three months ended March 31, 2020 and 2019, certain key employees of the Company, consultants, and non-employee directors of the Company were granted 1.1 million and 1.9 million RSUs, respectively. The stock awards for employees generally vest in equal installments on each of the first three anniversaries of the awards, provided that (i) the participant remains continuously employed with the Company during that time or (ii) the participant’s employment has terminated by reason of retirement. The stock awards for non-employee directors generally vest the earlier of (a) the first anniversary of the grant date or (b) the date of the next annual stockholders meeting following the grant date. In addition, upon death or disability, the unvested shares of an award will vest. During the three months ended March 31, 2020, certain executives of the Company were granted 0.5 million PSUs. For the 2020 PSU program, PSUs are eligible to vest and be settled into shares of Common Stock in an amount between 0% and 200% of a target award based on achievement of total shareholder return performance vesting criteria over a period of three years beginning March 1, 2020, with one-third of the units also eligible to vest based on performance through March 1, 2021.
The Company recorded $4 and $4 of expenses related to equity-based awards during the three months ended March 31, 2020 and 2019, respectively.
14.11. Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares.On March 26, 2021, the Company repurchased 3,700 thousand shares of its common stock from affiliates of Kohlberg Kravis Roberts & Co. L.P., a related party of the Company, for a total cost of $119 or $32.25 per share.
The following table sets forth the computation of basic and diluted net lossincome (loss) per common share (amounts in millions, except per share amounts):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| Computation of Earnings Per Share | 2021 | | 2020 | | | | |
| Net income (loss) attributable to Mr. Cooper | $ | 561 | | | $ | (168) | | | | | |
| Less: Undistributed earnings attributable to participating stockholders | 5 | | | 0 | | | | | |
| Net income (loss) attributable to common stockholders | $ | 556 | | | $ | (168) | | | | | |
| | | | | | | |
| Net income (loss) per common share attributable to Mr. Cooper: | | | | | | | |
| Basic | $ | 6.22 | | | $ | (1.84) | | | | | |
| Diluted | $ | 5.92 | | | $ | (1.84) | | | | | |
| | | | | | | |
| Weighted average shares of common stock outstanding (in thousands): | | | | | | | |
| Basic | 89,458 | | | 91,385 | | | | | |
Dilutive effect of stock awards(1) | 3,590 | | | 0 | | | | | |
Dilutive effect of participating securities(1) | 839 | | | 0 | | | | | |
| Diluted | 93,887 | | | 91,385 | | | | | |
(1)For periods with net loss, the Company excluded potential common shares from the computation of diluted EPS because inclusion would be antidilutive.
|
| | | | | | | |
| Computation of earnings per share | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Net loss attributable to Mr. Cooper | $ | (168 | ) | | $ | (186 | ) |
| Less: Undistributed earnings attributable to participating stockholders | — |
| | — |
|
| Net loss attributable to common stockholders | $ | (168 | ) | | $ | (186 | ) |
| | | | |
| Net loss per common share attributable to Mr. Cooper: | | | |
| Basic | $ | (1.84 | ) | | $ | (2.05 | ) |
| Diluted | $ | (1.84 | ) | | $ | (2.05 | ) |
| | | | |
| Weighted average shares of common stock outstanding (in thousands): | | | |
| Basic | 91,385 |
| | 90,828 |
|
Dilutive effect of stock awards(1) | — |
| | — |
|
Dilutive effect of participating securities(1) | — |
| | — |
|
| Diluted | 91,385 |
| | 90,828 |
|
| |
(1)
| Due to year-to-date loss, the Company excluded potential common shares from the computation of diluted EPS because inclusion would be antidilutive. |
15.12. Income Taxes
The components of income tax benefit were as follows:
|
| | | | | | | |
| Income taxes | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Loss before income tax benefit | $ | (239 | ) | | $ | (233 | ) |
| | | | |
| Income tax benefit | $ | (68 | ) | | $ | (47 | ) |
| | | | |
Effective tax rate(1) | 28.4 | % | | 20.3 | % |
| |
(1)
| Effective tax rate is calculated using whole numbers. |
For the three months ended March 31, 2020,2021, the effective tax rate, based on whole numbers, was 22.9% which differed from the statutory federal rate of 21% primarily due to state income taxes, as well as unfavorable permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m). The increase in the effective tax rate as compared todecreased during the three months ended March 31, 2019 is primarily attributable2021 compared to the increased relative unfavorablesame period in 2020, primarily due to quarterly discrete tax impactsitems related to the excess tax benefit from stock-based compensation and the recognition of a deferred tax asset for the permanent differences oninvestment in subsidiaries as it relates to the annual effective rate.Title Transaction.
For the three months ended March 31, 2019,2020, the effective tax rate, based on whole numbers, was 28.4% which differed from the statutory federal rate of 21% primarily due to permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses, as well as other recurring items such as the state tax benefit.
16.13. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
There have been no significant changes to the methodsvaluation techniques and assumptionsinputs used by the Company in estimating fair values:
Cashvalues of Level 2 and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reportedLevel 3 assets and liabilities as disclosed in the consolidated balance sheets approximates fair value.
Mortgage Loans Held for Sale (Level 2) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.
Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valuedCompany’s Annual Reports on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value. See Note 6, Mortgage Loans Held for Sale, for more information.
Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrow and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 4, Advances and Other Receivables, Net for more information.
Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Company determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information.
Derivative Financial Instruments (Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. These derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market priceForm 10-K for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, the Company enters into IRLCs and LPCs with prospective borrowers and other loan originators. These commitments are carried at fair value based on the fair value of underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised, and the loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company has entered into Eurodollar futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. Derivative financial instruments are recorded in other assets and payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, for more information.year ended December 31, 2020.
Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported at amortized cost on the consolidated balance sheets approximates fair value. See Note 10, Indebtedness, for more information.
Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 10, Indebtedness, for more information.
Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Participating Interest Financing (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. Participating interest financing is recorded in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, Net, and Note 10, Indebtedness, for more information.
HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the consolidated balance sheets. See Note 10, Indebtedness for more information.
The following table presentstables present the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | | | Recurring Fair Value Measurements |
| Fair Value - Recurring Basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 6,351 | | | $ | 0 | | | $ | 6,351 | | | $ | 0 | |
| Forward mortgage servicing rights | 3,354 | | | 0 | | | 0 | | | 3,354 | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 232 | | | 0 | | | 0 | | | 232 | |
| Forward MBS trades | 286 | | | 0 | | | 286 | | | 0 | |
| LPCs | 8 | | | 0 | | | 0 | | | 8 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 1 | | | 0 | | | 0 | | | 1 | |
| Forward MBS trades | 76 | | | 0 | | | 76 | | | 0 | |
| LPCs | 38 | | | 0 | | | 0 | | | 38 | |
| Swap futures | 1 | | | 0 | | | 1 | | | 0 | |
| Mortgage servicing rights financing | 23 | | | 0 | | | 0 | | | 23 | |
| Excess spread financing | 934 | | | 0 | | | 0 | | | 934 | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | | | Recurring Fair Value Measurements |
| Fair value - Recurring basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 3,922 |
| | $ | — |
| | $ | 3,922 |
| | $ | — |
|
| Forward mortgage servicing rights | 3,109 |
| | — |
| | — |
| | 3,109 |
|
| Derivative financial instruments | | | | | | | |
| IRLCs | 263 |
| | — |
| | 263 |
| | — |
|
| Forward MBS trades | 6 |
| | — |
| | 6 |
| | — |
|
| LPCs | 25 |
| | — |
| | 25 |
| | — |
|
| Total assets | $ | 7,325 |
| | $ | — |
| | $ | 4,216 |
| | $ | 3,109 |
|
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | $ | 223 |
| | $ | — |
| | $ | 223 |
| | $ | — |
|
| Mortgage servicing rights financing | 43 |
| | — |
| | — |
| | 43 |
|
| Excess spread financing | 1,242 |
| | — |
| | — |
| | 1,242 |
|
| Total liabilities | $ | 1,508 |
| | $ | — |
| | $ | 223 |
| | $ | 1,285 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | | | Recurring Fair Value Measurements |
| Fair Value - Recurring Basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 5,720 | | | $ | 0 | | | $ | 5,720 | | | $ | 0 | |
| Forward mortgage servicing rights | 2,703 | | | 0 | | | 0 | | | 2,703 | |
| Derivative financial instruments | | | | | | | |
| IRLCs | 414 | | | 0 | | | 0 | | | 414 | |
| Forward MBS trades | 37 | | | 0 | | | 37 | | | 0 | |
| LPCs | 38 | | | 0 | | | 0 | | | 38 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | 156 | | | 0 | | | 156 | | | 0 | |
| LPCs | 1 | | | 0 | | | 0 | | | 1 | |
| Mortgage servicing rights financing | 33 | | | 0 | | | 0 | | | 33 | |
| Excess spread financing | 934 | | | 0 | | | 0 | | | 934 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | | | Recurring Fair Value Measurements |
| Fair value - Recurring basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 4,077 |
| | $ | — |
| | $ | 4,077 |
| | $ | — |
|
| Forward mortgage servicing rights | 3,496 |
| | — |
| | — |
| | 3,496 |
|
| Derivative financial instruments | | | | | | | |
| IRLCs | 135 |
| | — |
| | 135 |
| | — |
|
| Forward MBS trades | 7 |
| | — |
| | 7 |
| | — |
|
| LPCs | 12 |
| | — |
| | 12 |
| | — |
|
| Total assets | $ | 7,727 |
| | $ | — |
| | $ | 4,231 |
| | $ | 3,496 |
|
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | — |
|
| LPCs | 3 |
| | — |
| | 3 |
| | — |
|
| Mortgage servicing rights financing | 37 |
| | — |
| | — |
| | 37 |
|
| Excess spread financing | 1,311 |
| | — |
| | — |
| | 1,311 |
|
| Total liabilities | $ | 1,363 |
| | $ | — |
| | $ | 15 |
| | $ | 1,348 |
|
The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| | Assets | | Liabilities |
| Fair Value - Level 3 Assets and Liabilities | Forward mortgage servicing rights | | IRLCs | | LPCs | | Excess spread financing | | Mortgage servicing rights financing | | LPCs |
| Balance - beginning of period | $ | 2,703 | | | $ | 414 | | | $ | 38 | | | $ | 934 | | | $ | 33 | | | $ | 1 | |
| Total gains or losses included in earnings | 298 | | | (182) | | | (30) | | | 41 | | | (10) | | | 37 | |
| | | | | | | | | | | |
| Purchases, issuances, sales, repayments and settlements | | | | | | | | | | | |
| Purchases | 67 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Issuances | 288 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Sales | (2) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Settlements and repayments | 0 | | | 0 | | | 0 | | | (41) | | | 0 | | | 0 | |
| Balance - end of period | $ | 3,354 | | | $ | 232 | | | $ | 8 | | | $ | 934 | | | $ | 23 | | | $ | 38 | |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Assets | | Liabilities |
| Fair value - Level 3 assets and liabilities | Mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,496 |
| | $ | 1,311 |
| | $ | 37 |
|
| Total gains or losses included in earnings | (534 | ) | | (35 | ) | | 6 |
|
| Purchases, issuances, sales, repayments and settlements | | | | | |
| Purchases | 24 |
| | — |
| | — |
|
| Issuances | 123 |
| | 24 |
| | — |
|
| Settlements and repayments | — |
| | (58 | ) | | — |
|
| Balance - end of period | $ | 3,109 |
| | $ | 1,242 |
| | $ | 43 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| | Assets | | Liabilities |
| Fair Value - Level 3 Assets and Liabilities | Forward mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,496 | | | $ | 1,311 | | | $ | 37 | |
| Total gains or losses included in earnings | (534) | | | (35) | | | 6 | |
| Purchases, issuances, sales, repayments and settlements | | | | | |
| Purchases | 24 | | | 0 | | | 0 | |
| Issuances | 123 | | | 24 | | | 0 | |
| Settlements and repayments | 0 | | | (58) | | | 0 | |
| Balance - end of period | $ | 3,109 | | | $ | 1,242 | | | $ | 43 | |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Assets | | Liabilities |
| Fair value - Level 3 assets and liabilities | Mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,665 |
| | $ | 1,184 |
| | $ | 32 |
|
| Total gains or losses included in earnings | (399 | ) | | (69 | ) | | 2 |
|
| Purchases, issuances, sales, repayments and settlements | | | | | |
| Purchases | 409 |
| | — |
| | — |
|
| Issuances | 66 |
| | 245 |
| | — |
|
| Sales | (260 | ) | | — |
| | — |
|
| Settlements and repayments | — |
| | (51 | ) | | — |
|
| Balance - end of period | $ | 3,481 |
| | $ | 1,309 |
| | $ | 34 |
|
As of March 31, 2020 and December 31, 2019, the Company had no financial instruments classified as mortgage loans held for investment as the related portfolio was sold in September 2019. During the three months ended March 31, 2019, the Company had an immaterial change in mortgage loans held for investment.
No transfers were made intoin or out of Level 3 fair value assets and liabilities for the Company forduring the three months ended March 31, 20202021 and 2019, respectively.2020.
The tables below present the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Level 3 Inputs | Min | | Max | | | Min | | Max | |
| Forward MSR | | | | | | | | | | | |
| Discount rate | 8.2 | % | | 12.0 | % | | 9.3 | % | | 8.2 | % | | 12.0 | % | | 9.4 | % |
| Prepayment speed | 10.5 | % | | 17.7 | % | | 12.4 | % | | 14.2 | % | | 21.3 | % | | 15.4 | % |
Cost to service per loan(1) | $ | 64 | | | $ | 226 | | | $ | 92 | | | $ | 66 | | | $ | 257 | | | $ | 98 | |
Average life(2) | | | | | 5.9 years | | | | | | 5.0 years |
| | | | | | | | | | | |
| IRLCs | | | | | | | | | | | |
| Value of servicing (basis points per loan) | (1.3) | | | 2.2 | | | 1.2 | | | (1.0) | | | 2.2 | | | 1.2 | |
| | | | | | | | | | | |
| Excess spread financing | | | | | | | | | | | |
| Discount rate | 9.6 | % | | 15.7 | % | | 11.9 | % | | 9.9 | % | | 15.7 | % | | 12.2 | % |
| Prepayment speed | 11.3 | % | | 14.6 | % | | 12.5 | % | | 13.9 | % | | 15.0 | % | | 14.4 | % |
| Recapture rate | 17.1 | % | | 23.1 | % | | 19.0 | % | | 17.7 | % | | 24.2 | % | | 19.5 | % |
Average life(2) | | | | | 5.7 years | | | | | | 5.1 years |
| | | | | | | | | | | |
| Mortgage servicing rights financing | | | | | | | | | | | |
| Advance financing and counterparty fee rates | 4.1 | % | | 8.4 | % | | 7.4 | % | | 4.6 | % | | 8.5 | % | | 7.5 | % |
| Annual advance recovery rates | 18.1 | % | | 22.0 | % | | 19.9 | % | | 18.3 | % | | 22.0 | % | | 19.9 | % |
(1)Presented in whole dollar amounts.
(2)Average life is included for informational purposes.
The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments:instruments not carried at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 674 | | | $ | 674 | | | $ | 0 | | | $ | 0 | |
| Restricted cash | 261 | | | 261 | | | 0 | | | 0 | |
| Advances and other receivables, net | 838 | | | 0 | | | 0 | | | 838 | |
| Reverse mortgage interests, net | 5,091 | | | 0 | | | 0 | | | 5,166 | |
| Loans subject to repurchase from Ginnie Mae | 5,816 | | | 0 | | | 5,816 | | | 0 | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 2,074 | | | 2,120 | | | 0 | | | 0 | |
| Advance and warehouse facilities, net | 7,379 | | | 0 | | | 7,388 | | | 0 | |
| Liability for loans subject to repurchase from Ginnie Mae | 5,816 | | | 0 | | | 5,816 | | | 0 | |
| Participating interest financing, net | 3,318 | | | 0 | | | 0 | | | 3,319 | |
| HECM Securitization (HMBS), net | | | | | | | |
| Trust 2020-1 | 469 | | | 0 | | | 0 | | | 471 | |
| Trust 2019-2 | 231 | | | 0 | | | 0 | | | 231 | |
| Trust 2019-1 | 203 | | | 0 | | | 0 | | | 203 | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Carrying Amount | | Fair Value |
| Financial instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 579 |
| | $ | 579 |
| | $ | — |
| | $ | — |
|
| Restricted cash | 266 |
| | 266 |
| | — |
| | — |
|
| Advances and other receivables, net | 685 |
| | — |
| | — |
| | 685 |
|
| Reverse mortgage interests, net | 5,955 |
| | — |
| | — |
| | 6,015 |
|
| Mortgage loans held for sale | 3,922 |
| | — |
| | 3,922 |
| | — |
|
| Derivative financial instruments | 294 |
| | — |
| | 294 |
| | — |
|
| Financial liabilities | | | | | | | |
Unsecured senior notes(1) | 2,259 |
| | 2,055 |
| | — |
| | — |
|
Advance facilities(1) | 489 |
| | — |
| | 489 |
| | — |
|
Warehouse facilities(1) | 4,551 |
| | — |
| | 4,551 |
| | — |
|
| Mortgage servicing rights financing liability | 43 |
| | — |
| | — |
| | 43 |
|
| Excess spread financing | 1,242 |
| | — |
| | — |
| | 1,242 |
|
| Derivative financial instruments | 223 |
| | — |
| | 223 |
| | — |
|
Participating interest financing(1) | 4,056 |
| | — |
| | — |
| | 4,056 |
|
HECM Securitization (HMBS)(1) | | | | | | | |
| Trust 2019-2 | 295 |
| | — |
| | — |
| | 295 |
|
| Trust 2019-1 | 268 |
| | — |
| | — |
| | 268 |
|
| Trust 2018-3 | 189 |
| | — |
| | — |
| | 189 |
|
| Trust 2018-2 | 137 |
| | — |
| | — |
| | 137 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Carrying
Amount | | Fair Value |
| Financial Instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 695 | | | $ | 695 | | | $ | 0 | | | $ | 0 | |
| Restricted cash | 218 | | | 218 | | | 0 | | | 0 | |
| Advances and other receivables, net | 940 | | | 0 | | | 0 | | | 940 | |
| Reverse mortgage interests, net | 5,253 | | | 0 | | | 0 | | | 5,383 | |
| Loans subject to repurchase from Ginnie Mae | 6,159 | | | 0 | | | 6,159 | | | 0 | |
| Financial liabilities | | | | | | | |
| Unsecured senior notes, net | 2,074 | | | 2,208 | | | 0 | | | 0 | |
| Advance and warehouse facilities, net | 6,763 | | | 0 | | | 6,774 | | | 0 | |
| Liability for loans subject to repurchase from Ginnie Mae | 6,159 | | | 0 | | | 6,159 | | | 0 | |
| Participating interest financing, net | 3,485 | | | 0 | | | 0 | | | 3,496 | |
| HECM Securitization (HMBS), net | | | | | | | |
| Trust 2020-1 | 488 | | | 0 | | | 0 | | | 490 | |
| Trust 2019-2 | 240 | | | 0 | | | 0 | | | 241 | |
| Trust 2019-1 | 211 | | | 0 | | | 0 | | | 212 | |
| |
(1)
| The amounts are presented net of unamortized debt issuance costs, premium and discount. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Carrying Amount | | Fair Value |
| Financial instruments | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | |
| Cash and cash equivalents | $ | 329 |
| | $ | 329 |
| | $ | — |
| | $ | — |
|
| Restricted cash | 283 |
| | 283 |
| | — |
| | — |
|
| Advances and other receivables, net | 988 |
| | — |
| | — |
| | 988 |
|
| Reverse mortgage interests, net | 6,279 |
| | — |
| | — |
| | 6,318 |
|
| Mortgage loans held for sale | 4,077 |
| | — |
| | 4,077 |
| | — |
|
| Derivative financial instruments | 153 |
| | — |
| | 153 |
| | — |
|
| Financial liabilities | | | | | | | |
Unsecured senior notes(1) | 2,366 |
| | 2,505 |
| | — |
| | — |
|
| Advance facilities | 422 |
| | — |
| | 422 |
| | — |
|
Warehouse facilities(1) | 4,575 |
| | — |
| | 4,575 |
| | — |
|
| Mortgage servicing rights financing liability | 37 |
| | — |
| | — |
| | 37 |
|
| Excess spread financing | 1,311 |
| | — |
| | — |
| | 1,311 |
|
| Derivative financial instruments | 15 |
| | — |
| | 15 |
| | — |
|
Participating interest financing(1) | 4,299 |
| | — |
| | — |
| | 4,299 |
|
HECM Securitization (HMBS)(1) | | | | | | | |
| Trust 2019-2 | 331 |
| | — |
| | — |
| | 331 |
|
| Trust 2019-1 | 300 |
| | — |
| | — |
| | 300 |
|
| Trust 2018-3 | 208 |
| | — |
| | — |
| | 208 |
|
| Trust 2018-2 | 148 |
| | — |
| | — |
| | 148 |
|
| |
(1)
| The amounts are presented net of unamortized debt issuance costs, premium and discount. |
17.14. Capital Requirements
Certain of the Company’s secondary market investors require minimum net worth (“capital”) requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to approve large servicing transfers. To the extent that these requirements are not met, the Company’s secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company’s selling and servicing agreements, which would prohibit the Company from further originating or securitizing these specific types of mortgage loans or being an approved servicer. The Company’s various capital requirements related to its outstanding selling and servicing agreements are measured based on the Company’s operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020,2021, the Company was in compliance with its selling and servicing capital requirements.
18.15. Commitments and Contingencies
Litigation and Regulatory
The Company and its subsidiaries are routinely and currently involved in a significant number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. The legal proceedings are at varying stages of adjudication, arbitration or investigation and are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the “Bankruptcy Code”), False Claims Act and Making Home Affordable loan modification programs.
In addition, along with others in its industry, the Company is subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company is also subject to legal actions or proceedings related to loss sharing and indemnification provisions of its various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or statutory damages or claims for an indeterminate amount of damages.
The Company’sCompany operates within highly regulated industries on a federal, state and local level. In the normal and ordinary course of its business, the Company is alsoroutinely subject to extensive examinations, investigations, subpoenas, inquiries and reviews by various federal, state and local governmental, regulatory and enforcement agencies. The Company has historically had a number of open investigations with these agencies, and that trend continues. The Company is currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations byincluding the Consumer Financial Protection Bureau, (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state committee ofvarious State mortgage banking regulators and various State Attorneys General. These specific mattersGeneral, related to the Company’s residential loan servicing and origination practices, its financial reporting and other aspects of its businesses. Any pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements, and possibly result in remedies including fines, penalties, restitution, or alterations in the Company’s business practices, and additional expenses and collateral costs. The Company is cooperating fully in these matters. Responding to these matters requires the Company to devote substantial resources, resulting in higher costs and lower net cash flows.
For example, the Company continues to progress towards resolution Adverse results in any of certain legacy regulatorythese matters involving examination findings for alleged violations of certain laws related tocould further increase the Company’s operating expenses and reduce its revenues, require it to change business practices. The Company has been in discussions with the multi-state committee of mortgage banking regulatorspractices and various State Attorneys General concerning a potential resolution of their investigations. The Company is continuinglimit its ability to cooperate with all partiesgrow and in connection with these discussions, the Company previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulatorsotherwise materially and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’sadversely affect its business, reputation, financial condition and results of operations.operation.
Further, on April 24, 2018, the CFPB notified Nationstar that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take enforcement action against the Company, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. The Company has not recorded an accrual related to this matter as of March 31, 2020 because it does not believe that the possible loss or range of loss arising from any such action is estimable. The Company is continuing to cooperate with the CFPB.
Similarly, the Company is in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, the Company is undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While the Company and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. However, the Company believes it is premature to predict the potential outcome or to estimate the financial impact to the Company in connection with any potential action or settlement arising from this matter, including the voluntary remediation activities undertaken and to be undertaken by the Company.
The Company seeks to resolve all legal proceedings and other matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. The Company has entered into agreements with a number of entities and regulatory agencies that toll applicable limitations periods with respect to their claims.
On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal and regulatory and governmental proceedings utilizing the latest information available. Where available information indicates that it is probable, a liability has been incurred, and the Company can reasonably estimate the amount of the loss, an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.
As a legal matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to legal-related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Legal-related expense for the Company, which includes legal settlements and the fees paid to external legal service providers, of $13 and $15 and $11 for the three months ended March 31, 2021 and 2020, respectively, and 2019, respectively, was included in general and administrative expenses on the unaudited condensed consolidated statements of operations.operations.
For a number of matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its material legal matters on an ongoing basis, in conjunction with any outside counsel handling the matter. For those matters for which an estimate is possible, managementManagement currently believes the aggregate range of reasonably possible loss is $17$2 to $47$18 in excess of the accrued liability (if any) related to those matters as of March 31, 2020.2021. This estimated range of possible loss isis based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, the Company’s exposure and ultimate losses may be higher, possibly significantly so, than the amounts accrued or this aggregate amount.
In the Company’s experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; the Company has not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; predicting possible outcomes depends on making assumptions about future decisions of courts or governmental or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for the Company to estimate losses or ranges of losses that is reasonably possible the Company could incur.
Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability within payables and accrued liabilities, is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending, on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s condensed consolidated financial statements.
Other Loss Contingencies
As part of the Company’s ongoing operations, it acquires servicing rights of forward and reverse mortgage loan portfolios that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. The Company believes all balances sought from sellers recorded in advances and other receivables and reverse mortgage interests represent valid claims. However, the Company acknowledges that the claims process can be prolonged due to the required time to perfect claims at the loan level. Because of the required time to perfect or remediate these claims, management relies on the sufficiency of documentation supporting the claim, current negotiations with the counterparty and other evidence to evaluate whether a reserve is required for non-recoverable balances. In the absence of successful negotiations with the seller, all amounts claimed may not be recovered. Balances may be written-off and charged against earnings when management identifies amounts where recoverability from the seller is not likely. As of March 31, 2020,2021, the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no evidence suggests additional reserves are warranted.
Loan and Other Commitments
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. The Company also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See Note 9,8, Derivative Financial Instruments, for more information.
The Company had certain reverse MSRs, reverse MSLs and reverse mortgage loans related to approximately $21,590 $17,269 and $22,725$18,091 of UPB in reverse mortgage loans as of March 31, 20202021 and December 31, 2019,2020, respectively. As a servicer for these reverse mortgage loans, among other things, the Company is obligated to fund borrowers’ draws to the loan customers as required in accordance with the loan agreement. As of March 31, 20202021 and December 31, 2019,2020, the Company’s maximum unfunded advance obligation to fund borrower draws related to these reverse MSRs and loans was approximately $2,504$2,113 and $2,617,$2,202, respectively. Upon funding any portion of these draws, the Company expects to securitize and sell the advances in transactions that will be accounted for as secured borrowings.
19. Business16. Segment ReportingInformation
The Company’s segments are based upon the Company’s organizational structure, which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on the actual cost of services performed, based on direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties.
In the second quarter of 2020, the Company updated its presentation of segment assets to be aligned with a change in the reporting package provided to the Chief Operating Decision Maker. The presentation change had no impact on the segments' operations. Assets allocated to the Servicing segment include MSRs; advances and other receivables, except for co-issue MSR holdback; Servicing related mortgage loans held for sale; and other assets including property, plant and equipment, lease-related assets, prepaid assets, and goodwill. Assets allocated to Originations segment include co-issue MSR holdback in advances and other receivables; Originations related mortgage loans held for sale; derivative assets; and other assets including property, plant and equipment, lease-related assets, prepaid assets, and goodwill. Assets allocated to the Xome segment include cash and cash equivalents; tax-related assets; receivables; and other assets including property, plant and equipment, lease-related assets, prepaid assets, goodwill, and other intangible assets. All assets that are not specifically identified or allocated to a reporting segment are reported as part of Corporate/Other and include cash and cash equivalents; tax-related assets; and intangibles assets excluding goodwill and assets allocated to Xome. Eliminations are also included in Corporate/Other. Prior year financial information has been adjusted retrospectively to reflect the updated presentation.
The following tables present financial information by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| Financial Information by Segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | 449 | | | $ | 43 | | | $ | 96 | | | $ | 0 | | | $ | 588 | |
| Net gain on mortgage loans held for sale | 127 | | | 552 | | | 0 | | | 0 | | | 679 | |
| Total revenues | 576 | | | 595 | | | 96 | | | 0 | | | 1,267 | |
| Total expenses | 125 | | | 231 | | | 87 | | | 26 | | | 469 | |
| Interest income | 66 | | | 23 | | | 0 | | | 0 | | | 89 | |
| Interest expense | (104) | | | (25) | | | 0 | | | (30) | | | (159) | |
| | | | | | | | | |
| Total other expenses, net | (38) | | | (2) | | | 0 | | | (30) | | | (70) | |
| Income (loss) before income tax expense (benefit) | $ | 413 | | | $ | 362 | | | $ | 9 | | | $ | (56) | | | $ | 728 | |
| Depreciation and amortization for property and equipment and intangible assets | $ | 5 | | | $ | 4 | | | $ | 3 | | | $ | 4 | | | $ | 16 | |
| Total assets | $ | 16,696 | | | $ | 5,559 | | | $ | 120 | | | $ | 2,338 | | | $ | 24,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Financial Information by Segment | Servicing | | Originations | | Xome | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | |
| Service related, net | $ | (180) | | | $ | 20 | | | $ | 106 | | | $ | 1 | | | $ | (53) | |
| Net gain on mortgage loans held for sale | 34 | | | 297 | | | 0 | | | 0 | | | 331 | |
| Total revenues | (146) | | | 317 | | | 106 | | | 1 | | | 278 | |
| Total expenses | 149 | | | 166 | | | 96 | | | 33 | | | 444 | |
| Interest income | 83 | | | 34 | | | 0 | | | 1 | | | 118 | |
| Interest expense | (113) | | | (27) | | | 0 | | | (52) | | | (192) | |
| Other income, net | 0 | | | 0 | | | 1 | | | 0 | | | 1 | |
| Total other (expenses) income, net | (30) | | | 7 | | | 1 | | | (51) | | | (73) | |
| (Loss) income before income tax (benefit) expense | $ | (325) | | | $ | 158 | | | $ | 11 | | | $ | (83) | | | $ | (239) | |
| Depreciation and amortization for property and equipment and intangible assets | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 10 | | | $ | 19 | |
| Total assets | $ | 10,619 | | | $ | 4,459 | | | $ | 135 | | | $ | 2,400 | | | $ | 17,613 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| Financial information by segment | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total expenses | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: |
| |
| |
| |
| | | |
| |
|
| Interest income | 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other income (expenses), net | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
| Depreciation and amortization for property and equipment and intangible assets | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | 9 |
| | $ | 10 |
| | $ | 19 |
|
| Total assets | $ | 10,142 |
| | $ | 9,608 |
| | $ | 534 |
| | $ | (5,964 | ) | | $ | 14,320 |
| | $ | 3,293 |
| | $ | 17,613 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| Financial information by segment | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total expenses | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | |
| Interest income | 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other income, net | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
| Depreciation and amortization for property and equipment and intangible assets | $ | 4 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| | $ | 11 |
| | $ | 10 |
| | $ | 21 |
|
| Total assets | $ | 13,642 |
| | $ | 4,865 |
| | $ | 502 |
| | $ | (4,100 | ) | | $ | 14,909 |
| | $ | 2,737 |
| | $ | 17,646 |
|
CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts, including the projected impact of COVID-19 on our business, financial performance and operating results. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
the severity•economic, financial and duration ofpublic health disruptions caused by the COVID-19 pandemic; the pandemic’s impact on the U.S. and global economies;pandemic and federal, state and local governmental responses to the pandemicpandemic;
•our ability to maintain or grow the size of our servicing portfolio;
•our ability to maintain or grow our originations volume and profitability;
•our ability to recapture voluntary prepayments related to our existing servicing portfolio;
•our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
•delays in our ability to collect or be reimbursed for servicing advances;
•our ability to obtain sufficient liquidity and capital to operate our business;
•changes in prevailing interest rates;
•our ability to finance and recover costs of our reverse servicing operations;
•our ability to successfully implement our strategic initiatives;
•our ability to realize anticipated benefits of our previous acquisitions;
•our ability to use net operating loss carryforwards and other tax attributes;
•changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•Xome’s ability to compete in highly competitive markets;
•our ability to pay down debt;
•our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•our ability to prevent cyber intrusions and mitigate cyber risks; and
•our ability to maintain our licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Risk Factor,Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this report and in our Annual Report on Form 10-K for the year ended December 31, 20192020 for further information on these and other risk factors affecting us.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.2020. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.
We are a leading servicer and originator of residential mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to $629$646 billion as of March 31, 2020.2021. We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology. More information on the Company is available at investors.mrcoopergroup.com. Information contained on our websites is not, and should not be deemed to be, a part of this report.
Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on tangible equity of 12% or higher. Key strategic priorities include the following:
•Strengthen our balance sheet by reducing leverage, building capital and liquidity, and managing interest rate and creditother forms of risk;
•Improve efficiency by driving continuous improvement in unit costs for Servicing and Originations and Xome,segments, as well as by taking corporate actions to eliminate costs throughout the organizationsorganization;
•Grow our servicing portfolio and strengthen our customer base in each our segmentsby acquiring new customers and retaining existing customers;
•Reinvent the customer experience by acting as the customer’s advocate and by harnessing technology to deliver user-friendly digital solutionssolutions;
•Sustain the talent of our people and the culture of our organizationorganization; and
•Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have taken aggressive steps to address these risks, including moving in excess of 95% of our staff to work-from-home status as well as implementing other practices for mitigating the risk of the pandemic, including restrictions on non-essential travel and face-to-face meetings and enhanced sanitization of our facilities. We have also implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to one yeareighteen months for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio.portfolio. As of April 27, 2020,18, 2021, approximately 194,000 or 5.6% of4.5% of our customers were on a forbearance plan.
Depending on how long the pandemic continues to disrupt the economy and employment, our Servicing segment could experience our cost-to-service increase as we deal with higher delinquencies and foreclosures. However, we have not seenplan, down from a deteriorationpeak of 7.2%. More customers are now exiting forbearance than are entering. We include loans in 30-day or 60-day delinquencies at this time. We expect servicing costs to be moderately elevated for loans on forbearance offset by servicing fees earned during the period. As the pandemic began to impact the mortgage capital markets, our Originations segment took several steps to rapidly de-risk the pipeline. We slowed correspondent production, and closed our wholesale lending channel, which had only been marginally profitable and reallocated those resourcesrelated to the direct-to-consumer channel. As the foreclosure process is currentlyCARES Act, whereby no payments have been received from borrowers for greater than 90 days, in loans subject to repurchase rights from Ginnie Mae in other assets and payables and other liabilities on hold, with moratoriums in place at the national level and in some local markets, Xome’s revenues, particularly revenuesa gross basis. The balance was $5,557 as of Exchange division, are expected to be negatively impacted. In the short term, however once the moratoriums are lifted, we expect Xome to return to profitability.March 31, 2021. See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A.
Anticipated Trends
In the first quarter of 2021, our Servicing segment experienced portfolio growth due to strong execution across all channels - correspondent, direct-to-consumer, subservicing and acquisitions. We expect to see continued portfolio growth in the remainder of 2021. We benefited from early-buyout gains in the first quarter of 2021 as we helped customers exit forbearance and expect a similar level of contributions from early-buyout volumes to continue throughout 2021.
Our Originations segment experienced record funded volumes from both the correspondent and direct-to-consumer channels in the first quarter of 2021. As interest rates are on the rise, we expect lower volumes and a more normalized originations margin in the second quarter of 2021.
Our Xome segment revenue from Title division has benefited from the lower interest rate environment and increase in origination volume. On March 12, 2021, we entered into an agreement to sell the Title business for a total purchase price of $500, which is expected to close in the second quarter of 2021. In connection with the sale agreement, earnings from the Title business subsequent to March 12, 2021 will be held for the benefit of the buyer, therefore, the division will not contribute to earnings in the second quarter of 2021. Xome’s revenue from the Exchange division has been, and is expected to continue to be, negatively impacted, as the REO exchange continues to be idle while the foreclosure moratoriums remain in effect.
Results of Operations
|
| |
| Table 1. Consolidated Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
Revenues - operational(1) | $ | 913 | | | $ | 661 | | | $ | 252 | | | 38 | % |
| Revenues - mark-to-market | 354 | | | (383) | | | 737 | | | NM |
| Total revenues | 1,267 | | | 278 | | | 989 | | | NM |
| Total expenses | 469 | | | 444 | | | 25 | | | 6 | % |
| Total other expenses, net | (70) | | | (73) | | | 3 | | | (4) | % |
| Income (loss) before income tax expense (benefit) | 728 | | | (239) | | | 967 | | | NM |
| Less: Income tax expense (benefit) | 167 | | | (68) | | | 235 | | | NM |
| Net income (loss) | 561 | | | (171) | | | 732 | | | NM |
| Less: Net income (loss) attributable to non-controlling interests | — | | | (3) | | | 3 | | | 100 | % |
| Net income (loss) attributable to Mr. Cooper | $ | 561 | | | $ | (168) | | | $ | 729 | | | NM |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues - operational | $ | 661 |
| | $ | 543 |
| | $ | 118 |
| | 22 | % |
| Revenues - Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | 278 |
| | 250 |
| | 28 |
| | 11 | % |
| Total expenses | 444 |
| | 443 |
| | 1 |
| | — | % |
| Total other income (expenses), net | (73 | ) | | (40 | ) | | (33 | ) | | 83 | % |
| Loss before income tax expense benefit | (239 | ) | | (233 | ) | | (6 | ) | | 3 | % |
| Less: Income tax benefit | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Net loss | (171 | ) | | (186 | ) | | 15 |
| | (8 | )% |
| Less: Net loss attributable to non-controlling interests | (3 | ) | | — |
| | (3 | ) | | (100 | )% |
| Net loss attributable to Mr. Cooper | $ | (168 | ) | | $ | (186 | ) | | $ | 18 |
| | (10 | )% |
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
WeNM = Not meaningful or greater than 200% change.
During the three months ended March 31, 2021, we recorded income before income tax expense of $728 compared to a net loss before income tax benefit of $171$239 for 2020. The change was primarily driven by favorable MTM adjustments in 2021 compared to negative MTM adjustments in 2020, and due to higher revenues from our Originations segment. For more information on our segment results, see below.
During the three months ended March 31, 2021 and 2020, we had an income tax expense and benefit, respectively. The effective tax rate during the three months ended March 31, 2020 compared to a net loss of $186 during the same period in 2019. The net loss in 20202021 was lower primarily due to the income tax benefit. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume in a declining interest rate environment and incremental volumes associated with the acquisition of Pacific Union, which was completed in February 2019. Partially offsetting the increase in operational revenues was an increase in negative mark-to-market (“MTM”) adjustments for the three months ended March 31, 2020 compared to the same period in 2019. Total expenses for the three months ended March 31, 2020 were consistent with the same period in 2019.
Total other income (expenses), net increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and other income (expenses), net. Interest income decreased primarily due to a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other income (expenses), net was higher in three months ended March 31, 2019 primarily due to income related to the change in fair value of the contingent consideration for the acquisition of Assurant Mortgage Solutions (“AMS”).
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| | | | |
Table 2. Provision for Income Taxes |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Income tax benefit | $ | (68 | ) | | $ | (47 | ) | | $ | (21 | ) | | 45 | % |
| | | | | | | | |
Effective tax rate(1) | 28.4 | % | | 20.3 | % | | | | |
| |
(1)
| Effective tax rate is calculated using whole numbers. |
For the three months ended March 31, 2020 and 2019, we had an income tax benefit. The effective tax rate for the three months ended March 31, 2020 was 28.4%22.9% as compared to the effective tax rate of 20.3% for the three months ended March 31, 2019.28.4% in 2020. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items induring the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019.2020.
Our operations are conducted through fourthree segments: Servicing, Originations, Xome, and Corporate/Other.Xome.
•The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
•The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent and wholesale channelschannel, which purchasepurchases or originateoriginates loans from mortgage bankers and brokers.bankers.
•The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties.
On March 12, 2021, we entered into an agreement to sell the title business. The Corporate/Other segment represents unallocated overhead expenses, includingsale is expected to close during the costssecond quarter of executive management2021. For more information, see Note 1, Nature of Business and other corporate functions that are not directly attributable to our operating segments, our senior unsecured notes, and the resultsBasis of a legacy mortgage investment portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held Presentation in the trustNotes to the Condensed Consolidated Financial Statements (unaudited).
Refer to Note 16, Segment Information, in September 2019.the Notes to the Condensed Consolidated Financial Statements (unaudited) for a summary of segment results.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total expenses | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: | | | | | | |
| | | |
| | |
| Interest income | 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other income (expenses), net | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total expenses | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | |
| Interest income | 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other income, net | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in our strong servicer ratings.
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| | | | | | | | | | | | | |
Table 4.2. Servicer Ratings |
| | | | | | | | | | | | | | | | | |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | January 2020 | | February 2021 | | December 2020 |
| | | | | |
| Residential | Fitch(1)
RPS2- | | Moody’s(2)
SQ2- | | S&P(3)
Above Average |
Rating dateMaster Servicer | January 2020RMS2+ | | May 2019SQ2 | | May 2019Above Average |
| Special Servicer | RSS2- | | SQ2- | | Above Average |
ResidentialSubprime Servicer | RPS2- | | Not RatedSQ2- | | Above Average |
Master Servicer | RMS2+ | | SQ2 | | Above Average |
Special Servicer | RSS2- | | Not Rated | | Above Average |
Subprime Servicer | RPS2- | | Not Rated | | Above Average |
| |
(1)
| Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency) |
| |
(2)
| Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability) |
| |
(3)
| S&P’s Rating Scale of Strong to Weak |
Servicing Portfolio Composition(1)Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
(2)Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)
As(3)S&P Rating Scale of March 31, 2020, the unpaid principal balance in our servicing portfolio consistedStrong to Weak
The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.
Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not record an MSR on our balance sheet.
Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired our reverse mortgages in prior years through several transactions and it is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.
The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as of March 31, 2020 and 2019:
The following tables set forth the results of operations for the Servicing segment:
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| | | | | | | | | | | | | |
Table 5.3. Servicing Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps | | Amt | | bps |
| Revenues | | | | | | | | | | | | | | | |
| Operational | $ | 375 | | | 24 | | | $ | 313 | | | 20 | | | $ | 62 | | | 4 | | | 20 | % | | 20 | % |
| Amortization, net of accretion | (153) | | | (10) | | | (76) | | | (5) | | | (77) | | | (5) | | | 101 | % | | 100 | % |
| Mark-to-market | 354 | | | 22 | | | (383) | | | (24) | | | 737 | | | 46 | | | NM | | NM |
| Total revenues | 576 | | | 36 | | | (146) | | | (9) | | | 722 | | | 45 | | | NM | | NM |
| Expenses | | | | | | | | | | | | | | | |
| Salaries, wages and benefits | 73 | | | 5 | | | 86 | | | 5 | | | (13) | | | — | | | (15) | % | | — | % |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 24 | | | 2 | | | 25 | | | 2 | | | (1) | | | — | | | (4) | % | | — | % |
| Corporate and other general and administrative expenses | 32 | | | 2 | | | 35 | | | 2 | | | (3) | | | — | | | (9) | % | | — | % |
| Foreclosure and other liquidation related (recoveries) expenses, net | (9) | | | (1) | | | — | | | — | | | (9) | | | (1) | | | NM | | NM |
| Depreciation and amortization | 5 | | | — | | | 3 | | | — | | | 2 | | | — | | | 67 | % | | — | % |
| Total general and administrative expenses | 52 | | | 3 | | | 63 | | | 4 | | | (11) | | | (1) | | | (17) | % | | (25) | % |
| Total expenses | 125 | | | 8 | | | 149 | | | 9 | | | (24) | | | (1) | | | (16) | % | | (11) | % |
| Other income (expense) | | | | | | | | | | | | | | | |
| Income earned on reverse mortgage interests | 44 | | | 3 | | | 43 | | | 3 | | | 1 | | | — | | | 2 | % | | — | % |
| Other interest income | 22 | | | 1 | | | 40 | | | 2 | | | (18) | | | (1) | | | (45) | % | | (50) | % |
| Interest income | 66 | | | 4 | | | 83 | | | 5 | | | (17) | | | (1) | | | (20) | % | | (20) | % |
| Reverse mortgage interest expense | (33) | | | (2) | | | (52) | | | (3) | | | 19 | | | 1 | | | (37) | % | | (33) | % |
| Advance interest expense | (6) | | | — | | | (5) | | | — | | | (1) | | | — | | | 20 | % | | — | % |
| Other interest expense | (65) | | | (4) | | | (56) | | | (4) | | | (9) | | | — | | | 16 | % | | — | % |
| Interest expense | (104) | | | (6) | | | (113) | | | (7) | | | 9 | | | 1 | | | (8) | % | | (14) | % |
| | | | | | | | | | | | | | | |
| Total other expenses, net | (38) | | | (2) | | | (30) | | | (2) | | | (8) | | | — | | | 27 | % | | — | % |
| Income (loss) before income tax expense (benefit) | $ | 413 | | | 26 | | | $ | (325) | | | (20) | | | $ | 738 | | | 46 | | | NM | | NM |
| | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 3.0 | % | | | | — | % | | | | — | % | | |
| Weighted average cost - excess spread financing | 9.0 | % | | | | 9.0 | % | | | | — | % | | | | — | % | | |
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
NM = Not meaningful or greater than 200% change.
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operational | $ | 313 |
| | $ | 324 |
| | $ | (11 | ) | | (3 | )% |
| Amortization, net of accretion | (76 | ) | | (23 | ) | | (53 | ) | | 230 | % |
| Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | (146 | ) | | 8 |
| | (154 | ) | | (1,925 | )% |
| Total expenses | 149 |
| | 195 |
| | (46 | ) | | (24 | )% |
| Total other income (expenses), net | (30 | ) | | 1 |
| | (31 | ) | | (3,100 | )% |
| Loss before income tax benefit | $ | (325 | ) | | $ | (186 | ) | | $ | (139 | ) | | 75 | % |
| | |
| Table 4. Servicing - Revenues |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps | | Amt | | bps |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 223 | | | 14 | | $ | 250 | | | 16 | | $ | (27) | | | (2) | | (11) | % | | (13) | % |
Modification fees(2) | 7 | | | — | | 3 | | | — | | 4 | | | — | | 133 | % | | — | % |
Incentive fees(2) | 1 | | | — | | 4 | | | — | | (3) | | | — | | (75) | % | | — | % |
Late payment fees(2) | 14 | | | 1 | | 23 | | | 2 | | (9) | | | (1) | | (39) | % | | (50) | % |
Other ancillary revenues(2) | 140 | | | 9 | | 38 | | | 2 | | 102 | | | 7 | | NM | | NM |
| Total forward MSR operational revenue | 385 | | | 24 | | 318 | | | 20 | | 67 | | | 4 | | 21 | % | | 20 | % |
Base subservicing fees and other subservicing revenue(2) | 68 | | | 5 | | 65 | | | 4 | | 3 | | | 1 | | 5 | % | | 25 | % |
| Reverse servicing fees | 5 | | | — | | 6 | | | — | | (1) | | | — | | (17) | % | | — | % |
| Total servicing fee revenue | 458 | | | 29 | | 389 | | | 24 | | 69 | | | 5 | | 18 | % | | 21 | % |
| MSR financing liability costs | (7) | | | — | | (8) | | | — | | 1 | | | — | | (13) | % | | — | % |
| Excess spread costs - principal | (76) | | | (5) | | (68) | | | (4) | | (8) | | | (1) | | 12 | % | | 25 | % |
| Total operational revenue | 375 | | | 24 | | 313 | | | 20 | | 62 | | | 4 | | 20 | % | | 20 | % |
| Amortization, Net of Accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (232) | | | (15) | | (152) | | | (10) | | (80) | | | (5) | | 53 | % | | 50 | % |
| Excess spread accretion | 76 | | | 5 | | 68 | | | 4 | | 8 | | | 1 | | 12 | % | | 25 | % |
| Reverse MSL accretion | 3 | | | — | | 8 | | | 1 | | (5) | | | (1) | | (63) | % | | (100) | % |
| | | | | | | | | | | | | | | |
| Total amortization, net of accretion | (153) | | | (10) | | (76) | | | (5) | | (77) | | | (5) | | 101 | % | | 100 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | 385 | | | 24 | | (412) | | | (26) | | 797 | | | 50 | | NM | | NM |
| Excess spread / financing MTM | (31) | | | (2) | | 29 | | | 2 | | (60) | | | (4) | | NM | | NM |
| Total MTM adjustments | 354 | | | 22 | | (383) | | | (24) | | 737 | | | 46 | | NM | | NM |
| Total revenues - Servicing | $ | 576 | | | 36 | | $ | (146) | | | (9) | | $ | 722 | | | 45 | | NM | | NM |
For
(1)Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.
(3)The amount of MSR MTM includes the three months ended March 31, 2020, we incurred a loss before income tax benefitimpact of $325 comparednegative modeled cash flows which have been transferred to a loss before income tax benefitreserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of $186 for the same period in 2019.MSR portfolio. The change in loss before income tax benefitimpact of negative modeled cash flows was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues$12 and $10 during the three months ended March 31, 2021 and 2020, comparedrespectively.
NM = Not meaningful or greater than 200% change.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Forward - Due to the same period in 2019. Amortization, netdecrease of accretion, forthe forward MSR portfolio’s UPB, base servicing fee revenue decreased during the three months ended March 31, 2020 increased2021 as compared to the same period in 2019,2020. Other ancillary revenues increased primarily due to an increase inthe $101 gain on sale associated with loans bought out of GNMA securitization, modified and redelivered following GNMA guidelines. Late payment fees decreased due to loan forbearance related to the CARES Act.
Forward MSR amortization of forward MSRs as a result of growth in the forward MSR portfolio and elevated prepayments driven by the declining interest rate environment. Total expenses forincreased during the three months ended March 31, 2020 decreased2021 as compared to the same period in 20192020, primarily due to a decrease in foreclosure and other liquidation expenses. The decrease in foreclosure and other liquidation expenses was primarilyhigher prepayments driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. Total other income (expense), net forlow interest rate environment.
We recorded favorable MTM adjustments during the three months ended March 31, 2020 decreased2021 compared to negative MTM adjustments in 2020, primarily due to favorable impact from changes in interest rates.
Subservicing - Subservicing fees increased during the same periodthree months ended March 31, 2021 as compared to 2020, primarily due to higher average subservicing portfolio UPB.
Servicing Segment Expenses
Total expenses decreased during the three months ended March 31, 2021 as compared to 2020, primarily driven by the decrease in 2019salaries, wages and benefits and the change in foreclosure and other liquidation related recoveries, net. Salaries, wages and benefits decreased in 2021 compared to 2020 primarily due to operational efficiencies driven by cost saving initiatives, which included consolidation of one of our servicing centers in the second quarter of 2020. We had foreclosure and other liquidation related recoveries, net during the three months ended March 31, 2021, primarily due to release of loss reserves on servicing advances as a result of loan modification programs related to the COVID-19 pandemic.
Servicing Segment Other Income (Expenses), net
Total other expenses, net increased during the three months ended March 31, 2021 as compared to 2020, primarily due to decrease in other interest income due to lower interest income earned on custodial balances due to lower LIBOR rates. Interest expense decreased during the three months ended March 31, 2021 as compared to 2020, due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest expense primarily driven by the decline in the reverse mortgage interests balanceportfolio, partially offset by higher compensating interest expense and the amortizationbank fees.
|
| | | | | | | | | | | | | |
Table 6.5. Servicing Portfolio - Unpaid Principal Balances |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended March 31, |
| | | | | | | | | | 2021 | | 2020 |
| Average UPB | | | | | | | | | | | | |
| Forward MSRs | | | | | | | | | | $ | 281,519 | | | $ | 303,578 | |
Subservicing and other(1) | | | | | | | | | | 335,230 | | | 310,160 | |
| Reverse loans | | | | | | | | | | 17,627 | | | 22,059 | |
| Total average UPB | | | | | | | | | | $ | 634,376 | | | $ | 635,797 | |
| | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 |
| | UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs | | | | | | | | | | | | |
| Agency | | $ | 234,589 | | | $ | 2,965 | | | 126 | | $ | 238,956 | | | $ | 2,618 | | | 110 |
| Non-agency | | 41,439 | | | 389 | | | 94 | | 51,678 | | | 491 | | | 95 |
| Total forward MSRs | | 276,028 | | | 3,354 | | | 122 | | 290,634 | | | 3,109 | | | 107 |
| | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | | |
| Agency | | 338,064 | | | N/A | | | | 302,060 | | | N/A | | |
| Non-agency | | 14,417 | | | N/A | | | | 14,873 | | | N/A | | |
| Total subservicing and other | | 352,481 | | | N/A | | | | 316,933 | | | N/A | | |
| | | | | | | | | | | | |
| Reverse loans | | | | | | | | | | | | |
| MSR | | 1,847 | | | 5 | | | | | 2,332 | | | 6 | | | |
| MSL | | 10,372 | | | (38) | | | | | 13,360 | | | (53) | | | |
| Securitized loans | | 5,050 | | | 5,091 | | | | | 5,898 | | | 5,955 | | | |
| Total reverse portfolio serviced | | 17,269 | | | 5,058 | | | | | 21,590 | | | 5,908 | | | |
| Total ending balance | | $ | 645,778 | | | $ | 8,412 | | | | | $ | 629,157 | | | $ | 9,017 | | | |
| | | | | | | | | | | | |
| Forward MSRs UPB Encumbrance | | | | | | | | March 31, 2021 | | March 31, 2020 |
| Forward MSRs - unencumbered | | | | | | | | $ | 121,311 | | | $ | 85,124 | |
Forward MSRs - encumbered(2) | | | | | | | | | | 154,717 | | | 205,510 | |
| Total Forward MSRs UPB | | | | | | | | | | $ | 276,028 | | | $ | 290,634 | |
(1)Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights.
(2)The encumbered forward MSRs consist of residential mortgage loans included within our excess spread financing transactions and MSR financing liability.
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Average UPB | | | |
| Forward MSRs | $ | 303,578 |
| | $ | 308,984 |
|
Subservicing and other(1) | 310,160 |
| | 239,468 |
|
| Reverse loans | 22,059 |
| | 27,472 |
|
| Total average UPB | $ | 635,797 |
| | $ | 575,924 |
|
| | | | |
| | March 31, 2020 | | March 31, 2019 |
| Ending UPB | | | |
| Forward MSRs | | | |
| Agency | $ | 238,956 |
| | $ | 238,937 |
|
| Non-agency | 51,678 |
| | 64,755 |
|
| Total forward MSRs | 290,634 |
| | 303,692 |
|
| | | | |
Subservicing and other(1) | | | |
| Agency | 302,060 |
| | 273,786 |
|
| Non-agency | 14,873 |
| | 27,405 |
|
| Total subservicing and other | 316,933 |
| | 301,191 |
|
| |
| | |
| Reverse loans | | | |
| MSR | 2,332 |
| | 3,559 |
|
| MSL | 13,360 |
| | 15,928 |
|
| Securitized loans | 5,898 |
| | 7,527 |
|
| Total reverse portfolio serviced | 21,590 |
| | 27,014 |
|
| Total ending UPB | $ | 629,157 |
| | $ | 631,897 |
|
| |
(1)
| Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights. |
The following table providestables provide a rollforward of our forward servicingMSR and subservicing and other portfolio UPB:
|
| | | | |
Table 7.6. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 271,189 | | | $ | 336,513 | | | $ | 607,702 | | | $ | 296,782 | | | $ | 323,983 | | | $ | 620,765 | |
| Additions: | | | | | | | | | | | |
| Originations | 23,623 | | | 1,504 | | | 25,127 | | | 11,635 | | | 662 | | | 12,297 | |
Acquisitions / Increase in subservicing(1) | 4,647 | | | 53,318 | | | 57,965 | | | (673) | | | 23,352 | | | 22,679 | |
| Deductions: | | | | | | | | | | | |
| Dispositions | (50) | | | (1,130) | | | (1,180) | | | (40) | | | (10,359) | | | (10,399) | |
| Principal reductions and other | (2,702) | | | (3,231) | | | (5,933) | | | (2,748) | | | (2,965) | | | (5,713) | |
Voluntary reductions(2) | (20,474) | | | (34,455) | | | (54,929) | | | (13,864) | | | (17,672) | | | (31,536) | |
Involuntary reductions(3) | (133) | | | (38) | | | (171) | | | (387) | | | (68) | | | (455) | |
| Net changes in loans serviced by others | (72) | | | — | | | (72) | | | (71) | | | — | | | (71) | |
| Balance - end of period | $ | 276,028 | | | $ | 352,481 | | | $ | 628,509 | | | $ | 290,634 | | | $ | 316,933 | | | $ | 607,567 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| | Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 296,782 |
| | $ | 323,983 |
| | $ | 620,765 |
| | $ | 295,481 |
| | $ | 223,886 |
| | $ | 519,367 |
|
| Additions: | | | | | | | | | | | |
| Originations | 11,635 |
| | 662 |
| | 12,297 |
| | 4,891 |
| | 404 |
| | 5,295 |
|
| Acquisitions / Increase in subservicing | (673 | ) | | 23,352 |
| | 22,679 |
| | 13,404 |
| | 84,406 |
| | 97,810 |
|
| Deductions: | | | | | | | | | | | |
| Dispositions | (40 | ) | | (10,359 | ) | | (10,399 | ) | | (133 | ) | | (1,118 | ) | | (1,251 | ) |
| Principal reductions and other | (2,748 | ) | | (2,965 | ) | | (5,713 | ) | | (2,827 | ) | | (2,317 | ) | | (5,144 | ) |
Voluntary reductions(1) | (13,864 | ) | | (17,672 | ) | | (31,536 | ) | | (6,297 | ) | | (3,975 | ) | | (10,272 | ) |
Involuntary reductions(2) | (387 | ) | | (68 | ) | | (455 | ) | | (762 | ) | | (95 | ) | | (857 | ) |
| Net changes in loans serviced by others | (71 | ) | | — |
| | (71 | ) | | (65 | ) | | — |
| | (65 | ) |
| Balance - end of period | $ | 290,634 |
| | $ | 316,933 |
| | $ | 607,567 |
| | $ | 303,692 |
| | $ | 301,191 |
| | $ | 604,883 |
|
| |
(1)
| Voluntary reductions are related to loan payoffs by customers. |
| |
(2)
| Involuntary reductions refer to loan chargeoffs. |
(1)Includes transfers to/from Subservicing and Other.
As of(2)Voluntary reductions are related to loan payoffs by customers.
(3)Involuntary reductions refer to loan chargeoffs.
During the three months ended March 31, 2020,2021, our ending forward servicingMSR UPB decreased when compared to 2019,increased primarily due to increased voluntary reductions in aoriginations volumes driven by the low interest rate environment, partially offset by increased origination volumes. As ofvoluntary reductions. During the three months ended March 31, 2020,2021, our subservicing and other portfolio ending UPB increased when comparedprimarily due to 2019, primarily driven by portfolio growth from our subservicing clients, partially offset by increased dispositions primarily due to various MSR sales.voluntary reductions in the low interest rate environment.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio:
|
| | | | |
Table 8.7. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) |
| | | | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 |
Loan count(2) | | 3,373,173 | | | 3,506,998 | |
Average loan amount(3) | | $ | 186,328 | | | $ | 173,231 | |
Average coupon - agency(4) | | 4.0 | % | | 4.4 | % |
Average coupon - non-agency(4) | | 4.4 | % | | 4.7 | % |
60+ delinquent (% of loans)(5) | | 5.3 | % | | 1.9 | % |
90+ delinquent (% of loans)(5) | | 4.9 | % | | 1.6 | % |
120+ delinquent (% of loans)(5) | | 4.6 | % | | 1.4 | % |
| | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
| Total prepayment speed (12-month constant prepayment rate) | | 30.8 | % | | 19.2 | % |
(1)Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others.
(2)As of March 31, 2021, loan count includes 154,194 loans in forbearance related to the CARES Act.
(3)Average loan amount is presented in whole dollar amounts.
(4)The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value.
|
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Loan count | 3,506,998 |
| | 3,616,323 |
|
Average loan amount(2) | $ | 173,231 |
| | $ | 167,266 |
|
Average coupon - credit sensitive(3) | 4.7 | % | | 4.9 | % |
Average coupon - interest sensitive(3) | 4.3 | % | | 4.3 | % |
Average coupon - agency(3) | 4.4 | % | | 4.4 | % |
Average coupon - non-agency(3) | 4.7 | % | | 4.8 | % |
60+ delinquent (% of loans)(4) | 1.9 | % | | 2.4 | % |
90+ delinquent (% of loans)(4) | 1.6 | % | | 2.1 | % |
120+ delinquent (% of loans)(4) | 1.4 | % | | 1.9 | % |
| Total prepayment speed (12-month constant prepayment rate) | 19.2 | % | | 8.2 | % |
| |
(1)
| Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others. |
| |
(2)
| Average loan amount is presented in whole dollar amounts. |
| |
(3)
| The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value. |
| |
(4)
| Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. |
Delinquency is a significantan assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continueDue to experience low delinquency rates during the three months ended March 31, 2020 which preserves the value of our MSRs. At this time, it is too early to estimate the potential impact the COVID-19 pandemic willand the implementation of the CARES Act, loans greater than 60 days, 90 days and 120 days delinquent have on future delinquencies.increased as of March 31, 2021 compared to 2020.
|
| | | | |
Table 9.8. Forward Loan Modifications and Workout Units |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | Amount Change | | % Change |
Modifications(1) | 15,635 | | | 4,715 | | | 10,920 | | | NM |
Workouts(2) | 18,341 | | | 3,113 | | | 15,228 | | | NM |
| Total modifications and workout units | 33,976 | | | 7,828 | | | 26,148 | | | NM |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Amount Change | | % Change |
| Modifications | 4,715 |
| | 5,189 |
| | (474 | ) | | (9 | )% |
| Workouts | 3,994 |
| | 4,401 |
| | (407 | ) | | (9 | )% |
| Total modifications and workout units | 8,709 |
| | 9,590 |
| | (881 | ) | | (9 | )% |
(1)Modifications adjust the terms of the loan.
(2)Workouts are other loss mitigation options which do not adjust the terms of the loan. Workouts exclude loans which did not miss a contractual payment during forbearance related to the CARES Act.
NM = Not meaningful or greater than 200% change.
Total modifications and workouts during the three months ended March 31, 2020 decreased2021 increased compared to the same period in 20192020 primarily due to lower delinquency rates. At this time, it is too earlyan increase in modifications and workouts related to estimate the potential impactloans impacted by the COVID-19 pandemic will have on future delinquencieswhich successfully exited their forbearance plans.
Servicing Portfolio and corresponding modification activity.Related Liabilities
The following table providessets forth the compositionactivities of revenues for the Servicing segment:
|
| | | | | | | | | |
Table 10. Servicing - Revenues |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 250 |
| | 16 | | $ | 240 |
| | 17 | | $ | 10 |
| | (1) | | 4 | % | | (6 | )% |
Modification fees(2) | 3 |
| | — | | 3 |
| | — | | — |
| | — | | — | % | | — | % |
Incentive fees(2) | 4 |
| | — | | 1 |
| | — | | 3 |
| | — | | 300 | % | | — | % |
Late payment fees(2) | 23 |
| | 2 | | 19 |
| | 2 | | 4 |
| | — | | 21 | % | | — | % |
Other ancillary revenues(2) | 38 |
| | 2 | | 48 |
| | 3 | | (10 | ) | | (1) | | (21 | )% | | (33 | )% |
| Total forward MSR operational revenue | 318 |
| | 20 | | 311 |
| | 22 | | 7 |
| | (2) | | 2 | % | | (9 | )% |
Base subservicing fees and other subservicing revenue(3) | 65 |
| | 4 | | 52 |
| | 4 | | 13 |
| | — | | 25 | % | | — | % |
| Reverse servicing fees | 6 |
| | — | | 9 |
| | — | | (3 | ) | | — | | (33 | )% | | — | % |
| Total servicing fee revenue | 389 |
| | 24 | | 372 |
| | 26 | | 17 |
| | (2) | | 5 | % | | (8 | )% |
| MSR financing liability costs | (8 | ) | | — | | (12 | ) | | (1) | | 4 |
| | 1 | | (33 | )% | | 100 | % |
| Excess spread costs - principal | (68 | ) | | (4) | | (36 | ) | | (2) | | (32 | ) | | (2) | | 89 | % | | 100 | % |
| Total operational revenue | 313 |
| | 20 | | 324 |
| | 23 | | (11 | ) | | (3) | | (3 | )% | | (13 | )% |
| Amortization, net of accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (152 | ) | | (10) | | (79 | ) | | (6) | | (73 | ) | | (4) | | 92 | % | | 67 | % |
| Excess spread accretion | 68 |
| | 4 | | 36 |
| | 3 | | 32 |
| | 1 | | 89 | % | | 33 | % |
| Reverse MSL accretion | 8 |
| | 1 | | 18 |
| | 1 | | (10 | ) | | — | | (56 | )% | | — | % |
| Reverse MSR amortization | — |
| | — | | 2 |
| | — | | (2 | ) | | — | | (100 | )% | | — | % |
| Total amortization, net of accretion | (76 | ) | | (5) | | (23 | ) | | (2) | | (53 | ) | | (3) | | 230 | % | | 150 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | (412 | ) | | (26) | | (360 | ) | | (25) | | (52 | ) | | (1) | | 14 | % | | 4 | % |
| Excess spread / financing MTM | 29 |
| | 2 | | 67 |
| | 5 | | (38 | ) | | (3) | | (57 | )% | | (60 | )% |
| Total MTM adjustments | (383 | ) | | (24) | | (293 | ) | | (20) | | (90 | ) | | (4) | | 31 | % | | 20 | % |
| Total revenues - Servicing | $ | (146 | ) | | (9) | | $ | 8 |
| | 1 | | $ | (154 | ) | | (10) | | (1,925 | )% | | (1,000 | )% |
| |
(1)
| Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
|
| |
(2)
| Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues. |
| |
(3)
| The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $10 and $11 for the three months ended March 31, 2020 and 2019, respectively. |
9. Forward - Due to the shift in the forward MSR portfolio mix, base servicing fee revenue increased for the three months ended March 31, 2020 as compared to the same period in 2019. The decrease in BPS is primarily driven by an increase in the average loan size due to a shift in portfolio mix.
MSR prepayment and forward MSR amortization increased for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment.
Total negative MTM adjustments increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to the declining interest rate environment during 2020.
Subservicing - Subservicing fees increased for the three months ended March 31, 2020 as compared to the same period in 2019, due to significant growth in the subservicing portfolio UPB.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended March 31, 2020 decreased as compared to the same period in 2019, primarily due to the decline in the reverse mortgage portfolio. Reverse MSL accretion was further impacted by $6 pertaining to accumulated accretion recorded during the three months ended March 31, 2019 related to fair value adjustments for MSL assumed from the Merger. The fair value adjustment resulted from the revised cost to service assumption used in the valuation of MSL during the measurement period.
The tables below summarize expenses for the Servicing segment:
|
| | | | |
Table 11. Servicing - Expenses |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 86 |
| | 5 | | $ | 86 |
| | 6 | | $ | — |
| | (1) | | — | % | | (17 | )% |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 25 |
| | 2 | | 39 |
| | 3 | | (14 | ) | | (1) | | (36 | )% | | (33 | )% |
| Corporate and other general and administrative expenses | 35 |
| | 2 | | 39 |
| | 3 | | (4 | ) | | (1) | | (10 | )% | | (33 | )% |
| Foreclosure and other liquidation related expenses | — |
| | — | | 27 |
| | 2 | | (27 | ) | | (2) | | (100 | )% | | (100 | )% |
| Depreciation and amortization | 3 |
| | — | | 4 |
| | — | | (1 | ) | | — | | (25 | )% | | — | % |
| Total general and administrative expenses | 63 |
| | 4 | | 109 |
| | 8 | | (46 | ) | | (4) | | (42 | )% | | (50 | )% |
| Total expenses - Servicing | $ | 149 |
| | 9 | | $ | 195 |
| | 14 | | $ | (46 | ) | | (5) | | (24 | )% | | (36 | )% |
| |
(1)
| Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
|
Total expenses decreased during the three months ended March 31, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation expenses. Foreclosure and other liquidation related expenses were lower during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to recovery of $5 prior period operating losses from a previous sub-servicer during the three months ended March 31, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses.
|
| | | | |
Table 12. Servicing - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Income earned on Reverse mortgage interest | $ | 43 |
| | 3 | | $ | 82 |
| | 6 | | $ | (39 | ) | | (3) | | (48 | )% | | (50 | )% |
| Other interest income | 40 |
| | 2 | | 33 |
| | 2 | | 7 |
| | — | | 21 | % | | — | % |
| Interest income | 83 |
| | 5 | | 115 |
| | 8 | | (32 | ) | | (3) | | (28 | )% | | (38 | )% |
| | | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (52 | ) | | (3) | | (71 | ) | | (5) | | 19 |
| | 2 | | (27 | )% | | (40 | )% |
| Advance interest expense | (5 | ) | | — | | (9 | ) | | (1) | | 4 |
| | 1 | | (44 | )% | | 100 | % |
| Other interest expense | (56 | ) | | (4) | | (34 | ) | | (2) | | (22 | ) | | (2) | | 65 | % | | 100 | % |
| Interest expense | (113 | ) | | (7) | | (114 | ) | | (8) | | 1 |
| | 1 | | (1 | )% | | (13 | )% |
| Total other income (expenses), net - Servicing | $ | (30 | ) | | (2) | | $ | 1 |
| | — | | $ | (31 | ) | | (2) | | (3,100 | )% | | (100 | )% |
| | | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 4.7 | % | | | | (1.7 | )% | |
| | (36 | )% | |
|
|
| Weighted average cost - excess spread financing | 9.0 | % | | | | 9.0 | % | | | | — | % | |
| | — | % | |
|
|
| |
(1)
| Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.
|
Total other income (expenses), net decreased during the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income increased primarily driven by an increase in earnings credits and bank fee credits. Interest expense remained relatively flat during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to an increase in other interest expense primarily driven by higher compensating interest expense and bank fees, partially offset by a decrease in reverse mortgage interest expense due to the decline in the reverse mortgage interest portfolio.
Servicing Portfolio and Related Liabilities
The tables below summarize the servicing portfolio and related liabilities in the Servicing segment:
|
| | | | |
Table 13. Servicing Portfolios and Related Liabilities |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs - acquisition pool: | | | | | | | | | | | |
| Credit sensitive | $ | 138,726 |
| | $ | 1,386 |
| | 100 | | $ | 147,895 |
| | $ | 1,613 |
| | 109 |
| Interest sensitive | 151,908 |
| | 1,723 |
| | 113 | | 148,887 |
| | 1,883 |
| | 126 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Forward MSRs - investor pool: | | | | | | | | | | | |
| Agency | $ | 238,956 |
| | $ | 2,618 |
| | 110 | | $ | 240,688 |
| | $ | 2,944 |
| | 122 |
| Non-agency | 51,678 |
| | 491 |
| | 95 | | 56,094 |
| | 552 |
| | 98 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Total forward MSRs | $ | 290,634 |
| | $ | 3,109 |
| | | | $ | 296,782 |
| | $ | 3,496 |
| | |
| | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | |
| Agency | 302,060 |
| | N/A |
| | | | 308,532 |
| | N/A |
| | |
| Non-agency | 14,873 |
| | N/A |
| | | | 15,451 |
| | N/A |
| | |
| Total subservicing and other | 316,933 |
| | N/A |
| | | | 323,983 |
| | N/A |
| | |
| | | | | | | | | | | | |
| Reverse portfolio - amortized cost | | | | | | | | | | | |
| MSR | 2,332 |
| | 6 |
| | | | 2,508 |
| | 6 |
| | |
| MSL | 13,360 |
| | (53 | ) | | | | 13,994 |
| | (61 | ) | | |
| Securitized loans | 5,898 |
| | 5,955 |
| | | | 6,223 |
| | 6,279 |
| | |
| Total reverse portfolio serviced | 21,590 |
| | 5,908 |
| | | | 22,725 |
| | 6,224 |
| | |
| Total servicing portfolio unpaid principal balance | $ | 629,157 |
| | $ | 9,017 |
| | | | $ | 643,490 |
| | $ | 9,720 |
| | |
| |
(1)
| Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances for which we own the mortgage servicing rights. |
As of March 31, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value 13 bps, compared to December 31, 2019 due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020.
We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolios primarily consist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.
The following table provides information on the fair value of our owned forward MSR portfolio:
|
| | | | |
Table 14. MSRs - Fair Value Rollforward |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 3,496 |
| | $ | 3,665 |
|
| Additions: | | | |
| Servicing retained from mortgage loans sold | 123 |
| | 66 |
|
| Purchases of servicing rights | 24 |
| | 409 |
|
| Dispositions: | | | |
| Sales and cancellation of servicing assets | — |
| | (260 | ) |
| Changes in fair value: | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | | | |
| Credit sensitive | (181 | ) | | (121 | ) |
| Interest sensitive | (220 | ) | | (211 | ) |
| Other changes in fair value: | | | |
| Scheduled principal payments | (23 | ) | | (22 | ) |
Disposition of negative MSRs and other(1) | 20 |
| | 12 |
|
| Prepayments | | | |
| Voluntary prepayments | | | |
| Credit sensitive | (24 | ) | | (19 | ) |
| Interest sensitive | (102 | ) | | (32 | ) |
| Involuntary prepayments | | | |
| Credit sensitive | (1 | ) | | (2 | ) |
| Interest sensitive | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 3,109 |
| | $ | 3,481 |
|
| |
(1)
| Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments. |
The following table sets forth the weighted-average key assumptions in estimating the fair value of forward MSRs:
|
| | | | |
Table 15. MSRs - Fair Value |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Fair value - beginning of period | $ | 2,703 | | | $ | 3,496 | | | | | |
| Additions: | | | | | | | |
| Servicing retained from mortgage loans sold | 288 | | | 123 | | | | | |
| Purchases of servicing rights | 67 | | | 24 | | | | | |
| Dispositions: | | | | | | | |
| Sales and cancellation of servicing assets | (2) | | | — | | | | | |
| Changes in fair value: | | | | | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | | | | | | | |
| Agency | 149 | | | (351) | | | | | |
| Non-agency | 361 | | | (50) | | | | | |
| Other changes in fair value: | | | | | | | |
| Scheduled principal payments | (24) | | | (23) | | | | | |
Disposition of negative MSRs and other(1) | 20 | | | 20 | | | | | |
| Prepayments | | | | | | | |
| Voluntary prepayments | | | | | | | |
| Agency | (197) | | | (116) | | | | | |
| Non-agency | (10) | | | (10) | | | | | |
| Involuntary prepayments | | | | | | | |
| Agency | (1) | | | (4) | | | | | |
| Non-agency | — | | | — | | | | | |
| Fair value - end of period | $ | 3,354 | | | $ | 3,109 | | | | | |
|
| | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Total MSRs Portfolio | | | |
| Discount rate | 9.7 | % | | 10.3 | % |
| Prepayment speeds | 13.4 | % | | 13.0 | % |
| Average life | 5.7 years |
| | 6.0 years |
|
| | | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 10.2 | % | | 11.3 | % |
| Prepayment speeds | 13.0 | % | | 13.5 | % |
| Average life | 5.9 years |
| | 6.0 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 9.1 | % | | 9.4 | % |
| Prepayment speeds | 13.8 | % | | 12.5 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
| | | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 9.0 | % | | 9.4 | % |
| Prepayment speeds | 13.2 | % | | 12.4 | % |
| Average life | 5.6 years |
| | 6.1 years |
|
| | | | |
| Non-Agency | | | |
| Discount rate | 12.6 | % | | 13.6 | % |
| Prepayment speeds | 14.3 | % | | 15.4 | % |
| Average life | 6.1 years |
| | 5.9 years |
|
(1)Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
The weighted-average discount rate for total MSRs portfolio decreased as of March 31, 2020 compared to the same period in 2019 due to the declining interest rate environment in 2020. Weighted-average life for total MSRs portfolio decreased due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists.
Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.
In determining key assumptions in estimating fair value of forward MSRs, we took into account the situations created by COVID-19 pandemic.
Excess Spread Financing
As further disclosed in See Note 3,2, Mortgage Servicing Rights and Related Liabilities and Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements (unaudited), for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of forward MSRs as of March 31, 2021 and December 31, 2020.
Excess Spread Financing
As further disclosed in Note 2, Mortgage Servicing Rights and Related Liabilities,in the Notes to the Condensed Consolidated Financial Statements (unaudited), we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs and the purchase of loans. We do not currently utilize these transactions as a primary source of financing due to the availability of lower cost sources of funding.
Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to (i) prepayment speeds and (ii) our ability to recapture mortgage prepayments through the origination platform. See Note 3,2, Mortgage Servicing Rights and Related Liabilitiesand Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements (unaudited), for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of March 31, 20202021 and December 31, 2019.2020.
The following table sets forth the change in the excess spread liability and the related weighted-average assumptions:
|
| | | | | | | | | |
Table 16.10. Excess Spread Financing |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 1,311 |
| | $ | 1,184 |
|
| Additions: | | | |
| New financings | 24 |
| | 245 |
|
| Deductions: | | | |
| Settlements and repayments | (58 | ) | | (51 | ) |
| Changes in fair value: | | | |
| Credit Sensitive | (2 | ) | | (32 | ) |
| Interest Sensitive | (33 | ) | | (37 | ) |
| Fair value - end of period | $ | 1,242 |
| | $ | 1,309 |
|
| | | | |
| Key Weighted-Average Assumptions: | March 31, 2020 | | March 31, 2019 |
| Total Excess Spread Portfolio | | | |
| Discount rate | 11.6 | % | | 10.4 | % |
| Prepayment speeds | 12.8 | % | | 12.9 | % |
| Recapture rate | 18.6 | % | | 20.4 | % |
| Average life | 5.7 years |
| | 5.9 years |
|
| | | | |
| Credit Sensitive | | | |
| Discount rate | 12.3 | % | | 10.9 | % |
| Prepayment speeds | 12.3 | % | | 13.2 | % |
| Recapture rate | 18.4 | % | | 21.7 | % |
| Average life | 5.9 years |
| | 5.9 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 10.3 | % | | 9.1 | % |
| Prepayment speeds | 13.5 | % | | 12.4 | % |
| Recapture rate | 19.8 | % | | 17.3 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
The following table sets forth the change in the MSRs financing liability and the related weighted-average assumptions.
|
| | - Rollforward | | |
Table 17. MSRs Financing Liability - Rollforward |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Fair value - beginning of period | $ | 934 | | | $ | 1,311 | | | | | |
| Additions: | | | | | | | |
| New financings | — | | | 24 | | | | | |
| Deductions: | | | | | | | |
| Settlements and repayments | (41) | | | (58) | | | | | |
| Changes in fair value: | | | | | | | |
| Agency | 38 | | | (43) | | | | | |
| Non-agency | 3 | | | 8 | | | | | |
| Fair value - end of period | $ | 934 | | | $ | 1,242 | | | | | |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 37 |
| | $ | 32 |
|
| Changes in fair value: | | | |
| Changes in valuation inputs or assumptions used in the valuation model | 9 |
| | 6 |
|
| Other changes in fair value | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 43 |
| | $ | 34 |
|
| | | | |
| | March 31, 2020 | | March 31, 2019 |
| Weighted-Average Assumptions | | | |
| Advance financing rates | 1.7 | % | | 3.9 | % |
| Annual advance recovery rates | 18.4 | % | | 19.3 | % |
We entered into several sale agreements whereby we sold the right to receive repayment of servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs, and also transferred the obligations to make future advances. These transactions are recorded as an MSR Financing Liability in our consolidated balance sheets and represent the incremental costs relative to the market participant assumptions contained in the MSR valuation. Changes in the value of the MSR financing liability are recorded against servicing revenue and interest imputed on the outstanding liability is recorded as interest expense.
We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market rate for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates.
The following table provides an overview of our forward servicing portfolio and amounts that involve excess spread financing with our co-invest partners for the periods indicated.
|
| | | | |
Table 18. Leveraged Portfolio Characteristics |
|
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Owned forward servicing portfolio - unencumbered | $ | 85,124 |
| | $ | 88,995 |
|
| Owned forward servicing portfolio - encumbered | 205,510 |
| | 214,697 |
|
| Subserviced forward servicing portfolio and other | 316,933 |
| | 301,191 |
|
| Total unpaid principal balance | $ | 607,567 |
| | $ | 604,883 |
|
The encumbered forward servicing portfolio consists of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold and (3) agency REO balances for which we own the mortgage servicing rights.
Reverse - MSRs, MSLs and Participating Interests in Reverse Mortgages - Amortized Cost
The table below provides detail of the characteristics and key performance metrics of the reverse servicing portfolio, which is included in reverse MSRs, MSLs and participating interests in reverse mortgages. Such assets are recorded at amortized cost.
|
| | | | | | | | | | | | | |
Table 19.11. Reverse - Mortgage Portfolio Characteristics |
| | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 |
| Loan count | 135,979 | | | 158,838 | |
| Ending unpaid principal balance | $ | 17,269 | | | $ | 21,590 | |
Average loan amount(1) | $ | 126,995 | | | $ | 135,924 | |
| Average coupon | 2.1 | % | | 3.3 | % |
| Average borrower age | 81.5 years | | 80.9 years |
|
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Loan count | 158,838 |
| | 184,807 |
|
| Ending unpaid principal balance | $ | 21,590 |
| | $ | 27,014 |
|
Average loan amount(1) | $ | 135,924 |
| | $ | 146,173 |
|
| Average coupon | 3.3 | % | | 4.4 | % |
| Average borrower age | 81 |
| | 80 |
|
(1)Average loan amount is calculated and presented in whole dollar amounts.
| |
(1)
| Average loan amount is presented in whole dollar amounts. |
Historically, the Companywe acquired servicing rights and participating interests in reverse mortgage portfolios.portfolios; however, the portfolio is no longer regarded as a core business and is currently in run-off. Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. For acquired servicing rights, an MSR or MSL is established on the acquisition date at fair value, as applicable, based on the expected discounted cash flow from servicing the reverse portfolio.
Each quarter, we accrete the MSL to revenues - service related, net of the respective portfoliosportfolios’ run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the key assumptions being discount rates, prepayment speeds and borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance.
Based on our assessment, no impairment or increased obligation was required to be recorded for reverse MSRs and MSLs as of March 31, 2020.2021.
The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Growing the Originations segment has been a strategic focus for us for several years.
The Originations segment includes threetwo channels:
•Our direct-to-consumer (“DTC”) lending channel relies on our call centers, our website and mobile apps, specially trained teams of licensed mortgage originators, predictive analytics and modeling utilizing proprietary data from our servicing portfolio to interact with customers. Our primary focus isreach our existing customers who may benefit from a new mortgage. Depending on borrower eligibility, we will refinance existing loans into conventional, government or non-agency products. Through lead campaigns and direct marketing, the direct-to-consumer channel seeks to assist our customers withconvert leads into loans in a refinance or home purchase by providing them with a needs-based approach to understanding their current mortgage options.cost-efficient manner.
•Our correspondent lending channel acquires newly originated residential mortgage loans that have been underwritten to investor guidelines. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our correspondent lending channel enables us to replenish servicing portfolio run-off typically at a better rate of return than traditional bulk or flow acquisitions.
Our wholesale lending channel works with mortgage brokers to source loans which are underwritten and funded by us in our name. Counterparty risk is mitigated through quality and compliance monitoring and all brokers are subject to our eligibility requirements coupled with an annual recertification process. Subsequent to March 31, 2020, we closed our wholesale lending channel.
The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix:
The following tables set forth the results of operations for the Originations segment:
|
| | | | |
Table 20.12. Originations Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Service related, net | $ | 43 | | | $ | 20 | | | $ | 23 | | | 115 | % |
| Net gain on mortgage loans held for sale | | | | | | | |
| Net gain on loans originated and sold | 286 | | | 183 | | | 103 | | | 56 | % |
| Capitalized servicing rights | 274 | | | 119 | | | 155 | | | 130 | % |
| Provision for repurchase reserves, net of release | (8) | | | (5) | | | (3) | | | 60 | % |
| Total net gain on mortgage loans held for sale | 552 | | | 297 | | | 255 | | | 86 | % |
| Total revenues | 595 | | | 317 | | | 278 | | | 88 | % |
| Expenses | | | | | | | |
| Salaries, wages and benefits | 167 | | | 117 | | | 50 | | | 43 | % |
| General and administrative | | | | | | | |
| Loan origination expenses | 27 | | | 16 | | | 11 | | | 69 | % |
| Corporate and other general administrative expenses | 20 | | | 18 | | | 2 | | | 11 | % |
| Marketing and professional service fees | 13 | | | 12 | | | 1 | | | 8 | % |
| Depreciation and amortization | 4 | | | 3 | | | 1 | | | 33 | % |
| Total general and administrative | 64 | | | 49 | | | 15 | | | 31 | % |
| Total expenses | 231 | | | 166 | | | 65 | | | 39 | % |
| Other income (expenses) | | | | | | | |
| Interest income | 23 | | | 34 | | | (11) | | | (32) | % |
| Interest expense | (25) | | | (27) | | | 2 | | | (7) | % |
| | | | | | | |
| Total other (expenses) income, net | (2) | | | 7 | | | (9) | | | (129) | % |
| Income before income tax expense | $ | 362 | | | $ | 158 | | | $ | 204 | | | 129 | % |
| | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 2.9 | % | | 3.8 | % | | (0.9) | % | | (24) | % |
| Weighted average cost of funds (excluding facility fees) | 2.2 | % | | 3.2 | % | | (1.0) | % | | (31) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Total revenues | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| Total expenses | 166 |
| | 104 |
| | 62 |
| | 60 | % |
| Total other income (expenses), net | 7 |
| | 3 |
| | 4 |
| | 133 | % |
| Income before income tax expense | $ | 158 |
| | $ | 45 |
| | $ | 113 |
| | 251 | % |
| | | | | | | | |
| Originations Margin | | | | | | | |
| Revenue | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| Pull through adjusted lock volume | $ | 12,677 |
| | $ | 5,960 |
| | $ | 6,717 |
| | 113 | % |
Revenue as a percentage of pull through adjusted lock volume(1) | 2.50 | % | | 2.45 | % | | 0.05 | % | | 2 | % |
| | | | | | | | |
| Expenses | $ | 166 |
| | $ | 104 |
| | $ | 62 |
| | 60 | % |
| Funded volume | $ | 12,359 |
| | $ | 5,716 |
| | $ | 6,643 |
| | 116 | % |
Expenses as a percentage of funded volume(2) | 1.34 | % | | 1.82 | % | | (0.48 | )% | | (26 | )% |
| | | | | | | | |
| Originations Margin | 1.16 | % | | 0.63 | % | | 0.53 | % | | 84 | % |
| | |
(1)
| Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.Table 13. Originations - Key Metrics |
| |
(2)
| Calculated on funded volume as expenses are incurred based on closing of the loan. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Key Metrics | | | | | | | |
Consumer direct lock pull through adjusted volume(1) | $ | 10,322 | | | $ | 7,423 | | | $ | 2,899 | | | 39 | % |
Other locked pull through adjusted volume(1) | 12,945 | | | 5,254 | | | 7,691 | | | 146 | % |
| Total pull through adjusted lock volume | $ | 23,267 | | | $ | 12,677 | | | $ | 10,590 | | | 84 | % |
| Funded volume | $ | 25,133 | | | $ | 12,359 | | | $ | 12,774 | | | 103 | % |
| Volume of loans sold | $ | 26,311 | | | $ | 13,255 | | | $ | 13,056 | | | 98 | % |
Recapture percentage(2) | 31.0 | % | | 29.8 | % | | 1.2 | % | | 4 | % |
Refinance recapture percentage(3) | 36.5 | % | | 37.5 | % | | (1.0) | % | | (3) | % |
| Purchase as a percentage of funded volume | 12.2 | % | | 26.0 | % | | (13.8) | % | | (53) | % |
| Value of capitalized servicing on retained settlements | 128 | bps | | 137 | bps | | (9) | bps | | (7) | % |
| | | | | | | |
| Originations Margin | | | | | | | |
| Revenue | $ | 595 | | | $ | 317 | | | $ | 278 | | | 88 | % |
| Pull through adjusted lock volume | $ | 23,267 | | | $ | 12,677 | | | $ | 10,590 | | | 84 | % |
Revenue as a percentage of pull through adjusted lock volume(4) | 2.56 | % | | 2.50 | % | | 0.06 | % | | 2 | % |
| | | | | | | |
Expenses(5) | $ | 233 | | | $ | 159 | | | $ | 74 | | | 47 | % |
| Funded volume | $ | 25,133 | | | $ | 12,359 | | | $ | 12,774 | | | 103 | % |
Expenses as a percentage of funded volume(6) | 0.93 | % | | 1.29 | % | | (0.36) | % | | (28) | % |
| | | | | | | |
| Originations Margin | 1.63 | % | | 1.21 | % | | 0.42 | % | | 35 | % |
(1)Pull through adjusted volume represents the expected funding from locks taken during the period.
(2)Recapture percentage includes new loan originations for both purchase and refinance transactions where borrower retention and/or property retention occurs as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(3)Refinance recapture percentage includes new loan originations for refinance transactions where borrower retention and property retention occurs as a result of a loan payoff from our servicing portfolio. Excludes loans we are contractually unable to solicit.
(4)Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(5)Expenses include total expenses and total other income (expenses), net.
(6)Calculated on funded volume as expenses are incurred based on closing of the loan.
Income before income tax expense increased for the three months ended March 31, 20202021 as compared to the same period in 20192020 primarily due to an increase in total revenues driven by origination volume growth. The growth in origination volume was primarily due to decliningthe low interest rates and incremental volumes associated with the acquisition of Pacific Union.rate environment. The Originations Margin for the three months ended March 31, 20202021 increased as compared to the same period in 20192020 primarily due to a lower expenses ratio as a percentage of funded volume as the increase in total expenses was partially offsetdriven by expense reduction initiatives relative to the significant increase in funded volume.operational efficiencies.
Originations Segment Revenues
Service related fee, net - Originations refers to fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting, and other similar fees.
Net gain on loans originated and sold represents the gains and losses from the origination, purchase, and sale of loans and related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity and is impacted by fluctuation in interest rates.
Capitalized servicing rights represents the fair value attributed to mortgage servicing rights at the time in which they are retained in connection with the sale of loans during the period.
Total revenues, including net gain on mortgage loans held for sale, for our Originations segment are set forth in the tables below:
|
| | | | |
Table 21. Originations - Revenues |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Service related, net - Originations | $ | 20 |
| | $ | 15 |
| | $ | 5 |
| | 33 | % |
| Net gain on mortgage loans held for sale | | | | | | | |
| Net gain on loans originated and sold | 183 |
| | 72 |
| | 111 |
| | 154 | % |
| Capitalized servicing rights | 119 |
| | 61 |
| | 58 |
| | 95 | % |
| Provision for repurchase reserves, net of release | (5 | ) | | (2 | ) | | (3 | ) | | 150 | % |
| Total net gain on mortgage loans held for sale | 297 |
| | 131 |
| | 166 |
| | 127 | % |
| Total revenues - Originations | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| | | | | | | | |
| Key Metrics | | | | | | | |
Consumer direct lock pull through adjusted volume(1) | $ | 7,423 |
| | $ | 2,333 |
| | $ | 5,090 |
| | 218 | % |
Other locked pull through adjusted volume(1) | 5,254 |
| | 3,627 |
| | 1,627 |
| | 45 | % |
| Total pull through adjusted volume | $ | 12,677 |
| | $ | 5,960 |
| | $ | 6,717 |
| | 113 | % |
| Funded volume | $ | 12,359 |
| | $ | 5,716 |
| | $ | 6,643 |
| | 116 | % |
| Volume of loans sold | $ | 13,255 |
| | $ | 6,235 |
| | $ | 7,020 |
| | 113 | % |
| Recapture percentage | 29.8 | % | | 27.5 | % | | 2.3 | % | | 7 | % |
| Purchase as a percentage of funded volume | 26.0 | % | | 51.7 | % | | (25.7 | )% | | (50 | )% |
| Value of capitalized servicing on retained settlements | 137 | bps | | 141 | bps | | (4) bps |
| | (3 | )% |
| |
(1)
| Pull through adjusted volume represents the expected funding from locks taken during the period. |
Total revenues increased forduring the three months ended March 31, 20202021 compared to the same period in 20192020 primarily driven by the higher origination volumes in a declininglower interest rate environment, andprimarily from the incremental volumes made available with the Pacific Union acquisition and related origination channels, which occurred in February 2019.DTC channel. Total revenue increased $171$278 or 117%88% period over period as total pull through adjusted lock volume increased 113%84% during the same period. There were no material changes for repurchase reserves.
The table below summarizes expenses for the Originations segment:
|
| | | | |
Table 22. Originations -Segment Expenses |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 117 |
| | $ | 69 |
| | $ | 48 |
| | 70 | % |
| General and administrative | | | | | | | |
| Loan origination expenses | 16 |
| | 10 |
| | 6 |
| | 60 | % |
| Corporate and other general and administrative expenses | 18 |
| | 14 |
| | 4 |
| | 29 | % |
| Marketing and professional service fees | 12 |
| | 8 |
| | 4 |
| | 50 | % |
| Depreciation and amortization | 3 |
| | 3 |
| | — |
| | — | % |
| Total general and administrative | 49 |
| | 35 |
| | 14 |
| | 40 | % |
| Total expenses - Originations | $ | 166 |
| | $ | 104 |
| | $ | 62 |
| | 60 | % |
Total expenses forduring the three months ended March 31, 20202021 increased when compared to the same period in 20192020 primarily due to growth in volumes, which was driven by the low interest rate environment and the incremental volumes made available with the Pacific Union acquisition and related origination channels.volumes. The origination volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs, and loan origination expenses. The increase in loan origination expenses attributable to higher volume was partially offset by expense reduction initiatives. In addition, corporate and other general and administrative expenses increased during the three months ended March 31, 2020 primarily driven by higher outsourcing costs.
The table below summarizes other income (expenses), net for the Originations segment:
|
| | | | |
Table 23. Originations -Segment Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Interest income | $ | 34 |
| | $ | 17 |
| | $ | 17 |
| | 100 | % |
| Interest expense | (27 | ) | | (18 | ) | | (9 | ) | | 50 | % |
| Other income, net | — |
| | 4 |
| | (4 | ) | | (100 | )% |
| Total other income (expenses), net - Originations | $ | 7 |
| | $ | 3 |
| | $ | 4 |
| | 133 | % |
| | | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 3.8 | % | | 4.9 | % | | (1.1 | )% | | (22 | )% |
| Weighted average cost of funds (excluding facility fees) | 3.2 | % | | 4.7 | % | | (1.5 | )% | | (32 | )% |
Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans.
Interest income forduring the three months ended March 31, 2020 increased2021 decreased when compared to the same period in 20192020 primarily driven by higher funded volume. The increase in interest income was offset by an increase in interest expense due to an increase in originations volume, partially offset by a lower cost of funds. Other income, net was higher in 2019 due to recognition of incentives we received related to our financing of certain loans satisfying certain customer relief characteristics. In September 2018, we entered into a master repurchase agreement that provided us with incentives to financeaverage note rate on mortgage loans satisfying certain consumer relief characteristics as provided in the agreement. We recorded $4 in other income, net related to such incentivesheld for the three months ended March 31, 2019. The master repurchase agreement expired during the third quarter of 2019.sale.
Xome is a real estate data and services company that provides services for mortgage originators and servicers, including Mr. Cooper, as well as mortgage and real estate investors. Xome is strategically important because it generates fee income that complements our servicing and origination businesses without requiring a significant amount of capital or exposing us to the same level of interest rate or credit risk.
Xome is organized into three divisions: Exchange, ServicesTitle and Data/Technology.Solutions.
•The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.
•The Title division is a tech-enabled platform and offers an extensive product suite including origination, home equity, and default with centralized title production. Title insurance workflow is enhanced via X1 Analytics proprietary automated title data and decision engine. On March 12, 2021, we entered into an agreement to sell the title business. The sale is expected to close during the second quarter of 2021. For more information, see Note 1, Nature of Business and Basis of Presentation, in theNotes to the Condensed Consolidated Financial Statements (unaudited).
•The Solutions division consists of field services, collateral valuation, recapture and data analytic solutions to improve purchase, refinance and default transactions.
The Services division includes title, escrow, collateral valuation and field services related to real estate investments or transactions including purchases, sales, refinances and defaults.
The Data/Technology division contains a diversified set of businesses that provide technology solutions to real estate service providers, aggregators, and a variety of investors. This includes providing aggregation, standardization and licensing for one of the nation’s largest set of MLS, public records and neighborhood demographic data.
The charts belowfollowing tables set forth the Xome’s total revenues, Exchange properties sold, and Services completed orders:
results of operations for the Xome segment: |
| | | | |
Table 24.14. Xome Segment Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Xome - Operations | | | | | | | |
| Revenues: | | | | | | | |
| Exchange | $ | 5 | | | $ | 16 | | | $ | (11) | | | (69) | % |
| Title | 56 | | | 43 | | | 13 | | | 30 | % |
| Solutions | 35 | | | 47 | | | (12) | | | (26) | % |
| Total revenues | 96 | | | 106 | | | (10) | | | (9) | % |
| Expenses: | | | | | | | |
| Salaries, wages and benefits | 29 | | | 35 | | | (6) | | | (17) | % |
| General and administrative | | | | | | | |
| Operational expenses | 55 | | | 58 | | | (3) | | | (5) | % |
| Depreciation and amortization | 3 | | | 3 | | | — | | | — | % |
| Total general and administrative | 58 | | | 61 | | | (3) | | | (5) | % |
| Total expenses | 87 | | | 96 | | | (9) | | | (9) | % |
| Total other income, net | — | | | 1 | | | (1) | | | (100) | % |
| Income before income tax expense | $ | 9 | | | $ | 11 | | | $ | (2) | | | (18) | % |
| Pre-tax margin | 9.4 | % | | 10.4 | % | | (1.0) | % | | (10) | % |
| | | | | | | |
| Key Metrics | | | | | | | |
| Exchange properties sold | 710 | | | 2,114 | | | (1,404) | | | (66) | % |
| Average Exchange properties under management | 14,210 | | | 17,777 | | | (3,567) | | | (20) | % |
| Title completed orders | 188,356 | | | 230,648 | | | (42,292) | | | (18) | % |
| Solutions completed orders | 546,552 | | | 430,726 | | | 115,826 | | | 27 | % |
| Percentage of revenue earned from third-party customers | 48.2 | % | | 54.6 | % | | (6.4) | % | | (12) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Xome - Operations | | | | | | | |
| Total revenues | $ | 106 |
| | $ | 96 |
| | $ | 10 |
| | 10 | % |
| Total expenses | 96 |
| | 99 |
| | (3 | ) | | (3 | )% |
| Total other income (expenses), net | 1 |
| | 11 |
| | (10 | ) | | (91 | )% |
| Income before income tax expense | $ | 11 |
| | $ | 8 |
| | $ | 3 |
| | 38 | % |
| Income before taxes margin - Xome | 10.4 | % | | 8.3 | % | | 2.1 | % | | 25 | % |
| | | | | | | | |
| Xome - Revenues | | | | | | | |
| Exchange | $ | 16 |
| | $ | 20 |
| | $ | (4 | ) | | (20 | )% |
| Services | 85 |
| | 71 |
| | 14 |
| | 20 | % |
| Data/Technology | 5 |
| | 5 |
| | — |
| | — | % |
| Total revenues - Xome | $ | 106 |
| | $ | 96 |
| | $ | 10 |
| | 10 | % |
| | | | | | | | |
| Key Metrics | | | | | | | |
| Exchange properties sold | 2,114 |
| | 2,421 |
| | (307 | ) | | (13 | )% |
| Average Exchange properties under management | 17,777 |
| | 6,634 |
| | 11,143 |
| | 168 | % |
| Services completed orders | 408,734 |
| | 379,585 |
| | 29,149 |
| | 8 | % |
| Percentage of revenue earned from third-party customers | 54.6 | % | | 53.0 | % | | 1.6 | % | | 3 | % |
| | | | | | | | |
| Xome - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 35 |
| | $ | 38 |
| | $ | (3 | ) | | (8 | )% |
| General and administrative | | | | | | | |
| Operational expenses | 58 |
| | 57 |
| | 1 |
| | 2 | % |
| Depreciation and amortization | 3 |
| | 4 |
| | (1 | ) | | (25 | )% |
| Total general and administrative | 61 |
| | 61 |
| | — |
| | — | % |
| Total expenses - Xome | $ | 96 |
| | $ | 99 |
| | $ | (3 | ) | | (3 | )% |
Income before income tax expense increased fordecreased during the three months ended March 31, 20202021 as compared to the same period in 20192020 primarily due to an increasea decrease in total revenues, partially offset by a decrease in other income (expense), net.total expenses. The increasedecrease in total revenues was driven by an increasea decrease in ServicesSolutions revenues from higher volumes of units for valuationprimarily due to a shift in product mix with lower third party originations and field services, partially offset bydefault appraisals and a decrease in Exchange revenues due to the decrease in defaults and foreclosures nationwide.nationwide related to the CARES Act. The decrease in other income (expense), nettotal revenues was partially offset by an increase in Title revenues primarily driven by a shift in product mix with higher Title origination orders. The decrease in total expenses was primarily due to $11 for the changea decrease in fair valuesalaries, wages and benefits driven by operational efficiencies.
Contents
Corporate/Other represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, and interest expense on our unsecured senior notes.
The following table setsset forth the selected financial results of operations for the Corporate/Other segment:
|
| | | | |
Table 25.15. Corporate/Other SegmentSelected Financial Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total expenses | $ | 26 | | | $ | 33 | | | $ | (7) | | | (21) | % |
| Interest expense | 30 | | | 52 | | | (22) | | | (42) | % |
| | | | | | | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total revenues | $ | 2 |
| | $ | — |
| | $ | 2 |
| | 100 | % |
| Total expenses | 34 |
| | 45 |
| | (11 | ) | | (24 | )% |
| Total other income (expenses), net | (51 | ) | | (55 | ) | | 4 |
| | (7 | )% |
| Loss before income tax benefit - Corporate/Other | $ | (83 | ) | | $ | (100 | ) | | $ | 17 |
| | (17 | )% |
| | | | | | | | |
| Corporate/Other - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 8 |
| | $ | 22 |
| | $ | (14 | ) | | (64 | )% |
| General and administrative | | | | | | | |
| Operational expenses | 8 |
| | 13 |
| | (5 | ) | | (38 | )% |
| Depreciation and amortization | 10 |
| | 10 |
| | — |
| | — | % |
| Loss on impairment of assets | 8 |
| | — |
| | 8 |
| | 100 | % |
| Total general and administrative | 26 |
| | 23 |
| | 3 |
| | 13 | % |
| Total expenses - Corporate/Other | $ | 34 |
| | $ | 45 |
| | $ | (11 | ) | | (24 | )% |
| | | | | | | | |
| Corporate/Other - Other Income (Expenses), Net | | | | | | | |
| Total interest income | $ | 1 |
| | $ | 2 |
| | $ | (1 | ) | | (50 | )% |
| Interest expense on unsecured senior notes | (51 | ) | | (51 | ) | | — |
| | — | % |
| Other interest expense | (1 | ) | | (6 | ) | | 5 |
| | (83 | )% |
| Total interest expense | (52 | ) | | (57 | ) | | 5 |
| | (9 | )% |
| Total other income (expenses), net - Corporate/Other | $ | (51 | ) | | $ | (55 | ) | | $ | 4 |
| | (7 | )% |
| | | | | | | | |
| Weighted average cost - unsecured senior notes | 7.8 | % | | 7.9 | % | | (0.1 | )% | | (1 | )% |
Loss before income tax benefitTotal expenses decreased in the three months ended March 31, 20202021 as compared to the same period in 20192020 primarily due to a decrease in total expenses. Total expenses decreased primarily due to lower salaries, wagesgeneral and benefits, which wereadministrative expense. General and administrative expense was higher in the three months ended March 31, 20192020 due to the Pacific Union acquisition and the acquisition of the Seterus mortgage servicing platform and assumption of certain assets related thereto from IBM (“Seterus acquisition”). The decrease in salaries, wages and benefits was partially offset by an $8 loss on impairment of assets in connection with an ancillary business.
Other income (expenses), net for the Corporate/Other segment consists of interest expense on our unsecured senior notes, the interest incomebusiness and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.
higher legal reserves. The changedecrease in total other income (expenses), netexpenses was partially offset by higher salaries, wages and benefits primarily driven by an increase in stock based compensation and severance.
Interest expense decreased in the three months ended March 31, 20202021 as compared to the same period in 2019 was2020 primarily due to a decrease in other interest expense on unsecured senior notes as a result of repayment and redemption in 2020 of the unsecured senior notes due 2021, 2022, 2023 and 2026 and the issuance in 2020 of the unsecured senior notes due 2027, 2028 and 2030 at lower commitment and facility fees, which were higher in 2019 due to the Pacific Union acquisition.interest rates.
|
| | | | |
Changes in Financial Position |
|
| | | | |
Table 26. Changes in Assets |
|
| | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Cash and cash equivalents | $ | 579 |
| | $ | 329 |
| | $ | 250 |
| | 76 | % |
| Mortgage servicing rights | 3,115 |
| | 3,502 |
| | (387 | ) | | (11 | )% |
| Advances and other receivables, net | 685 |
| | 988 |
| | (303 | ) | | (31 | )% |
| Reverse mortgage interests, net | 5,955 |
| | 6,279 |
| | (324 | ) | | (5 | )% |
| Mortgage loans held for sale at fair value | 3,922 |
| | 4,077 |
| | (155 | ) | | (4 | )% |
| Deferred tax assets, net | 1,411 |
| | 1,345 |
| | 66 |
| | 5 | % |
| Other | 1,946 |
| | 1,785 |
| | 161 |
| | 9 | % |
| Total assets | $ | 17,613 |
| | $ | 18,305 |
| | $ | (692 | ) | | (4 | )% |
Total assets as of March 31, 2020 decreased by $692 or 4% compared with December 31, 2019 primarily due to the decrease in mortgage servicing rights, reverse mortgage interests, net and advances and other receivables, net, partially offset by an increase in cash and cash equivalents. Mortgage servicing rights decreased in 2019 primarily due to a negative mark-to-market adjustment of $383 driven by declining interest rates. Reverse mortgage interests, net decreased $324 primarily due to the collection on participating interests in HMBS. Advances and other receivables decreased primarily due to recoveries on advances through claim proceeds, customer payments and servicing transfers. Cash and cash equivalents was higher as of March 31, 2020 compared with December 31, 2019 primarily due to additional funds drawn on our MSR facilities given the market risk at the end of the quarter in relation to COVID-19 pandemic.
|
| | | | |
Table 27. Changes in Liabilities and Stockholders’ Equity |
|
| | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Unsecured senior notes, net | $ | 2,259 |
| | $ | 2,366 |
| | $ | (107 | ) | | (5 | )% |
| Advance facilities, net | 489 |
| | 422 |
| | 67 |
| | 16 | % |
| Warehouse facilities, net | 4,551 |
| | 4,575 |
| | (24 | ) | | (1 | )% |
| MSR related liabilities - nonrecourse at fair value | 1,285 |
| | 1,348 |
| | (63 | ) | | (5 | )% |
| Other nonrecourse debt, net | 4,945 |
| | 5,286 |
| | (341 | ) | | (6 | )% |
| Other liabilities | 2,018 |
| | 2,077 |
| | (59 | ) | | (3 | )% |
| Total liabilities | 15,547 |
| | 16,074 |
| | (527 | ) | | (3 | )% |
| Total stockholders’ equity | 2,066 |
| | 2,231 |
| | (165 | ) | | (7 | )% |
| Total liabilities and stockholders’ equity | $ | 17,613 |
| | $ | 18,305 |
| | $ | (692 | ) | | (4 | )% |
Total stockholders’ equity at March 31, 2020 decreased by $165 or 7% compared with the balance as of December 31, 2019 primarily due to net loss of $171 during the three months ended March 31, 2020. Total liabilities at March 31, 2020 decreased by $527 or 3% compared with the balance as of December 31, 2019 primarily due to a decrease in other nonrecourse debt and unsecured senior notes, net. Other nonrecourse debt decreased by $341 primarily due to repayments of reverse mortgage related nonrecourse debt. Unsecured senior notes, net, decreased by $107 primarily due to the repayment and redemption of the 2021 and 2022 unsecured senior notes, partially offset by the issuance of the 2027 unsecured senior notes.
|
| | | | |
| Liquidity and Capital Resources |
We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities and other facilities. OurWe held cash and cash equivalents on hand increased to $579of $674 as of March 31, 2020 from $3292021 compared to $695 as of December 31, 2019.2020. During the three months ended March 31, 2021, we bought back 4.5 million shares of our outstanding common stocks as part of the $210 stock repurchase program.
We have sufficient borrowing capacity to support our operations. As of March 31, 2020,2021, total available borrowing capacity was $14,680, of which $7,292 was unused. Specifically, in regards to the MSR facilities as of March 31, 2021, we had $1,216$1,827 collateral pledged against the MSR facilities, of which we could borrow an additional $705. During the three months ended March 31, 2020, operating activities used cash totaling $710. As of March 31, 2020, total available borrowing capacity is $9,690, of which $4,648 is unused.$390.
We expect theThe economic impact of the COVID-19 pandemic could continue to result in a significantan increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. Forbearance rates have declined since the peak during the second of quarter of 2020. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage a significantan increase in advances. In April 2020, we expandedAs of March 31, 2021, our committedtotal advance facility capacity by $850, including an expansionwas $2,040, of capacity for private label advances for $200, which we believe will be adequate for$1,402 remained unused. For more information on our needs. We planMSR and advance facilities, see Note 9, Indebtedness in the Notes to finance GNMA advances with existing MSR lines and corporate cash flow, along with GNMA’s Pass-Through Assistance Program as a backup.the Condensed Consolidated Financial Statements (unaudited). For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances with even with higher forbearance rates.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing advances which are expected to increase in the near future due to COVID-19 pandemic; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) payment of our technology expenses.
We believe that our cash flows from operating activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs. Reverse mortgage loans provide seniors
In addition, derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. See Note 8, Derivative Financial Instruments, in the abilityNotes to monetize the equityCondensed Consolidated Financial Statements (unaudited) in Item 1, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our derivative transactions.
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be variable interest entities (“VIEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which we transfer assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, we typically receive cash and/or other interests in the SPE as proceeds for the transferred assets. See Note 10, Securitizations and Financings, in the Notes to the Condensed Consolidated Financial Statements (unaudited) in Item 1, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances, and details of their homes in a lump sum, lineimpact on our condensed consolidated financial statements.
Cash Flows
The table below presents the major sources and uses of cash flow for operating activities:
|
| | | | | | | | | | | | | |
Table 28. Operating16. Cash FlowFlows |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
| Net cash attributable to: | | | | | | | |
| Operating activities | $ | (76) | | | $ | 710 | | | $ | (786) | | | NM |
| Investing activities | (82) | | | 4 | | | (86) | | | NM |
| Financing activities | 180 | | | (481) | | | 661 | | | NM |
| Net increase in cash, cash equivalents, and restricted cash | $ | 22 | | | $ | 233 | | | $ | (211) | | | (91) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Net loss | $ | (171 | ) | | $ | (186 | ) | | $ | 15 |
| | (8 | )% |
| Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment | 497 |
| | 311 |
| | 186 |
| | 60 | % |
| Deferred tax benefit | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Other non-cash adjustments to net loss | (332 | ) | | (210 | ) | | (122 | ) | | 58 | % |
| Originations net sales activities | 430 |
| | 116 |
| | 314 |
| | 271 | % |
| Changes in working capital | 354 |
| | 301 |
| | 53 |
| | 18 | % |
| Net cash attributable to operating activities | $ | 710 |
| | $ | 285 |
| | $ | 425 |
| | 149 | % |
NM = Not meaningful or greater than 200% change.
Operating activities
Our operating activities generatedused cash of $710$76 during the three months ended March 31, 20202021 compared to $285 cash generated of $710 in the same period2020. The change in 2019. The increasecash attributable to operating activities was primarily due to an increase of $747 in the cash generated in originations net sales activities.
Cash generated inused from originations net sales activities, was $430as a result of an increase in repurchases of forward loans assets out of Ginnie Mae securitizations, partially offset by an increase in working capital of $161.
Investing activities
Our investing activities used cash of $82 during the three months ended March 31, 20202021 compared to $116cash generated of $4 in the same period2020. The change in 2019. The changecash attributable to investing activities was primarily due to an increase of $42 in cash used for the purchase of forward mortgage servicing rights and a decrease in cash generated of $42 from proceeds on sale of $7,527 on the salesforward mortgage servicing rights.
Financing activities
Our financing activities generated cash of previously originated loans, partially offset by higher funding of $6,658 for loan origination activities driven by the declining interest rate environment and an increase in funds used of $555 to repurchase forward loan assets out of Ginnie Mae securitizations.
Cash generated from fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment$180 during the three months ended March 31, 2020 increased by $186 when2021 compared to the same periodcash used of $481 in 2019.2020. The change was primarily due to an increase in fair value changes and amortization/accretion of mortgage servicing rights/liabilities of $147, primarily due to the negative mark-to-market adjustment for the three months ended March 31, 2020.
Cash used from the other non-cash adjustments to net loss during the three months ended March 31, 2020 increased by $122 when compared to the same period in 2019 primarily due to the $165 increase in net gain on mortgage loans held for sale primarily driven by the higher volumes in a declining interest rate environment and the incremental volumes made available with the February 2019 Pacific Union acquisition and related origination channels.
The table below presents the major sources and uses of cash flow for investing activities:
|
| | | | |
Table 29. Investing Cash Flows |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Acquisitions, net | $ | — |
| | $ | (85 | ) | | $ | 85 |
| | (100 | )% |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | (27 | ) | | (130 | ) | | 103 |
| | (79 | )% |
| Proceeds on sale of forward and reverse mortgage servicing rights | 43 |
| | 243 |
| | (200 | ) | | (82 | )% |
| Other | (12 | ) | | (10 | ) | | (2 | ) | | 20 | % |
| Net cash attributable to investing activities | $ | 4 |
| | $ | 18 |
| | $ | (14 | ) | | (78 | )% |
Our investing activities generated $4 during the three months ended March 31, 2020 compared to $18 during the same period in 2019. The decrease in cash generated from investingattributable to financing activities was primarily due to a decreasethe increase of $200 in proceeds on sale of forward mortgage servicing rights. Partially offsetting the decrease$570 in cash generated was a $103 decreasefrom advance and warehouse facilities due to net increased borrowing of $613 from advance and warehouse facilities compared to $43 in 2020. Additionally, in 2020, $698 of cash was used in the purchase of forward mortgage servicing rights, net of liabilities incurred,redemption and an $85 decrease in cash used in connection with the Pacific Union and Seterus acquisitions, which were acquired during the three months ended March 31, 2019. Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amounts and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods.
The table below presents the major sources and uses of cash flow for financing activities:
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| | | | |
Table 30. Financing Cash Flow |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| (Decrease) increase in warehouse facilities | $ | (25 | ) | | $ | 307 |
| | $ | (332 | ) | | (108 | )% |
| Increase (decrease) in advance facilities | 68 |
| | (30 | ) | | 98 |
| | (327 | )% |
| Repayment of notes payable | — |
| | (294 | ) | | 294 |
| | (100 | )% |
| Redemption and repayment of unsecured senior notes and nonrecourse debt | (698 | ) | | (3 | ) | | (695 | ) | | 23,167 | % |
| Issuance of unsecured senior debt | 600 |
| | — |
| | 600 |
| | 100 | % |
| Issuance of excess spread financing | 24 |
| | 245 |
| | (221 | ) | | (90 | )% |
| Settlements and repayments of excess spread financing | (58 | ) | | (50 | ) | | (8 | ) | | 16 | % |
| Decrease of participating interest financing | (275 | ) | | (408 | ) | | 133 |
| | (33 | )% |
| Changes in HECM securitizations | (99 | ) | | (107 | ) | | 8 |
| | (7 | )% |
| Other | (18 | ) | | (4 | ) | | (14 | ) | | 350 | % |
| Net cash attributable to financing activities | $ | (481 | ) | | $ | (344 | ) | | $ | (137 | ) | | 40 | % |
Our financing activities used $481 cash during the three months ended March 31, 2020 compared to $344 cash used in the same period in 2019. Contributing to the increase in cash used was the repayment of unsecured senior debt and nonrecourse debt of $698 during the three months ended March 31, 2020 compared to $3 in the same period in 2019. The $695 increase in cash used for the payment of unsecured senior debt and nonrecourse debt is primarily due to the repayment and redemption of the 2021 and 2022 unsecured senior notes, in February 2020. Cash used also increased due to a net pay down of $25 in warehouse facilities during the three months ended March 31, 2020 compared to a net increase of $307 in the same period in 2019. The cash generated from the issuance of excess spread financing decreasedpartially offset by $221 due to a decline in excess spread financing deals in the three months ended March 31, 2020 compared to the same period in 2019.
Offsetting these increases in cash used was a decrease in cash used for the repayment of notes payable. During the three months ended March 31, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition. In addition, there was an increase in cash generated of $600 duerelated to the issuance of the 2027 unsecured senior notesnotes. There were no such activities in January 2020.2021.
Capital Resources
Capital Structure and Debt
We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions. In April 2020, we expanded our committed advance capacity by $850.
Financial Covenants
Our credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements. These covenants are measured at our operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020,2021, we were in compliance with our required financial covenants.
Seller/Servicer Financial Requirements
We are also subject to net worth, liquidity and capital ratio and liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. In both cases, theseissuers, as summarized below. These requirements apply to our operating subsidiary, Nationstar Mortgage, LLC.
Minimum Net Worth
▪FHFA - a net worth base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced.
▪Ginnie Mae - a net worth equal to the sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective outstanding HMBS obligations.
Minimum Liquidity
•FHFA - 3.5 basis points of total Agency Mortgage Servicing UPB plus incremental 200 basis points of total nonperforming Agency, measured at 90+ delinquencies, servicing in excess of 6% total Agency servicing UPB.
•Ginnie Mae - the greater of $1 or 10 basis points of our outstanding single-family MBS and at least 20% of our net worth requirement for HECM MBS.
Minimum Capital Ratio
▪FHFA and Ginnie Mae - a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%.
Secured Debt to Gross Tangible Asset Ratio
•Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
As of March 31, 2020,2021, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
| |
▪ | Base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced. |
| |
▪ | Tangible Net Worth comprises of total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. |
The minimum net worth requirement for Ginnie Mae is defined as follows:
| |
▪ | The sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective HMBS outstanding obligations. |
| |
▪ | Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirement. |
Minimum Capital Ratio
| |
▪ | In addition to the minimum net worth requirement, we are also required to hold a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%. |
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
| |
▪ | 3.5 basis points of total Agency servicing. |
| |
▪ | Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB. |
| |
▪ | Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines. |
The minimum liquidity requirement for Ginnie Mae is defined as follows:
| |
▪ | Maintain liquid assets equal to the greater of $1 or 10 basis points of our outstanding single-family MBS. |
| |
▪ | Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS. |
Secured Debt to Gross Tangible Asset Ratio
Under the Ginnie Mae guide, we are also required to maintain a secured debt to gross tangible asset ratios no greater than 60%.
Since we have a Ginnie Mae single-family servicing portfolio that exceeds $75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. Effective for fiscal year 2020, weWe are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents.
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 17,14, Capital Requirements,, in the notesNotes to consolidated financial statementsthe Condensed Consolidated Financial Statements (unaudited) for additional information.
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Advance facilities principal amount | $ | 638 | | | $ | 669 | |
| Warehouse facilities principal amount | 6,480 | | | 5,835 | |
| MSR facilities principal amount | 270 | | | 270 | |
| Unsecured senior notes principal amount | 2,100 | | | 2,100 | |
|
| | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Advance facilities, net | $ | 489 |
| | $ | 422 |
|
| Warehouse facilities, net | 4,551 |
| | 4,575 |
|
| Unsecured senior notes, net | 2,259 |
| | 2,366 |
|
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As of March 31, 2021, we had a total borrowing capacity of $2,040, of which we could borrow an additional $1,402.
Warehouse and MSR Facilities
Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.As of March 31, 2021, we had a total borrowing capacity of $11,980 and $660 for warehouse and MSR facilities, of which we could borrow an additional $5,500 and $390, respectively.
As a servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. As of March 31, 2020,2021, unsecuritized borrower draws totaled $64,totaled $77 and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,504.$2,113.
Unsecured Senior Notes
In 2018 and 2020, we completed offerings of unsecured senior notes which mature on various dated through January 2027.with maturity dates ranging from 2027 to 2030. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.000%5.125% to 9.125%6.000%.For more information regarding our indebtedness, see Note 9, Indebtedness, in the Notes to the Condensed Consolidated Financial Statements (unaudited).
Contractual Obligations
As of March 31, 2020, the expected maturities of our unsecured senior notes based on contractual maturities are presented below:
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| | | | |
Table 32. Contractual Maturities - Unsecured Senior Notes |
|
| | | | |
| Year Ending December 31, | | Amount |
| 2020 | | $ | — |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 | | 950 |
|
| 2024 | | — |
|
| Thereafter | | 1,350 |
|
| Unsecured senior notes principal amount | | 2,300 |
|
| Unamortized debt issuance costs, premium and discount | | (41 | ) |
| Unsecured senior notes, net | | $ | 2,259 |
|
As of March 31, 2020,2021, no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 except for the following, in connection with the issuance of the 2027 notes and redemption of the 2021 and 2022 notes during the three months ended March 31, 2020:2020.
|
| | | | | | | | | | | | | |
Table 33. Contractual ObligationsCritical Accounting Policies and Estimates |
|
| | | | | | | | | | | | | | | | | | | |
| | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
| Unsecured senior notes | $ | — |
| | $ | — |
| | $ | 950 |
| | $ | 1,350 |
| | $ | 2,300 |
|
| Interest payment from unsecured senior notes | 182 |
| | 363 |
| | 248 |
| | 175 |
| | 968 |
|
| Total | $ | 182 |
| | $ | 363 |
| | $ | 1,198 |
| | $ | 1,525 |
| | $ | 3,268 |
|
|
| | | | |
Critical Accounting Policies |
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our condensed consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 16,13, Fair Value Measurements, in notesthe Notes to consolidated financial statements, business combinations andthe Condensed Consolidated Financial Statements (unaudited), goodwill, and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our condensed consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on our condensed consolidated financial statements, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs, (ii) the valuation of excess spread financing, and (iii) the valuation of the mortgage servicing rights financing liability.IRLCs. For further information on our critical accounting policies and estimates, please refer to the Company’s Annual Reports on Form 10-K for the year ended December 31, 2019.2020. There have been no material changes to our critical accounting policies and estimates since December 31, 2019. During the three months ended March 31, 2020, we updated the policies for reserves related to certain financial assets that are subject to CECL accounting in connection with adoption of ASU 2016-13. The update did not have material impact on the consolidated financial statements. See Note 1, Nature of Business and Basis of Presentation, in the consolidated financial statements which is incorporated herein for details.2020.
Recent Accounting Developments
Below lists recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2019-12, Income Taxes (Topic 740) - Simplifying2020-04 and 2021-01, collectively implemented as Accounting Standards Codification Topic 848 (“ASC 848”), Reference Rate Reform provide temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedge accounting and other transactions affected by the Accountingtransitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for Income Taxes (“any reasons, interest rates on our floating rate loans, obligation derivatives, and other financial instruments tied to LIBOR rates, may be affected and need renegotiation with its lenders. In January 2021, ASU 2019-12”) simplifies accounting for income taxes2021-01 was issued to clarify that all derivatives instruments affected by removing certain exceptions from the general principles in Topic 740 including elimination of the exceptionchanges to the incremental approachinterests rates used for intraperiod tax allocation when there is a loss from continuing operationsdiscounting, margining alignment due to reference rate reform are in scope of ASC 848. ASU 2020-04 and income or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies2021-01 are effective March 2020 and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning afterJanuary 2021, respectively, through December 15, 2020, including interim periods, with early adoption of all amendments in the same period permitted. The Company is31, 2022. We are currently assessing the impact of ASU 2019-12, but does not believe it will have a material impact2020-04 and ASU 2020-01 on itsour consolidated financial statements.
Impact
Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility.A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency. Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (and collectively, the “Agencies”)
Agency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
Asset-Backed Securities (“ABS”).A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated credit risk of borrower default versus payoff.
Delinquent Loan.A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”). The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations.originations (“DTC”). A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Federal National Mortgage Association (“Fannie Mae” or “FNMA”). FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.
Federal Housing Administration (“FHA”). The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (“FHFA”). A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”). Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Forbearance.An agreement between the mortgage servicer or lender and borrower for a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”). GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”). Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Home Equity Conversion Mortgage (“HECM”). Reverse mortgage loans issued by FHA. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.
HECM mortgage-backed securities (“HMBS”). A type of asset-backed security that is secured by a group of HECM loans.
Interest Rate Lock Commitments (“IRLC”).Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Interest-Sensitive Loan. A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (“MBS”).A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (“MSRs”). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
MSR Facility. A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower.
Mortgage Servicing Liability (“MSL”).The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned (”REO”).Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture.The refinancing of a loan currently in the portfolio, or the financing of a customer’s new purchase which resulted in the payoff of an existing loan.
Refinancing. The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.
Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances,Advances, T&I Advances and Corporate Advances.
(i) P&I advancesAdvances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I advancesAdvances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate advancesAdvances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing advancesAdvances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”). The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
Wholesale Originations. A type
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the discussion included in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no material changes in the types of market risks faced by us since December 31, 2019 except for2020. Our market risks include the broad effects of the COVID-19 pandemic. As we cannot predictWhile the durationpandemic’s effect on the macroeconomic environment has yet to be fully determined and could continue for months or scopeyears, the pandemic and governmental programs created as a response to the pandemic, has affected and will continue to affect our business, financial conditions and results of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated at this time.operations.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in thisdiscounted cash flow model areincorporates prepayment speeds, discount rate, costs to service, and other assumptions (including delinquencies, ancillary revenues, float earnings relatedand forbearance rates) that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to floatdetermine fair value include prepayment speed, discount rate and market discount rates.cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, the primary assumption used for IRLCs, is the borrower’s propensity to close their mortgage loans under the commitment.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used March 31, 20202021 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of March 31, 20202021 given hypothetical instantaneous parallel shifts in the yield curve. ResultsActual results could differ materially.
|
| | | | | | | | | | | | | |
Table 34.18. Change in Fair Value |
| | | | | | | | | | | |
| March 31, 2021 |
| Down 25 bps | | Up 25 bps |
| Increase (decrease) in assets | | | |
| Mortgage servicing rights at fair value | $ | (182) | | | $ | 191 | |
| Mortgage loans held for sale at fair value | 43 | | | (48) | |
| Derivative financial instruments: | | | |
| Interest rate lock commitments | 68 | | | (79) | |
| Forward MBS trades | (135) | | | 152 | |
| Total change in assets | (206) | | | 216 | |
| Increase (decrease) in liabilities | | | |
| Mortgage servicing rights financing at fair value | (3) | | | 3 | |
| Excess spread financing at fair value | (23) | | | 26 | |
| Derivative financial instruments: | | | |
| Interest rate lock commitments | (41) | | | 46 | |
| Forward MBS trades | 18 | | | (20) | |
| Total change in liabilities | (49) | | | 55 | |
| Total, net change | $ | (157) | | | $ | 161 | |
|
| | | | | | | |
| | March 31, 2020 |
| Down 25 bps | | Up 25 bps |
| Increase (decrease) in assets | | | |
| Mortgage servicing rights at fair value | $ | (229 | ) | | $ | 235 |
|
| Mortgage loans held for sale at fair value | 10 |
| | (12 | ) |
| Derivative financial instruments: | | | |
| Interest rate lock commitments | 31 |
| | (37 | ) |
| Total change in assets | (188 | ) | | 186 |
|
| Increase (decrease) in liabilities | | | |
| Mortgage servicing rights liabilities at fair value | (5 | ) | | 4 |
|
| Excess spread financing at fair value | (46 | ) | | 51 |
|
| Derivative financial instruments: | | | |
| Forward MBS trades | 36 |
| | (44 | ) |
| Total change in liabilities | (15 | ) | | 11 |
|
| Total, net change | $ | (173 | ) | | $ | 175 |
|
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of March 31, 2020.2021.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020,2021, our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2020,2021, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
PART II – OTHER INFORMATION
Item 1.Legal Proceedings
We areFor a state licensed, non-bank mortgage lender, servicer and ancillary services provider. From time to time, we anddescription of our subsidiaries are involved in a number ofmaterial legal proceedings, including, but not limited to, judicial, arbitration, regulatorysee Note 15, Commitments and governmental proceedings relating to matters that arise in connection with the conduct of our business. These legal proceedings are generally based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities including, without limitation, consumer protection laws, but may also include alleged violations of securities, employment, contract, tort, common law fraud and other laws. Legal proceedings include open and pending examinations, information gathering requests and investigations by governmental, regulatory and enforcement agencies as well as litigation in judicial forums and arbitration proceedings.
Our business is subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. We have historically had and continue to have a number of open investigations with these agencies. We continue to receive governmental and regulatory requests for information, subpoenas, examinations and other inquiries. We are currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”)Contingencies, the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters.
For example, we continue to progress towards resolution of certain legacy regulatory matters involving examination findings in prior years for alleged violations of certain laws related to our business practices. We have been in discussions with the multi-state committee of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigations. We are continuing to cooperate with all parties. In connection with these discussions, we previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations.
Further, on April 24, 2018, the CFPB notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take enforcement action against us, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its positionNotes to the CFPB before an enforcement action may be recommended or commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and resultsCondensed Consolidated Financial Statements within Part I, Item 1. Financial Statements, of operations. We have not recorded an accrual related to this matter as of March 31, 2020 as we do not believe that the possible loss or range of loss arising from any such action is estimable. We are continuing to cooperate with the CFPB. Form 10-Q.
Similarly, we are in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, we are undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While we and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on our business, reputation, financial condition and results of operations. However, we believe it is premature to predict the potential outcome or to estimate the financial impact to us in connection with any potential action or settlement arising from this matter, including the voluntary remediation activities undertaken and to be undertaken by us.
Responding to these matters requires us to devote substantial resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.
Item 1A.Risk Factors
There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K filed for the year ended December 31, 2019, except for the following:2020.
The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, forbearance take-up rates under the forbearance program included in the CARES Act and the related funding for the P&I and T&I servicing advances, the sources, adequacy and availability of financing to fund advances, origination volumes and our overall profitability and liquidity.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
We did not make any repurchasesOn July 30, 2020, we announced that our Board of Directors authorized the repurchase of up to $100 of our shares duringoutstanding common stock. On March 25, 2021, our Board of Directors authorized a $110 increase to the original repurchase authorization for an aggregate repurchase authorization of $210 under our stock repurchase program. The stock repurchase program may be suspended, modified or discontinued at any time at our discretion. During the three months ended March 31, 2020.2021, we repurchased shares of our common stock at a total cost of $148 under our share repurchase program. The number and average price of shares purchased are set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased (in thousands) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (in thousands) | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program (in millions) |
| January 2021 | | — | | | $ | — | | | — | | | $ | 42 | |
| February 2021 | | — | | | $ | — | | | — | | | $ | 42 | |
March 2021(1) | | 4,505 | | | $ | 32.93 | | | 4,505 | | | $ | 4 | |
| Total | | 4,505 | | | | | 4,505 | | | |
(1)On March 26, 2021, we repurchased 3,700 thousand shares of our common stock from affiliates of our related party, Kohlberg Kravis Roberts & Co. L.P., for a total cost of $119 or $32.25 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
Item 6.Exhibits
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
Exhibit
Number | Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith |
| | | | | | |
| 2.1 | | 8-K | 001-14667 | 2.1 | 03/15/2021 | |
| 10.1** | | | | | | X |
| 10.2** | | | | | | X |
| 31.1 | | | | | | X |
| 31.2 | | | | | | X |
| 32.1 | | | | | | X |
| 32.2 | | | | | | X |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | X |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | | | | X |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101.) | | | | | X |
|
| | | | | | |
| | Incorporated by Reference | |
Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith |
| | | | | | |
10.1** | | | | | | X |
10.2** | | | | | | X |
10.3 | | | | | | X |
31.1 | |
|
|
|
| X |
31.2 | | | | | | X |
32.1 | |
|
|
|
| X |
32.2 | | | | | | X |
101.INS | XBRL Instance Document |
|
|
|
| X |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
| X |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
| X |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
** Management, contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | MR. COOPER GROUP INC. |
| | |
| April 29, 2021 | | MR. COOPER GROUP INC. |
| | |
April 30, 2020 | | /s/ Jay Bray |
| Date | | Jay Bray
Chief Executive Officer
(Principal Executive Officer) |
| | |
April 30, 202029, 2021 | | /s/ Christopher G. Marshall |
| Date | | Christopher G. Marshall
Vice Chairman & Chief Financial Officer
(Principal Financial and Accounting Officer)
|
