UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
For the quarterly period ended SeptemberJune 30, 20212022
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from: ____________________ to ____________________ |
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Florida | | 65-0039856 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 1661 Worthington Road, Suite 100 | | 33409 |
| West Palm Beach, | Florida | |
| (Address of principal executive office) | | (Zip Code) |
(561) 682-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 Par Value | OCN | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | | Accelerated filer | ☒ |
| Non-accelerated filer | ☐ | | | Smaller reporting company | ☒☐ |
| | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No x
Number of shares of common stock outstanding as of OctoberJuly 29, 2021: 9,200,7522022: 8,698,688 shares
OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
Forward-looking statements may be identified by a reference to a future period or by the use of forward-looking terminology. Forward-looking statements are typically identified by words such as “expect”, “believe”, “foresee”, “anticipate”, “intend”, “estimate”, “goal”, “strategy”, “plan”, “target” and “project” or conditional verbs such as “will”, “may”, “should”, “could” or “would” or the negative of these terms, although not all forward-looking statements contain these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Readers should bear these factors in mind when considering forward-looking statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed or referenced under Part II,I, Item 1A, Risk Factors of this reportour Annual Report on Form 10-K for the year ended December 31, 2021 and the following:
•the potential for ongoing disruption in the financial markets and in commercial activity generally related to changes in monetary and fiscal policy, international events including the conflict in Ukraine and other sources of instability;
•the impacts of inflation, employment disruption, and other financial difficulties facing our borrowers;
•our ability to timely reduce operating costs, or generate offsetting revenue, in proportion to the recent industry-wide decrease in originations activity and the impact of cost-reduction initiatives on our business and operations;
•the amount of shares of common stock that we repurchase pursuant to our announced stock repurchase authorization, the timing of such repurchases, and the long-term impact, if any, on the trading price of our stock;
•uncertainty relating to the continuing impacts of the Coronavirus 2019 (COVID-19)COVID-19 pandemic, including with respect to the response of the U.S. government, state governments, the Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the GSEs), the Government National Mortgage Association (Ginnie Mae) and regulators;
•the potential for ongoing COVID-19 related disruption in the financial markets and in commercial activity generally, increased unemployment, and other financial difficulties facing our borrowers;
•the proportion of borrowers who enter into forbearance plans, the financial ability of borrowers to resume repayment and their timing for doing so;
•the extent to which our mortgage servicing right (MSR) joint venture with Oaktree Capital Management L.P. and its affiliates (Oaktree), other recent transactions and our enterprise sales initiatives will generate additional subservicing volume and result in increased profitability;
•our ability, and the ability of MSR Asset Vehicle LLC (MAV), to deploy the proceedsbid competitively for, and close acquisitions of, the senior secured notesMSRs on terms that will enable us to achieve our growth objectives and a favorable return on our investment in suitable investments at appropriate returns;MAV;
•our ability to reach an agreement to upsize MAV and the timing and terms of any such agreement;
•our ability to identify, enter into and close acquisitions of MSRs and otheradditional strategic transactions, including the ability to obtain regulatory approvals, enter into definitive financing arrangements, and satisfy closing conditions, and the timing for doing so;
•our ability to efficiently integrate the operations assets and employees of Reverse Mortgage Solutions, Inc. (RMS) following our acquisition of certain assets of RMS related to reverse mortgage subservicing, including subservicing contractsacquired businesses and related foreclosed properties;
•our ability to obtain the necessary counterparty approvals to begin servicing our owned reverse servicing portfolio, and the timing for doing so;
•our ability to retain thetheir employees and customers and employees acquired from Texas Capital Bank, and the extent to which this acquisition and our other correspondent lending initiatives will contribute to achieving our growth objectives;over time;
•the extent to which we will be able to execute call rights transactions, and whether such transactions will generate the returns anticipated;
•the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover servicing advances, forward and reverse whole loans, and Home Equity Conversion Mortgage (HECM) and forward loan buyouts and put-backs, as well as repay, renew and extend borrowings, borrow additional amounts as and when required, meet our MSR or other asset investment objectives and comply with our debt agreements, including the financial and other covenants contained in them;
•increased servicing costs based on rising borrower delinquency levels or other factors;factors, including an increase in severe weather events resulting in property damage and financial hardship to our borrowers;
•reduced collection of servicing fees and ancillary income and delayed collection of servicing revenue as a result of forbearance plans and moratoria on evictions and foreclosure proceedings;
•our ability to continueimprove our financial performance through cost re-engineering initiatives and other actions;
•our ability to grow our lending businessmaintain and increase market share in our lending volumestarget markets, including in a competitiveforward and reverse servicing;
•our ability to reduce expenses in our mortgage origination business in response to market and uncertain interest rate environment;adjustments;
•uncertainty related to our long-term relationship and remaining agreements with Rithm Capital Corp. (formerly New Residential Investment Corp. (NRZ)and referenced throughout as NRZ), our largest servicing client, including whether our subservicing agreements will renew or terminate in July 2022;client;
•uncertainty related to past, present or future claims, litigation, cease and desist orders and investigations relating to our business practices, including those brought by government agencies and private parties regarding our servicing, foreclosure, modification, origination and other practices, including uncertainty related to past, present or future investigations, litigation, cease and desist orders and settlements with state regulators, the Consumer Financial Protection
Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), the Department of Justice or the Department of Housing and Urban Development (HUD);
•adverse effects on our business as a result of regulatory investigations, litigation, cease and desist orders or settlements and the reactions of key counterparties, including lenders, the GSEs and Ginnie Mae;
•our ability to complythe costs of complying with the terms of our settlements with regulatory agencies and the costs of doing so;disputes as to whether we have fully complied;
•any adverse developments in existing legal proceedings or the initiation of new legal proceedings;
•our ability to effectivelyefficiently manage our regulatory and contractual compliance obligations;obligations and fully comply with all applicable requirements;
•uncertainty related to changes in legislation, regulations, government programs and policies, industry initiatives, best servicing and lending practices, and media scrutiny of our business and industry;
•the extent to which a recent judicialchanges in the law as well as changes in the interpretation of the Fair Debt Collection Practices Actlaw may require us to modify our business practices and expose us to increased expense and litigation risk;
•our ability to interpret correctly and comply with current or future liquidity, net worth and other financial and other requirements of regulators, the GSEs and Ginnie Mae, as well as those set forth in our debt and other agreements;
•our ability to comply with our servicing agreements, including our ability to comply with our agreements with and the requirements of, the GSEs and Ginnie Mae and maintain our seller/servicer and other statuses with them;
•our servicer and credit ratings as well as other actions from various rating agencies, including the impact of prior or future downgrades of our servicer and credit ratings;
•failure of our, or our vendors’, information technology or other security systems or breach of our, or our vendors’, privacy protections, including any failure to protect customers’ data;
•our reliance on our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, and uncertainty relating to our ability to transition to alternative vendors, if necessary, without incurring significant cost or disruption to our operations;
•the loss of the services of ourincreased difficulty recruiting and retaining existing or new senior managers and key employees;
•increased compensation and benefits expense as a result of rising inflation and labor market trends;
•uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, the GSEs, Ginnie Mae and trustees regarding loan put-backs, penalties and legal actions;
•uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Administration (FHA) of the HUD, or Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) ceasing to provide insurance;
•uncertainty related to our ability to continue to collect certain expedited payment or convenience fees and potential liability for charging such fees;
•uncertainty related to our reserves, valuations, provisions and anticipated realization of assets;
•uncertainty related to the ability of third-party obligors and financing sources to fund servicing advances on a timely basis on loans serviced by us;
•the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;
•our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
•uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices;
•our ability to adequately manage and maintain real estate owned (REO) properties and vacant properties collateralizing loans that we service;
•our ability to realize anticipated future gains from future draws on existing loans in our reverse mortgage portfolio;
•our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
•our ability to effectively transform our operations in response to changing business needs, including our ability to do so without unanticipated adverse tax consequences;
•increasingly frequent and costly disruptions to our operations as a result of severe weather events;
•uncertainty related to the political or economic stability of the United States and of the foreign countries in which we have operations; and
•our ability to maintain positive relationships with our large shareholders and obtain their support for management proposals requiring shareholder approval.
Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our Annual Report on Form 10-K for the year ended December 31, 2020 and2021, our Quarterly ReportsReport on Form 10-Q and our Current Reports on Form 8-K since such date. Forward-looking statements speak only as of the date they were made and we disclaim any obligation to update or revise forward-looking statements whether because of new information, future events or otherwise.
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Assets | Assets | | | | Assets | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 236,072 | | | $ | 284,802 | | Cash and cash equivalents | $ | 255,885 | | | $ | 192,792 | |
| Restricted cash (amounts related to variable interest entities (VIEs) of $9,417 and $16,791) | 85,277 | | | 72,463 | | |
| Restricted cash ($9,032 and $9,759 related to variable interest entities (VIEs)) | | Restricted cash ($9,032 and $9,759 related to variable interest entities (VIEs)) | 66,690 | | | 70,654 | |
| Mortgage servicing rights (MSRs), at fair value | Mortgage servicing rights (MSRs), at fair value | 2,176,260 | | | 1,294,817 | | Mortgage servicing rights (MSRs), at fair value | 2,485,679 | | | 2,250,147 | |
| Advances, net (amounts related to VIEs of $594,645 and $651,576) | 739,596 | | | 828,239 | | |
| Advances, net ($550,978 and $587,059 related to VIEs) | | Advances, net ($550,978 and $587,059 related to VIEs) | 647,167 | | | 772,433 | |
| | Loans held for sale ($921,621 and $366,364 carried at fair value) (amounts related to VIEs of $461,827 and $0) | 933,700 | | | 387,836 | | |
| Loans held for investment, at fair value (amounts related to VIEs of $8,004 and $9,770) | 7,108,730 | | | 7,006,897 | | |
| Loans held for sale ($683,140 and $917,534 carried at fair value) ($127,138 and $462,144 related to VIEs) | | Loans held for sale ($683,140 and $917,534 carried at fair value) ($127,138 and $462,144 related to VIEs) | 687,465 | | | 928,527 | |
| Loans held for investment, at fair value ($7,289 and $7,879 related to VIEs) | | Loans held for investment, at fair value ($7,289 and $7,879 related to VIEs) | 7,383,817 | | | 7,207,641 | |
| Receivables, net | Receivables, net | 183,090 | | | 187,665 | | Receivables, net | 178,480 | | | 180,707 | |
| | Premises and equipment, net | 15,122 | | | 16,925 | | |
| | Investment in equity method investee | Investment in equity method investee | 19,794 | | | — | | Investment in equity method investee | 38,821 | | | 23,297 | |
| Other assets ($22,158 and $25,476 carried at fair value) (amounts related to VIEs of $1,988 and $4,544) | 542,597 | | | 571,483 | | |
| Premises and equipment, net | | Premises and equipment, net | 19,200 | | | 13,674 | |
| Other assets ($13,899 and $21,886 carried at fair value) ($465 and $1,530 related to VIEs) | | Other assets ($13,899 and $21,886 carried at fair value) ($465 and $1,530 related to VIEs) | 344,486 | | | 507,250 | |
| | Total assets | Total assets | $ | 12,040,238 | | | $ | 10,651,127 | | Total assets | $ | 12,107,690 | | | $ | 12,147,123 | |
| | Liabilities and Equity | Liabilities and Equity | | | | Liabilities and Equity | | | |
| Liabilities | Liabilities | | | | Liabilities | | | |
| Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value | Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value | $ | 6,782,564 | | | $ | 6,772,711 | | Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value | $ | 7,155,251 | | | $ | 6,885,022 | |
| Other financing liabilities, at fair value (amounts related to VIEs of $8,004 and $9,770) | 710,911 | | | 576,722 | | |
| Advance match funded liabilities (related to VIEs) | 516,572 | | | 581,288 | | |
| Other financing liabilities, at fair value ($355,530 and $238,144 due to related party) ($7,289 and $7,879 related to VIEs ) | | Other financing liabilities, at fair value ($355,530 and $238,144 due to related party) ($7,289 and $7,879 related to VIEs ) | 913,627 | | | 804,963 | |
| Advance match funded liabilities ($475,487 and $512,297 related to VIEs) | | Advance match funded liabilities ($475,487 and $512,297 related to VIEs) | 476,978 | | | 512,297 | |
| Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 1,069,170 | | | 451,713 | | Mortgage loan warehouse facilities | 779,270 | | | 1,085,076 | |
| MSR financing facilities, net | MSR financing facilities, net | 945,744 | | | 437,672 | | MSR financing facilities, net | 987,712 | | | 900,760 | |
| Senior secured term loan, net | — | | | 179,776 | | |
| Senior notes, net | 612,658 | | | 311,898 | | |
| | Other liabilities ($20,518 and $4,638 carried at fair value) | 932,748 | | | 923,975 | | |
| Senior notes, net ($226,165 and $222,242 due to related party) | | Senior notes, net ($226,165 and $222,242 due to related party) | 594,889 | | | 614,797 | |
| | Other liabilities ($9,646 and $3,080 carried at fair value) | | Other liabilities ($9,646 and $3,080 carried at fair value) | 656,048 | | | 867,514 | |
| | Total liabilities | Total liabilities | 11,570,367 | | | 10,235,755 | | Total liabilities | 11,563,775 | | | 11,670,429 | |
| | Commitments and Contingencies (Notes 21 and 22) | Commitments and Contingencies (Notes 21 and 22) | 0 | | 0 | Commitments and Contingencies (Notes 21 and 22) | 0 | | 0 |
| | Stockholders’ Equity | Stockholders’ Equity | | | | Stockholders’ Equity | | | |
| | Common stock, $.01 par value; 13,333,333 shares authorized; 9,189,030 and 8,687,750 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively. | 92 | | | 87 | | |
| Common stock, $.01 par value; 13,333,333 shares authorized; 9,189,005 and 9,208,312 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | Common stock, $.01 par value; 13,333,333 shares authorized; 9,189,005 and 9,208,312 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | 92 | | | 92 | |
| | Additional paid-in capital | Additional paid-in capital | 591,839 | | | 556,062 | | Additional paid-in capital | 591,132 | | | 592,572 | |
| Accumulated deficit | Accumulated deficit | (111,909) | | | (131,682) | | Accumulated deficit | (45,168) | | | (113,604) | |
| Accumulated other comprehensive loss, net of income taxes | Accumulated other comprehensive loss, net of income taxes | (10,151) | | | (9,095) | | Accumulated other comprehensive loss, net of income taxes | (2,141) | | | (2,366) | |
| | Total stockholders’ equity | Total stockholders’ equity | 469,871 | | | 415,372 | | Total stockholders’ equity | 543,915 | | | 476,694 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 12,040,238 | | | $ | 10,651,127 | | Total liabilities and stockholders’ equity | $ | 12,107,690 | | | $ | 12,147,123 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | Revenue | | | | | | | | Revenue | | | | | | | |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 206,585 | | | $ | 181,722 | | | $ | 562,764 | | | $ | 568,445 | | Servicing and subservicing fees | $ | 215,131 | | | $ | 184,441 | | | $ | 427,754 | | | $ | 356,179 | |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | 5,035 | | | 14,499 | | | 56,162 | | | 51,055 | | Reverse mortgage revenue, net | (2,616) | | | 29,301 | | | 10,494 | | | 51,127 | |
| Gain on loans held for sale, net | 59,702 | | | 45,886 | | | 108,136 | | | 92,764 | | |
| Gain (loss) on loans held for sale, net | | Gain (loss) on loans held for sale, net | 940 | | | 42,713 | | | (2,266) | | | 48,434 | |
| | Other revenue, net | Other revenue, net | 11,779 | | | 6,928 | | | 29,078 | | | 17,637 | | Other revenue, net | 8,704 | | | 8,990 | | | 17,740 | | | 17,299 | |
| Total revenue | Total revenue | 283,101 | | | 249,035 | | | 756,140 | | | 729,901 | | Total revenue | 222,159 | | | 265,445 | | | 453,722 | | | 473,039 | |
| | MSR valuation adjustments, net | MSR valuation adjustments, net | (6,320) | | | (33,814) | | | (57,562) | | | (231,368) | | MSR valuation adjustments, net | 33,198 | | | (72,450) | | | 95,830 | | | (51,242) | |
| | Operating expenses | Operating expenses | | | | | Operating expenses | | | | |
| Compensation and benefits | Compensation and benefits | 68,960 | | | 69,648 | | | 209,413 | | | 195,393 | | Compensation and benefits | 83,879 | | | 72,172 | | | 151,882 | | | 140,453 | |
| Servicing and origination | Servicing and origination | 27,932 | | | 22,930 | | | 82,044 | | | 60,547 | | Servicing and origination | 19,099 | | | 26,642 | | | 33,266 | | | 54,112 | |
| Technology and communications | | Technology and communications | 14,691 | | | 13,170 | | | 29,603 | | | 26,313 | |
| Professional services | Professional services | 18,379 | | | 28,361 | | | 61,245 | | | 77,816 | | Professional services | 8,686 | | | 25,544 | | | 20,853 | | | 42,866 | |
| Technology and communications | 14,737 | | | 15,850 | | | 41,050 | | | 47,154 | | |
| Occupancy and equipment | Occupancy and equipment | 8,962 | | | 9,572 | | | 25,699 | | | 37,677 | | Occupancy and equipment | 9,658 | | | 7,885 | | | 19,725 | | | 16,737 | |
| | Other expenses | Other expenses | 6,466 | | | 3,161 | | | 15,422 | | | 12,958 | | Other expenses | 8,358 | | | 4,395 | | | 16,060 | | | 8,956 | |
| Total operating expenses | Total operating expenses | 145,436 | | | 149,522 | | | 434,873 | | | 431,545 | | Total operating expenses | 144,371 | | | 149,808 | | | 271,389 | | | 289,437 | |
| | Other income (expense) | Other income (expense) | | Other income (expense) | |
| Interest income | Interest income | 7,869 | | | 3,801 | | | 15,993 | | | 12,762 | | Interest income | 9,746 | | | 4,188 | | | 16,858 | | | 8,124 | |
| Interest expense | (40,623) | | | (26,815) | | | (102,591) | | | (83,557) | | |
| Pledged MSR liability expense | (91,160) | | | (57,404) | | | (168,820) | | | (105,684) | | |
| Loss on extinguishment of debt | — | | | — | | | (15,458) | | | — | | |
| Interest expense ($10,487, $8,748, $20,883 and $11,114 on amounts due to related party) | | Interest expense ($10,487, $8,748, $20,883 and $11,114 on amounts due to related party) | (37,861) | | | (33,516) | | | (75,736) | | | (61,968) | |
| Pledged MSR liability expense ($20,843, $—, $75,356, and $— on amounts due to related party) | | Pledged MSR liability expense ($20,843, $—, $75,356, and $— on amounts due to related party) | (74,083) | | | (39,810) | | | (160,980) | | | (77,660) | |
| Earnings of equity method investee | | Earnings of equity method investee | 3,932 | | | 350 | | | 15,935 | | | 350 | |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | 947 | | | — | | | 914 | | | (15,458) | |
| | Earnings of equity method investee | 932 | | | — | | | 1,282 | | | — | | |
| Other, net | Other, net | 1,900 | | | 3,345 | | | 5,554 | | | 4,616 | | Other, net | (4,237) | | | 3,364 | | | (4,399) | | | 3,654 | |
| Total other expense, net | (121,082) | | | (77,073) | | | (264,040) | | | (171,863) | | |
| Total other income (expense), net | | Total other income (expense), net | (101,556) | | | (65,424) | | | (207,408) | | | (142,958) | |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | Income (loss) before income taxes | 10,263 | | | (11,374) | | | (335) | | | (104,875) | | Income (loss) before income taxes | 9,430 | | | (22,237) | | | 70,755 | | | (10,598) | |
| Income tax benefit | (11,289) | | | (1,954) | | | (20,108) | | | (71,920) | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | (924) | | | (11,915) | | | 2,319 | | | (8,819) | |
| Net income (loss) | Net income (loss) | $ | 21,552 | | | $ | (9,420) | | | $ | 19,773 | | | $ | (32,955) | | Net income (loss) | $ | 10,354 | | | $ | (10,322) | | | $ | 68,436 | | | $ | (1,779) | |
| | | Earnings (loss) per share | Earnings (loss) per share | | Earnings (loss) per share | |
| Basic | Basic | $ | 2.35 | | | $ | (1.09) | | | $ | 2.21 | | | $ | (3.76) | | Basic | $ | 1.12 | | | $ | (1.15) | | | $ | 7.41 | | | $ | (0.20) | |
| Diluted | Diluted | $ | 2.29 | | | $ | (1.09) | | | $ | 2.13 | | | $ | (3.76) | | Diluted | $ | 1.11 | | | $ | (1.15) | | | $ | 7.19 | | | $ | (0.20) | |
| | Weighted average common shares outstanding | Weighted average common shares outstanding | | Weighted average common shares outstanding | |
| Basic | Basic | 9,189,030 | | | 8,669,550 | | | 8,960,696 | | | 8,770,102 | | Basic | 9,257,089 | | | 8,999,544 | | | 9,236,221 | | | 8,844,637 | |
| Diluted | Diluted | 9,401,858 | | | 8,669,550 | | | 9,270,751 | | | 8,770,102 | | Diluted | 9,366,606 | | | 8,999,544 | | | 9,514,202 | | | 8,844,637 | |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) | Net income (loss) | $ | 21,552 | | | $ | (9,420) | | | $ | 19,773 | | | $ | (32,955) | | Net income (loss) | $ | 10,354 | | | $ | (10,322) | | | $ | 68,436 | | | $ | (1,779) | |
| | Other comprehensive income (loss), net of income taxes: | Other comprehensive income (loss), net of income taxes: | | | | | | Other comprehensive income (loss), net of income taxes: | | | | | |
| | Change in unfunded pension plan obligation liability | Change in unfunded pension plan obligation liability | (386) | | | 47 | | | (1,119) | | | 139 | | Change in unfunded pension plan obligation liability | 91 | | | (367) | | | 182 | | | (733) | |
| Other | Other | 18 | | | 42 | | | 63 | | | 118 | | Other | 19 | | | 22 | | | 43 | | | 45 | |
| Comprehensive income (loss) | Comprehensive income (loss) | $ | 21,184 | | | $ | (9,331) | | | $ | 18,717 | | | $ | (32,698) | | Comprehensive income (loss) | $ | 10,464 | | | $ | (10,667) | | | $ | 68,661 | | | $ | (2,467) | |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 20202021
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Income Taxes | | | | Total |
| | Shares | | Amount | | | | | |
| Three Months Ended September 30, 2021 and 2020 | | | | | | | | | | | | | |
| Balance at June 30, 2021 | 9,189,030 | | | $ | 92 | | | $ | 590,252 | | | $ | (133,461) | | | $ | (9,783) | | | | | $ | 447,100 | |
| Net income | — | | | — | | | — | | | 21,552 | | | — | | | | | 21,552 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | — | | | — | | | 1,587 | | | — | | | — | | | | | 1,587 | |
| Other comprehensive loss, net of income taxes | — | | | — | | | — | | | — | | | (368) | | | | | (368) | |
| Balance at September 30, 2021 | 9,189,030 | | | $ | 92 | | | $ | 591,839 | | | $ | (111,909) | | | $ | (10,151) | | | | | $ | 469,871 | |
| | | | | | | | | | | | | |
| Balance at June 30, 2020 | 8,667,260 | | | $ | 87 | | | $ | 555,147 | | | $ | (115,039) | | | $ | (7,426) | | | | | $ | 432,769 | |
| Net loss | — | | | — | | | — | | | (9,420) | | | — | | | | | (9,420) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Additional shares issued on reverse stock split rounding | 4,692 | | | — | | | — | | | — | | | — | | | | | — | |
| Equity-based compensation and other | 320 | | | — | | | 1,029 | | | — | | | — | | | | | 1,029 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | 89 | | | | | 89 | |
| Balance at September 30, 2020 | 8,672,272 | | | $ | 87 | | | $ | 556,176 | | | $ | (124,459) | | | $ | (7,337) | | | | | $ | 424,467 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Income Taxes | | | | Total |
| | Shares | | Amount | | | | | |
| | | | | | | | | | | | | |
| Balance at March 31, 2022 | 9,243,658 | | | $ | 92 | | | $ | 591,811 | | | $ | (55,522) | | | $ | (2,251) | | | | | $ | 534,130 | |
| Net income | — | | | — | | | — | | | 10,354 | | | — | | | | | 10,354 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Repurchase of common stock | (84,087) | | | (1) | | | (2,261) | | | — | | | — | | | | | (2,262) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | 29,434 | | | 1 | | | 1,582 | | | — | | | — | | | | | 1,583 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | 110 | | | | | 110 | |
| Balance at June 30, 2022 | 9,189,005 | | | $ | 92 | | | $ | 591,132 | | | $ | (45,168) | | | $ | (2,141) | | | | | $ | 543,915 | |
| | | | | | | | | | | | | |
| Balance at March 31, 2021 | 8,701,530 | | | $ | 87 | | | $ | 572,500 | | | $ | (123,139) | | | $ | (9,438) | | | | | $ | 440,010 | |
| Net loss | — | | | — | | | — | | | (10,322) | | | — | | | | | (10,322) | |
| Issuance of common stock | 426,705 | | | 4 | | | 12,165 | | | — | | | — | | | | | 12,169 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Issuance of common stock warrants, net of issuance costs | — | | | — | | | 4,203 | | | — | | | — | | | | | 4,203 | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | 60,795 | | | 1 | | | 1,384 | | | — | | | — | | | | | 1,385 | |
| Other comprehensive loss, net of income taxes | — | | | — | | | — | | | — | | | (345) | | | | | (345) | |
| Balance at June 30, 2021 | 9,189,030 | | | $ | 92 | | | $ | 590,252 | | | $ | (133,461) | | | $ | (9,783) | | | | | $ | 447,100 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 20202021
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Loss, Net of Income Taxes | | | | Total |
| | Shares | | Amount | | | | | |
| Nine Months Ended September 30, 2021 and 2020 | | | | | | | | | | | | | |
| Balance at December 31, 2020 | 8,687,750 | | | $ | 87 | | | $ | 556,062 | | | $ | (131,682) | | | $ | (9,095) | | | | | $ | 415,372 | |
| Net income | — | | | — | | | — | | | 19,773 | | | — | | | | | 19,773 | |
| Issuance of common stock | 426,705 | | | 4 | | | 12,165 | | | — | | | — | | | | | 12,169 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Issuance of common stock warrants, net of issuance costs | — | | | — | | | 19,956 | | | — | | | — | | | | | 19,956 | |
| Equity-based compensation and other | 74,575 | | | 1 | | | 3,656 | | | — | | | — | | | | | 3,657 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | (1,056) | | | | | (1,056) | |
| Balance at September 30, 2021 | 9,189,030 | | | $ | 92 | | | $ | 591,839 | | | $ | (111,909) | | | $ | (10,151) | | | | | $ | 469,871 | |
| | | | | | | | | | | | | |
| Balance at December 31, 2019 | 8,990,816 | | | $ | 90 | | | $ | 558,057 | | | $ | (138,542) | | | $ | (7,594) | | | | | $ | 412,011 | |
| Net loss | — | | | — | | | — | | | (32,955) | | | — | | | | | (32,955) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cumulative effect of adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13 | — | | | — | | | — | | | 47,038 | | | — | | | | | 47,038 | |
| | | | | | | | | | | | | |
| Repurchase of common stock | (377,484) | | | (4) | | | (4,601) | | | — | | | — | | | | | (4,605) | |
| | | | | | | | | | | | | |
| Additional shares issued on reverse stock split rounding | 4,692 | | | — | | | — | | | — | | | — | | | | | — | |
| Equity-based compensation and other | 54,248 | | | 1 | | | 2,720 | | | — | | | — | | | | | 2,721 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | 257 | | | | | 257 | |
| Balance at September 30, 2020 | 8,672,272 | | | $ | 87 | | | $ | 556,176 | | | $ | (124,459) | | | $ | (7,337) | | | | | $ | 424,467 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Loss, Net of Income Taxes | | | | Total |
| | Shares | | Amount | |
| | | | | | | | | | | | | |
| Balance at December 31, 2021 | 9,208,312 | | | $ | 92 | | | $ | 592,572 | | | $ | (113,604) | | | $ | (2,366) | | | | | $ | 476,694 | |
| Net income | — | | | — | | | — | | | 68,436 | | | — | | | | | 68,436 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Repurchase of common stock | (84,087) | | | (1) | | | (2,261) | | | — | | | — | | | | | (2,262) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | 64,780 | | | 1 | | | 821 | | | — | | | — | | | | | 822 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | 225 | | | | | 225 | |
| Balance at June 30, 2022 | 9,189,005 | | | $ | 92 | | | $ | 591,132 | | | $ | (45,168) | | | $ | (2,141) | | | | | $ | 543,915 | |
| | | | | | | | | | | | | |
| Balance at December 31, 2020 | 8,687,750 | | | $ | 87 | | | $ | 556,062 | | | $ | (131,682) | | | $ | (9,095) | | | | | $ | 415,372 | |
| Net loss | — | | | — | | | — | | | (1,779) | | | — | | | | | (1,779) | |
| Issuance of common stock | 426,705 | | | 4 | | | 12,165 | | | — | | | — | | | | | 12,169 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Issuance of common stock warrants, net of issuance costs | — | | | — | | | 19,956 | | | — | | | — | | | | | 19,956 | |
| Equity-based compensation and other | 74,575 | | | 1 | | | 2,069 | | | — | | | — | | | | | 2,070 | |
| Other comprehensive income, net of income taxes | — | | | — | | | — | | | — | | | (688) | | | | | (688) | |
| Balance at June 30, 2021 | 9,189,030 | | | $ | 92 | | | $ | 590,252 | | | $ | (133,461) | | | $ | (9,783) | | | | | $ | 447,100 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2021 | | 2020 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | 19,773 | | | $ | (32,955) | |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | |
| MSR valuation adjustments, net | 57,562 | | | 231,368 | |
| Loss (gain) on sale of MSRs, net | 64 | | | (48) | |
| | | |
| Provision for bad debts | 16,069 | | | 18,801 | |
| Depreciation | 7,527 | | | 15,398 | |
| | | |
| | | |
| Amortization of debt issuance costs and discount | 5,438 | | | 5,335 | |
| Equity-based compensation expense | 3,697 | | | 2,392 | |
| Loss on extinguishment of debt | 15,458 | | | — | |
| | | |
| | | |
| | | |
| Loss (gain) on valuation of Pledged MSR financing liability | 71,273 | | | (21,314) | |
| Net gain on valuation of loans held for investment and HMBS-related borrowings | (9,993) | | | (14,410) | |
| Earnings of equity method investee | (1,282) | | | — | |
| Gain on loans held for sale, net | (108,136) | | | (92,764) | |
| | | |
| Origination and purchase of loans held for sale | (12,987,522) | | | (4,378,999) | |
| Proceeds from sale and collections of loans held for sale | 12,411,398 | | | 4,259,127 | |
| Changes in assets and liabilities: | | | |
| Decrease in advances, net | 69,868 | | | 210,688 | |
| Decrease in receivables and other assets, net | 9,659 | | | 105,023 | |
| Decrease (increase) in other liabilities | 9,582 | | | (47,981) | |
| Other, net | (3,271) | | | (11,622) | |
| Net cash (used in) provided by operating activities | (412,836) | | | 248,039 | |
| | | |
| Cash flows from investing activities | | | |
| Origination of loans held for investment | (1,214,772) | | | (867,702) | |
| Principal payments received on loans held for investment | 1,172,011 | | | 619,486 | |
| Purchase of MSRs | (785,194) | | | (82,990) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Investment in equity method investee | (18,512) | | | — | |
| Other, net | 1,086 | | | 3,090 | |
| Net cash used in investing activities | (845,381) | | | (328,116) | |
| | | |
| Cash flows from financing activities | | | |
| Repayment of advance match funded liabilities, net | (64,716) | | | (99,031) | |
| | | |
| Repayment of other financing liabilities | (62,076) | | | (84,185) | |
| Proceeds from mortgage loan warehouse facilities, net | 617,457 | | | 109,538 | |
| Proceeds from MSR financing facilities | 680,711 | | | 128,641 | |
| Repayment of MSR financing facilities | (170,500) | | | (208,996) | |
| Repayment of Senior notes | (319,156) | | | — | |
| Proceeds from issuance of Senior notes and warrants | 647,944 | | | — | |
| Repayment of senior secured term loan (SSTL) borrowings | (188,700) | | | (136,066) | |
| Payment of debt issuance costs | (16,173) | | | (7,522) | |
| Proceeds from sale of MSRs accounted for as secured financing | 130,024 | | | — | |
| Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings) | 1,119,742 | | | 885,987 | |
| Repayment of HMBS-related borrowings | (1,161,609) | | | (613,026) | |
| | | |
| Issuance of common stock | 9,878 | | | — | |
| Repurchase of common stock | — | | | (4,605) | |
| | | |
| | | |
| Other, net | (525) | | | (32) | |
| Net cash provided by (used in) financing activities | 1,222,301 | | | (29,297) | |
| | | |
| Net decrease in cash, cash equivalents and restricted cash | (35,916) | | | (109,374) | |
| Cash, cash equivalents and restricted cash at beginning of year | 357,265 | | | 492,340 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 321,349 | | | $ | 382,966 | |
| | | |
| Supplemental non-cash investing and financing activities: | | | |
| | | |
| Recognition of gross right-of-use asset and lease liability: | | | |
| Right-of-use asset | $ | 3,955 | | | $ | 2,608 | |
| Lease liability | 3,955 | | | 2,597 | |
| Transfers of loans held for sale to real estate owned (REO) | $ | 5,312 | | | $ | 2,554 | |
| Transfer from loans held for investment to loans held for sale | 2,898 | | | 1,900 | |
| Derecognition of MSRs and financing liabilities: | | | |
| MSRs | $ | — | | | $ | (263,344) | |
| Financing liability - MSRs pledged | — | | | (263,344) | |
| Deconsolidation of mortgage-backed securitization trusts (VIEs) | | | |
| Loans held for investment | $ | — | | | $ | (10,715) | |
| Other financing liabilities | — | | | (9,519) | |
| Recognition of future draw commitments for HECM loans at fair value upon adoption of FASB ASU No. 2016-13 | $ | — | | | $ | 47,038 | |
| | | |
| Supplemental information - Sale and deconsolidation of subsidiary | | | |
| Cash proceeds received | $ | 4,409 | | | $ | — | |
| Equity / cash balance held by subsidiary upon sale | (5,250) | | | — | |
| | | |
| | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2022 | | 2021 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | 68,436 | | | $ | (1,779) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
| MSR valuation adjustments, net | (95,830) | | | 51,242 | |
| Loss on sale of MSRs, net | 239 | | | 41 | |
| | | |
| Provision for bad debts | 9,822 | | | 11,522 | |
| Depreciation | 5,169 | | | 5,066 | |
| | | |
| Amortization of debt issuance costs and discount | 5,082 | | | 3,232 | |
| Amortization of intangibles | 2,125 | | | — | |
| Equity-based compensation expense | 1,288 | | | 2,260 | |
| Loss (gain) on extinguishment of debt | (914) | | | 15,458 | |
| | | |
| | | |
| | | |
| Loss on valuation of Pledged MSR financing liability | 95,330 | | | 9,944 | |
| Net loss (gain) on valuation of loans held for investment and HMBS-related borrowings | 16,180 | | | (18,505) | |
| Earnings of equity method investee | (15,935) | | | (350) | |
| Loss (gain) on loans held for sale, net | 2,266 | | | (48,434) | |
| | | |
| Origination and purchase of loans held for sale | (8,154,599) | | | (6,620,727) | |
| Proceeds from sale and collections of loans held for sale | 8,275,230 | | | 6,287,238 | |
| Changes in assets and liabilities: | | | |
| Decrease in advances, net | 105,932 | | | 56,461 | |
| Decrease in receivables and other assets, net | 62,810 | | | 44,368 | |
| Decrease in other liabilities | (84,223) | | | (9,034) | |
| Other, net | 466 | | | (4,240) | |
| Net cash provided by (used in) operating activities | 298,874 | | | (216,237) | |
| | | |
| Cash flows from investing activities | | | |
| Origination of loans held for investment | (1,144,856) | | | (720,442) | |
| Principal payments received on loans held for investment | 995,711 | | | 722,099 | |
| Acquisition of loans held for investment, net | (3,634) | | | — | |
| Acquisition of reverse mortgage subservicing agreements | (6,906) | | | — | |
| Purchase of MSRs | (103,473) | | | (712,578) | |
| Proceeds from sale of MSRs | 134,465 | | | — | |
| | | |
| | | |
| Proceeds from sale of advances | 754 | | | — | |
| | | |
| | | |
| Additions to premises and equipment | (2,152) | | | (831) | |
| Purchase of real estate | (197) | | | (5,098) | |
| Proceeds from sale of real estate | 4,402 | | | 5,190 | |
| Proceeds from sale of premises and equipment | 135 | | | — | |
| | | |
| Investment in equity method investee | (16,500) | | | (11,528) | |
| Distribution of capital from equity method investee | 16,875 | | | — | |
| Other, net | 30 | | | 692 | |
| Net cash used in investing activities | (125,346) | | | (722,496) | |
| | | |
| Cash flows from financing activities | | | |
| Repayment of advance match funded liabilities, net | (35,319) | | | (51,106) | |
| | | |
| Repayment of other financing liabilities | (57,608) | | | (39,616) | |
| Proceeds from (repayment of) mortgage loan warehouse facilities, net | (305,806) | | | 321,639 | |
| Proceeds from MSR financing facilities | 277,688 | | | 630,003 | |
| Repayment of MSR financing facilities | (188,929) | | | (53,509) | |
| Repurchase and repayment of Senior notes | (23,625) | | | (319,156) | |
| Proceeds from issuance of Senior notes and warrants | — | | | 647,944 | |
| Repayment of senior secured term loan (SSTL) borrowings | — | | | (188,700) | |
| Payment of debt issuance costs | (1,164) | | | (16,032) | |
| Proceeds from sale of MSRs accounted for as secured financing | 66,237 | | | — | |
| Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings) | 1,149,876 | | | 667,480 | |
| Repayment of HMBS-related borrowings | (993,487) | | | (715,332) | |
| | | |
| Issuance of common stock | — | | | 9,878 | |
| Repurchase of common stock | (2,262) | | | — | |
| | | |
| | | |
| Other, net | — | | | (525) | |
| Net cash provided by (used in) financing activities | (114,399) | | | 892,968 | |
| | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 59,129 | | | (45,765) | |
| Cash, cash equivalents and restricted cash at beginning of year | 263,446 | | | 357,265 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 322,575 | | | $ | 311,500 | |
| | | |
| Supplemental non-cash investing and financing activities: | | | |
| | | |
| Loans held for investment acquired at fair value | $ | 224,052 | | | $ | — | |
| HMBS-related borrowings assumed at fair value | (219,509) | | | — | |
| Holdback | (909) | | | — | |
| Net cash paid to acquire loans held for investment | $ | 3,634 | | | $ | — | |
| | | |
| Recognition of gross right-of-use asset and lease liability: | | | |
| Right-of-use asset | $ | 8,583 | | | $ | 3,204 | |
| Lease liability | 8,583 | | | 3,204 | |
| Transfers of loans held for sale to real estate owned (REO) | 381 | | | 4,090 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Supplemental information - Sale and deconsolidation of subsidiary | | | |
| Cash proceeds received | $ | — | | | $ | 4,409 | |
| Equity / cash balance held by subsidiary upon sale | — | | | (5,250) | |
| | | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets and the unaudited consolidated statements of cash flows:
| | | | | | | | | | | |
| September 30, 2021 | | September 30, 2020 |
| Cash and cash equivalents | $ | 236,072 | | | $ | 321,455 | |
| Restricted cash and equivalents: | | | |
| Debt service accounts | 13,271 | | | 14,873 | |
| Other restricted cash | 72,006 | | | 46,638 | |
| Total cash, cash equivalents and restricted cash reported in the statements of cash flows | $ | 321,349 | | | $ | 382,966 | |
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
| Cash and cash equivalents | $ | 255,885 | | | $ | 243,582 | |
| Restricted cash and equivalents: | | | |
| Debt service accounts | 13,605 | | | 15,643 | |
| Other restricted cash | 53,085 | | | 52,275 | |
| Total cash, cash equivalents and restricted cash reported in the statements of cash flows | $ | 322,575 | | | $ | 311,500 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20212022
(Dollars in thousands, except per share data and unless otherwise indicated)
| | |
| Note 1 - Organization and Basis of Presentation |
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, OFC, we, us and our) is a non-bank mortgage servicer and originator providing solutions to homeowners, clients, investors and others through its primary operating subsidiary, PHH Mortgage Corporation (PMC). We are headquartered in West Palm Beach, Florida with offices and operations in the United States (U.S.), the United States Virgin Islands (USVI), India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen directly or indirectly owns all of the outstanding common stock of its operating subsidiaries, including PMC since its acquisition on October 4, 2018, Ocwen Financial Solutions Private Limited (OFSPL) and Ocwen USVI Services, LLC (OVIS). Effective May 3, 2021, Ocwen holds a 15% equity interest in MAV Canopy HoldCo I, LLC (MAV Canopy) that invests in mortgage servicing assets through its licensed mortgage subsidiary MSR Asset Vehicle LLC (MAV). See Note 10 - Investment in Equity Method Investee and Related Party Transactions for additional information.
We perform servicing activities related to our own MSR portfolio (primary) and on behalf of other servicers (subservicing), the largest being New Residential Investment Corp. (NRZ), and investors (primary and master servicing), including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively referred to as GSEs), the Government National Mortgage Association (Ginnie Mae, and together with the GSEs, the Agencies) and private-label securitizations (PLS, or non-Agency). As a subservicer or primary servicer, we may be required to make advances for certain property tax and insurance premium payments, default and property maintenance payments and principal and interest payments on behalf of delinquent borrowers to mortgage loan investors before recovering them from borrowers. Most, but not all, of our subservicing agreements provide for us to be reimbursed for any such advances by the owner of the servicing rights. Advances made by us as primary servicer are generally recovered from the borrower or the mortgage loan investor. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall, subject to certain limitations.
We source our servicing portfolio through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window programs and bulk MSR purchases. We originate, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency or GSE) loans and government-insured (Federal Housing Administration (FHA) or, Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA)) forward mortgage loans, generally with servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate and purchase Home Equity Conversion Mortgage (HECM) loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae.
We had a total of approximately 5,2005,600 employees at SeptemberJune 30, 20212022 of which approximately 3,2003,400 were located in India and approximately 400 were based in the Philippines. Our operations in India and the Philippines primarily provide internal support services principally to our loan servicing businessand originations businesses and our corporate functions. Of our foreign-based employees, approximately 67%72% were engaged in supporting our loan servicing operations as of SeptemberJune 30, 2021.2022.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three and ninesix months ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021.2022. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
In August 2020, Ocwen implemented a reverse stock split of its shares of common stock in a ratio of one-for-15. The number of shares, loss per share amounts, repurchase price per share amounts, and Common stock and Additional paid-in capital balances have been retroactively adjusted for all periods presented in this Quarterly Report on Form 10-Q to give effect to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 14 – Equity for additional information.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, income taxes and the provision for losses that may arise from contingencies including litigation proceedings. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Recently Adopted Accounting Standards
Income Taxes (ASC Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12)
The FASB issued this ASU to Accounting Standards Codification (ASC) Topic 740, Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include the removal of certain exceptions to the general principles of ASC Topic 740 in such areas as intraperiod tax allocation, year to date losses in interim periods and deferred tax liabilities related to outside basis differences. Amendments also include simplification in other areas such as interim recognition of enactment of tax laws or rate changes and accounting for a franchise tax (or similar tax) that is partially based on income.
Our adoption of this standard on January 1, 2021 did not have a material impact on our consolidated financial statements.
Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06)
The amendments in this ASU simplify the accounting for certain financial instruments with characteristics of liabilities and equity by reducing the number of accounting models for convertible debt and convertible preferred stock instruments. In addition, this ASU amended the derivative guidance for the “own stock” scope exception and certain aspects when calculating earnings per share. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity.
The amendments in this ASU are effective on January 1, 2022, with early adoption permitted on January 1, 2021. Our early adoption of this standard on January 1, 2021 did not have a material impact on our consolidated financial statements.
Investments—Equity Securities (ASC Topic 321), Investments—Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) (ASU 2020-01)
The amendments in this ASU affect all entities that apply the guidance in ASC Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The amendments clarify that forward or option contracts to purchase investments that will be accounted for using the equity method that do not meet the definition of a derivative under ASC Topic 815 are in the scope of ASC Topic 321. Therefore, when the purchase contract is considered a forward or option contract in the scope of this guidance, the investor would account for changes in the contract’s fair value prior to closing through earnings, unless the contract qualifies for the measurement alternative and it is elected. If the measurement alternative is elected, the change in the fair value of the contract would be reflected in earnings upon closing. In addition, if there are observable transactions or impairments before closing, the guidance would require remeasurement of the contract to fair value.
The guidance in this ASU also specifies that when applying the measurement alternative in ASC Topic 321, observable
transactions include those transactions by the investor that result in the application or discontinuation of the equity method
of accounting.
The amendments under this ASU are effective prospectively. Our adoption of this standard on January 1, 2021 did not have a material impact on our consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
Earnings Per Share (Topic(ASC 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic(ASC 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) (ASU 2021-04)
The amendments in this ASU provide the following guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic: (1) treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument, (2) measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange and (3) recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate for goods or services in accordance with the guidance in ASC Topic 718. In a multiple-element transaction (for example, one that includes both debt financing and equity financing), the total effect of the modification should be allocated to the respective elements in the transaction.
Our adoption of this standard on January 1, 2022 did not have a material impact on our consolidated financial statements.
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
This standard provides for optional expedients and other guidance regarding the accounting related to modifications of contracts, hedging relationships and other transactions affected by the phase-out of certain tenors of the London Inter-bank Offered Rate (LIBOR) by the end of 2021 (or June 30, 2023 for U.S. dollar LIBOR of certain tenors). This guidance is effective upon issuance in March 2020 through December 31, 2022 and allows for retrospective application to contract modifications as early as January 1, 2020. We elected to retrospectively adopt this ASU as of January 1, 2020 which resulted in no immediate impact on our consolidated financial statements. Although we do not have any hedge accounting relationships, many of our debt facilities and loan agreements incorporate LIBOR as the referenced interest rate. Some of these facilities and loan agreements either matured prior to June 30, 2022 or have terms in place that provide for an alternative to LIBOR upon its phase-out.
Accounting Standards Issued but Not Yet Adopted
Business Combinations (ASC 805) - Accounting for Contract Assets and Contract Liabilities (ASU 2021-08)
The amendments in this Update apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combinations— Overall. The amendments in this ASU are issued to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the following: (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements (if the acquiree prepared financial statements in accordance with generally accepted accounting principles (GAAP)).
The amendments in this ASU are effective for us on January 1, 2022.2023. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
| | |
| Note 2 – Securitizations and Variable Interest Entities |
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these transfers of financial assets and asset-backed financing arrangements using special purpose entities (SPEs) or variable interest entities (VIEs) into the following groups: (1) securitizations of residential mortgage loans, (2) financings of loans held for sale, (3) financings of advances and (4) MSR financings. Financing transactions that do not use SPEs or VIEs are disclosed in Note 1213 – Borrowings.
From time to time, we may acquire beneficial interests issued in connection with mortgage-backed securitizations where we may also be the master and/or primary servicer. These beneficial interests consist of subordinate and residual interests acquired from third-parties in market transactions. We consolidate the VIE when we conclude we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization typically occurs within 30 days of loan closing or purchase. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers of loans accounted for as sales that were outstanding:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | 2022 | | 2021 | | 2022 | | 2021 |
| Proceeds received from securitizations | Proceeds received from securitizations | $ | 5,823,765 | | | $ | 2,364,829 | | | $ | 12,220,596 | | | $ | 4,256,082 | | Proceeds received from securitizations | $ | 4,109,553 | | | $ | 3,147,912 | | | $ | 7,697,825 | | | $ | 6,396,831 | |
| Servicing fees collected (1) | Servicing fees collected (1) | 16,440 | | | 12,561 | | | 43,968 | | | 35,204 | | Servicing fees collected (1) | 23,908 | | | 14,350 | | | 45,577 | | | 27,528 | |
| Purchases of previously transferred assets, net of claims reimbursed | Purchases of previously transferred assets, net of claims reimbursed | (6,065) | | | (2,061) | | | (16,085) | | | (6,338) | | Purchases of previously transferred assets, net of claims reimbursed | (4,794) | | | (6,780) | | | (6,824) | | | (10,019) | |
| | $ | 5,834,140 | | | $ | 2,375,329 | | | $ | 12,248,479 | | | $ | 4,284,948 | | | $ | 4,128,667 | | | $ | 3,155,482 | | | $ | 7,736,578 | | | $ | 6,414,340 | |
(1)We receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees in the unaudited consolidated statements of operations.
In connection with these transfers, we retained MSRs of $66.4$60.2 million and $136.5$106.0 million during the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $22.1$35.8 million and $37.8$70.1 million during the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. We securitize forward and reverse residential mortgage loans involving the GSEs and loans insured by the FHA, VA or VAUSDA through Ginnie Mae.
Certain obligations arise from the agreements associated with our transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer for losses incurred due to material breach of contractual representations and warranties.
The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as an estimate of our maximum exposure to loss including the UPB of the transferred loans:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Carrying value of assets | Carrying value of assets | | | | Carrying value of assets | | | |
| MSRs, at fair value | MSRs, at fair value | $ | 281,161 | | | $ | 137,029 | | MSRs, at fair value | $ | 415,869 | | | $ | 360,830 | |
| | Advances | Advances | 133,994 | | | 143,361 | | Advances | 67,499 | | | 151,166 | |
| UPB of loans transferred (1) | UPB of loans transferred (1) | 26,724,676 | | | 18,062,856 | | UPB of loans transferred (1) | 30,276,506 | | | 31,864,769 | |
| Maximum exposure to loss | $ | 27,139,831 | | | $ | 18,343,246 | | |
| Maximum exposure to loss (2) | | Maximum exposure to loss (2) | $ | 30,759,874 | | | $ | 32,376,765 | |
(1)Includes $5.3$5.8 billion and $4.1$5.6 billion of loans delivered to Ginnie Mae as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, and includes loan modifications repurchased and delivered through the Ginnie Mae Early Buyout Program (EBO).
(2)The maximum exposure to loss does not take into consideration any recourse available to us, including from the underlying collateral or from correspondent sellers. Also, refer to Loan Put-Back and Related Contingencies in Note 22 – Contingencies,
At SeptemberJune 30, 20212022 and December 31, 2020, 4.3%2021, 2.5% and 6.8%3.6%, respectively, of the transferred residential loans that we service were 60 days or more past due, including 60 days or more past due loans under forbearance. This includes 13.1%7.5% and 17.1%12.0%, respectively, of loans delivered to Ginnie Mae that are 60 days or more past due.
Transfers of Reverse Mortgages
We pool HECM loans into HMBS that we sell into the secondary market with servicing rights retained or we sell the loans to third parties with servicing rights released.retained. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest and the servicing requirements require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECM loans do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECM loans are classified as Loans held for investment, at fair value, on our unaudited consolidated balance sheets. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except with respect to standard representations and warranties and our contractual obligation to service the HECM loans and the HMBS.
Financing of Loans Held for Sale using SPEs
We entered into a warehouse mortgage loan financing facility with a third-party lender involving an SPE (trust). This facility is structured as a gestation repurchase facility whereby Agency mortgage loans are transferred by PMC to the trust for collateralization purposes. We have designed the trust to facilitate the third party financing facility and have determined that the trust is a VIE for which we are the primary beneficiary. Therefore, we have included the trust in our consolidated financial statements.
The table below presents the carrying value and classification of the assets and liabilities of the loans held for sale financing facility:
| | | | | | | |
| September 30, 2021 | | |
Mortgage loans (Loans held for sale, at fair value) | $ | 461,827 | | | |
| | | |
| | | |
| | | |
Outstanding borrowings (Mortgage loan warehouse facilities) | 465,018 | | | |
| | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | |
| Mortgage loans (Loans held for sale, at fair value) | $ | 127,138 | | | $ | 462,144 | | | |
| | | | | |
| | | | | |
| | | | | |
| Outstanding borrowings (Mortgage loan warehouse facilities) | 126,098 | | | 459,344 | | | |
Financings of Advances using SPEs
Match funded advances, i.e., advances that are pledged as collateral to our advance facilities, result from our transfers of residential loan servicing advances to SPEs in exchange for cash. We consolidate these SPEs because we have determined that Ocwen iswe are the primary beneficiary of the SPEs. Through wholly-owned subsidiaries we hold the sole equity interests in the SPEs and service the mortgage loans that generate the advances. These SPEs issue debt supported by collections on the transferred advances, and we refer to this debt as Advance match funded liabilities. Holders of the debt issued by the SPEs have recourse only to the assets of the SPE for satisfaction of the debt.
The table below presents the carrying value and classification of the assets and liabilities of the advance financing facilities:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Match funded advances (Advances, net) | Match funded advances (Advances, net) | $ | 594,645 | | | $ | 651,576 | | Match funded advances (Advances, net) | $ | 550,978 | | | $ | 587,059 | |
| Debt service accounts (Restricted cash) | Debt service accounts (Restricted cash) | 7,241 | | | 14,195 | | Debt service accounts (Restricted cash) | 6,931 | | | 7,687 | |
| Unamortized deferred lender fees (Other assets) | Unamortized deferred lender fees (Other assets) | 1,783 | | | 4,253 | | Unamortized deferred lender fees (Other assets) | 288 | | | 1,305 | |
| Prepaid interest (Other assets) | Prepaid interest (Other assets) | 205 | | | 291 | | Prepaid interest (Other assets) | 177 | | | 225 | |
| Advance match funded liabilities | Advance match funded liabilities | 516,572 | | | 581,288 | | Advance match funded liabilities | 475,487 | | | 512,297 | |
MSR Financings using SPEs
In 2019, we entered into a financing facilityWe established two SPEs (trusts) in connection with a third-party financing facility secured by certain Fannie Mae and Freddie Mac MSRs (Agency MSRs). Two SPEs (trusts) were established in connection with this facility.
We determined that the trusts are VIEs for which we are the primary beneficiary. Therefore, we have included the trusts in our consolidated financial statements. We have the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance given that we are the servicer of the Agency MSRs that result in cash flows to the trusts. In addition, we have designed the trusts at inception to facilitate the third-party funding facility under which we have the obligation to absorb the losses of the VIEs that could be potentially significant to the VIEs.
The table below presents the carrying value and classification of the assets and liabilities of the Agency MSR financing facility:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | MSRs pledged (MSRs, at fair value) | MSRs pledged (MSRs, at fair value) | $ | 649,202 | | | $ | 476,371 | | MSRs pledged (MSRs, at fair value) | $ | 655,389 | | | $ | 630,605 | |
| Unamortized deferred lender fees (Other assets) | Unamortized deferred lender fees (Other assets) | 2,290 | | | 1,183 | | Unamortized deferred lender fees (Other assets) | 2,250 | | | 1,495 | |
| Debt service account (Restricted cash) | Debt service account (Restricted cash) | 104 | | | 211 | | Debt service account (Restricted cash) | 102 | | | 104 | |
| Outstanding borrowings (MSR financing facilities, net) | Outstanding borrowings (MSR financing facilities, net) | 349,298 | | | 210,755 | | Outstanding borrowings (MSR financing facilities, net) | 389,037 | | | 317,523 | |
|
In 2019, we issued Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 Class A (PLS Notes) secured by certain of PMC’s private label MSRs (PLS MSRs). On March 15, 2022, we replaced the existing PLS Notes with a new series of notes, Ocwen Excess Spread-Collateralized Notes, Series 2022-PLS1 Class A, at an initial principal amount of $75.0 million. An SPE, PMC PLS ESR Issuer LLC (PLS Issuer), was established in this connection as a wholly owned subsidiary of PMC. Ocwen guarantees the obligations of PLS Issuer under the facility.
We determined that PLS Issuer is a VIE for which we are the primary beneficiary. Therefore, we have included PLS Issuer in our consolidated financial statements. We have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance given that we are the servicer of the MSRs that result in cash flows to PLS Issuer. In addition, PMC has designed PLS Issuer at inception to facilitate the funding for general corporate purposes. Separately, inof PMC’s MSRs. In return for the participation interests, PMC received the proceeds from issuance of the PLS Notes. PMC is the sole member of PLS Issuer, thus PMC has the obligation to absorb the losses of the VIE that could be potentially significant to the VIE.
The table below presents the carrying value and classification of the assets and liabilities of the PLS Notes facility:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | MSRs pledged (MSRs, at fair value) | MSRs pledged (MSRs, at fair value) | $ | 103,082 | | | $ | 129,204 | | MSRs pledged (MSRs, at fair value) | $ | 114,600 | | | $ | 99,833 | |
| Debt service account (Restricted cash) | Debt service account (Restricted cash) | 2,071 | | | 2,385 | | Debt service account (Restricted cash) | 1,999 | | | 1,968 | |
| Outstanding borrowings (MSR financing facilities, net) | Outstanding borrowings (MSR financing facilities, net) | 48,243 | | | 68,313 | | Outstanding borrowings (MSR financing facilities, net) | 67,131 | | | 41,663 | |
| Unamortized debt issuance costs (MSR financing facilities, net) | Unamortized debt issuance costs (MSR financing facilities, net) | 506 | | | 894 | | Unamortized debt issuance costs (MSR financing facilities, net) | 951 | | | 413 | |
|
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in
pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not measured, at fair value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2021 | | December 31, 2020 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets | | | | | | | | | |
| Loans held for sale | | | | | | | | | |
| Loans held for sale, at fair value (a) (e) | 3, 2 | | $ | 921,621 | | | $ | 921,621 | | | $ | 366,364 | | | $ | 366,364 | |
| Loans held for sale, at lower of cost or fair value (b) | 3 | | 12,079 | | | 12,079 | | | 21,472 | | | 21,472 | |
| Total Loans held for sale | | | $ | 933,700 | | | $ | 933,700 | | | $ | 387,836 | | | $ | 387,836 | |
| | | | | | | | | |
| Loans held for investment | | | | | | | | | |
| Loans held for investment - Reverse mortgages (a) | 3 | | $ | 7,100,726 | | | $ | 7,100,726 | | | $ | 6,997,127 | | | $ | 6,997,127 | |
| Loans held for investment - Restricted for securitization investors (a) | 3 | | 8,004 | | | 8,004 | | | 9,770 | | | 9,770 | |
| Total loans held for investment | | | $ | 7,108,730 | | | $ | 7,108,730 | | | $ | 7,006,897 | | | $ | 7,006,897 | |
| | | | | | | | | |
| Advances, net (c) | 3 | | $ | 739,596 | | | $ | 739,596 | | | $ | 828,239 | | | $ | 828,239 | |
| | | | | | | | | |
| Receivables, net (c) | 3 | | 183,090 | | | 183,090 | | | 187,665 | | | 187,665 | |
| Mortgage-backed securities (a) | 3 | | 1,618 | | | 1,618 | | | 2,019 | | | 2,019 | |
| | | | | | | | | |
| Corporate bonds (a) | 2 | | 211 | | | 211 | | | 211 | | | 211 | |
| Investment in equity method investee (c) | 3 | | 19,794 | | | 19,794 | | | — | | | — | |
| | | | | | | | | |
| Financial liabilities: | | | | | | | | | |
| Advance match funded liabilities (c) | 3 | | $ | 516,572 | | | $ | 515,405 | | | $ | 581,288 | | | $ | 581,997 | |
| Financing liabilities: | | | | | | | | | |
| HMBS-related borrowings (a) | 3 | | $ | 6,782,564 | | | $ | 6,782,564 | | | $ | 6,772,711 | | | $ | 6,772,711 | |
| Other financing liabilities | | | | | | | | | |
| Financing liability -Transferred MSR liability (a) | 3 | | 702,907 | | | 702,907 | | | 566,952 | | | 566,952 | |
| Financing liability - Owed to securitization investors (a) | 3 | | 8,004 | | | 8,004 | | | 9,770 | | | 9,770 | |
| | | | | | | | | |
| Total Other financing liabilities | | | 710,911 | | | 710,911 | | | 576,722 | | | 576,722 | |
| | | | | | | | | |
| | | | | | | | | | |
| Senior secured term loan (c) (d) | 2 | | $ | — | | | $ | — | | | $ | 179,776 | | | $ | 184,639 | |
| Mortgage loan warehouse facilities (c) | 3 | | 1,069,170 | | | 1,069,170 | | | 451,713 | | | 451,713 | |
| MSR financing facilities (c) (d) | 3 | | 945,744 | | | 918,217 | | | 437,672 | | | 406,860 | |
| | | | | | | | | |
| Senior notes: | | | | | | | | | |
| Senior notes (c) (d) (f) | 2 | | 392,190 | | | 403,490 | | | 311,898 | | | 320,879 | |
| OFC Senior notes due 2027 (c) (d) (f) | 3 | | 220,468 | | | 258,805 | | | — | | | — | |
| Total Senior notes | | | $ | 612,658 | | | $ | 662,295 | | | $ | 311,898 | | | $ | 320,879 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets | | | | | | | | | |
| Loans held for sale | | | | | | | | | |
| Loans held for sale, at fair value (a) (e) | 3, 2 | | $ | 683,140 | | | $ | 683,140 | | | $ | 917,534 | | | $ | 917,534 | |
| Loans held for sale, at lower of cost or fair value (b) | 3 | | 4,325 | | | 4,325 | | | 10,993 | | | 10,993 | |
| Total Loans held for sale | | | $ | 687,465 | | | $ | 687,465 | | | $ | 928,527 | | | $ | 928,527 | |
| | | | | | | | | |
| | | | | | September 30, 2021 | | December 31, 2020 | | | | June 30, 2022 | | December 31, 2021 |
| | | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Loans held for investment | | Loans held for investment | |
| Loans held for investment - Reverse mortgages (a) | | Loans held for investment - Reverse mortgages (a) | 3 | | $ | 7,376,528 | | | $ | 7,376,528 | | | $ | 7,199,762 | | | $ | 7,199,762 | |
| Loans held for investment - Restricted for securitization investors (a) | | Loans held for investment - Restricted for securitization investors (a) | 3 | | 7,289 | | | 7,289 | | | 7,879 | | | 7,879 | |
| Total loans held for investment | | Total loans held for investment | | $ | 7,383,817 | | | $ | 7,383,817 | | | $ | 7,207,641 | | | $ | 7,207,641 | |
| | Advances, net (c) | | Advances, net (c) | 3 | | $ | 647,167 | | | $ | 647,167 | | | $ | 772,433 | | | $ | 772,433 | |
| | Receivables, net (c) | | Receivables, net (c) | 3 | | 178,480 | | | 178,480 | | | 180,707 | | | 180,707 | |
| Mortgage-backed securities (a) | | Mortgage-backed securities (a) | 3 | | — | | | — | | | 1 | | | 1 | |
| | Corporate bonds (a) | | Corporate bonds (a) | 2 | | 211 | | | 211 | | | 211 | | | 211 | |
| | | Financial liabilities: | | Financial liabilities: | | | | | | | | | |
| Advance match funded liabilities (c) | | Advance match funded liabilities (c) | 3 | | $ | 476,978 | | | $ | 471,357 | | | $ | 512,297 | | | $ | 511,994 | |
| Financing liabilities: | | Financing liabilities: | |
| HMBS-related borrowings (a) | | HMBS-related borrowings (a) | 3 | | $ | 7,155,251 | | | $ | 7,155,251 | | | $ | 6,885,022 | | | $ | 6,885,022 | |
| Other financing liabilities | | Other financing liabilities | |
| Financing liability -Transferred MSR liability (a) | | Financing liability -Transferred MSR liability (a) | 3 | | $ | 906,338 | | | $ | 906,338 | | | $ | 797,084 | | | $ | 797,084 | |
| Financing liability - Owed to securitization investors (a) | | Financing liability - Owed to securitization investors (a) | 3 | | 7,289 | | | 7,289 | | | 7,879 | | | 7,879 | |
| | Total Other financing liabilities | | Total Other financing liabilities | | $ | 913,627 | | | $ | 913,627 | | | $ | 804,963 | | | $ | 804,963 | |
| | | | | | | | | | | | |
| | Mortgage loan warehouse facilities (c) | | Mortgage loan warehouse facilities (c) | 3 | | 779,270 | | | 779,270 | | | 1,085,076 | | | 1,085,076 | |
| MSR financing facilities (c) (d) | | MSR financing facilities (c) (d) | 3 | | 987,712 | | | 965,069 | | | 900,760 | | | 873,820 | |
| | Senior notes: | | Senior notes: | |
| PMC Senior secured notes due 2026 (c) (d) | | PMC Senior secured notes due 2026 (c) (d) | 2 | | $ | 368,724 | | | $ | 333,124 | | | $ | 392,555 | | | $ | 413,472 | |
| OFC Senior secured notes due 2027 (c) (d) | | OFC Senior secured notes due 2027 (c) (d) | 3 | | 226,165 | | | 223,800 | | | 222,242 | | | 261,455 | |
| Total Senior notes | | Total Senior notes | | $ | 594,889 | | | $ | 556,924 | | | $ | 614,797 | | | $ | 674,927 | |
| | Derivative financial instrument assets (liabilities) | Derivative financial instrument assets (liabilities) | | | | | | | | | | Derivative financial instrument assets (liabilities) | | | | | | | | | |
| Interest rate lock commitments (a) | 3 | | $ | 14,030 | | | $ | 14,030 | | | $ | 22,706 | | | $ | 22,706 | | |
| Interest rate lock commitments (IRLCs) (a) | | Interest rate lock commitments (IRLCs) (a) | 3 | | $ | 5,746 | | | $ | 5,746 | | | $ | 18,085 | | | $ | 18,085 | |
| Forward trades - Loans held for sale (a) | Forward trades - Loans held for sale (a) | 2 | | 421 | | | 421 | | | (50) | | | (50) | | Forward trades - Loans held for sale (a) | 1 | | 565 | | | 565 | | | 364 | | | 364 | |
| TBA / Forward mortgage-backed securities (MBS) trades (a) | TBA / Forward mortgage-backed securities (MBS) trades (a) | 1 | | (11,227) | | | (11,227) | | | (4,554) | | | (4,554) | | TBA / Forward mortgage-backed securities (MBS) trades (a) | 1 | | (4,058) | | | (4,058) | | | (240) | | | (240) | |
| Interest rate swap futures (a) | Interest rate swap futures (a) | 1 | | (8,236) | | | (8,236) | | | 504 | | | 504 | | Interest rate swap futures (a) | 1 | | 742 | | | 742 | | | 1,734 | | | 1,734 | |
| TBA forward Pipeline trades (a) | 1 | | 5,262 | | | 5,262 | | | — | | | — | | |
| Other | 3 | | (438) | | | (438) | | | — | | | — | | |
| | Option contracts (a) | | Option contracts (a) | 2 | | 1,179 | | | 1,179 | | | (277) | | | (277) | |
| Other (a) | | Other (a) | 3 | | (133) | | | (133) | | | (1,070) | | | (1,070) | |
| | MSRs (a) | MSRs (a) | 3 | | $ | 2,176,260 | | | $ | 2,176,260 | | | $ | 1,294,817 | | | $ | 1,294,817 | | MSRs (a) | 3 | | $ | 2,485,679 | | | $ | 2,485,679 | | | $ | 2,250,147 | | | $ | 2,250,147 | |
|
(a)Measured at fair value on a recurring basis.
(b)Measured at fair value on a non-recurring basis.
(c)Disclosed, but not measured, at fair value.
(d)The carrying values are net of unamortized debt issuance costs and discount. See Note 1213 – Borrowings for additional information.
(e)Loans repurchased from Ginnie Mae securitizations with a fair value of $210.8$41.4 million and $51.1$220.9 million at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, are classified as Level 3. The remaining balance of loans held for sale at fair value is classified as Level 2.
(f)
On March 4, 2021, PMC completed the issuance and sale of $400.0 million aggregate principal amount of senior secured notes. Fair value is based on valuation data obtained from a pricing service. Therefore, these notes are classified as Level 2. Additionally on March 4, 2021 and May 3, 2021, Ocwen completed the private placement of $199.5 million and $85.5 million, respectively, aggregate principal amount of senior secured second lien notes. These notes are classified as Level 3. See Note 12 – Borrowings for additional information.
The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis:
| | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-Backed Securities | | | IRLCs | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | | IRLCs | |
| Three months ended September 30, 2021 | |
| Three months ended June 30, 2022 | | Three months ended June 30, 2022 |
| Beginning balance | Beginning balance | | $ | 8,680 | | | $ | (8,680) | | | $ | 138,842 | | | $ | 1,607 | | | | $ | 17,437 | | | Beginning balance | | $ | 7,722 | | | $ | (7,722) | | | $ | 230,443 | | | | $ | 5,673 | | |
| Cumulative effect of fair value election | | — | | | — | | | — | | | — | | | | | | |
| | Purchases, issuances, sales and settlements | Purchases, issuances, sales and settlements | | | | | | Purchases, issuances, sales and settlements | | | | | |
| Purchases | Purchases | | — | | | — | | | 136,996 | | | — | | | | — | | | Purchases | | — | | | — | | | 57,542 | | | | — | | |
Issuances | Issuances | | — | | | — | | | — | | | — | | | | 184,995 | | | Issuances | | — | | | — | | | — | | | | 82,228 | | |
| | Sales | Sales | | — | | | — | | | (64,032) | | | — | | | | — | | | Sales | | — | | | — | | | (243,810) | | | | — | | |
| Settlements | Settlements | | (676) | | | 676 | | | — | | | — | | | | — | | | Settlements | | (433) | | | 433 | | | — | | | | — | | |
| Transfers (to) from: | Transfers (to) from: | | | | | | Transfers (to) from: | | | | | |
| Loans held for sale, at fair value | Loans held for sale, at fair value | | — | | | — | | | — | | | — | | | | (182,783) | | | Loans held for sale, at fair value | | — | | | — | | | — | | | | 3,642 | | |
| | Receivables, net | Receivables, net | | — | | | — | | | (558) | | | — | | | | — | | | Receivables, net | | — | | | — | | | (1,655) | | | | — | | |
| | | | | (676) | | | 676 | | | 72,406 | | | — | | | | 2,212 | | | | | (433) | | | 433 | | | (187,923) | | | | 85,870 | | |
| Change in fair value included in earnings | Change in fair value included in earnings | | — | | | — | | | (496) | | | 11 | | | | (5,619) | | | Change in fair value included in earnings | | — | | | — | | | (1,157) | | | | (85,797) | | |
| | Transfers in and / or out of Level 3 | | — | | | — | | | — | | | — | | | | — | | | |
| | Ending balance | Ending balance | | $ | 8,004 | | | $ | (8,004) | | | $ | 210,752 | | | $ | 1,618 | | | | $ | 14,030 | | | Ending balance | | $ | 7,289 | | | $ | (7,289) | | | $ | 41,363 | | | | $ | 5,746 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-Backed Securities | | | | IRLCs | | | | |
| Three months ended September 30, 2020 |
| Beginning balance | | | | | $ | 11,664 | | | $ | (11,664) | | | $ | 25,950 | | | $ | 1,726 | | | | | $ | 17,818 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 45,445 | | | — | | | | | — | | | | | |
| Issuances | | | | | — | | | — | | | — | | | — | | | | | 87,311 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | (45,723) | | | — | | | | | — | | | | | |
| Settlements | | | | | (652) | | | 652 | | | 356 | | | — | | | | | (77,785) | | | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Receivables, net | | | | | — | | | — | | | 157 | | | — | | | | | — | | | | | |
| | | | | | (652) | | | 652 | | | 235 | | | — | | | | | 9,526 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings | | | | | — | | | — | | | 224 | | | 424 | | | | | (4,665) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance | | | | | $ | 11,012 | | | $ | (11,012) | | | $ | 26,409 | | | $ | 2,150 | | | | | $ | 22,679 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-backed Securities | | | | IRLCs | | | | |
| Nine Months Ended September 30, 2021 |
| Beginning balance | | | | | $ | 9,770 | | | $ | (9,770) | | | $ | 51,072 | | | $ | 2,019 | | | | | $ | 22,706 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 303,117 | | | — | | | | | — | | | | | |
| Issuances | | | | | — | | | — | | | — | | | — | | | | | 446,751 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | (135,088) | | | — | | | | | — | | | | | |
| Settlements | | | | | (1,766) | | | 1,766 | | | — | | | — | | | | | — | | | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value | | | | | — | | | — | | | — | | | — | | | | | (425,169) | | | | | |
| Other assets | | | | | — | | | — | | | (377) | | | — | | | | | — | | | | | |
| Receivables, net | | | | | — | | | — | | | (1,113) | | | — | | | | | — | | | | | |
| | | | | | (1,766) | | | 1,766 | | | 166,539 | | | — | | | | | 21,582 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings | | | | | — | | | — | | | (6,859) | | | (401) | | | | | (30,258) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance | | | | | $ | 8,004 | | | $ | (8,004) | | | $ | 210,752 | | | $ | 1,618 | | | | | $ | 14,030 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-backed Securities | | | | IRLCs | | |
| Nine Months Ended September 30, 2020 |
| Beginning balance | | | | | $ | 23,342 | | | $ | (22,002) | | | $ | — | | | $ | 2,075 | | | | | $ | — | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 103,955 | | | — | | | | | — | | | |
| Issuances | | | | | — | | | — | | | — | | | — | | | | | 144,931 | | | |
| Deconsolidation of mortgage-backed securitization trusts | | | | | (10,715) | | | 9,519 | | | — | | | — | | | | | — | | | |
| Sales | | | | | — | | | — | | | (104,273) | | | — | | | | | — | | | |
| Settlements | | | | | (1,615) | | | 1,615 | | | (70) | | | — | | | | | — | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value | | | | | — | | | — | | | — | | | — | | | | | (128,224) | | | |
| | | | | | | | | | | | | | | | | |
| Receivables, net | | | | | — | | | — | | | (113) | | | — | | | | | — | | | |
| | | | | | (12,330) | | | 11,134 | | | (501) | | | — | | | | | 16,707 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings | | | | | — | | | (144) | | | 1,328 | | | 75 | | | | | (4,506) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Transfers in and / or out of Level 3 | | | | | — | | | — | | | 25,582 | | | — | | | | | 10,478 | | | |
| Ending balance | | | | | $ | 11,012 | | | $ | (11,012) | | | $ | 26,409 | | | $ | 2,150 | | | | | $ | 22,679 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-Backed Securities | | | | IRLCs | | | | |
| Three months ended June 30, 2021 |
| Beginning balance | | | | | $ | 8,820 | | | $ | (8,820) | | | $ | 71,367 | | | $ | 1,613 | | | | | $ | 14,589 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 107,206 | | | — | | | | | — | | | | | |
| Issuances (1) | | | | | — | | | — | | | — | | | — | | | | | 127,386 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | (38,167) | | | — | | | | | — | | | | | |
| Settlements | | | | | (140) | | | 140 | | | — | | | — | | | | | — | | | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value (1) | | | | | — | | | — | | | — | | | — | | | | | (113,822) | | | | | |
| Other assets | | | | | — | | | — | | | (281) | | | — | | | | | — | | | | | |
| Receivables, net | | | | | — | | | — | | | (555) | | | — | | | | | — | | | | | |
| | | | | | (140) | | | 140 | | | 68,203 | | | — | | | | | 13,564 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings (1) | | | | | — | | | — | | | (728) | | | (6) | | | | | (10,716) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance | | | | | $ | 8,680 | | | $ | (8,680) | | | $ | 138,842 | | | $ | 1,607 | | | | | $ | 17,437 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | | | | | IRLCs | | | | |
| Six Months Ended June 30, 2022 |
| Beginning balance | | | | | $ | 7,879 | | | $ | (7,879) | | | $ | 220,940 | | | | | | | $ | 18,085 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 118,237 | | | | | | | — | | | | | |
| Issuances (1) | | | | | — | | | — | | | — | | | | | | | 161,852 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | (291,612) | | | | | | | — | | | | | |
| Settlements | | | | | (590) | | | 590 | | | — | | | | | | | — | | | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value (1) | | | | | — | | | — | | | — | | | | | | | (53,862) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Receivables, net | | | | | — | | | — | | | (1,770) | | | | | | | — | | | | | |
| | | | | | (590) | | | 590 | | | (175,145) | | | | | | | 107,990 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings (1) | | | | | — | | | — | | | (4,432) | | | | | | | (120,329) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance | | | | | $ | 7,289 | | | $ | (7,289) | | | $ | 41,363 | | | | | | | $ | 5,746 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | Mortgage-backed Securities | | | | IRLCs | | |
| Six Months Ended June 30, 2021 |
| Beginning balance | | | | | $ | 9,770 | | | $ | (9,770) | | | $ | 51,072 | | | $ | 2,019 | | | | | $ | 22,706 | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 166,121 | | | — | | | | | — | | | |
| Issuances (1) | | | | | — | | | — | | | — | | | — | | | | | 261,756 | | | |
| | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | (71,056) | | | — | | | | | — | | | |
| Settlements | | | | | (1,090) | | | 1,090 | | | — | | | — | | | | | — | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value (1) | | | | | — | | | — | | | — | | | — | | | | | (242,386) | | | |
| Other assets | | | | | — | | | — | | | (377) | | | — | | | | | — | | | |
| Receivables, net | | | | | — | | | — | | | (555) | | | — | | | | | — | | | |
| | | | | | (1,090) | | | 1,090 | | | 94,133 | | | — | | | | | 19,370 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings (1) | | | | | — | | | — | | | (6,363) | | | (412) | | | | | (24,639) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Ending balance | | | | | $ | 8,680 | | | $ | (8,680) | | | $ | 138,842 | | | $ | 1,607 | | | | | $ | 17,437 | | | |
(1)IRLC activity (issuances and transfers) represent changes in fair value included in earnings. This activity is presented on a gross basis in the table for disclosure purposes. Total net change in fair value included in earnings attributed to IRLCs is a gain (loss) of $0.1 million and $(12.3) million for the three and six months ended June 30, 2022, respectively, and $2.9 million and $(5.3) million for the three and six months ended June 30, 2021, respectively. See Note 16 – Derivative Financial Instruments and Hedging Activities.
A rollforward ofreconciliation from the beginning andbalances to the ending balances of Loans Held for Investment and HMBS-related borrowings, MSRs and Financing liability - MSRs pledgedPledged liabilities that we measure at fair value on a recurring and non-recurring basis is provideddisclosed in Note 5 –- Reverse Mortgages, Note 7 – Mortgage Servicing and Note 8 — MSR Transfers Not Qualifying for Sale Accounting, respectively.
During the ninesix months ended SeptemberJune 30, 2021,2022, there have been no changes to the methodologies that we use in estimating fair values or classifications under the valuation hierarchy as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. The significant unobservable assumptions that we make to estimate the fair value of significant assets and liabilities classified as Level 3 and measured at fair value on a recurring or non-recurring basis are provided below.
Loans Held for Sale
The fair value of loans we purchased from Ginnie Mae guaranteed securitizations is estimated using both observable and unobservable inputs, including published forward Ginnie Mae prices or existing sale contracts, as well as estimated default, prepayment, and discount rates. The significant unobservable input in estimating fair value is the estimated default rate. Accordingly, these repurchased Ginnie Mae loans are classified as Level 3 within the valuation hierarchy.
Loans Held for Investment - Reverse Mortgages
Reverse mortgage loans held for investment are carried at fair value and classified as Level 3 within the valuation hierarchy. Significant unobservable assumptions include voluntaryconditional prepayment speeds, defaultsrate and discount rate. The conditional prepayment speedrate assumption displayed in the table below is inclusive of voluntary (repayment or payoff) and involuntary (inactive/delinquent status and default) prepayments. The discount rate assumption is primarily based on an assessment of current market yields on reverse mortgage loan and tail securitizations, expected duration of the asset and current market interest rates.
| | Significant unobservable assumptions | Significant unobservable assumptions | September 30,
2021 | | December 31,
2020 | Significant unobservable assumptions | June 30,
2022 | | December 31,
2021 |
| Life in years | Life in years | | | | Life in years | | | |
| Range | Range | 1.1 to 8.0 | | 0.9 to 8.0 | Range | 1.1 to 9.5 | | 1.0 to 8.2 |
| Weighted average | Weighted average | 5.6 | | 5.9 | | Weighted average | 5.2 | | 5.7 | |
| Conditional prepayment rate, including voluntary and involuntary prepayments | Conditional prepayment rate, including voluntary and involuntary prepayments | | Conditional prepayment rate, including voluntary and involuntary prepayments | |
| Range | Range | 11.0% to 35.5% | | 10.6% to 28.8% | Range | 11.9% to 47.0% | | 11.2% to 36.6% |
| Weighted average | Weighted average | 16.2 | % | | 15.4 | % | Weighted average | 17.3 | % | | 16.0 | % |
| Discount rate | Discount rate | 2.5 | % | | 1.9 | % | Discount rate | 4.2 | % | | 2.6 | % |
Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the securitized loans held for investment, excluding future draw commitments, are partially offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.
MSRs
MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is determined usingequal to the mid-point of the range of pricesfair value mark provided by the third-party valuation experts, without adjustment, except in the event we have a potential or completed sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is recorded at the estimated sale price.
A change in the valuation inputs or assumptions may result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value of Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance funding costs. The significant unobservable assumptions used in the valuation of these MSRs include prepayment speeds, delinquency rates, cost to service and discount rates.
| | Significant unobservable assumptions | Significant unobservable assumptions | September 30, 2021 | | December 31, 2020 | Significant unobservable assumptions | June 30, 2022 | | December 31, 2021 |
| Agency | | Non-Agency | | Agency | | Non-Agency | Agency | | Non-Agency | | Agency | | Non-Agency |
| Weighted average prepayment speed | Weighted average prepayment speed | 9.0 | % | | 12.0 | % | | 11.8 | % | | 11.5 | % | Weighted average prepayment speed | 6.9 | % | | 12.0 | % | | 8.5 | % | | 12.1 | % |
| Weighted average lifetime delinquency rate | Weighted average lifetime delinquency rate | 1.4 | % | | 12.8 | % | | 3.0 | % | | 28.0 | % | Weighted average lifetime delinquency rate | 1.1 | % | | 10.8 | % | | 1.2 | % | | 11.9 | % |
| | Weighted average discount rate | Weighted average discount rate | 8.6 | % | | 11.2 | % | | 9.2 | % | | 11.4 | % | Weighted average discount rate | 8.5 | % | | 10.7 | % | | 8.5 | % | | 11.2 | % |
| Weighted average cost to service (in dollars) | Weighted average cost to service (in dollars) | $ | 72 | | | $ | 209 | | | $ | 79 | | | $ | 270 | | Weighted average cost to service (in dollars) | $ | 70 | | | $ | 199 | | | $ | 71 | | | $ | 205 | |
Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs as of SeptemberJune 30, 20212022 given hypothetical increases in lifetime prepayments and yield assumptions:
| | Adverse change in fair value | Adverse change in fair value | 10% | | 20% | Adverse change in fair value | 10% | | 20% |
| Weighted average prepayment speeds | Weighted average prepayment speeds | $ | (65,965) | | | $ | (128,151) | | Weighted average prepayment speeds | $ | (58,012) | | | $ | (113,093) | |
| Weighted average discount rate | Weighted average discount rate | (53,571) | | | (103,573) | | Weighted average discount rate | (63,752) | | | (122,853) | |
Investment in Equity Method Investee
Our investment in equity method investee is accounted for using the equity method and classified as Level 3 within the valuation hierarchy. The assets, including MSRs and MSR related assets, and liabilities of the investee are carried at fair value or a value that approximates fair value. Accordingly, the investee’s net asset value approximates its fair value, and its earnings or losses reflect the change in its net asset value, resulting in our recorded investment approximating fair value. See Note 10 - Investment in Equity Method Investee for further details.
Financing Liabilities
HMBS-Related Borrowings
HMBS-related borrowings are carried at fair value and classified as Level 3 within the valuation hierarchy. These borrowings are not actively traded, and therefore, quoted market prices are not available.
Significant unobservable assumptions include yield spread and discount rate. The yield spread and discount rate assumption for these liabilities are primarily based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
| | | | | | | | | | | |
| Significant unobservable assumptions | September 30,
2021 | | December 31,
2020 |
| Life in years | | | |
| Range | 1.1 to 8.0 | | 0.9 to 8.0 |
| Weighted average | 5.6 | | 5.9 | |
| Conditional prepayment rate | | | |
| Range | 11.0% to 35.5% | | 10.6% to 28.8% |
| Weighted average | 16.2 | % | | 15.4 | % |
| Discount rate | 2.3 | % | | 1.7 | % |
| | | | | | | | | | | |
| Significant unobservable assumptions | June 30,
2022 | | December 31,
2021 |
| Life in years | | | |
| Range | 1.1 to 9.5 | | 1.0 to 8.2 |
| Weighted average | 5.2 | | 5.7 | |
| Conditional prepayment rate | | | |
| Range | 11.9% to 47.0% | | 11.2% to 36.6% |
| Weighted average | 17.3 | % | | 16.0 | % |
| Discount rate | 4.2 | % | | 2.5 | % |
Significant increases or decreases in any of these assumptions in isolation could result in a significantly higher or lower fair value, respectively. The effects of changes in the assumptions used to value the HMBS-related borrowings are partially offset by the effects of changes in the assumptions used to value the associated pledged loans held for investment, excluding future draw commitments.
MSRs Pledged MSR Liabilities
ThesePledged MSR pledged liabilities are carried at fair value and classified as Level 3 within the valuation hierarchy. We determine the fair value of the pledged MSR liability consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR, considering retained cash flows.
| | Significant unobservable assumptions | Significant unobservable assumptions | September 30,
2021 | | December 31,
2020 | Significant unobservable assumptions | June 30,
2022 | | December 31,
2021 |
| Weighted average prepayment speed | Weighted average prepayment speed | 11.2 | % | | 11.5 | % | Weighted average prepayment speed | 10.2 | % | | 10.9 | % |
| Weighted average delinquency rate | Weighted average delinquency rate | 11.2 | % | | 29.8 | % | Weighted average delinquency rate | 7.4 | % | | 8.8 | % |
| | Weighted average discount rate | Weighted average discount rate | 10.7 | % | | 11.4 | % | Weighted average discount rate | 10.0 | % | | 10.5 | % |
| Weighted average cost to service (in dollars) | Weighted average cost to service (in dollars) | $ | 199 | | | $ | 287 | | Weighted average cost to service (in dollars) | $ | 171 | | | $ | 182 | |
Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
Derivative Financial Instruments
Interest rate lock commitments (IRLCs)IRLCs are classified as Level 3 assets as fallout rates were determined to be significant unobservable assumptions.
| | |
| Note 4 – Loans Held for Sale |
| | Loans Held for Sale - Fair Value | Loans Held for Sale - Fair Value | Three Months Ended September 30, | | Nine Months Ended September 30, | Loans Held for Sale - Fair Value | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | Beginning balance | $ | 680,866 | | | $ | 253,037 | | | $ | 366,364 | | | $ | 208,752 | | Beginning balance | $ | 716,024 | | | $ | 500,814 | | | $ | 917,534 | | | $ | 366,364 | |
| Originations and purchases | Originations and purchases | 6,366,795 | | | 2,429,977 | | | 12,987,522 | | | 4,378,999 | | Originations and purchases | 4,681,989 | | | 3,286,826 | | | 8,154,599 | | | 6,620,727 | |
| Proceeds from sales | Proceeds from sales | (6,098,495) | | | (2,317,579) | | | (12,362,149) | | | (4,190,355) | | Proceeds from sales | (4,603,355) | | | (3,094,639) | | | (8,174,218) | | | (6,263,654) | |
| Principal collections | Principal collections | (22,334) | | | (5,721) | | | (39,037) | | | (21,479) | | Principal collections | (65,765) | | | (11,285) | | | (95,231) | | | (16,703) | |
| Transfers from (to): | Transfers from (to): | | Transfers from (to): | |
| Loans held for investment, at fair value | Loans held for investment, at fair value | 1,220 | | | 781 | | | 2,898 | | | 1,900 | | Loans held for investment, at fair value | 16,492 | | | 777 | | | 19,630 | | | 1,678 | |
| | Receivables, net | Receivables, net | (7,625) | | | (14,723) | | | (25,151) | | | (62,949) | | Receivables, net | 32,911 | | | (8,893) | | | 32,211 | | | (17,526) | |
| REO (Other assets) | REO (Other assets) | (1,767) | | | (1,713) | | | (5,312) | | | (2,554) | | REO (Other assets) | (24) | | | (1,493) | | | (24) | | | (3,545) | |
| Gain (loss) on sale of loans | Gain (loss) on sale of loans | 1,793 | | | 17,509 | | | (13,006) | | | 45,762 | | Gain (loss) on sale of loans | (114,300) | | | (1,067) | | | (186,602) | | | (14,799) | |
| Capitalization of advances on Ginnie Mae modifications | | Capitalization of advances on Ginnie Mae modifications | 5,810 | | | 3,897 | | | 13,114 | | | 7,291 | |
| Increase (decrease) in fair value of loans | Increase (decrease) in fair value of loans | (5,336) | | | 4,220 | | | (6,025) | | | 1,925 | | Increase (decrease) in fair value of loans | 10,841 | | | 4,567 | | | (1,429) | | | (689) | |
| Other | Other | 6,504 | | | 1,178 | | | 15,517 | | | 6,965 | | Other | 2,517 | | | 1,362 | | | 3,556 | | | 1,722 | |
Ending balance (1) | Ending balance (1) | $ | 921,621 | | | $ | 366,966 | | | $ | 921,621 | | | $ | 366,966 | | Ending balance (1) | $ | 683,140 | | | $ | 680,866 | | | $ | 683,140 | | | $ | 680,866 | |
(1)At SeptemberJune 30, 20212022 and 2020,2021, the balances include $(9.3)$(5.7) million and $(5.8)$(7.4) million, respectively, of fair value adjustments.
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans Held for Sale - Lower of Cost or Fair Value | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Beginning balance - before Valuation Allowance | $ | 20,278 | | | $ | 31,880 | | | $ | 27,652 | | | $ | 73,160 | |
| | | | | | | |
| Proceeds from sales | (2,916) | | | 891 | | | (9,583) | | | (45,974) | |
| Principal collections | (415) | | | (514) | | | (629) | | | (1,319) | |
| Transfers from (to): | | | | | | | |
| Receivables, net | (444) | | | — | | | (936) | | | 61 | |
| | | | | | | |
| | | | | | | |
| Gain (loss) on sale of loans | 35 | | | (1,141) | | | 549 | | | 474 | |
| Other | 123 | | | (1,220) | | | (392) | | | 3,494 | |
| Ending balance - before Valuation Allowance | 16,661 | | | 29,896 | | | 16,661 | | | 29,896 | |
| | | | | | | |
| Beginning balance - Valuation Allowance | $ | (5,124) | | | $ | (6,400) | | | $ | (6,180) | | | $ | (6,643) | |
| (Provision for) reversal of valuation allowance | 602 | | | 45 | | | 1,582 | | | (1,084) | |
| Transfer to (from) Liability for indemnification obligations (Other liabilities) | (60) | | | (42) | | | 16 | | | (117) | |
| Sales of loans | — | | | 166 | | | — | | | 1,613 | |
| | | | | | | |
| Ending balance - Valuation Allowance | (4,582) | | | (6,231) | | | (4,582) | | | (6,231) | |
| | | | | | | |
| Ending balance, net | $ | 12,079 | | | $ | 23,665 | | | $ | 12,079 | | | $ | 23,665 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain on Loans Held for Sale, Net | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Gain on sales of loans, net | | | | | | | |
| MSRs retained on transfers of forward mortgage loans | $ | 66,420 | | | $ | 22,096 | | | $ | 136,482 | | | $ | 37,785 | |
| | | | | | | |
| Gain (loss) on sale of forward mortgage loans (1) | (2,601) | | | 11,897 | | | (25,440) | | | 35,201 | |
| Gain on sale of repurchased Ginnie Mae loans | 3,962 | | | 4,663 | | | 12,277 | | | 11,036 | |
| | | | | | | |
| | 67,781 | | | 38,656 | | | 123,319 | | | 84,022 | |
| Change in fair value of IRLCs | (4,135) | | | 4,828 | | | (9,225) | | | 16,876 | |
| Change in fair value of loans held for sale | (3,491) | | | 3,061 | | | (3,323) | | | 3,367 | |
| Loss on economic hedge instruments (2) | 780 | | | 179 | | | 592 | | | (10,141) | |
| | | | | | | |
| Other | (1,233) | | | (838) | | | (3,227) | | | (1,360) | |
| $ | 59,702 | | | $ | 45,886 | | | $ | 108,136 | | | $ | 92,764 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans Held for Sale - Lower of Cost or Fair Value | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance - before Valuation Allowance | $ | 13,347 | | | $ | 22,471 | | | $ | 15,365 | | | $ | 27,652 | |
| | | | | | | |
| Proceeds from sales | (4,824) | | | (1,827) | | | (5,160) | | | (6,667) | |
| Principal collections | (393) | | | — | | | (621) | | | (214) | |
| Transfers from (to): | | | | | | | |
| Receivables, net | (89) | | | (492) | | | (1,192) | | | (716) | |
| REO (Other assets) | — | | | (72) | | | (358) | | | (545) | |
| | | | | | | |
| Gain on sale of loans | — | | | 125 | | | 4 | | | 514 | |
| Other | 97 | | | 73 | | | 100 | | | 254 | |
| Ending balance - before Valuation Allowance | 8,138 | | | 20,278 | | | 8,138 | | | 20,278 | |
| | | | | | | |
| Beginning balance - Valuation Allowance | $ | (4,320) | | | $ | (5,462) | | | $ | (4,372) | | | $ | (6,180) | |
| (Provision for) reversal of valuation allowance | 109 | | | 277 | | | 38 | | | 980 | |
| Transfer to Liability for indemnification obligations (Other liabilities) | 398 | | | 61 | | | 521 | | | 76 | |
| | | | | | | |
| | | | | | | |
| Ending balance - Valuation Allowance | (3,813) | | | (5,124) | | | (3,813) | | | (5,124) | |
| | | | | | | |
| Ending balance, net | $ | 4,325 | | | $ | 15,154 | | | $ | 4,325 | | | $ | 15,154 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) on Loans Held for Sale, Net | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Gain (loss) on sales of loans, net | | | | | | | |
| MSRs retained on transfers of forward mortgage loans | $ | 60,162 | | | $ | 35,802 | | | $ | 105,965 | | | $ | 70,062 | |
| | | | | | | |
| Gain (loss) on sale of forward mortgage loans (1) | (90,298) | | | (4,272) | | | (162,594) | | | (22,839) | |
| Gain (loss) on sale of repurchased Ginnie Mae loans (1)(2) | (10,262) | | | 3,416 | | | (9,664) | | | 8,316 | |
| | | | | | | |
| | (40,398) | | | 34,946 | | | (66,292) | | | 55,539 | |
| Change in fair value of IRLCs | 890 | | | 3,528 | | | (11,167) | | | (5,090) | |
| Change in fair value of loans held for sale | 12,048 | | | 5,149 | | | 362 | | | 168 | |
| Gain (loss) on economic hedge instruments (3) | 29,118 | | | (188) | | | 76,224 | | | (188) | |
| | | | | | | |
| Other | (718) | | | (722) | | | (1,393) | | | (1,995) | |
| $ | 940 | | | $ | 42,713 | | | $ | (2,266) | | | $ | 48,434 | |
(1)Realized gain (loss) on sale of loans, excluding retained MSRs.
(2)Includes $22.5an $8.8 million gain in the three and nine months ended September 30, 2021 related to loans purchased through the exercise of our servicer call rights with respect to certain Non-Agency trusts and sold, servicing release, inloss during the three months ended SeptemberJune 30, 2021.2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program with an aggregated UPB of $299.7 million, net of the associated MSR fair value adjustment.
(2)(3)Excludes gains (losses) of $1.5$0.1 million and $25.5$13.4 million during the three and six months ended June 30, 2022, respectively, and $(11.3) million and $24.1 million during the three and six months ended June 30, 2021, respectively, on inter-segment economic hedge derivativederivatives presented within MSR valuation adjustments, net for the three and nine months ended September 30, 2021, respectively, and a loss of $7.8 million for the three and nine months ended September 30, 2020.net. Third-party derivatives are hedging the net exposure of MSR and pipeline, and the change in fair value of derivatives are reported within MSR valuation adjustments, net. Inter-segment derivatives are established to transfer risk and allocate hedging gains/losses to the pipeline separately from the MSR portfolio. Refer to Note 19 – Business Segment Reporting.
| | | | | | | | | | | | | | |
Note 5 –- Reverse Mortgages |
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings (2) | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings (2) |
| Beginning balance | Beginning balance | $ | 7,112,273 | | | $ | (6,823,911) | | | $ | 6,718,992 | | | $ | (6,477,616) | | Beginning balance | $ | 7,451,555 | | | $ | (7,118,844) | | | $ | 7,044,374 | | | $ | (6,778,195) | |
| | Originations | Originations | 494,330 | | | — | | | 299,628 | | | — | | Originations | 524,618 | | | — | | | 393,707 | | | — | |
| Securitization of HECM loans accounted for as a financing | Securitization of HECM loans accounted for as a financing | — | | | (452,262) | | | — | | | (295,347) | | Securitization of HECM loans accounted for as a financing | — | | | (565,977) | | | — | | | (379,650) | |
| Additional proceeds from securitization of HECM loans and tails | Additional proceeds from securitization of HECM loans and tails | — | | | (7,751) | | | — | | | (12,407) | | Additional proceeds from securitization of HECM loans and tails | — | | | (10,102) | | | — | | | (14,608) | |
| | Repayments (principal payments received) | Repayments (principal payments received) | (449,236) | | | 446,277 | | | (249,372) | | | 247,793 | | Repayments (principal payments received) | (476,303) | | | 476,108 | | | (406,856) | | | 403,770 | |
| Transfers to: | Transfers to: | | Transfers to: | |
| Loans held for sale, at fair value | Loans held for sale, at fair value | (1,220) | | | — | | | (781) | | | — | | Loans held for sale, at fair value | (16,492) | | | — | | | (777) | | | — | |
| Receivables, net | Receivables, net | (84) | | | — | | | 105 | | | — | | Receivables, net | (36,933) | | | — | | | 31 | | | — | |
| Other assets | Other assets | (121) | | | — | | | (38) | | | — | | Other assets | — | | | — | | | (84) | | | — | |
| Change in fair value included in earnings | (55,216) | | | 55,083 | | | 81,396 | | | (68,966) | | |
| Ending Balance | $ | 7,100,726 | | | $ | (6,782,564) | | | $ | 6,849,930 | | | $ | (6,606,543) | | |
| Change in fair value included in earnings (3) | | Change in fair value included in earnings (3) | (69,917) | | | 63,564 | | | 81,878 | | | (55,228) | |
| Ending balance | | Ending balance | $ | 7,376,528 | | | $ | (7,155,251) | | | $ | 7,112,273 | | | $ | (6,823,911) | |
| Securitized loans (pledged to HMBS-Related Borrowings) | Securitized loans (pledged to HMBS-Related Borrowings) | $ | 6,874,025 | | | $ | (6,782,564) | | | $ | 6,715,093 | | | $ | (6,606,543) | | Securitized loans (pledged to HMBS-Related Borrowings) | $ | 7,220,774 | | | $ | (7,155,251) | | | $ | 6,928,459 | | | $ | (6,823,911) | |
| Unsecuritized loans | Unsecuritized loans | 226,701 | | | 134,837 | | | — | | Unsecuritized loans | 155,754 | | | 183,814 | | |
| Total | Total | $ | 7,100,726 | | | $ | 6,849,930 | | | Total | $ | 7,376,528 | | | $ | 7,112,273 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings (2) | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings (2) |
| Beginning balance | $ | 7,199,762 | | | $ | (6,885,022) | | | $ | 6,997,127 | | | $ | (6,772,711) | |
| | | | | | | |
| Originations | 1,144,856 | | | — | | | 720,442 | | | — | |
| Securitization of HECM loans accounted for as a financing (incl. realized fair value changes) | — | | | (1,149,876) | | | — | | | (667,480) | |
| Additional proceeds from securitization of HECM loans and tails | — | | | (22,299) | | | — | | | (27,173) | |
| Acquisition (1) | 211,258 | | | (209,057) | | | — | | | — | |
| Repayments (principal payments received) | (995,122) | | | 993,487 | | | (721,009) | | | 715,332 | |
| Transfers to: | | | | | | | |
| Loans held for sale, at fair value | (19,646) | | | — | | | (1,678) | | | — | |
| Receivables, net | (49,395) | | | — | | | (85) | | | — | |
| REO (Other assets) | (132) | | | — | | | (195) | | | — | |
| Change in fair value (3) | (115,053) | | | 117,516 | | | 117,671 | | | (71,879) | |
| Ending Balance | $ | 7,376,528 | | | $ | (7,155,251) | | | $ | 7,112,273 | | | $ | (6,823,911) | |
| Securitized loans (pledged to HMBS-related borrowings) | $ | 7,220,774 | | | $ | (7,155,251) | | | $ | 6,928,459 | | | $ | (6,823,911) | |
| Unsecuritized loans | 155,754 | | | | | 183,814 | | | |
| Total | $ | 7,376,528 | | | | | $ | 7,112,273 | | | |
(1)During the first quarter of 2022, we purchased a reverse mortgage servicing portfolio of HECM loans securitized in Ginnie Mae pools. As the Ginnie Mae HMBS program does not qualify for sale accounting, the transaction conveyed the HECM loans and associated
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings |
| Beginning balance | $ | 6,997,127 | | | $ | (6,772,711) | | | $ | 6,269,596 | | | $ | (6,063,435) | |
| Cumulative effect of fair value election (1) | — | | | — | | | 47,038 | | | — | |
| Originations | 1,214,772 | | | — | | | 867,702 | | | — | |
| Securitization of HECM loans accounted for as a financing (incl. realized fair value changes) | — | | | (1,119,742) | | | — | | | (885,987) | |
| Additional proceeds from securitization of HECM loans and tails | — | | | (34,918) | | | — | | | (28,572) | |
| Repayments (principal payments received) | (1,170,245) | | | 1,161,609 | | | (619,486) | | | 613,026 | |
| Transfers to: | | | | | | | |
| Loans held for sale, at fair value | (2,898) | | | — | | | (1,900) | | | — | |
| Receivables, net | (169) | | | — | | | (181) | | | — | |
| REO (Other assets) | (316) | | | — | | | (403) | | | — | |
| Change in fair value | 62,455 | | | (16,802) | | | 287,564 | | | (241,575) | |
| Ending Balance | $ | 7,100,726 | | | $ | (6,782,564) | | | $ | 6,849,930 | | | $ | (6,606,543) | |
| Securitized | $ | 6,874,025 | | | $ | (6,782,564) | | | $ | 6,715,093 | | | $ | (6,606,543) | |
| Unsecuritized | 226,701 | | | | | 134,837 | | | |
| $ | 7,100,726 | | | | | $ | 6,849,930 | | | |
(1)(2)In conjunctionRepresents amounts due to the holders of beneficial interests in Ginnie Mae guaranteed HMBS that did not qualify for sale accounting treatment of HECM loans. Under this accounting treatment, the HECM loans securitized with Ginnie Mae remain on our consolidated balance sheets and the proceeds from the sale are recognized as a financing liability, which is recorded at fair value consistent with the adoptionrelated HECM loans. The beneficial interests in Ginnie Mae guaranteed HMBS have no maturity dates, and the borrowings mature as the related loans are repaid. The interest rate is the pass-through rate of ASU 2016-13, we elected the fair value option for future draw commitments (tails) on HECM reverse mortgage loans purchased or originated before December 31, 2018, which resultedless applicable margin. See Note 2 – Securitizations and Variable Interest Entities
(3)See further breakdown in the recognition of the fair value of such tails through stockholders’ equity on January 1, 2020.table below.
| | Reverse Mortgage Revenue, net | Reverse Mortgage Revenue, net | Three Months Ended September 30, | | Nine Months Ended September 30, | Reverse Mortgage Revenue, net | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Gain on new originations (1) | Gain on new originations (1) | $ | 12,900 | | | $ | 13,545 | | | $ | 46,170 | | | $ | 33,156 | | Gain on new originations (1) | $ | 12,674 | | | $ | 16,163 | | | $ | 33,343 | | | $ | 33,270 | |
| Change in fair value of securitized loans held for investment and HMBS-related borrowings, net | Change in fair value of securitized loans held for investment and HMBS-related borrowings, net | (13,033) | | | (1,115) | | | (517) | | | 12,833 | | Change in fair value of securitized loans held for investment and HMBS-related borrowings, net | (19,028) | | | 10,487 | | | (30,881) | | | 12,522 | |
| Change in fair value included in earnings, net | Change in fair value included in earnings, net | (133) | | | 12,430 | | | 45,653 | | | 45,989 | | Change in fair value included in earnings, net | (6,354) | | | 26,650 | | | 2,462 | | | 45,792 | |
| Loan fees and other | Loan fees and other | 5,168 | | | 2,069 | | | 10,509 | | | 5,066 | | Loan fees and other | 3,738 | | | 2,651 | | | 8,032 | | | 5,335 | |
| | $ | 5,035 | | | $ | 14,499 | | | $ | 56,162 | | | $ | 51,055 | | | $ | (2,616) | | | $ | 29,301 | | | $ | 10,494 | | | $ | 51,127 | |
(1)Includes the changes in fair value of newly originated loans held for investment in the period through securitization date.
(2)See breakdown between loans held-for-investment and HMBS - related borrowings in the table above.
| | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| Principal and interest | $ | 238,071 | | | $ | 277,132 | |
| Taxes and insurance | 331,013 | | | 364,593 | |
| Foreclosures, bankruptcy, REO and other | 177,189 | | | 192,787 | |
| | 746,273 | | | 834,512 | |
| Allowance for losses | (6,677) | | | (6,273) | |
| Advances, net | $ | 739,596 | | | $ | 828,239 | |
| | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| Principal and interest | $ | 212,656 | | | $ | 228,041 | |
| Taxes and insurance | 294,269 | | | 381,025 | |
| Foreclosures, bankruptcy, REO and other | 146,843 | | | 170,385 | |
| | 653,768 | | | 779,451 | |
| Allowance for losses | (6,601) | | | (7,018) | |
| Advances, net | $ | 647,167 | | | $ | 772,433 | |
The following table summarizes the activity in net advances:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance - before Allowance for Losses | Beginning balance - before Allowance for Losses | $ | 768,864 | | | $ | 908,829 | | | $ | 834,512 | | | $ | 1,066,448 | | Beginning balance - before Allowance for Losses | $ | 736,870 | | | $ | 792,837 | | | $ | 779,451 | | | $ | 834,512 | |
| Acquisition of advances in connection with the purchase of MSRs | Acquisition of advances in connection with the purchase of MSRs | — | | | 14 | | | 4,495 | | | 14 | | Acquisition of advances in connection with the purchase of MSRs | — | | | 4,495 | | | — | | | 4,495 | |
| | New advances | New advances | 181,567 | | | 198,549 | | | 565,284 | | | 667,577 | | New advances | 190,020 | | | 180,317 | | | 387,274 | | | 383,717 | |
| Sales of advances | Sales of advances | (80) | | | (150) | | | (328) | | | (604) | | Sales of advances | (190) | | | (115) | | | (831) | | | (248) | |
Collections of advances and other | Collections of advances and other | (204,078) | | | (268,560) | | | (657,690) | | | (894,753) | | Collections of advances and other | (272,932) | | | (208,670) | | | (512,126) | | | (453,612) | |
| | Ending balance - before Allowance for Losses | Ending balance - before Allowance for Losses | 746,273 | | | 838,682 | | | 746,273 | | | 838,682 | | Ending balance - before Allowance for Losses | 653,768 | | | 768,864 | | | 653,768 | | | 768,864 | |
| | Beginning balance - Allowance for Losses | Beginning balance - Allowance for Losses | $ | (6,891) | | | $ | (7,820) | | | $ | (6,273) | | | $ | (9,925) | | Beginning balance - Allowance for Losses | $ | (6,897) | | | $ | (6,159) | | | $ | (7,018) | | | $ | (6,273) | |
| Provision | (1,581) | | | (2,173) | | | (5,478) | | | (5,944) | | |
| Provision expense | | Provision expense | (2,111) | | | (2,394) | | | (3,876) | | | (3,896) | |
| Net charge-offs and other | Net charge-offs and other | 1,795 | | | 3,915 | | | 5,074 | | | 9,791 | | Net charge-offs and other | 2,407 | | | 1,662 | | | 4,293 | | | 3,278 | |
| Ending balance - Allowance for Losses | Ending balance - Allowance for Losses | (6,677) | | | (6,078) | | | (6,677) | | | (6,078) | | Ending balance - Allowance for Losses | (6,601) | | | (6,891) | | | (6,601) | | | (6,891) | |
| | Ending balance, net | Ending balance, net | $ | 739,596 | | | $ | 832,604 | | | $ | 739,596 | | | $ | 832,604 | | Ending balance, net | $ | 647,167 | | | $ | 761,973 | | | $ | 647,167 | | | $ | 761,973 | |
(1) Includes $22.6 million tax, insurance and other advances transferred during the three months ended June 30, 2022 on the repurchase of certain delinquent and aged loans in connection with the Ginnie Mae EBO program. See Note 4 – Loans Held for Sale.
| | |
| Note 7 – Mortgage Servicing |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MSRs – At Fair Value | Three Months Ended September 30, |
| 2021 | | 2020 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 1,408,420 | | | $ | 664,098 | | | $ | 2,072,518 | | | $ | 305,085 | | | $ | 739,829 | | | $ | 1,044,914 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Sales and other transfers | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Additions: | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 66,420 | | | — | | | 66,420 | | | 22,096 | | | — | | | 22,096 | |
| Purchase of MSRs | 36,153 | | | — | | | 36,153 | | | 32,249 | | | — | | | 32,249 | |
| Servicing transfers and adjustments | 17 | | | (4,723) | | | (4,706) | | | 16 | | | — | | | 16 | |
| Changes in fair value: | | | | | | | | | | | |
| Changes in valuation inputs or assumptions (2) | 6,983 | | | 67,836 | | | 74,819 | | | (4,731) | | | 13,496 | | | 8,765 | |
| Realization of expected cash flows (2) | (38,186) | | | (30,758) | | | (68,944) | | | (15,051) | | | (23,975) | | | (39,026) | |
| Ending balance | $ | 1,479,807 | | | $ | 696,453 | | | $ | 2,176,260 | | | $ | 339,664 | | | $ | 729,349 | | | $ | 1,069,013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| MSRs – At Fair Value | Nine Months Ended September 30, |
| 2021 | | 2020 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 578,957 | | | $ | 715,860 | | | $ | 1,294,817 | | | $ | 714,006 | | | $ | 772,389 | | | $ | 1,486,395 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Sales and other transfers | — | | | — | | | — | | | — | | | (108) | | | (108) | |
| Additions: | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 136,482 | | | — | | | 136,482 | | | 37,785 | | | — | | | 37,785 | |
| Purchase of MSRs | 806,469 | | | — | | | 806,469 | | | 78,994 | | | — | | | 78,994 | |
| Servicing transfers and adjustments (1) | 73 | | | (6,913) | | | (6,840) | | | (263,830) | | | 403 | | | (263,427) | |
| Changes in fair value: | | | | | | | | | | | |
| Changes in valuation inputs or assumptions (2) | 47,132 | | | 73,306 | | | 120,438 | | | (166,546) | | | 23,839 | | | (142,707) | |
| Realization of expected cash flows (2) | (89,306) | | | (85,800) | | | (175,106) | | | (60,745) | | | (67,174) | | | (127,919) | |
| Ending balance | $ | 1,479,807 | | | $ | 696,453 | | | $ | 2,176,260 | | | $ | 339,664 | | | $ | 729,349 | | | $ | 1,069,013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MSRs – At Fair Value | Three Months Ended June 30, |
| 2022 | | 2021 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 1,664,855 | | | $ | 658,426 | | | $ | 2,323,281 | | | $ | 708,663 | | | $ | 691,554 | | | $ | 1,400,217 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Sales of MSRs | (28) | | | — | | | (28) | | | — | | | — | | | — | |
| Additions: | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 60,162 | | | — | | | 60,162 | | | 35,802 | | | — | | | 35,802 | |
| Purchase of MSRs | 36,863 | | | — | | | 36,863 | | | 733,538 | | | — | | | 733,538 | |
| Servicing transfers and adjustments (1) | 11,795 | | | 2,926 | | | 14,721 | | | 27 | | | (1,633) | | | (1,606) | |
| Changes in fair value: | | | | | | | | | | | |
| Changes in valuation inputs or assumptions | 85,955 | | | 32,297 | | | 118,252 | | | (42,337) | | | 3,941 | | | (38,396) | |
| Realization of expected cash flows | (42,998) | | | (24,574) | | | (67,572) | | | (27,273) | | | (29,764) | | | (57,037) | |
| Ending balance | $ | 1,816,604 | | | $ | 669,075 | | | $ | 2,485,679 | | | $ | 1,408,420 | | | $ | 664,098 | | | $ | 2,072,518 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| MSRs – At Fair Value | Six Months Ended June 30, |
| 2022 | | 2021 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 1,571,837 | | | $ | 678,310 | | | $ | 2,250,147 | | | $ | 578,957 | | | $ | 715,860 | | | $ | 1,294,817 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Sales of MSRs | (149,339) | | | (24) | | | (149,363) | | | — | | | — | | | — | |
| Additions: | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 105,965 | | | — | | | 105,965 | | | 70,062 | | | — | | | 70,062 | |
| Purchase of MSRs | 83,662 | | | — | | | 83,662 | | | 770,316 | | | — | | | 770,316 | |
| Servicing transfers and adjustments | 14,720 | | | (822) | | | 13,898 | | | 56 | | | (2,190) | | | (2,134) | |
| Changes in fair value: | | | | | | | | | | | |
| Changes in valuation inputs or assumptions | 280,431 | | | 41,341 | | | 321,772 | | | 40,149 | | | 5,470 | | | 45,619 | |
| Realization of expected cash flows | (90,672) | | | (49,730) | | | (140,402) | | | (51,120) | | | (55,042) | | | (106,162) | |
| Ending balance | $ | 1,816,604 | | | $ | 669,075 | | | $ | 2,485,679 | | | $ | 1,408,420 | | | $ | 664,098 | | | $ | 2,072,518 | |
(1)Servicing transfers and adjustments include a $263.7 million derecognition of MSRs effective with the February 20, 2020 notice of terminationThe following table summarizes delinquency status of the subservicing agreement between NRZ and PMC. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.loans underlying our MSRs:
(2)Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three and nine months ended September 30, 2020 in the table above has been recast to conform to current year disclosure, resulting in a $9.1 million and $4.0 million gain, respectively, reclassified from Realization of expected cash flows to Changes in valuation inputs or assumptions. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Delinquent loans | Agency | | Non - Agency | | Total | | Agency | | Non - Agency | | Total |
| 30 days | 1.5 | % | | 7.3 | % | | 4.2 | % | | 1.4 | % | | 7.2 | % | | 4.1 | % |
| 60 days | 0.4 | | | 2.8 | | | 1.5 | | | 0.4 | | | 2.8 | | | 1.6 | |
| 90 days or more | 1.2 | | | 8.4 | | | 4.6 | | | 1.9 | | | 8.0 | | | 4.8 | |
| Total 30-60-90 days or more | 3.1 | % | | 18.5 | % | | 10.3 | % | | 3.7 | % | | 18.0 | % | | 10.5 | % |
MSR UPB and Fair Value
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | June 30, 2021 | | December 31, 2020 | | September 30, 2020 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Owned MSRs | $ | 136,316,900 | | | $ | 148,882,743 | | | $ | 90,174,495 | | | $ | 71,301,427 | |
| NRZ pledged MSRs (1) | 56,141,289 | | | 59,038,668 | | | 64,061,198 | | | 66,782,351 | |
| MAV pledged MSRs (1) | 13,570,892 | | | — | | | — | | | — | |
| Total MSR UPB | $ | 206,029,081 | | | $ | 207,921,411 | | | $ | 154,235,693 | | | $ | 138,083,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | June 30, 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Fair Value | UPB | | Fair Value | UPB | | Fair Value | UPB |
| Owned MSRs | $ | 1,552,622 | | $ | 116,260,079 | | | $ | 1,422,546 | | $ | 127,919,800 | | | $ | 1,536,947 | | $ | 148,882,743 | |
| NRZ transferred MSRs (1) (2) | 550,808 | | 49,730,000 | | | 558,940 | | 53,652,843 | | | 535,571 | | 59,038,668 | |
| MAV transferred MSRs (1) | 382,249 | | 28,486,472 | | | 268,661 | | 24,018,904 | | | — | | — | |
| Total | $ | 2,485,679 | | $ | 194,476,551 | | | $ | 2,250,147 | | $ | 205,591,547 | | | $ | 2,072,518 | | $ | 207,921,411 | |
(1)MSRs subject to sale agreements with NRZ and MAV that do not meet sale accounting criteria. During the six months ended June 30, 2022 , we transferred MSRs with a UPB of$5.9 billion to MAV. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting.
(2)At June 30, 2022, the UPB of MSRs transferred to NRZ for which title is retained by Ocwen was $11.3 billion and the UPB of MSRs transferred to NRZ for which title has passed was$38.4 billion.
We purchased MSRs with a UPB of $72.2$7.3 billion and $9.9$67.3 billion from unrelated third-parties during the ninesix months ended SeptemberJune 30, 20212022 and 2020, respectively. Purchases during the nine months ended September 30, 2021, include a bulk MSR acquisition of performing GSE loans from an unrelated third party effective June 1, 2021, with a UPB and fair value of $46.8 billion and $575.3 million, respectively. We sold MSRs with a UPB of $18.0 million$11.1 billion and $55.7$13.1 million during the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, mostly to Freddie Mac under the Voluntary Partial Cancellation (VPC) program for delinquent loans.unrelated third parties.
Servicing Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Loan servicing and subservicing fees | | | | | | | |
| Servicing | $ | 80,889 | | | $ | 79,377 | | | $ | 169,424 | | | $ | 143,269 | |
| Subservicing | 20,353 | | | 2,617 | | | 35,032 | | | 6,104 | |
| MAV (1) | 18,837 | | | — | | | 35,460 | | | — | |
| NRZ (1) | 64,729 | | | 77,716 | | | 131,875 | | | 158,101 | |
| 184,809 | | | 159,710 | | | 371,791 | | | 307,474 | |
| Ancillary income | | | | | | | |
| Late charges | 11,738 | | | 11,447 | | | 21,758 | | | 20,679 | |
| Reverse subservicing ancillary fees | 6,257 | | | — | | | 9,390 | | | — | |
| Recording fees | 2,624 | | | 3,202 | | | 5,874 | | | 6,854 | |
| Loan collection fees | 2,870 | | | 2,761 | | | 5,819 | | | 5,711 | |
| | | | | | | |
| Boarding and deboarding fees | 1,863 | | | 2,184 | | | 3,625 | | | 5,203 | |
| Custodial accounts (float earnings) | 1,804 | | | 1,306 | | | 2,786 | | | 2,313 | |
| GSE forbearance fees | 181 | | | 507 | | | 365 | | | 1,072 | |
| Other, net | 2,985 | | | 3,325 | | | 6,346 | | | 6,873 | |
| 30,322 | | | 24,731 | | | 55,963 | | | 48,705 | |
| | $ | 215,131 | | | $ | 184,441 | | | $ | 427,754 | | | $ | 356,179 | |
At September 30, 2021, the S&P Global Ratings, Inc.’s (S&P’s) servicer ratings outlook(1)Includes servicing fees related to transferred MSRs and subservicing fees. See Note 8 — MSR Transfers Not Qualifying for PMC is stable. On June 29, 2021, S&P affirmed PMC’s servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC’s master servicer rating from Average to Above Average reflecting the industry experience of PMC’s management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, amongst other factors mentioned by S&P. On September 28, 2021, Moody’s upgraded the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+, reflecting solid reporting and remitting processes and proactive servicer oversight. On March 24, 2020, Fitch Ratings, Inc. (Fitch) placed all U.S Residential Mortgage Backed Securities (RMBS) servicer ratings on Outlook Negative, resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus. On April 28, 2021, Fitch affirmed PMC’s servicer ratings and revised its outlook from Negative to Stable as PMC’s performance in this evolving environment has not raised any elevated concerns. According to Fitch, the affirmation and stable outlook reflected PMC’s diligent response to the coronavirus pandemic and its impact on servicing operations, effective enterprise-wide risk environment and compliance management framework, satisfactory loan servicing performance metrics, special servicing expertise, and efficient servicing technology. The ratings also consider the financial condition of PMC’s parent, OFC. Sale Accounting.
| | | | | | | | | | | | | | | | | | | | | | | |
| Servicing Revenue | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Loan servicing and subservicing fees | | | | | | | |
| Servicing | $ | 103,094 | | | $ | 53,410 | | | $ | 246,363 | | | $ | 161,154 | |
| Subservicing | 2,867 | | | 10,324 | | | 8,971 | | | 26,143 | |
| MAV | 1,575 | | | — | | | 1,575 | | | — | |
| NRZ | 75,034 | | | 91,015 | | | 233,135 | | | 299,089 | |
| 182,570 | | | 154,749 | | | 490,044 | | | 486,386 | |
| Ancillary income | | | | | | | |
| Late charges | 10,656 | | | 11,012 | | | 31,335 | | | 38,323 | |
| Recording fees | 3,726 | | | 3,900 | | | 10,579 | | | 9,828 | |
| Loan collection fees | 2,858 | | | 3,047 | | | 8,568 | | | 10,048 | |
| | | | | | | |
| Boarding and deboarding fees | 1,627 | | | 4,262 | | | 6,830 | | | 5,619 | |
| Custodial accounts (float earnings) | 1,234 | | | 1,057 | | | 3,547 | | | 8,787 | |
| Other, net | 3,914 | | | 3,695 | | | 11,859 | | | 9,454 | |
| 24,015 | | | 26,973 | | | 72,720 | | | 82,059 | |
| | $ | 206,585 | | | $ | 181,722 | | | $ | 562,764 | | | $ | 568,445 | |
Float balances (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers)borrowers on behalf of investors) are held in escrow by unaffiliated banks and are excluded from our unaudited consolidated balance sheets. Float balances amounted to $3.3$1.8 billion, $1.7$2.1 billion and $2.0$2.1 billion at SeptemberJune 30, 2022, December 31, 2021 and June 30, 2021, December 31, 2020 and September 30, 2020, respectively.
| | |
| Note 8 — MSR Transfers Not Qualifying for Sale Accounting |
MSRs transferred or sold in transactions which diddo not initially qualify for sale accounting treatment are accounted for as secured financings. Until such time as the transaction qualifies as a sale for accounting purposes, we continue to recognize the MSRs and related financing liability on our unaudited consolidated balance sheets, as well as the full amount of servicing fee collected as revenue and the servicing fee remitted as pledgedPledged MSR liability expense in our unaudited consolidated statements of operations. In addition, changes in fair value of the transferred MSRs are recognized in MSR valuation adjustments, net in the
unaudited consolidated statements of operations, while changes in fair value of the related MSR financing liability are reported in Pledged MSR liability expense.
In June2021 and September 2021,2022, PMC entered into agreements to sell MSR portfolios to MAV.MAV on a bulk and flow basis. In each such agreement, PMC has been retained as subservicer for the sold portfolio in accordance with the terms of the subservicing agreement entered into on May 3, 2021. The transactions do not qualify for sale accounting treatment predominantly due to the termination restrictions of the subservicing agreement. See Note 10 - Investment in Equity Method Investee.Investee and Related Party Transactions.
Starting in 2012, Ocwen and PMC entered into agreements to sell MSRs or Rights to MSRs and the related servicing advances to NRZ, and in all cases have been retained by NRZ as subservicer. In May 2022, Ocwen entered into amendments to the subservicing agreements to extend their terms to December 31, 2023 and establish a process for subsequent term extensions. In addition, the amendments provide for a modification of the sharing of some ancillary income between PMC and NRZ. Due to the length of the non-cancellable term of the subservicing agreements, the transactions diddo not initially qualify for sale accounting treatment which resultedresults in such transactions being accounted for as secured financings. In the case of Rights to MSRs transactions with NRZ, legal title was retained by Ocwen, causing the transactions to be accounted for as secured financings.
0The following tables present the activity of the pledged MSR liability recorded in connection with the MSR transfer agreements with NRZ and MAV that do not qualify for sale accounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | | | |
| Pledged MSR Liability | Original Rights to MSRs Agreements - NRZ | | MAV Agreements (2) | | Total | | Original Rights to MSRs Agreements - NRZ | | | | |
| Beginning Balance | $ | 545,306 | | | $ | 319,009 | | | $ | 864,315 | | | $ | 550,364 | | | | | |
| | | | | | | | | | | |
| MSR transfers | 10 | | | 30,895 | | | 30,904 | | | — | | | | | |
| Changes in fair value | 24,736 | | | 15,136 | | | 39,872 | | | 8,393 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Runoff and settlement | (19,243) | | | (9,509) | | | (28,753) | | | (20,910) | | | | | |
| Calls (1) | — | | | — | | | — | | | (2,276) | | | | | |
| Ending Balance | $ | 550,808 | | | $ | 355,530 | | | $ | 906,338 | | | $ | 535,571 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | |
| 2022 | | 2021 | | | | | |
| Pledged MSR Liability | Original Rights to MSRs Agreements - NRZ | | MAV Agreements (2) | | Total | | Original Rights to MSRs Agreements - NRZ | | | | | |
| Beginning Balance | $ | 558,940 | | | $ | 238,144 | | | $ | 797,085 | | | $ | 566,952 | | | | | | |
| | | | | | | | | | | | |
| MSR transfers | — | | | 71,501 | | | 71,501 | | | — | | | | | | |
| Changes in fair value (3) | 31,534 | | | 63,796 | | | 95,330 | | | 9,944 | | | | | | |
| Runoff and settlement | (39,106) | | | (17,912) | | | (57,018) | | | (38,526) | | | | | | |
| | | | | | | | | | | | |
| Calls (1) | (560) | | | — | | | (560) | | | (2,799) | | | | | | |
| Ending Balance | $ | 550,808 | | | $ | 355,530 | | | $ | 906,338 | | | $ | 535,571 | | | | | | |
| | | | | | | | | | | | |
(1)Represents the carrying value of MSRs in connection with call rights exercised by NRZ, or by Ocwen at NRZ’s direction. Ocwen derecognizes the MSRs and the related financing liability upon collapse of the securitization.
(2)The fair value of the Pledged MSR liability differs from the fair value of the associated transferred MSR asset mostly due to the portion of ancillary income that is retained by PMC (shared between PMC and MAV) and other contractual cash flows under the terms of the subservicing agreement. As the MSR sales to MAV do not achieve sale accounting, the MSR asset transferred remains on the consolidated balance sheet and the proceeds from the sale are initially recognized as a financing liability (Pledged MSR liability), which is recorded at fair value with changes in fair value reported in Pledged MSR liability expense.
(3)The changes in fair value of the MAV Pledged MSR Liability include a $14.1 million loss associated with the amendment to the MAV Subservicing Agreement in March 2022, resulting in lower contractually retained ancillary income by PMC. See Note 10 - Investment in Equity Method Investee and Related Party Transactions.
The following table presents selected assets and liabilities recorded on our unaudited consolidated balance sheets in connection with the MSR transfer agreements with NRZ and MAV that do not qualify for sale accounting.
| | | | | | | | | | | |
| Balance Sheets | September 30, 2021 | | December 31, 2020 |
| Transferred MSRs, at fair value | | | |
| NRZ | $ | 574,020 | | | $ | 566,952 | |
| MAV | 144,893 | | | — | |
| $ | 718,913 | | | $ | 566,952 | |
| | | |
| | | |
| Other financing liability - Transferred MSR liability (1), at fair value | | | |
| NRZ | $ | 574,020 | | | $ | 566,952 | |
| MAV | 128,887 | | | — | |
| | | |
| | | |
| | $ | 702,907 | | | $ | 566,952 | |
| | | |
| Due from NRZ (Receivables) - Subservicing fees and reimbursable expenses | $ | 2,892 | | | $ | 4,611 | |
| Due to NRZ (Other liabilities) - Advance collections, servicing fees and other | 92,188 | | | 94,691 | |
(1)accounting (refer to Note 9 – ReceivablesAlso referredand Note 14 – Other Liabilities for receivables and other liabilities, respectively, related to as Pledged MSR liability.MAV):
The following tables present the activity of the transferred MSR liability recorded in connection with the MSR transfer agreements with NRZ and MAV that do not qualify for sale accounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| September 30, 2021 | | September 30, 2020 |
| Transferred MSR Liability | Original Rights to MSRs Agreements - NRZ | | MAV Agreements | | Total | | Original Rights to MSRs Agreements - NRZ | | | | |
| Beginning Balance | $ | 535,571 | | | $ | — | | | $ | 535,571 | | | $ | 582,558 | | | | | |
| | | | | | | | | | | |
| Sales | — | | | 132,003 | | | 132,003 | | | — | | | | | |
| Changes in fair value (2) | 63,762 | | | (2,433) | | | 61,329 | | | 12,203 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Runoff and settlement | (21,100) | | | (683) | | | (21,783) | | | (17,452) | | | | | |
| Calls (1) | (4,213) | | | — | | | (4,213) | | | — | | | | | |
| Ending Balance | $ | 574,020 | | | $ | 128,887 | | | $ | 702,907 | | | $ | 577,309 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 | | | | | |
| Transferred MSR Liability | Original Rights to MSRs Agreements - NRZ | | MAV Agreements | | | | Total | | | | | |
| Beginning Balance | $ | 566,952 | | | $ | — | | | | | $ | 566,952 | | | | | | |
| | | | | | | | | | | | |
| Sales | — | | | 132,003 | | | | | 132,003 | | | | | | |
| Changes in fair value | 73,706 | | | (2,433) | | | | | 71,273 | | | | | | |
| | | | | | | | | | | | |
| Runoff and settlement | (59,626) | | | (683) | | | | | (60,309) | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Calls (1) | (7,012) | | | — | | | | | (7,012) | | | | | | |
| | | | | | | | | | | | |
| Ending Balance | $ | 574,020 | | | $ | 128,887 | | | | | $ | 702,907 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Transferred MSR Liability | Original Rights to MSRs Agreements - NRZ | | 2017 Agreements and New RMSR Agreements - NRZ | | PMC MSR Agreements - NRZ | | Total |
| Beginning Balance | $ | 603,046 | | | $ | 35,445 | | | $ | 312,102 | | | $ | 950,593 | |
| | | | | | | |
| Sales | — | | | — | | | (226) | | | (226) | |
| Changes in fair value (2) | 26,081 | | | 903 | | | (40,720) | | | (13,736) | |
| Runoff and settlement: | (49,150) | | | (35,121) | | | (7,492) | | | (91,763) | |
| Derecognition of Pledged MSR financing liability due to termination of PMC MSR Agreements | — | | | — | | | (263,664) | | | (263,664) | |
| Calls (1) | (2,668) | | | (1,227) | | | — | | | (3,895) | |
| Ending Balance | $ | 577,309 | | | $ | — | | | $ | — | | | $ | 577,309 | |
(1)Represents the carrying value of MSRs in connection with call rights exercised by NRZ, for MSRs transferred to NRZ under the 2017 Agreements and New RMSR Agreements (each as defined below), or by Ocwen at NRZ’s direction, for MSRs underlying the Original Rights to MSRs Agreements (as defined below). Ocwen derecognizes the MSRs and the related financing liability upon collapse of the securitization.
(2)Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three and nine months ended September 30, 2020 in the table above has been recast to conform to current year disclosure, resulting in losses of $1.8 million and $7.6 million, respectively, reclassified from Runoff and settlement to Changes in fair value.
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Balance Sheet | | | |
| NRZ - Transferred MSRs, at fair value | $ | 550,808 | | | $ | 558,940 | |
| | | |
| | | |
| | | |
| | | |
| Other financing liability - Pledged MSR liability, at fair value | | | |
| NRZ - Original Rights to MSRs Agreements | 550,808 | | | 558,940 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Due from NRZ (Receivables) - Advance funding, subservicing fees and reimbursable expenses | 1,932 | | | 3,781 | |
| | | |
| Due to NRZ (Other liabilities) | $ | 63,398 | | | $ | 76,590 | |
The following tables present selected items in our unaudited consolidated statements of operations in connection with the MSR transfer agreements with NRZ and MAV that do not qualify for sale accounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2021 | | 2020 | | 2021 | | 2020 | |
| Statements of Operations | | | | | | | | |
| Servicing fees | | | | | | | | |
| Servicing fees collected on behalf of NRZ | $ | 75,034 | | | $ | 91,015 | | | $ | 233,135 | | | $ | 299,089 | | |
| Servicing fees collected on behalf of MAV | 1,001 | | | — | | | $ | 1,001 | | | — | | |
| $ | 76,035 | | | $ | 91,015 | | | $ | 234,136 | | | $ | 299,089 | | |
| | | | | | | | |
| Pledged MSR liability expense | | | | | | | | |
| NRZ (see further details below) | $ | 93,253 | | | $ | 57,404 | | | $ | 170,914 | | | $ | 105,684 | | |
| MAV (see further details below) | (2,094) | | | — | | | (2,094) | | | — | | |
| $ | 91,160 | | | $ | 57,404 | | | $ | 168,820 | | | $ | 105,684 | | |
| | | | | | | | |
NRZ Pledged MSR liability expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Servicing fees collected on behalf of NRZ | $ | 75,034 | | | $ | 91,015 | | | $ | 233,135 | | | $ | 299,089 | |
| Less: Subservicing fee retained by Ocwen | 21,475 | | | 25,674 | | | 67,987 | | | 80,529 | |
| Net servicing fees remitted to NRZ | 53,559 | | | 65,341 | | | 165,148 | | | 218,560 | |
| | | | | | | |
| Less: Reduction (increase) in financing liability | | | | | | | |
| Changes in fair value: | | | | | | | |
| Original Rights to MSRs Agreements (1) | (63,762) | | | (12,202) | | | (73,706) | | | (26,081) | |
| 2017 Agreements and New RMSR Agreements | — | | | — | | | — | | | (903) | |
| PMC MSR Agreements | — | | | — | | | — | | | 40,720 | |
| (63,762) | | | (12,202) | | | (73,706) | | | 13,736 | |
| Runoff and settlement: | | | | | | | |
| Original Rights to MSRs Agreements (1) | 21,100 | | | 17,451 | | | 59,627 | | | 49,150 | |
| 2017 Agreements and New RMSR Agreements | — | | | — | | | — | | | 35,121 | |
| PMC MSR Agreements | — | | | — | | | — | | | 7,492 | |
| 21,100 | | | 17,451 | | | 59,627 | | | 91,763 | |
| | | | | | | |
| Other | 2,968 | | | 2,688 | | | 8,313 | | | 7,377 | |
| | | | | | | |
| Pledged MSR liability expense - NRZ | $ | 93,253 | | | $ | 57,404 | | | $ | 170,914 | | | $ | 105,684 | |
(1) Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three and nine months ended September 30, 2020 in the table above has been recast to conform to current year disclosure, resulting in losses of $1.8 million and $7.6 million, respectively, reclassified from Runoff and settlement to Changes in fair value.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Statements of Operations | | | | | | | |
| Servicing fees | | | | | | | |
| Servicing fees collected on behalf of NRZ | $ | 64,729 | | | $ | 77,716 | | | $ | 131,875 | | | $ | 158,101 | |
| Servicing fees collected on behalf of MAV | 17,471 | | | — | | | $ | 33,204 | | | — | |
| $ | 82,200 | | | $ | 77,716 | | | $ | 165,079 | | | $ | 158,101 | |
| | | | | | | |
| Pledged MSR liability expense | | | | | | | |
| NRZ (see further details below) | $ | 53,239 | | | $ | 39,810 | | | $ | 85,623 | | | $ | 77,660 | |
| MAV (see further details below) | 20,843 | | | — | | | 75,357 | | | — | |
| $ | 74,083 | | | $ | 39,810 | | | $ | 160,980 | | | $ | 77,660 | |
MAV Pledged MSR liability expense:
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | | | | Nine Months Ended September 30, 2021 | | |
| | | | | | | |
| Servicing fees collected on behalf of MAV | $ | 1,001 | | | | | $ | 1,001 | | | |
| Less: Subservicing fee retained by Ocwen | 178 | | | | | 178 | | | |
| Net servicing fees remitted to MAV | 823 | | | | | 823 | | | |
| | | | | | | |
| Less: Reduction (increase) in Transferred MSR liability | | | | | | | |
| Changes in fair value | 2,433 | | | | | 2,433 | | | |
| Runoff and settlement | 683 | | | | | 683 | | | |
| 3,116 | | | | | 3,116 | | | |
| | | | | | | |
| Other | (199) | | | | | (199) | | | |
| | | | | | | |
| Pledged MSR liability expense - MAV | $ | (2,094) | | | | | $ | (2,094) | | | |
The following table presents UPB | | | | | | | | | | | | | | | | | | | | | | | |
| NRZ Pledged MSR liability expense: | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Servicing fees collected on behalf of NRZ | $ | 64,729 | | | $ | 77,716 | | | $ | 131,875 | | | $ | 158,101 | |
| Less: Subservicing fee retained by Ocwen | 18,771 | | | 22,521 | | | 38,137 | | | 46,512 | |
| Net servicing fees remitted to NRZ | 45,958 | | | 55,195 | | | 93,738 | | | 111,589 | |
| | | | | | | |
| Less: Reduction (increase) in Pledged MSR liability | | | | | | | |
| Changes in fair value due to valuation inputs or assumptions - Original Rights to MSRs Agreements | (24,736) | | | (8,393) | | | (31,534) | | | (9,944) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Runoff and settlement - Original Rights to MSRs Agreements | 19,244 | | | 20,910 | | | 39,106 | | | 38,526 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other | (1,789) | | | 2,868 | | | 543 | | | 5,347 | |
| | | | | | | |
| Pledged MSR liability expense - NRZ | $ | 53,239 | | | $ | 39,810 | | | $ | 85,623 | | | $ | 77,660 | |
| | | | | | | | | | | | | | | |
| MAV Pledged MSR liability expense: | Three Months Ended June 30, 2022 | | | | Six Months Ended June 30, 2022 | | |
| Servicing fees collected on behalf of MAV | $ | 17,471 | | | | | $ | 33,204 | | | |
| Less: Subservicing fee retained by Ocwen | 2,273 | | | | | 4,366 | | | |
| Net servicing fees remitted to MAV | 15,198 | | | | | 28,838 | | | |
| | | | | | | |
| Less: Reduction (increase) in Pledged MSR liability | | | | | | | |
| Changes in fair value due to valuation inputs or assumptions | (15,136) | | | | | (63,796) | | | |
| Runoff and settlement | 9,509 | | | | | 17,912 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other (1) | (18) | | | | | (634) | | | |
| | | | | | | |
| Pledged MSR liability expense - MAV | $ | 20,843 | | | | | $ | 75,357 | | | |
(1)Includes $0.0 million and $0.6 million for the three and six months ended June 30, 2022, respectively, of loans serviced on behalf of NRZ and MAV for transferred MSRs thatearly payment protection associated with the transfer (which did not qualify for sale accounting together with the UPBaccounting) of loans subserviced on behalf of NRZ and MAV:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| NRZ Agreements | | | |
| Ocwen servicer of record (MSR title retained by Ocwen) - Ocwen MSR (1) (2) | $ | 12,601,689 | | | $ | 14,114,602 | |
| NRZ servicer of record (MSR title transferred to NRZ) - Ocwen MSR (1) | 43,526,008 | | | 49,866,082 | |
| Ocwen subservicer | 2,251,947 | | | 3,130,704 | |
| 58,379,644 | | | 67,111,388 | |
| MAV Agreements | | | |
| | | |
| | | |
| MSR transferred to MAV (1) | 13,570,892 | | | — | |
| Ocwen subservicer | 7,855,112 | | | — | |
| 21,426,004 | | | — | |
| | | |
| Total UPB | $ | 79,805,648 | | | $ | 67,111,388 | |
(1)The MSR transfers did not qualify for sale accounting treatment.
(2)NRZ’s and MAV’s associated outstanding servicing advances were approximately $493.4 million and $4.5 million, respectively, as of September 30, 2021.portfolios by PMC to MAV.
NRZ - Ocwen Transactions
Ocwen entered into a series of agreements to transfer NRZ the servicing of certain mortgage loans. Prior to the transfer of legal title under the Master Servicing Rights Purchase Agreement dated as of October 1, 2012, as amended, and certain Sale Supplements, as amended (collectively, the Original Rights to MSRs Agreements), Ocwen agreed to service the mortgage loans underlying the MSRs on the economic terms set forth in the Original Rights to MSRs Agreements. After the transfer of legal title as contemplated under the Original Rights to MSRs Agreements, Ocwen was to service the mortgage loans underlying the MSRs as subservicer on substantially the same economic terms.
On July 23, 2017 and January 18, 2018, we entered into a series of agreements with NRZ that collectively modify, supplement and supersede the arrangements among the parties as set forth in the Original Rights to MSRs Agreements. The July 23, 2017 agreements, as amended, include a Master Agreement, a Transfer Agreement and the Subservicing Agreement between Ocwen and New Residential Mortgage LLC (NRM), a subsidiary of NRZ, relating to non-Agency loans (the NRM Subservicing Agreement) (collectively, the 2017 Agreements) pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to the remaining MSRs that were subject to the Original Rights to MSRs Agreements and under which Ocwen would subservice mortgage loans underlying the MSRs for an initial term ending in July 2022 (the Initial Term).
On January 18, 2018, the parties entered into new agreements (including a New RMSR Agreement, with an attached Servicing Addendum) regarding the Rights to MSRs related to MSRs that remained subject to the Original Rights to MSRs Agreements as of January 1, 2018 and amended the Transfer Agreement (collectively, New RMSR Agreements) to accelerate the implementation of certain parts of our arrangements in order to achieve the intent of the 2017 Agreements sooner. Under the new agreements, following receipt of the required consents and transfer of the MSRs, Ocwen subservices the mortgage loans underlying the transferred MSRs pursuant to the 2017 Agreements and the August 2018 subservicing agreement with NewRez LLC dba Shellpoint Mortgage Servicing (Shellpoint) described below.
Ocwen received lump-sum cash payments of $54.6 million and $279.6 million in September 2017 and January 2018 in accordance with the terms of the 2017 Agreements and New RMSR Agreements, respectively. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the Original Rights to MSRs Agreements and the future revenue stream Ocwen expected to receive under the 2017 Agreements and the New RMSR Agreements. We recognized the cash received as a financing liability that we accounted for at fair value through the term of the original agreements (April 2020). Changes in fair value were recognized in Pledged MSR liability expense in the unaudited consolidated statements of operations.
On August 17, 2018, Ocwen and NRZ entered into certain amendments (i) to the New RMSR Agreements to include Shellpoint, a subsidiary of NRZ, as a party to which legal title to the MSRs could be transferred after related consents are received, (ii) to add a Subservicing Agreement between Ocwen and Shellpoint relating to non-Agency loans (the Shellpoint Subservicing Agreement), (iii) to add an Agency Subservicing Agreement between Ocwen and NRM relating to Agency loans (the
(the Agency Subservicing Agreement), and (iv) to conform the New RMSR Agreements and the NRM Subservicing Agreement to certain of the terms of the Shellpoint Subservicing Agreement and the Agency Subservicing Agreement.
At any time duringOn May 2, 2022, Ocwen entered into amendments to the Initial Term, NRZ may terminatefollowing three agreements with certain subsidiaries of NRZ: (a) the Shellpoint Subservicing Agreement; (b) the NRM Subservicing Agreement; and (c) the New RMSR Agreement, including the attached Servicing Addendum, dated as of January 18, 2018 with NRM, HLLS Holdings, LLC and HLSS MSR – EBO Acquisition LLC (the New RMSR Agreement or the Servicing Addendum). The amendments modified the terms of the Subservicing Agreements and the Servicing Addendum for convenience, subjectas follows: (i) the term of each Agreement was extended to Ocwen’s right to receive a termination fee and 180 days’ notice. The termination fee is calculated as specified in the Subservicing Agreements and Servicing Addendum, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run-off assumptions.
FollowingDecember 31, 2023 (“Second Term”), with the Initial Term ending on May 1, 2022 and the Second Term beginning on May 2,2022; (ii) subsequent term extensions will be automatic one-year renewals, unless Ocwen provides six months’ advance notice of termination (by July 1), or the NRZ may extendparties provide three months’ advance notice of termination (by October 1) at the end of the then-current term as described below; and (iii) the parties will share a portion of some ancillary revenues. In addition, the amendments provided for certain immaterial modifications and clarifications of existing terms. The amendments on May 2, 2022 do not result in the prior transfers of MSR from Ocwen to NRZ qualifying for sale accounting prior to December 31, 2023, absent any subsequent amendment.
Under the terms of the Subservicing Agreements and Servicing Addendum, for additional three-month periods by providing proper notice. Inas amended, in addition to a base servicing fee, Ocwen receives certain ancillary fees, primarily late fees, loan modification fees and convenience or other loan collection fees, where permitted. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as being entitled to receive a portion of some ancillary revenues and certain REO related income including REO referral commissions.
Pursuant to the amendments noted above, the Subservicing Agreements and Servicing Addendum may be terminated by Ocwen or NRZ without cause on an annual basis (in effect a non-renewal) by providing at least 225 days’ notice in advance of the last dayend of the InitialSecond Term or the last dayend of each one-year extension of the applicable terms after the InitialSecond Term. Ocwen must provide a notice of termination by July 1, 2023, with respect to the Second Term or by July 1 of each one-year extended term after the Second Term and NRZ must provide notice by October 1, 2023 with respect to the Second Term or by October 1 of each one-year extended term after the Second Term.
In addition, NRZ and Ocwen have the ability to terminate the Subservicing Agreements and Servicing Addendum for cause if certain specified conditions occur. The terminations must be terminations in whole (i.e., cover all the loans under the relevant Subservicing Agreement or Servicing Addendum) and not in part, except for limited circumstances specified in the agreements. In addition, if NRZ terminates any of the NRM or Shellpoint Subservicing Agreements or the Servicing Addendum for cause, the other agreements will also terminate automatically.
Under the terms of the Subservicing Agreements and Servicing Addendum, in addition to a base servicing fee, Ocwen receives certain ancillary fees, primarily late fees, loan modification fees and convenience or Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as being entitled to receive certain REO related income including REO referral commissions.
As of SeptemberJune 30, 2021,2022, the UPB of MSRs subject to the Servicing Agreements and the New RMSR Agreements is $58.4$51.7 billion, including $12.6$11.3 billion for which title has not transferred to NRZ. As the third-party consents required for title to the MSRs to transfer were not obtained by May 31, 2019, the New RMSR Agreements set forth a process under which NRZ’s $12.6$11.3 billion Rights to MSRs may (i) be acquired by Ocwen at a price determined in accordance with the terms of the New RMSR Agreements, at the option of Ocwen, or (ii) be sold, together with Ocwen’s title to those MSRs, to a third party in accordance with the terms of the New RMSR Agreements, subject to an additional Ocwen option to acquire at a price based on the winning third-party bid rather than selling to the third party. If the Rights to MSRs are not transferred pursuant to these alternatives, then the Rights to MSRs will remain subject to the New RMSR Agreements.
In addition, as notedAs stated above, during the Initial Term, NRZ has the right to terminate the $12.6$11.3 billion New RMSR Agreements for convenience, in whole but not in part, subject to paymentapproximately three months’ advance notice of a termination fee and 180 days’ notice.at the end of the Second Term or the end of the then-applicable annual extended term. If NRZ exercises this termination right, NRZ has the option of seeking (i) the transfer of the MSRs through a sale to a third party of its Rights to MSRs (together with a transfer of Ocwen’s title to those MSRs) or (ii) a substitute RMSR arrangement that substantially replicates the Rights to MSRs structure (a Substitute RMSR Arrangement) under which we would transfer title to the MSRs to a successor servicer and NRZ would continue to own the economic rights and obligations related to the MSRs. In the case of option (i), we have a purchase option as specified in the New RMSR Agreements. If NRZ is not able to sell the Rights to MSRs or establish a Substitute RMSR Arrangement with another servicer, NRZ has the right to revoke its termination notice and re-instate the Servicing Addendum or to establish a subservicing arrangement whereby the MSRs remaining subject to the New RMSR Agreements would be transferred to up to three subservicers who would subservice under Ocwen’s
oversight. If such a subservicing arrangement were established, Ocwen would receive an oversight fee and reimbursement of expenses. We may also agree on alternative arrangements that are not contemplated under our existing agreements or that are variations of those contemplated under our existing agreements.
On December 28, 2016, PMC entered into an agreement to sell substantially all of its MSRs, and the related servicing advances, to NRM (the 2016 PMC Sale Agreement). In connection with this agreement, on December 28, 2016, PMC also entered into a subservicing agreement with NRZ which was subsequently amended and restated as of March 29, 2019 (together with the 2016 PMC Sale Agreement, the PMC MSR Agreements). The PMC subservicing agreement had an initial term of three years from the initial transaction date of June 16, 2017, subject to certain transfer and termination provisions. The MSR sale transaction did not originally achieve sale accounting treatment.
On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC servicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. As the sale accounting criteria were met upon the notice of termination, the MSRs and the Rights to MSRs were derecognized from our balance sheet on February 20, 2020 without any gain or loss on derecognition. We serviced these loans until deboarding in October 2020 representing $34.2 billion of UPB, and accounted for them as a subservicing relationship. Accordingly, we recognized subservicing fees associated with the subservicing agreement subsequent to February 20, 2020 and have not reported any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. On September 1, 2020, 133,718 loans representing $18.2 billion of UPB were deboarded and the remaining 136,500 loans representing $16.0 billion of UPB were deboarded on October 1, 2020.
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Servicing-related receivables: | Servicing-related receivables: | | | | Servicing-related receivables: | | | |
| Government-insured loan claims - Forward | Government-insured loan claims - Forward | $ | 93,717 | | | $ | 103,058 | | Government-insured loan claims - Forward | $ | 78,956 | | | $ | 90,603 | |
| Government-insured loan claims - Reverse | Government-insured loan claims - Reverse | 34,620 | | | 32,887 | | Government-insured loan claims - Reverse | 45,394 | | | 39,895 | |
| | Due from custodial accounts | Due from custodial accounts | 25,700 | | | 19,393 | | Due from custodial accounts | 20,792 | | | 7,777 | |
| | Receivable from sale of MSRs (holdback) | | Receivable from sale of MSRs (holdback) | 14,933 | | | — | |
| Reimbursable expenses | Reimbursable expenses | 5,419 | | | 4,970 | | Reimbursable expenses | 6,063 | | | 6,056 | |
| Servicing fees | | Servicing fees | 6,813 | | | 6,662 | |
| Subservicing fees, reimbursable expenses and other - Due from MAV | | Subservicing fees, reimbursable expenses and other - Due from MAV | 4,765 | | | 4,933 | |
| Subservicing fees and reimbursable expenses - Due from NRZ | Subservicing fees and reimbursable expenses - Due from NRZ | 2,892 | | | 4,611 | | Subservicing fees and reimbursable expenses - Due from NRZ | 1,932 | | | 3,781 | |
| Subservicing fees and reimbursable expenses - Due from MAV | 1,412 | | | — | | |
| Other | Other | 2,167 | | | 1,087 | | Other | 1,706 | | | 1,223 | |
| | 165,926 | | | 166,006 | | | 181,354 | | | 160,930 | |
| Income taxes receivable | Income taxes receivable | 54,501 | | | 57,503 | | Income taxes receivable | 30,757 | | | 56,776 | |
| Due from MAV | Due from MAV | 1,245 | | | — | | Due from MAV | 974 | | | 990 | |
| Other receivables | Other receivables | 3,093 | | | 3,200 | | Other receivables | 5,489 | | | 3,760 | |
| | 224,764 | | | 226,709 | | | 218,574 | | | 222,456 | |
| Allowance for losses | Allowance for losses | (41,674) | | | (39,044) | | Allowance for losses | (40,094) | | | (41,749) | |
| | | $ | 183,090 | | | $ | 187,665 | | | $ | 178,480 | | | $ | 180,707 | |
At SeptemberJune 30, 20212022 and December 31, 2020,2021, the allowance for losses primarily related to receivables of our Servicing business. The allowance for losses related to FHA-, VA- or VA-insuredUSDA insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured claims) was $41.1$39.8 million and $38.3$41.5 million at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. The government-insured claims that do not exceed HUD, VA, FHA or FHAUSDA insurance limits are not subject to any allowance for losses as guaranteed by the U.S. government. The receivable amount in excess of the guaranteed claim limits or recoverable amounts per insurer guidelines or as a result of servicer error, such as exceeding key filing or foreclosure timelines, is subject to an allowance for losses. Receivables are financial assets subject to the credit loss allowance model under ASC 326: Financial Instruments - Credit Losses (CECL). The allowance for expected credit losses is estimated based on relevant qualitative and quantitative information about past events, including historical collection and loss experience, current conditions, and reasonable and supportable forecasts that affect collectability. We generally charge off the receivable balance when management determines the receivable to be uncollectible and when the receivable has been classified as a loss by our servicing claims analysis process.
| | Allowance for Losses - Government-Insured Loan Claims | Allowance for Losses - Government-Insured Loan Claims | Three Months Ended September 30, | | Nine Months Ended September 30, | Allowance for Losses - Government-Insured Loan Claims | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | Beginning balance | $ | 41,216 | | | $ | 53,310 | | | $ | 38,339 | | | $ | 56,868 | | Beginning balance | $ | 40,836 | | | $ | 40,437 | | | $ | 41,495 | | | $ | 38,339 | |
| Provision | Provision | 2,990 | | | 5,055 | | | 10,526 | | | 12,249 | | Provision | 3,258 | | | 2,579 | | | 5,497 | | | 7,537 | |
| Charge-offs and other, net | Charge-offs and other, net | (3,141) | | | (17,607) | | | (7,800) | | | (28,359) | | Charge-offs and other, net | (4,343) | | | (1,800) | | | (7,241) | | | (4,660) | |
| Ending balance | Ending balance | $ | 41,065 | | | $ | 40,758 | | | $ | 41,065 | | | $ | 40,758 | | Ending balance | $ | 39,751 | | | $ | 41,216 | | | $ | 39,751 | | | $ | 41,216 | |
| | |
| Note 10 - Investment in Equity Method Investee and Related Party Transactions |
On December 21, 2020, Ocwen entered into a transaction agreement (the Transaction Agreement) with Oaktree Capital Management L.P. and certain affiliates (collectively Oaktree) to form a strategic relationship to invest in MSRs subserviced by PMC. The parties have agreed to invest their pro rata portions of up to an aggregate of $250.0 million in an intermediate holding company, MAV Canopy, held 15% by Ocwen and 85% by Oaktree.
On May 3, 2021, pursuant to the Transaction Agreement, Ocwen contributed 100% of its equity interest in MAV, which had total member’s equity and cash balances of approximately $5.0 million at the time of its contribution, to MAV Canopy, andCanopy. In exchange for its contribution, Ocwen received 15% equity interest of MAV Canopy andplus $4.4 million cash consideration.consideration from MAV Canopy that was representative of the remaining 85% of MAV. MAV is a licensed mortgage servicing company
approved to purchase GSE MSRs. PMC and MAV entered into a number of definitive agreements which govern the terms of their business relationship:
Subservicing Agreement. Effective May 3, 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV in exchange for a per-loan subservicing fee and certain other ancillary fees. The subservicing agreement will continue until terminated by mutual agreement of the parties or for cause, as defined. If either party terminates the agreement for cause, the other party is required to pay certain fees and costs. As of June 30, 2022, PMC subserviced a total $45.1 billion UPB on behalf of MAV, of which $28.5 billion MSR remains reported on the consolidated balance sheet of PMC - see below for information on MSR sales by PMC to MAV that do not achieve sale accounting. Subserviced loans exclude UPB of $1.6 billion that have not yet transferred to our servicing system as of June 30, 2022. Effective March 1, 2022, PMC and MAV amended certain provisions of the subservicing agreement to adjust down the ancillary fee retained by PMC to enhance the competitiveness of MAV when buying MSRs and generate additional subservicing volume to PMC. The amendment resulted in a $14.1 million fair value loss (as a change in the present value of future contractual cash flows) on the Pledged MSR liability that is reported at fair value in the three months ended March 31, 2022.
Joint Marketing Agreement and Recapture Agreement. Effective May 3, 2021, in conjunction with the subservicing agreement, PMC and MAV entered into a joint marketing agreement and a flow MSR sale agreement (MSR recapture), whereby PMC is entitled to the exclusive right to solicit and refinance borrowers with loans underlying the MSR owned by MAV, and is obligated to transfer to MAV the MSR associated with the loans so originated. Under the agreements, the parties share the recapture benefits, whereby PMC realizes gains on loans sold and MAV is delivered the recaptured MSR for no cash consideration. The joint marketing agreement and flow MSR sale agreement will continue until terminated by mutual agreement of the parties or for cause, as defined, or at the option of either party if the subservicing agreement is terminated. During the six months ended June 30, 2022, PMC transferred UPB of $191.4 million under this agreement.
Administrative Services Agreement:Right of First Offer Pursuant to the Transaction Agreement, Ocwen entered into an agreement to provide certain administrative services to MAV, including accounting, treasury, human resources, management information, MSR transaction management support, and certain licensing, regulatory and risk management support. Ocwen is entitled to a fee for such services, subject to an annual cap of $0.5 million.
. Following the execution of the Transaction Agreement and until the parties have contributed their pro rata portions of the $250.0 million aggregate capital contributions, Ocwen and its affiliates may not acquire, without Oaktree’s prior written approval, GSE MSRs that meet certain underwriting and other criteria (such criteria are referred to as the “buy-box”) unless Ocwen notifies MAV of the opportunity and MAV does not pursue it by submitting a competitive bid to the MSR seller.
In addition, until the earlier of (i) the time that MAV has been fully funded and (ii) May 3, 2024 (subject to two annual extensions by mutual agreement), if Ocwen seeks to sell any GSE MSRs that meet the buy-box, Ocwen must first offer such MSRs to MAV before initiating a sale process with a third party. If MAV does not accept Ocwen’s offer, Ocwen may sell the MSRs to a third party on terms no more favorable to the purchaser than those offered to MAV. The price at which Ocwen and its affiliates will offer MSRs to MAV will be based on the valuation of an independent third-party. This first offer provision does not apply to MSRs acquired by PMC prior to May 3, 2021.
On As of June 1, 2021, PMC agreed30, 2022, MAV’s aggregated capital contributions amounted to sell and MAV agreed to purchase a Fannie Mae MSR portfolio$128.4 million, net of approximately $4.1 billion, with certain pricing adjustments, subject to MAV obtaining the necessary regulatory approval. MAV has subsequently obtained approval from Fannie Mae and the transaction closed on September 1, 2021. In addition, on September 30, 2021, PMC agreed to sell and MAV agreed to purchase a GSE MSR portfolio of approximately $8.2 billion.distributions.
Forward Bulk Servicing Rights Purchase and Sale Agreement: On September 9, 2021, PMC and MAV entered into an MSR purchase and sale agreement whereby PMC agreed to sell andsells MAV agreed to purchaseon a monthly basis certain Fannie Mae MSRs at the price acquired by PMC, on a monthly basis. As of Septembersubject to certain adjustments. During the six months ended June 30, 2021,2022, PMC soldtransferred MSRs with UPB of $1.3$5.1 billion to MAV under this agreement.
Bulk Mortgage Servicing Rights Purchase and Sale Agreements. During the six months ended June 30, 2022, PMC transferred MAV certain MSRs in bulk transactions for an aggregate UPB of approximately $598.3 million.
The MSR sale transactions between PMC and MAV do not qualify for sale accounting and are accounted for as secured borrowings primarily due to the termination restrictions of the subservicing agreement.agreement, and are accounted for as secured borrowings. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for a summary of transactions under this agreement.
We account for our investments in unconsolidated entities using the equity method. These investments include our investment in Ocwen provides certain administrative services to MAV, Canopy in which we hold a significant, but less than controlling, ownership interest. Under the equity method ofincluding accounting, investments are initially recorded at costtreasury, human resources, management information, MSR transaction management support, and thereafter adjusted for additional investments, distributionscertain licensing, regulatory and the proportionate share of earnings or losses of the investee. We evaluate our equity method investments for impairment when events or changes in circumstances indicate that any other than‐temporary decline in value may have occurred.
Under ASC 323, Investments - Equity Method and Joint Ventures, an investment of less than 20 percent of the voting stock of an investee shall leadrisk management support. Ocwen is entitled to a presumption thatfee for such services, subject to an investor does not have the ability to exercise significant influence unless such ability can be demonstrated. Ocwen determined it has significant influence over MAV Canopy based on its representation on the MAV Canopy Boardannual cap of Directors and certain services it provides, amongst other factors. Accordingly, Ocwen deemed it appropriate to account for its investment in MAV Canopy under the$0.5 million.
Our equity method.
Ourmethod investment in MAV Canopy is comprised of the following at Septemberand for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Beginning balance | $ | 34,925 | | | $ | — | | | $ | 23,297 | | | $ | — | | |
| Capital contributions | — | | | 11,528 | | | 16,500 | | | 11,528 | | |
| Capital distributions | (36) | | | — | | | (16,911) | | | — | | |
| Earnings of equity method investee | 3,932 | | | 350 | | | 15,935 | | | 350 | | |
| Ending balance | $ | 38,821 | | | $ | 11,878 | | | $ | 38,821 | | | $ | 11,878 | | |
Under the Amended & Restated Limited Liability Company Agreement with MAV Canopy, Ocwen is entitled to receive its 15% percentage interest share of MAV Canopy’s earnings, subject to certain adjustments. In addition, upon MAV Canopy liquidation or upon determination of the MAV Canopy Board of Directors to make advance distributions, Ocwen is entitled to receive a specified portion of the distribution amount available (“Promote Distribution”), after satisfaction of required distribution thresholds, including a specified internal rate of return threshold on Oaktree member’s gross adjusted capital contributions. We determined that the Promote Distribution represents an incentive fee under our various service agreements with MAV with a variable consideration and is recognized in earnings when it is probable that a significant reversal will not occur. As of June 30, 2021:
| | | | | |
Capital contribution | $ | 18,512 | |
Earnings of equity method investee | 1,282 | |
Investment in equity method investee | $ | 19,794 | |
2022, Ocwen has not recognized any such incentive fee.MAV Canopy, MAV and Oaktree are deemed related parties to Ocwen. In addition to its investment in MAV Canopy, the subservicing agreement by PMC and the other agreements described above, Ocwen issued common stock, warrants and senior secured notes to Oaktree in 2021 as described in Note 1213 – Borrowings and Note 1417 – Equity.Interest Expense.
The following tables present a summary of our transactions with MAV, MAV Canopy or Oaktree as related parties, as of or for the three and nine months ended September 30, 2021:
| | | | | |
| Balance Sheet | |
| MSRs, at fair value (1) | $ | 144,893 | |
| Receivables | |
| Reimbursable expenses | |
| MSR sales price holdback - (MAV) (1) | $ | 1,644 | |
| Due from MAV | 2,657 | |
| Transferred MSR liability, at fair value (2) | $ | 128,887 | |
| Other liabilities | |
| Due to MAV | 226 | |
| |
| Revenue | |
| Servicing and subservicing fees | |
| Servicing fees collected on behalf of MAV (1) | $ | 1,001 | |
| Subservicing fees - Subservicing agreement (MAV) | 574 | |
| Ancillary fees (MAV) (1) | 707 | |
| $ | 2,282 | |
| |
| MSR valuation adjustments, net (MAV) (1) | $ | (3,116) | |
| |
| Other income (expense) | |
| Interest expense - OFC senior secured notes (Oaktree) | $ | (21,351) | |
| |
| |
| |
| Pledged MSR liability expense - MAV (1) | 2,094 | |
| Other income - Administrative services agreement (MAV) | 140 | |
| |
| Other | |
| UPB of MSR transferred by PMC to MAV in the three and nine months ended September 30, 2021 | $ | 13,683,143 | |
| Cash proceeds from transfers of MSRs by PMC to MAV in the three and nine months ended September 30, 2021 | $ | 130,024 |
| |
| UPB of loans sub-serviced - Subservicing agreement (MAV) as of September 30, 2021 | |
| |
| |
| MSR transferred to MAV, not qualifying for sale accounting | 13,570,892 |
| Ocwen subservicer | 7,855,112 |
| $ | 21,426,004 |
(1)For sales of MSRs to MAV which did not qualify as a sale for accounting purposes, we continue to recognize the MSRs and related pledged MSR liability on our consolidated balance sheets, as well as the full amount of servicing revenue and changes in the fair value of the MSRs and related financing liability in our unaudited consolidated statements of operations. Changes in fair value of the Rights to MSRs are recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations. Changes in fair value of the MSR related financing liability are reported in Pledged MSR liability expense.
(2)Also referred to as Pledged MSR liability. The fair value of the transferred MSR liability differs from the fair value of the MSR due to certain cash flows being retained by Ocwen in connection with the subservicing agreement.
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Contingent loan repurchase asset | Contingent loan repurchase asset | $ | 450,385 | | | $ | 480,221 | | Contingent loan repurchase asset | $ | 227,160 | | | $ | 403,740 | |
| Derivative margin deposit | | Derivative margin deposit | 23,704 | | | 2,024 | |
| Intangible assets, net (net of accumulated amortization of $2.8 million and $0.7 million) | | Intangible assets, net (net of accumulated amortization of $2.8 million and $0.7 million) | 20,281 | | | 14,335 | |
| Prepaid expenses | Prepaid expenses | 21,398 | | | 21,176 | | Prepaid expenses | 17,881 | | | 21,498 | |
| Prepaid representation, warranty and indemnification claims - Agency MSR sale | | Prepaid representation, warranty and indemnification claims - Agency MSR sale | 15,173 | | | 15,173 | |
| Derivatives, at fair value | Derivatives, at fair value | 20,329 | | | 23,246 | | Derivatives, at fair value | 13,688 | | | 21,675 | |
| Prepaid representation, warranty and indemnification claims - Agency MSR sale | 15,173 | | | 15,173 | | |
| REO | REO | 8,602 | | | 7,771 | | REO | 9,443 | | | 10,075 | |
| Prepaid lender fees, net | Prepaid lender fees, net | 8,338 | | | 9,556 | | Prepaid lender fees, net | 6,790 | | | 7,150 | |
| Deferred tax asset, net | Deferred tax asset, net | 3,724 | | | 3,543 | | Deferred tax asset, net | 3,323 | | | 3,329 | |
| Mortgage backed securities, at fair value | 1,618 | | | 2,019 | | |
| | Security deposits | Security deposits | 1,173 | | | 2,222 | | Security deposits | 1,013 | | | 1,174 | |
| | Other | Other | 11,857 | | | 6,556 | | Other | 6,030 | | | 7,077 | |
| | | $ | 542,597 | | | $ | 571,483 | | | $ | 344,486 | | | $ | 507,250 | |
Intangible assets, net are primarily comprised of a reverse subservicing contract intangible asset with an unamortized balance of $19.7 million and $13.7 million at June 30, 2022 and December 31, 2021, respectively.On April 1, 2022, PMC boarded approximately 19,000 reverse mortgage loans with a UPB of $4.1 billion onto our servicing platform under the five-year subservicing agreement executed on October 1, 2021 with Mortgage Assets Management, LLC (formerly known as Reverse Mortgage Solutions, Inc.) (MAM (RMS)). A purchase price of $6.9 million was paid on April 7, 2022 with the assumption of a liability for curtailments and $8.1 million was recognized as a subservicing contract intangible asset, based on its relative fair value, to be amortized ratably over the five-year term of the subservicing contract based on portfolio runoff. This boarding is in addition to approximately 40,000 reverse mortgage loans with a UPB of $9.1 billion boarded during the first quarter of 2022.
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Note 12 – Borrowings- Other Financing Liabilities |
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| Financing Liabilities | | | | | | | | Outstanding Balance |
| Borrowing Type | | Collateral | | Interest Rate | | Maturity | | September 30, 2021 | | December 31, 2020 |
| HMBS-related borrowings, at fair value (1) | | Loans held for investment | | 1ML + 242 bps (1) | | (1) | | $ | 6,782,564 | | | $ | 6,772,711 | |
| Other financing liabilities, at fair value | | | | | | | | | | |
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| Original Rights to MSRs Agreements - NRZ | | MSRs | | (2) | | (2) | | 574,020 | | | 566,952 | |
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| Transferred MSR liability - MAV | | MSRs | | (2) | | (2) | | 128,887 | | | — | |
| | | | | | | | 702,907 | | | 566,952 | |
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| Financing liability - Owed to securitization investors, at fair value: | | | | | | | | | | |
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| Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (3) | | Loans held for investment | | (3) | | Oct. 2033 | | 8,004 | | | 9,770 | |
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| Total Other financing liabilities, at fair value | | | | | | | | 710,911 | | | 576,722 | |
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| | | | | | | | $ | 7,493,475 | | | $ | 7,349,433 | |
(1)Represents amounts due to the holders of beneficial interestsThe following tables presents transferred MSR liabilities recorded in Ginnie Mae guaranteed HMBSconnection with MSR sales and transfers that diddo not qualify for sale accounting treatmentand liabilities of HECM loans. Under this accounting treatment, the HECM loans securitized with Ginnie Mae remain on our consolidated balance sheets and the proceeds from the sale are recognized as a financing liability, which is recorded at fair value consistent with the related HECM loans. The beneficial interests in Ginnie Mae guaranteed HMBS have no maturity dates, and the borrowings mature as the related loans are repaid. Interest rate is a weighted average based on the pass-through rate of the loans. See Note 2 – Securitizations and Variable Interest Entities.mortgage-backed securitization trusts.
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| | | | | | Outstanding Balance |
| Borrowing Type | | Collateral | | Maturity | | June 30, 2022 | | December 31, 2021 |
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| Original Rights to MSRs Agreements, at fair value - NRZ (1) | | MSRs | | (1) | | $ | 550,808 | | | $ | 558,940 | |
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| Pledged MSR liability, at fair value - MAV (1) | | MSRs | | (1) | | 355,530 | | | 238,144 | |
| | | | | | 906,338 | | | 797,084 | |
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| Financing liability - Owed to securitization investors, at fair value: | | | | | | | | |
| Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (2) | | Loans held for investment | | Oct. 2033 | | 7,289 | | | 7,879 | |
| Total Other financing liabilities, at fair value | | | | | | $ | 913,627 | | | $ | 804,963 | |
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(2)(1)Pledged MSR liabilities are recognized due to the accounting treatment of MSR sale transactions with NRZ and MAV that did not qualify as sales for accounting purposes. Under this accounting treatment, the MSRs transferred remain on the consolidated balance sheet and the proceeds from the sale are recognized as a financing liability, which is recorded at fair value consistent with the related MSRs. The financing liability has no contractual maturity or repayment schedule. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for additional information.
(3)(2)Consists of securitization debt certificates due to third parties that represent beneficial interests in trusts that we include in our unaudited consolidated financial statements. Holders of the debt issued by the consolidated securitization trust entities have recourse only to the assets of the SPE for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. TrustThe certificates in the trust pay interest based on fixed rates ranging between 4.25% and 5.75% and a variable rate based on 1ML plus 0.45%, includesapplicable margin, and include principal-only certificates that are Principal Only certificates and are not entitled to receive distributions of interest. The maturity of the certificates occurs upon maturity of the loans held by the trust.
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| Advance Match Funded Liabilities | | Borrowing Capacity | | September 30, 2021 | | December 31, 2020 |
| Borrowing Type | | | | Maturity (1) | | Amort. Date (1) | | Total | | Available (2) | | Weighted Average Interest Rate (6) | | Balance | | Weighted Average Interest Rate (6) | | Balance |
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| Advance Receivables Backed Notes - Series 2015-VF5 (3) | | | | Jun. 2052 | | Jun. 2022 | | $ | 80,000 | | | $ | 54,505 | | | 2.14 | % | | $ | 25,495 | | | 4.26 | % | | $ | 89,396 | |
| Advance Receivables Backed Notes, Series 2020-T1 (4) | | | | Aug. 2052 | | Aug. 2022 | | 475,000 | | | — | | | 1.49 | % | | 475,000 | | | 1.49 | % | | 475,000 | |
| Total Ocwen Master Advance Receivables Trust (OMART) | | 555,000 | | | 54,505 | | | 1.52 | % | | 500,495 | | | 1.93 | % | | 564,396 | |
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Ocwen Freddie Advance Funding (OFAF) - Advance Receivables Backed Notes, Series 2015-VF1 (5) | | | | Aug. 2052 | | Aug. 2022 | | 40,000 | | | 23,923 | | | 2.15 | % | | 16,077 | | | 3.26 | % | | 16,892 | |
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| | | | | | | | $ | 595,000 | | | $ | 78,428 | | | 1.54 | % | | $ | 516,572 | | | 1.96 | % | | $ | 581,288 | |
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| Advance Match Funded Liabilities | | Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | | | | Maturity (1) | | Amort. Date (1) | | Total | | Available (2) | | June 30, 2022 | | December 31, 2021 |
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| Advance Receivables Backed Notes - Series 2015-VF5 (3) | | | | Jun. 2052 | | Aug. 2022 | | $ | 80,000 | | | $ | 73,165 | | | $ | 6,835 | | | $ | 14,231 | |
| Advance Receivables Backed Notes, Series 2020-T1 (4) | | | | Aug. 2052 | | Aug. 2022 | | 430,000 | | | — | | | 430,000 | | | 475,000 | |
| Total Ocwen Master Advance Receivables Trust (OMART) | | 510,000 | | | 73,165 | | | 436,835 | | | 489,231 | |
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Ocwen GSE Advance Funding (OGAF) - Advance Receivables Backed Notes, Series 2015-VF1 (5) | | | | Aug. 2052 | | Aug. 2022 | | 40,000 | | | 1,348 | | | 38,652 | | | 23,065 | |
| EBO Advance facility (6) | | | | May 2026 | | May 2026 | | 20,000 | | | 18,509 | | | $ | 1,491 | | | $ | — | |
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| Total Servicing Advance Financing Facilities | | | | | | | | $ | 570,000 | | | $ | 93,022 | | | $ | 476,978 | | | $ | 512,297 | |
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| Weighted average interest rate (7) | | | | | | | | 1.65 | % | | 1.54 | % |
(1)The amortization date of our facilities is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In all of our advance facilities, there are multiple notes outstanding. After the amortization date for each note, all collections that represent the repayment of advances pledged to the facility must be applied ratably to each outstanding amortizing note to reduce the balance and, as such, the collection of advances allocated to the amortizing note may not be used to fund new advances.
(2)BorrowingThe committed borrowing capacity under the OMART and OFAFOGAF facilities is available to us provided that we have sufficient eligible collateral to pledge. At SeptemberJune 30, 2021,2022, none of the available borrowing capacity of the OMART and OFAFOGAF advance financing notes could be used based on the amount of eligible collateral.
(3)On June 30, 2022, the amortization date was extended to August 15, 2022. Interest is computed based on the lender’s cost of funds plus a margin of 200 bps. On June 30, 2021, the amortization date was extended by one year to June 30, 2022, the interest rate margin was reduced from 400 bps to 200 bps, and the borrowing capacity was voluntarily reduced to from $250.0 million to $80.0 million.applicable margin.
(4)The weighted average rate of the notes at September 30, 2021 is 1.49%, withinterest rates on the individual classes of notes ranging fromrange between 1.28% to 5.42%.
(5)Interest wasis computed based on the lender’s cost of funds plus applicable margin. On January 31, 2022, we amended the Ocwen Freddie Advance Funding (OFAF) advance facility to include Fannie Mae advances as eligible collateral and renamed the facility Ocwen GSE Advance Funding (OGAF).
(6)On May 2, 2022, we entered into a marginloan and security agreement and issued a $1.7 million promissory note to the lender. The facility has total uncommitted borrowing capacity of 300 bps. On$20.0 million to finance the acquisition of advances in connection with the early buyout of certain fixed-rate, fully-amortizing FHA-insured residential mortgage loans, at an interest rate of 1M Term Secured Overnight Financing Rate (SOFR) plus applicable margin. At June 30, 2021,2022, none of the amortization date was extended to August 27, 2021. On August 26, 2021, the interest rate was reduced to the lender’s cost of funds plus a margin of 200 bps, theavailable borrowing capacity was voluntarily reduced from $70.0 million to $40.0 million andof the amortization date was extended to August 26, 2022.facility could be used based on the amount of eligible collateral.
(6)(7)The weighted average interest rate, excluding the effect of the amortization of prepaid lender fees, is computed using the outstanding balance of each respective note and its interest rate at the financial statement date. At SeptemberJune 30, 20212022 and December 31, 2020,2021, the balance of unamortized prepaid lender fees was $1.8$0.3 million and $4.3$1.3 million, respectively, and are included in Other assets in our consolidated balance sheets.
| | Mortgage Loan Warehouse Facilities | Mortgage Loan Warehouse Facilities | | | | Available Borrowing Capacity | | Outstanding Balance | Mortgage Loan Warehouse Facilities | | | | Available Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | Borrowing Type | | Collateral | | Interest Rate (1) | | Maturity | | | Uncommitted | | Committed (2) | | September 30, 2021 | | December 31, 2020 | Borrowing Type | | Collateral | | Maturity | | | Uncommitted | | Committed (1) | | June 30, 2022 | | Dec. 31, 2021 |
Master repurchase agreement (3)(2) | Master repurchase agreement (3)(2) | | Loans held for sale (LHFS) | | 1ML + 220 - 375 bps | | June 2022 | | | $ | 115,000 | | | $ | 61,282 | | | $ | 98,718 | | | $ | 195,773 | | Master repurchase agreement (3)(2) | | Loans held for sale (LHFS), Receivables and REO | | Aug. 2022 | | | $ | 115,000 | | | $ | 71,047 | | | $ | 88,953 | | | $ | 109,437 | |
| | Master repurchase agreement (3) | | Master repurchase agreement (3) | | LHFS and Loans Held for Investment (LHFI) | | Dec. 2022 | | | 250,000 | | | 112,213 | | | 87,787 | | | 160,882 | |
| Master repurchase agreement (4) | Master repurchase agreement (4) | | LHFS (forward and reverse) | | 1ML + 325 bps forward; 1ML + 350 bps reverse | | Nov. 2021 | | | 50,000 | | | 124,385 | | | 75,615 | | | 80,081 | | Master repurchase agreement (4) | | LHFS | | N/A | | | 50,000 | | | — | | | — | | | — | |
| Participation agreement (5) | | Participation agreement (5) | | LHFS | | June 2023 | | | 150,000 | | | — | | | — | | | 45,186 | |
| Master repurchase agreement (5) | Master repurchase agreement (5) | | N/A | | SOFR + 190 bps; SOFR floor 25 bps | | N/A | | | 50,000 | | | — | | | — | | | — | | Master repurchase agreement (5) | | LHFS | | June 2023 | | | — | | | 42,415 | | | 130,585 | | | 1,766 | |
| Participation agreement (6) | | LHFS | | (6) | | June 2022 | | | 203,609 | | | — | | | 96,391 | | | — | | |
Master repurchase agreement (6) | Master repurchase agreement (6) | | LHFS | | (6) | | June 2022 | | | — | | | 100,000 | | | — | | | 63,281 | | Master repurchase agreement (6) | | LHFS | | June 2023 | | | — | | | 1,000 | | | — | | | — | |
| Master repurchase agreement (7) | | LHFS | | (7) | | June 2022 | | | — | | | 1,000 | | | — | | | — | | |
| Mortgage warehouse agreement (6) | | Mortgage warehouse agreement (6) | | LHFS and LHFI | | Mar. 2023 | | | — | | | 36,742 | | | 13,258 | | | 11,792 | |
Mortgage warehouse agreement (8)(7) | Mortgage warehouse agreement (8)(7) | | LHFS | | 1ML + 350 bps; Floor 5.25% | | Jan. 2022 | | | — | | | 37,681 | | | 12,319 | | | 11,715 | | Mortgage warehouse agreement (8)(7) | | LHFS and LHFI | | Mar. 2023 | | | 146,523 | | | — | | | 57,477 | | | 87,813 | |
Mortgage warehouse agreement (9)(8) | Mortgage warehouse agreement (9)(8) | | LHFS (reverse) | | 1ML + 250 bps; 3.25% floor | | Oct. 2021 | | | 28,929 | | | — | | | 146,071 | | | 73,134 | | Mortgage warehouse agreement (9)(8) | | LHFS and Receivables | | (8) | | | 200,764 | | | — | | | 29,236 | | | 192,023 | |
| Mortgage warehouse agreement (10) | | LHFS | | (10) | | N/A | | | 34,962 | | | — | | | 165,038 | | | 27,729 | | |
| Master repurchase agreement (9) | | Master repurchase agreement (9) | | LHFS | | (9) | | | — | | | — | | | 126,098 | | | 459,344 | |
| Loan and security agreement (10) | | Loan and security agreement (10) | | LHFS and Receivables | | Mar. 2023 | | | — | | | 25,133 | | | 24,867 | | | 16,834 | |
| Master repurchase agreement (11) | Master repurchase agreement (11) | | LHFS | | 1ML + 200 bps | | N/A | | | — | | | — | | | 465,018 | | | — | | Master repurchase agreement (11) | | LHFS | | Apr. 2023 | | | 128,993 | | | — | | | 221,007 | | | — | |
| Loan and security agreement (12) | | HECM (ABO) | | Prime Rate + 50 bps; Floor 450 bps | | Apr. 2022 | | | — | | | 20,000 | | | 10,000 | | | — | | |
| Master repurchase agreement (13) | | LHFS | | 1ML + 250 bps | | Oct. 2021 | | | 210,000 | | | — | | | — | | | — | | |
| | Total mortgage loan warehouse facilities | Total mortgage loan warehouse facilities | 2.77% (14) | | | | $ | 692,500 | | | $ | 344,348 | | | $ | 1,069,170 | | | $ | 451,713 | | Total mortgage loan warehouse facilities | | | | $ | 1,041,280 | | | $ | 288,549 | | | $ | 779,270 | | | $ | 1,085,076 | |
| | Weighted average interest rate (12) | | Weighted average interest rate (12) | | 3.25 | % | | 2.61 | % |
(1)1ML was 0.08% and 0.14% at September 30, 2021 and December 31, 2020, respectively. Prime Rate was 3.25% as at September 30, 2021.
(2)Of the borrowing capacity on mortgage loan warehouse facilities extended on a committed basis, $3.3$1.9 million of the available borrowing capacity could be used at SeptemberJune 30, 20212022 based on the amount of eligible collateral that could be pledged.
(3)(2)The maximum borrowing under this agreement is $275.0 million, of which $160.0 million is available on a committed basis and the remainder is available at the discretion of the lender. On March 31, 2021, we renewedJune 29, 2022, the maturity date of the facility was extended to August 1, 2022 and the interest rate was modified from 1ML plus applicable margin to 1M Term SOFR plus applicable margin. On July 29, 2022, the total maximum borrowing under this agreement was reduced to $175.0 million and the maturity date was extended to June 30,August 31, 2022. The borrowing available on a committed basis was reduced to $50.0 million and uncommitted capacity was increased to $125.0 million.
(4)(3)The maximum borrowing under this agreement is $250.0$450.0 million, of which $200.0 million is available on a committed basis and the remainder is available on an uncommitted basis. The agreement allows the lender to acquire a 100% beneficial interest in the underlying mortgage loans.rate for this facility was 1ML plus applicable margin.
(5)(4)The lender provides financing for up to $50.0 million at the discretion of the lender. The agreement has no stated maturity date. Interest on this facility is based on the Secured Overnight Financing Rate (SOFR).SOFR. The interest rate for this facility is SOFR plus applicable margin, with a SOFR floor of 25 bps.
(6)(5)On June 23, 2021, the facility was renewed for one year to June 23, 2022, theThe uncommitted borrowing capacity under the participation agreement is $150.0 million. On June 23, 2022, the maturity date of the participation agreement was increasedextended to $150.0 million andJune 22 2023. Also on June 23, 2022, the committed borrowing capacity under the repurchase agreement was increased from $100.0 million to $100.0 million.$173.0 million, the maturity date was extended to June 22, 2023, and, the interest rate was modified to 1M Term SOFR plus applicable margin, with an interest rate floor for Ginnie Mae modifications, Ginnie Mae buyouts
and RMBS bond clean-up loans. The previous interest rate on the repurchase agreement was revised to the stated interest rate of the mortgage loans, less 35 bpsapplicable margin with aan interest rate floor of 3.00% for new originations and less 10 bpsapplicable margin with aan interest rate floor of 3.25% for Ginnie Mae modifications, Ginnie Mae buyouts and RMBS bond clean upclean-up loans. The interest rate on the participation agreement was revisedmodified to the greater of the stated interest rate of the mortgage loans less 35 bpsan agreed upon servicing fee percentage or the 1M Term SOFR, plus the applicable margin. The previous interest rate was the stated interest rate of the mortgage loans, less applicable margin with aan interest rate floor of 3.00% for new originations. The agreements allow the lender to acquire a 100% beneficial interest in the underlying mortgage loans. On July 23, 2021, we temporarily increased the borrowing capacity under the participation agreement to $300.0 million until September 15, 2021. On September 14, 2021, the temporary increase in borrowing capacity was extended to November 15, 2021.
(7)On June 20, 2021, the facility was renewed for one year to June 23, 2022.
(8)(6)Under this agreement, the lender provides financing for up to $50.0 million on a committed basis. The interest rate for this facility was modified to 1M Term SOFR plus applicable margin with an interest rate floor. On January 15, 2021,14, 2022, the maturity date of this facility was extended to January 15, 2022.March 16, 2022 when it was further extended to March 16, 2023.
(9)(7)Under this agreement, the lender provides financing for up to $150.0204.0 million on an uncommitted basis. On February 1, 2021,20, 2022, the borrowing capacityinterest rate for this facility was temporarily increased from $100.0 millionmodified to $150.0 million until February 28, 2021 when it was reduced to $100.0 million.1M Term SOFR plus applicable margin, with an interest rate floor. On March 30, 2021, the borrowing capacity was temporarily increased to $150.0 million effective April 1, 2021 until April 29, 2021 when the increase was made permanent. On September 27, 2021, the borrowing capacity was increased to $175.0 million until maturity. On October 14, 2021,June 16, 2022, the maturity date of the facility was extended to November 23, 2021.March 16, 2023.
(10)(8)On May 17, 2021, theThe total borrowing capacity of this facility, all of which is uncommitted, was increased from $100.0$200.0 million to $150.0$250.0 million through the addition of a $50.0 million participation interest.on January 5, 2022. The agreement has no stated maturity date, however each transaction has a maximum duration of four years. The cost of this line is set at each transaction date and is based on the interest rate and type of the collateral.collateral. On September 1, 2021,May 2, 2022, $20.0 million of the total borrowinguncommitted capacity of thethis facility was increasedassigned to $200.0 million.a new EBO advance facility.
(11)(9)On March 29, 2021, we entered into aThis repurchase agreement which provides borrowing at our discretion up to a certain maximum amount of capacity on a rolling 30-day committed basis. This facility is structured as a gestation repurchase facility whereby dry Agency mortgage loans are transferred to a trust which trust issues a trust certificate that is pledged as the collateral for the borrowings. See Note 2 – Securitizations and Variable Interest Entities for additional information. On March 31, 2021, the trust issued the first certificate of $50.0 million which was increased to $75.0 million on May 28, 2021 and further increased to $225.0 million on July 29, 2021. The second trust certificate of $50.0 million was issued on April 12, 2021 and increased to $100.0 million on July 13, 2021. Additional trust certificates of $25.0 million and $100.0 million were issued for borrowing on June 25, 2021 and July 23, 2021, respectively, under this agreement. Each certificate is renewed monthly and we reduced the interest rate tofor this facility is 1ML + 200 bpsplus applicable margin. During first quarter of 2022, we voluntarily reduced the trust certificates by $175.0 million and by an additional $150.0 million during the monthly certificate renewals in July 2021.second quarter of 2022.
(12)(10)On April 29, 2021, we entered into aThis revolving facility agreement which provides up to $30.0$50.0 million of committed borrowing capacity secured by eligible HECM loans that are active buyouts (ABO), as defined in the agreement. On April 29, 2022, the maturity date was extended to March 16, 2023 and the interest rate was modified from Prime Rate plus applicable margin (with an interest rate floor) to 1M Term SOFR plus applicable margin, with an interest rate floor..
(13)(11)On July 23, 2021,April 11, 2022, we entered into a warehouse line (master repurchase agreement warehouse facilityagreement) with a total borrowing capacity of $210.0 million. This facility expired in October 2021.$350.0 million, of which $100.0 million is committed, to finance loans held for sale and loans held for investment at an interest rate of daily simple SOFR plus applicable margin.
(14)(12)Weighted1ML was 1.79% and 0.10% at June 30, 2022 and December 31, 2021, respectively. Prime Rate was 3.25% at December 31, 2021, 1M Term SOFR was 1.69% and 0.55% at June 30, 2022 and December 31, 2021, respectively. The weighted average interest rate at September 30, 2021, excludingexcludes the effect of the amortization of prepaid lender fees. At SeptemberJune 30, 20212022 and December 31, 2020,2021, unamortized prepaid lender fees were $0.9$1.1 million and $2.0$1.2 million, respectively, and are included in Other assets in our consolidated balance sheets.
| | MSR financing facilities, net | MSR financing facilities, net | | Available Borrowing Capacity | | Outstanding Balance | MSR financing facilities, net | | | Available Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | Borrowing Type | | Collateral | | Interest Rate (1) | | Maturity | | Uncommitted | | Committed (2) | | September 30, 2021 | | December 31, 2020 | Borrowing Type | | Collateral | | | Maturity | | Uncommitted | | Committed (1) | | June 30, 2022 | | December 31, 2021 |
Agency MSR financing facility (3)(2) | Agency MSR financing facility (3)(2) | | MSRs, Advances | | 1ML + 325 bps | | June 2022 | | $ | — | | | $ | 75,702 | | | $ | 349,298 | | | $ | 210,755 | | Agency MSR financing facility (3)(2) | | MSRs | | | June 2023 | | $ | — | | | $ | 60,963 | | | $ | 389,037 | | | $ | 317,523 | |
Ginnie Mae MSR financing facility (4)(3) | Ginnie Mae MSR financing facility (4)(3) | | MSRs, Advances | | 1ML + 450 bps; 1ML floor 0.50% | | Dec. 2021 | | 6,937 | | | — | | | 118,063 | | | 112,022 | | Ginnie Mae MSR financing facility (4)(3) | | MSRs, Advances | | | Feb. 2023 | | 49,525 | | | — | | | 125,475 | | | 131,694 | |
| Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 (5) | | MSRs | | 5.07% | | Nov. 2024 | | — | | | — | | | 48,243 | | | 68,313 | | |
| Secured Notes, Ocwen Asset Servicing Income Series, Series 2014-1 (6) | | MSRs | | (6) | | Feb. 2028 | | — | | | — | | | 41,362 | | | 47,476 | | |
| Ocwen Excess Spread-Collateralized Notes, Series 2019/2022-PLS1 (4) | | Ocwen Excess Spread-Collateralized Notes, Series 2019/2022-PLS1 (4) | | MSRs | | | Feb. 2025 | | — | | | — | | | 67,131 | | | 41,663 | |
| Secured Notes, Ocwen Asset Servicing Income Series Notes, Series 2014-1 (5) | | Secured Notes, Ocwen Asset Servicing Income Series Notes, Series 2014-1 (5) | | MSRs | | | Feb. 2028 | | — | | | — | | | 36,047 | | | 39,529 | |
Agency MSR financing facility - revolving loan (7)(6) | Agency MSR financing facility - revolving loan (7)(6) | | MSRs | | 1yr Swap + 2.50% | | June 2026 | | — | | | 7,929 | | | 277,071 | | | — | | Agency MSR financing facility - revolving loan (7)(6) | | MSRs | | | June 2026 | | — | | | 7,929 | | | 277,071 | | | 277,071 | |
Agency MSR financing facility - term loan (7)(6) | Agency MSR financing facility - term loan (7)(6) | | MSRs | | 1yr Swap + 2.50% | | June 2023 | | — | | | — | | | 112,779 | | | — | | Agency MSR financing facility - term loan (7)(6) | | MSRs | | | June 2023 | | — | | | — | | | 94,178 | | | 94,178 | |
| Total MSR financing facilities | Total MSR financing facilities | 3.68% (8) | | 6,937 | | | 83,631 | | | 946,816 | | | 438,566 | | Total MSR financing facilities | | | $ | 49,525 | | | $ | 68,892 | | | $ | 988,939 | | | 901,658 | |
| Unamortized debt issuance costs - PLS Notes and Agency MSR financing - term loan (9)(7) | Unamortized debt issuance costs - PLS Notes and Agency MSR financing - term loan (9)(7) | | (1,072) | | | (894) | | Unamortized debt issuance costs - PLS Notes and Agency MSR financing - term loan (9)(7) | | (1,227) | | | (898) | |
| Total MSR financing facilities, net | Total MSR financing facilities, net | | $ | 945,744 | | | $ | 437,672 | | Total MSR financing facilities, net | | | $ | 987,712 | | | $ | 900,760 | |
| | Weighted average interest rate (8) (9) | | Weighted average interest rate (8) (9) | | 5.36% | | 3.71% |
(1)1ML was 0.08% and 0.14% at September 30, 2021 and December 31, 2020, respectively. 1-year swap rate was 0.19% and 0.19% at September 30, 2021 and December 31, 2020, respectively.
(2)Of the borrowing capacity on MSR financing facilities extended on a committed basis, none$10.6 million of the available borrowing capacity could be used at SeptemberJune 30, 20212022 based on the amount of eligible collateral that could be pledged.
(2)PMC’s obligations under this facility are secured by a lien on the related MSRs. Ocwen guarantees the obligations of PMC under this facility. TheOn June 30, 2022, the maturity date was extended to June 30, 2023, the maximum amount which we may borrow pursuant to the repurchase agreements is $425.0was increased to $450.0 million (from $350.0 million) on a committed basis. We also pledgedbasis and the membership interest of the depositor for our OMART advance financing facility as additional collateralrate was modified from 1ML plus applicable margin to this facility.1M Term SOFR plus applicable margin. See Note 2 – Securitizations and Variable Interest Entities for additional information. We are subject to daily margining requirements
under the terms of our MSR financing facilities.the facility. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under these facilities. On March 31, 2021,
(3)In connection with this facility, PMC entered into a repurchase agreement pursuant to which PMC has sold a participation certificate representing certain economic interests in the facility was upsizedGinnie Mae MSRs and servicing advances and has agreed to $350.0 million,repurchase such participation certificate at a future date at the interest rate reduced to 1ML plus 325bps, andrepurchase price set forth in the maturity was renewed to June 30, 2022. These changes became effective on April 15, 2021. On June 2, 2021, the facility was temporarily upsized to $425.0 million for a period of 90 calendar days ending no later than September 1, 2021. On August 26, 2021 and later on October 25, 2021, the temporary upsize was extended until November 1, 2021.
(4)repurchase agreement. PMC’s obligations under this facility are secured by a lien on the related Ginnie Mae MSRs and servicing advances. Ocwen guarantees the obligations of PMC under the facility. The borrowing capacity is $125.0 million on an uncommitted basis. See (3)(2) above regarding daily margining requirements. On October 26, 2021,January 31, 2022, the maturity date of this facility was extended to February 28, 2022. On February 28, 2022, the maturity date was extended to February 28, 2023, the borrowing capacity was increased tofrom $150.0 million to $175.0 million ($50.0 million available on an uncommitted basis.a committed basis) and the interest rate was modified to adjusted daily simple SOFR plus applicable margin (adjusted SOFR floor of 25 bps).
(5)(4)PLS Issuer’s obligations under the facility are secured by a lien on the related PLS MSRs. Ocwen guarantees the obligations of PLS Issuer under the facility. The Class A PLS Notes issued pursuant to the credit agreement had an initial principal amount of $100.0 million and amortizea fixed interest rate of 5.07%. On March 15, 2022, we replaced the existing notes with a new series of notes (Series 2022-PLS1) at an initial principal amount of $75.0 million and a fixed interest rate of 5.114%. The principal balance amortizes in accordance with a pre-determinedpredetermined schedule subject to modification under certain events.events, with a final payment due in February 2025. See Note 2 – Securitizations and Variable Interest Entities for additional information. See (3) above regarding daily margining requirements.
(6)(5)OASIS noteholders are entitled to receive a monthly payment equal to the sum of: (a) 21 basis points of the UPB of the reference pool of Freddie Mac mortgages; (b) any termination payment amounts; (c) any excess refinance amounts; and (d) the note redemption amounts, each as defined in the indenture supplement for the notes. Monthly amortization of the liability is estimated using the proportion of monthly projected service fees on the underlying MSRs as a percentage of lifetime projected fees, adjusted for the term of the notes.
(7)(6)On June 28, 2021, we entered into aThis facility which includes a $135.0$94.2 million ($135.0 million original balance) term loan and a $285.0 million revolving loan secured by a lien on PMC’s Agency MSRs. See (3)(2) above regarding daily margining requirements. The interest rate for this facility is the 1-year swap rate plus applicable margin.
(7)At June 30, 2022 and December 31, 2021, unamortized debt issuance costs included $1.2 million and $0.9 million, respectively. on the PLS Notes and the Agency MSR financing facility - term loan. At June 30, 2022 and December 31, 2021, unamortized prepaid lender fees related to revolving type MSR financing facilities were $5.4 million and $4.7 million, respectively, and are included in Other assets in our consolidated balance sheets.
(8)Weighted average interest rate at, September 30, 2021, excluding the effect of the amortization of debt issuance costs and prepaid lender fees.
(9)At September1ML was 1.79% and 0.10% at June 30, 2021, unamortized debt issuance costs included $0.5 million and $0.6 million on the PLS Notes and the Agency MSR financing facility - term loan, respectively. At September 30, 20212022 and December 31, 2020, unamortized prepaid lender fees related to revolving type MSR financing facilities were $5.7 million2021, respectively. The 1-year swap rate was 3.48% and $3.3 million, respectively,0.19% at June 30, 2022 and are included in Other assets in our consolidated balance sheets.December 31, 2021, respectively. 1M Term SOFR was 1.69% and 0.55% at June 30, 2022 and December 31, 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior Secured Term Loan, net | | | | | | Outstanding Balance |
| Borrowing Type | | Collateral | | Interest Rate | | Maturity | | September 30, 2021 | | December 31, 2020 |
| SSTL (1) | | (1) | | 1-Month Euro-dollar rate + 600 bps with a Eurodollar floor of 100 bps (1) | | May 2022 (1) | | $ | — | | | $ | 185,000 | |
| | | | | | | | | | |
| Unamortized debt issuance costs | | | | | | | | — | | | (4,867) | |
| Discount | | | | | | | | — | | | (357) | |
| | | | | | | | $ | — | | | $ | 179,776 | |
(1)On March 4, 2021, we repaid in full the $185.0 million outstanding principal balance. The prepayment resulted in our recognition of an $8.4 million loss on debt extinguishment, including a prepayment premium of 2% of the outstanding principal balance, or $3.7 million.
| | Senior Notes | Senior Notes | Interest Rate (1) | | Maturity | Outstanding Balance | Senior Notes | Interest Rate (1) | | Maturity | Outstanding Balance |
| September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | PMC Senior Secured Notes | PMC Senior Secured Notes | 7.875% | | March 2026 | $ | 400,000 | | | $ | — | | PMC Senior Secured Notes | 7.875% | | March 2026 | $ | 375,000 | | | $ | 400,000 | |
| OFC Senior Secured Notes | 12% paid in cash or 13.25% paid-in-kind (see below) | | March 2027 | 285,000 | | | — | | |
| PHH Corporation (PHH) Senior Notes | 6.375% | | August 2021 | — | | | 21,543 | | |
| PMC Senior Secured Notes | 8.375% | | November 2022 | — | | | 291,509 | | |
| OFC Senior Secured Notes (due to related parties) | | OFC Senior Secured Notes (due to related parties) | 12% paid in cash or 13.25% paid-in-kind (see below) | | March 2027 | 285,000 | | | 285,000 | |
| Principal balance | Principal balance | | 685,000 | | | 313,052 | | Principal balance | | 660,000 | | | 685,000 | |
| Discount (2) | Discount (2) | | Discount (2) | | | | |
| PMC Senior Secured Notes | PMC Senior Secured Notes | | (1,844) | | | — | | PMC Senior Secured Notes | | (1,482) | | | (1,758) | |
| OFC Senior Secured Notes (3) | OFC Senior Secured Notes (3) | | (55,638) | | | — | | OFC Senior Secured Notes (3) | | (50,786) | | | (54,176) | |
| | (57,482) | | | — | | | (52,268) | | | (55,934) | |
| Unamortized debt issuance costs (2) | Unamortized debt issuance costs (2) | | Unamortized debt issuance costs (2) | | | | |
| PMC Senior Secured Notes | PMC Senior Secured Notes | | (5,966) | | | (968) | | PMC Senior Secured Notes | | (4,794) | | | (5,687) | |
| OFC Senior Secured Notes | OFC Senior Secured Notes | | (8,894) | | | — | | OFC Senior Secured Notes | | (8,049) | | | (8,582) | |
| | (14,860) | | | (968) | | | (12,843) | | | (14,269) | |
| Fair value adjustments | | — | | | (186) | | |
| | $ | 612,658 | | | $ | 311,898 | | |
| | | $ | 594,889 | | | $ | 614,797 | |
(1)Excluding the effect of the amortization of debt issuance costs and discount.
(2)The discount and debt issuance costs are amortized to interest expense through the maturity of the respective notes.
(3)Includes original issue discount (OID) and additional discount related to the concurrent issuance of warrants and common stock. See below for additional information.
Redemption of 6.375% Senior Unsecured Notes due 2021 and 8.375% Senior Secured Notes due 2022
On March 4, 2021, we redeemed all of PHH’s outstanding 6.375% Senior Notes due August 2021 at a price of 100% of the principal amount, plus accrued and unpaid interest, and all of PMC’s 8.375% Senior Secured Notes due November 2022 at a price of 102.094% of the principal amount, plus accrued and unpaid interest. The redemption resulted in our recognition of a $7.1 million loss on debt extinguishment.
Issuance of 7.875% Senior Secured Notes due 2026
On March 4, 2021, PMC completed the issuance and sale of $400.0 million aggregate principal amount of 7.875% senior secured notes due March 15, 2026 (the PMC Senior Secured Notes) at a discount of $2.1 million. The PMC Senior Secured Notes are guaranteed on a senior secured basis by Ocwen and PHH and were sold in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act).
Interest on the PMC Senior Secured Notes accrues at a rate of 7.875% per annum and is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021.
On or after March 15, 2023, PMC may redeem some or all of the PMC Senior Secured Notes at its option at the following redemption prices, plus accrued and unpaid interest, if any, on the notes redeemed to, but excluding, the redemption date if redeemed during the 12-month period beginning on March 15th of the years indicated below:
| | | | | | | | |
| Redemption Year | | Redemption Price |
| 2023 | | 103.938 | % |
| 2024 | | 101.969 | |
| 2025 and thereafter | | 100.000 | |
Prior to March 15, 2023, PMC may, on any one or more occasions, redeem some or all of the PMC Senior Secured Notes at its option at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus a “make-whole” premium equal to the greater of (i) 1.0% of the then outstanding principal amount of such note and (ii) the excess of (1) the present value at the redemption date of the sum of (A) the redemption price of the note at March 15, 2023 (such redemption price is set forth in the table above) plus (B) all required interest payments due on such notes through March 15, 2023 (excluding accrued but unpaid interest), such present value to be computed using a discount rate equal to the Treasury Rate (as
defined in the indenture governing the PMC Senior Secured Notes (Indenture)) as of such redemption date plus 50 basis points; over (2) the then outstanding principal amount of such notes, plus accrued and unpaid interest, if any, on the notes redeemed to, but excluding, the redemption date.
In addition, on or prior to March 15, 2023, PMC may also redeem up to 35.0% of the principal amount of all of the PMC Senior Secured Notes originally issued under the Indenture (including any additional PMC Senior Secured Notes issued under the Indenture) using the net proceeds of certain equity offerings at a redemption price equal to 107.875% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of redemption (subject to the rights of holders of notes on the relevant regular record date to receive interest due on the relevant interest payment date that is on or prior to the applicable date of redemption); provided that: (i) at least 65.0% of the principal amount of all PMC Senior Secured Notes issued under the Indenture remains outstanding immediately after any such redemption; and (ii) PMC makes such redemption not more than 120 days after the consummation of any such equity offering.
The Indenture contains customary covenants for debt securities of this type that limit the ability of PHH and its restricted subsidiaries (including PMC) to, among other things, (i) incur or guarantee additional indebtedness, (ii) incur liens, (iii) pay dividends on or make distributions in respect of PHH’s capital stock or make other restricted payments, (iv) make investments, (v) consolidate, merge, sell or otherwise dispose of certain assets, and (vi) enter into transactions with Ocwen’s affiliates.
During the three months ended June 30, 2022, we repurchased a total of $25.0 million of the PMC Senior Secured Notes in the open market for a price of $23.6 million, and recognized a $0.9 million gain on debt extinguishment, net of the respective write-off of unamortized discount and debt issuance costs.
Issuance of OFC Senior Secured Notes
On March 4, 2021, Ocwen completed the private placement of $199.5 million aggregate principal amount of senior secured notes (the OFC Senior Secured Notes) with an OID of $24.5 million to certain entities owned by funds and accounts managed by Oaktree Capital Management, L.P. (the Oaktree Investors). Concurrent with the issuance of the OFC Senior Secured Notes, Ocwen issued to the Oaktree Investors warrants to purchase shares of its common stock. The $158.5 million proceeds were allocated to the OFC Senior Secured Notes on a relative fair value basis resulting in an initial discount.
On May 3, 2021, Ocwen issued to Oaktree the second tranche of the OFC Senior Secured Notes in an aggregate principal amount of $85.5 million with an OID of $10.5 million. Concurrent with the issuance of the second tranche of OFC Senior
Secured Notes, Ocwen issued to the Oaktree Investors shares and warrants to purchase shares of its common stock. The $68.0 million proceeds were allocated to the OFC Senior Secured Notes on a relative fair value basis resulting in an initial discount. See Note 14 – Equity for additional information regarding the issuance of common stock and warrants.
The OFC Senior Secured Notes mature on March 4, 2027 with no amortization of principal. Interest is payable quarterly in arrears on the last business day of each March, June, September and December and accrues at the rate of 12% per annum to the extent interest is paid in cash or 13.25% per annum to the extent interest is “paid-in-kind” through an increase in the principal amount or the issuance of additional notes (PIK Interest). Prior to March 4, 2022, all of the interest on the OFC Senior Secured Notes may, at our option, be paid as PIK Interest. On or after March 4, 2022, a minimum amount of interest will beis required to be paid in cash equal to the lesser of (i) 7% per annum of the outstanding principal amount of the OFC Senior Secured Notes and (ii) the total amount of unrestricted cash of Ocwen and its subsidiaries less the greater of $125.0 million and the minimum liquidity amounts required by any agency.
The OFC Senior Secured Notes are solely the obligation of Ocwen and are secured by a pledge of substantially all of the assets of Ocwen, including a pledge of the equity of Ocwen’s directly held subsidiaries. The lien on Ocwen’s assets securing the OFC Senior Secured Notes is junior to the lien securing Ocwen’s guarantee of the 7.875% PMC Senior Secured Notes described above. The OFC Senior Secured Notes are not guaranteed by any of Ocwen’s subsidiaries nor are they secured by a pledge or lien on any assets of Ocwen’s subsidiaries.
Prior to March 4, 2026, we are permitted to redeem the OFC Senior Secured Notes in whole or in part at any time at a redemption price equal to par, plus a make-whole premium, plus accrued and unpaid interest. On and after March 4, 2026, we will be permitted to redeem the OFC Senior Secured Notes in whole or in part at any time at a redemption price equal to par plus accrued and unpaid interest.
The OFC Senior Secured Notes have two financial maintenance covenants: (1) a minimum book value of stockholders’ equity of not less than $275.0 million and (2) a minimum amount of unrestricted cash of not less than $50.0 million at any time. The OFC Senior Secured Notes also have affirmative and negative covenants and events of default that are customary for debt securities of this type.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligation.obligations. At SeptemberJune 30, 2021,2022, the S&P issuer credit rating for Ocwen was “B-”. On FebruaryJanuary 24, 2021, concurrent with2022, S&P raised the launchassigned rating of the PMC bond offering, S&P reaffirmed the ratings at B-Senior Secured Notes from “B-” to ‘B’ and changed themaintained a stable outlook from Negative to Stable.citing improved profitability and an increase in assets. Moody’s reaffirmed their ratings of Caa1 and revised their outlook to Stable from Negative on February 24, 2021. It is possible that additional actions by credit
rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Covenants
Under the terms of our debt agreements, we are subject to various affirmative and negative covenants. Collectively, these covenants include:
•Financial covenants, including, but not limited to, specified levels of net worth, liquidity and liquidity;leverage;
•Covenants to operate in material compliance with applicable laws;
•Restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional forms of debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries or of PHH or PMC and their respective subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates;
•Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying certain debt agreements; and
•Requirements to provide audited financial statements within specified timeframes, including requirements that Ocwen’s financial statements and the related audit report be unqualified as to going concern.
The most restrictive consolidated net worth requirement contained in our debt agreements with borrowings outstanding at SeptemberJune 30, 20212022 is a minimum of $275.0$300.0 million tangible net worth at Ocwen, as defined in certain of our mortgage warehouse, MSR financing and MSRadvance financing facilities agreements, or, if greater, the minimum requirement at PMC set forth by the Agencies. See Note 20 – Regulatory Requirements. The most restrictive liquidity requirement under our debt agreements with borrowings outstanding at SeptemberJune 30, 20212022 is for a minimum of $125.0$87.5 million in consolidated liquidity, as defined, under certain of our advance match funded debt and MSR financing facilities agreements.
We believe we were in compliance with all of the covenants in our debt agreements as of the date of these unaudited consolidated financial statements.
Collateral
Our assets held as collateral for secured borrowings and other unencumbered assets which may be subject to a lien under various collateralized borrowings are as follows at June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Pledged
Assets | | Collateralized Borrowings | | | | Unencumbered Assets (1) | | | |
| Cash | $ | 255,885 | | | $ | — | | | $ | — | | | | | $ | 255,885 | | | | |
| Restricted cash | 66,690 | | | 66,690 | | | — | | | | | — | | | | |
| Loans held for sale | 687,465 | | | 639,721 | | | 628,269 | | | | | 47,745 | | | | |
| Loans held for investment - securitized (2) | 7,220,774 | | | 7,220,774 | | | 7,155,251 | | | | | — | | | | |
| Loans held for investment - unsecuritized | 155,754 | | | 124,547 | | | 114,966 | | | | | 31,207 | | | | |
| MSRs (3) | 1,552,622 | | | 1,558,594 | | | 959,066 | | | | | 7,016 | | | | |
| Advances, net | 647,167 | | | 554,007 | | | 506,851 | | | | | 93,159 | | | | |
| Receivables, net | 178,480 | | | 33,155 | | | 32,221 | | | | | 145,324 | | | | |
| REO | 9,443 | | | 5,412 | | | 3,814 | | | | | 4,031 | | | | |
| Total (4) | $ | 10,774,280 | | | $ | 10,202,900 | | | $ | 9,400,438 | | | | | $ | 584,368 | | | | |
(1)Certain assets are pledged as collateral to the $375.0 million PMC Senior Secured Notes and $285.0 million OFC Senior Secured (second lien) Notes.
(2)Reverse mortgage loans and real estate owned are pledged as collateral to the HMBS beneficial interest holders, and are not available to satisfy the claims of our creditors. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of PMC’s default on its servicing obligations, or if the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to PMC in connection with certain claims relating to the performance and obligations of PMC as both issuer of HMBS and servicer of HECMs underlying HMBS.
(3)Excludes MSRs transferred to NRZ and MAV and associated Pledged MSR liability recorded as sale accounting criteria are not met. Pledged assets exceed the MSR asset balance due to the netting of certain PLS MSR portfolios with negative and positive fair values as eligible collateral.
(4)The total of selected assets disclosed in the above table does not represent the total consolidated assets of Ocwen. For example, the total excludes premises and equipment and certain other assets.
The OFC Senior Secured Notes due 2027 have a second lien priority on specified assets carried on PMC’s balance sheet, as defined under the OFC Senior Secured Note Agreement and listed in the table below, and have a priority lien on the following assets: investments by OFC in subsidiaries not guaranteeing the $375.0 million PMC Senior Secured Notes, including PHH and MAV; cash and investment accounts at OFC; and certain other assets, including receivables. | | | | | |
| June 30, 2022 |
| Specified net servicing advances | $ | 116,635 |
| Specified deferred servicing fee | 22,260 |
| Specified MSR value less borrowings | 683,270 |
| Specified unrestricted cash balances | 96,686 |
| Specified advance facility reserves | 6,931 |
| Specified loan value | 99,034 |
| Specified residual value | 67,464 |
| Specified fair value of marketable securities | — |
| Total (PMC) | $ | 1,092,279 |
| | |
Note 1314 – Other Liabilities |
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Contingent loan repurchase liability | Contingent loan repurchase liability | $ | 450,385 | | | $ | 480,221 | | Contingent loan repurchase liability | $ | 227,160 | | | $ | 403,740 | |
| Other accrued expenses | | Other accrued expenses | 70,870 | | | 104,931 | |
| Due to NRZ - Advance collections, servicing fees and other | Due to NRZ - Advance collections, servicing fees and other | 92,188 | | | 94,691 | | Due to NRZ - Advance collections, servicing fees and other | 63,398 | | | 76,590 | |
| Other accrued expenses | 83,397 | | | 87,898 | | |
| Checks held for escheat | Checks held for escheat | 44,780 | | | 35,654 | | Checks held for escheat | 45,776 | | | 44,866 | |
| Liability for indemnification obligations | | Liability for indemnification obligations | 44,039 | | | 51,243 | |
| Accrued legal fees and settlements | Accrued legal fees and settlements | 44,629 | | | 38,932 | | Accrued legal fees and settlements | 43,649 | | | 43,990 | |
| Liability for indemnification obligations | 44,478 | | | 41,920 | | |
| MSR purchase price holdback | 40,976 | | | 20,923 | | |
| Servicing-related obligations | Servicing-related obligations | 32,686 | | | 35,237 | | Servicing-related obligations | 42,923 | | | 32,366 | |
| Derivatives, at fair value | 20,518 | | | 4,638 | | |
| Derivative related payables | | Derivative related payables | 21,552 | | | 3,714 | |
| Lease liability | Lease liability | 20,311 | | | 27,393 | | Lease liability | 19,150 | | | 16,842 | |
| Liability for uncertain tax positions | Liability for uncertain tax positions | 16,119 | | | 16,188 | | Liability for uncertain tax positions | 15,006 | | | 14,730 | |
| Accrued interest payable | | Accrued interest payable | 13,509 | | | 11,998 | |
| MSR purchase price holdback | | MSR purchase price holdback | 12,809 | | | 32,620 | |
| Derivatives, at fair value | | Derivatives, at fair value | 9,646 | | | 3,080 | |
| Liability for unfunded India gratuity plan | | Liability for unfunded India gratuity plan | 5,994 | | | 6,263 | |
| Due to MAV | | Due to MAV | 5,322 | | | 2,134 | |
| Liability for unfunded pension obligation | Liability for unfunded pension obligation | 12,026 | | | 12,662 | | Liability for unfunded pension obligation | 3,461 | | | 4,183 | |
| Accrued interest payable | 6,534 | | | 4,915 | | |
| Liability for unfunded India gratuity plan | 6,103 | | | 6,051 | | |
| | Other | Other | 17,618 | | | 16,652 | | Other | 11,784 | | | 14,224 | |
| | $ | 932,748 | | | $ | 923,975 | | | $ | 656,048 | | | $ | 867,514 | |
| | | | | | | | | | | | | | |
Note 1415 – Stockholders’ Equity |
On February 3, 2020,May 20, 2022, Ocwen’s Board of Directors authorized a share repurchase program for an aggregate amount of up to $5.0$50.0 million of Ocwen’s issued and outstanding shares of common stock. DuringThe repurchase program is intended to qualify for the three months ended March 31, 2020,affirmative defense provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Through June 30, 2022, we completed the repurchase of 377,48484,087 shares of our common stock in the open market under this program at prevailing market prices for a total purchase price of $4.5$2.3 million forat an average price paid per share of $11.90. In addition, Ocwen paid $0.1 million in commissions.$26.87. The repurchased shares were formally retired as of March 31, 2020.June 30, 2022. Unless Ocwen amends the share repurchase program or repurchases the full $50.0 million amount by an earlier date, the share repurchase program will continue through November 20, 2022. No additional shares were repurchased priorassurances can be given as to the program’s expiration on February 3, 2021.amount of shares, if any, that Ocwen may repurchase in any given period.
Effective August 13, 2020, Ocwen implemented a one-for-15 reverse stock split of all outstanding shares of its common stock and reduced the number of authorized shares of common stock by the same proportion. Shareholders entitled to receive fractional shares of common stock received shares rounded up to the nearest whole share in lieu of such fractional shares, with an aggregate 4,692 additional shares issued. The number of outstanding shares was reduced from 130,013,696 to 8,672,272 and the authorized shares from 200,000,000 to 13,333,333 effective August 13, 2020, with giving effect to the rounding up of fractional shares. The $0.01 par value per share of common stock remained unchanged.
As disclosed in Note 12 – Borrowings, concurrent with the issuance of the OFC Senior Secured Notes on March 4, 2021, Ocwen issued to Oaktree warrants to purchase 1,184,768 shares of its common stock (which amount, upon exercise of the warrants, would be equal to 12% of Ocwen’s outstanding common stock as of the date of issuance of such warrants) at an exercise price of $26.82 per share, subject to antidilution adjustments. The warrants may be exercised at any time from the date of issuance through March 4, 2027. While the warrants will not be registered, we entered into a registration rights agreement with Oaktree pursuant to which we will register for resale the shares of common stock issuable upon exercise of the warrants within 18 months after March 4, 2021. On March 4, 2021, the $16.5 million allocated fair value of the warrants was reported as Additional Paid-in Capital in our consolidated balance sheet, net of allocated debt issuance costs of $0.8 million.
On May 3, 2021, concurrent with the issuance of the second tranche of OFC Senior Secured Notes described above, and in connection with the closing of the Transaction Agreement dated December 21, 2020 and disclosed in Note 10 - Investment in Equity Method Investee, we issued to Oaktree 426,705 shares of our common stock, representing 4.9% of our outstanding common stock, at a price per share of $23.15 for an aggregate purchase price of $9.9 million, and warrants to purchase 261,248 shares of our common stock (which amount was equal to 3% of Ocwen’s outstanding common stock as of the date of issuance of such warrants) at a price per share of $24.31 in consideration of the transaction. The warrants may be exercised at any time from the date of issuance through May 3, 2025. The issuance of the shares of common stock, warrants, and the shares of common stock issuable upon exercise of the warrants will not be registered under the Securities Act. These securities were or will be (as applicable) issued in a private placement exempt from the registration requirements of the Securities Act. On May 3, 2021, the $12.6 million allocated fair value of the common stock and $4.3 million allocated fair value of the warrants was reported as Common Stock, for face value of common stock issued and Additional Paid-in Capital in our consolidated balance sheet, net of allocated debt issuance costs of $0.5 million.
| | |
Note 1516 – Derivative Financial Instruments and Hedging Activities |
The table below summarizes the fair value, notional and maturity of our derivative instruments. The notional amount of our contracts does not represent our exposure to credit loss. None of the derivatives were designated as a hedge for accounting purposes as of or during the ninesix months ended SeptemberJune 30, 20212022 and 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Maturities | Notional | Fair value | | Maturities | Notional | Fair value |
| Derivative Assets (Other assets) | | | | | | | | |
| Forward sales of Reverse loans | | Oct. 2021 | $ | 85,000 | | $ | 762 | | | Jan. 2021 | $ | 30,000 | | $ | 34 | |
| Forward loans IRLCs | | Not.2021 - Dec.2021 | 1,222,451 | | 13,407 | | | Apr. 2021 | 619,713 | | 22,224 | |
| Reverse loans IRLCs | | Oct. 2021 | 80,486 | | 623 | | | Jan. 2021 | 11,692 | | 482 | |
| TBA forward Pipeline trades | | Oct.2021 - Dec.2021 | 1,210,000 | | 5,538 | | | N/A | — | | — | |
| | | | | | | | |
| Interest rate swap futures | | N/A | — | | — | | | Mar. 2021 | 593,500 | | 504 | |
| Other | | N/A | — | | — | | | N/A | — | | 2 | |
| Total | | | $ | 2,597,937 | | $ | 20,329 | | | | $ | 1,254,905 | | $ | 23,246 | |
| | | | | | | | |
| Derivative Liabilities (Other liabilities) | | | | | | | | |
| Forward sales of Reverse loans | | Oct. 2021 | $ | 55,000 | | $ | (341) | | | Jan. 2021 | $ | 20,000 | | $ | (84) | |
| TBA forward Pipeline trades | | Oct.2021 - Dec.2021 | 245,000 | | (276) | | | N/A | — | | — | |
| TBA forward MBS trades | | Oct.2021 - Nov.2021 | 1,210,000 | | (11,227) | | | Jan. 2021 | 400,000 | | (4,554) | |
| Interest rate swap futures | | Oct.2021 - Dec.2021 | 952,500 | | (8,236) | | | N/A | — | | — | |
| | | | | | | | |
| Other | | N/A | — | | (438) | | | N/A | — | | — | |
| Total | | | $ | 2,462,500 | | $ | (20,518) | | | | $ | 420,000 | | $ | (4,638) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Maturities | Notional | Fair value | | Maturities | Notional | Fair value |
| Derivative Assets (Other assets) | | | | | | | | |
| Forward sales of reverse loans | | July - Aug. 2022 | $ | 93,000 | | $ | 565 | | | Feb. 2022 | $ | 175,000 | | $ | 364 | |
| Forward loans IRLCs | | Jul. - Oct. 2022 | 526,212 | | 4,620 | | | Jan. - Apr. 2022 | 1,021,978 | | 16,074 | |
| Reverse loans IRLCs | | July 2022 | 31,202 | | 1,126 | | | Jan. 2022 | 63,327 | | 2,011 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| TBA forward MBS trades | | July - Aug. 2022 | 356,000 | | 3,566 | | | Jan. - Mar. 2022 | 587,000 | | 946 | |
| Interest rate swap futures | | Sep. 2022 | 250,000 | | 742 | | | Mar. 2022 | 792,500 | | 1,734 | |
| Interest rate option contracts | | Aug. 2022 | 525,000 | | 3,069 | | | Jan. 2022 | 125,000 | | 547 | |
| | | | | | | | |
| Total | | | $ | 1,781,414 | | $ | 13,688 | | | | $ | 2,764,805 | | $ | 21,675 | |
| | | | | | | | |
| Derivative Liabilities (Other liabilities) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| TBA forward MBS trades | | July - Sep. 2022 | 827,000 | | (7,623) | | | Jan. - Mar. 2022 | 1,195,000 | | (1,185) | |
| | | | | | | | |
| | | | | | | | |
| Interest rate option contracts | | July 2022 | 725,000 | | (1,890) | | | Feb. 2022 | 450,000 | | (824) | |
| Other | | N/A | 12,087 | | (133) | | | N/A | — | | (1,070) | |
| Total | | | $ | 1,564,087 | | $ | (9,646) | | | | $ | 1,645,000 | | $ | (3,080) | |
| | | | | | | | |
The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations.
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
| Gain / (Loss) | | Gain / (Loss) |
| Amount | Financial Statement Line | | Amount | Financial Statement Line |
| Derivative | | | | | |
| Forward loans IRLCs | $ | (8,817) | | Gain on loans held for sale, net | | $ | 16,860 | | Gain on loans held for sale, net |
| Reverse loans IRLCs | 141 | | Reverse mortgage revenue, net | | 940 | | Reverse mortgage revenue, net |
| | | | | |
| TBA forward pipeline trades | 592 | | Gain on loans held for sale, net (Economic hedge) | | — | | Gain on loans held for sale, net (Economic hedge) |
| Interest rate swap futures and TBA forward MBS trades | — | | Gain on loans held for sale, net (Economic hedge) | | (9,564) | | Gain on loans held for sale, net (Economic hedge) |
| Interest rate swap futures and TBA forward MBS trades | (3,310) | | MSR valuation adjustments, net | | 39,258 | | MSR valuation adjustments, net |
| Forward sales of Reverse loans | 471 | | Reverse mortgage revenue, net | | (62) | | Reverse mortgage revenue, net |
| | | | | |
| Other | (439) | | Gain on loans held for sale, net | | (561) | | Gain on loans held for sale, net |
| Total | $ | (11,362) | | | | $ | 46,871 | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Financial Statement Line |
| Gain (loss) | | 2022 | | 2021 | | 2022 | | 2021 | |
| Derivative Instruments | | | | | | | | | | |
| Forward loans IRLCs | | $ | 604 | | | $ | 3,528 | | | $ | (11,454) | | | $ | (5,074) | | | Gain on loans held for sale, net |
| Reverse loans IRLCs | | (817) | | | (671) | | | (1,171) | | | (186) | | | Reverse mortgage revenue, net |
| Reverse loans IRLCs (Equity IQ loans) | | 286 | | | — | | | 286 | | | — | | | Gain on loans held for sale, net |
| | | | | | | | | | |
| TBA trades (economically hedging forward pipeline trades and EBO pipeline) | | 29,118 | | | (188) | | | 76,224 | | | (188) | | | Gain on loans held for sale, net (Economic hedge) |
| | | | | | | | | | |
| TBA trades (economically hedging reverse pipeline trades) | | (78) | | | — | | | (78) | | | — | | | Reverse mortgage revenue, net |
| Interest rate swap futures, TBA trades and interest rate option contracts | | (16,913) | | | 22,979 | | | (83,676) | | | 9,297 | | | MSR valuation adjustments, net |
| Forward sales of Reverse loans | | 557 | | | 199 | | | 202 | | | 197 | | | Reverse mortgage revenue, net |
| | | | | | | | | | |
| Other | | — | | | — | | | — | | | (16) | | | Gain on loans held for sale, net |
| Other | | 544 | | | — | | | 937 | | | — | | | Other, net |
| Total | | $ | 13,302 | | | $ | 25,846 | | | $ | (18,729) | | | $ | 4,030 | | | |
| | | | | | | | | | |
Interest Rate Risk
MSR Hedging
MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates and prepayment speeds, among other factors.speeds.
Through May 2021, management maintainedimplemented a macro-hedging strategy to reduce the volatility of the MSR portfolio attributable to interest rate changes. As a general matter, the impact of interest rates on the fair value of our MSR portfolio is naturally offset by other exposures, including our loan pipeline and our economic MSR value embedded in our reverse mortgage loan portfolio. Our hedging strategy was targeted at mitigating the residual exposure, which we referred to as our net MSR portfolio exposure. We defined our net MSR portfolio exposure as follows:
•our more interest rate-sensitive Agency MSR portfolio,
•less the Agency MSRs subject to our agreements with NRZ (See Note 8 — MSR Transfers Not Qualifying for Sale Accounting),
•less the unsecuritized reverse mortgage loans and tails classified as held for investment,
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings, and
•less the net value of our held for sale loan portfolio and lock commitments (pipeline).
In the first and second quarters of 2021, we also included in our MSR portfolio the exposure related to expected future MSR bulk acquisitions subject to letters of intent.
Effective May 2021, management started hedging its MSR portfolio and its pipeline separately (see below for further description of pipeline hedging), effectively ending the macro-hedge strategy previously in place. Under the new MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure is now defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements with NRZ and MAV (See Note 8 — MSR Transfers Not Qualifying for Sale Accounting),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings.
OurThe objective of our MSR policy’s objectivepolicy is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio, defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement is subject to lower and upper thresholds, as modeled, of 40% and 60%, respectively.
respectively in order to preserve liquidity and optimize asset returns. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate
changes. We periodically evaluate the 40-60% coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the Market Risk Committee, in order to preserve liquidity and/or optimize asset returns. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments, among other factors. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy.
Effective October 2021, we refined the scope of the hedge policy to allow for MSRs subject to LOI to be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities, are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations.operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements.
The derivative instruments are subject to margin requirements, posted as either initial margin or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating couldmay require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Pipeline Hedging - Interest Rate Lock Commitments and Loans Held for Sale, at Fair Value
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale or securitization of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 7560 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 53 to 20 days. This interest rate exposure was not individually hedged until May 2021, but rather used as an offset to our MSR exposure and managed as part of our MSR macro-hedging strategy described above. Effective May 2021, we implemented a new pipeline hedging strategy, whereby the interest rate exposure of loans held for sale and interest rate lock commitmentsIRLCs is economically hedged with derivative instruments, including forward sales of Agency “to be announced” securities (TBAs).TBAs. The objective of our pipeline hedging strategy is to reduce the volatility of the fair value of IRLCs and loans due to market interest rates, thus to preserve the initial gain on sale margin at lock date. We report changes in fair value of these derivative instruments as gain or loss on economic hedge instruments within gaineither Gain on loans held-for-saleheld for sale, net and Reverse mortgage revenue, net in our consolidated statements of operations.operations, respectively.
Advance Match Funded LiabilitiesEBO and Loan Modification Hedging – Loans Held for Sale, at fair value
We monitor the effectEffective February 2022, management started hedging certain Ginnie Mae EBO loans as well as loans in process of increases inmodification pending redelivery/re-securitization to manage market risk due to increasing interest rates on the interest paid on our variable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. We purchaserates. Such interest rate capsexposure on these loans held for sale accounted for at fair value is economically hedged using forward trades of TBAs. Changes in fair value of these derivative instruments are reported as gain or loss on economic hedges (not designated as a hedge instruments within Gain on loans held for accounting purposes) when required bysale, net in our advance financing arrangements.consolidated statements of operations.
Foreign Currency Exchange Rate Risk
Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into any forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We currently do not hedge our foreign currency exposure with derivative instruments. Foreign currency remeasurement exchange gains (losses) were $0.2$0.0 million and $0.3$0.1 million for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $(0.2)$(0.1) million and $(1.1)$0.1 million during the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and are reported in Other, net in the consolidated statements of operations.
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Note 1617 – Interest Expense |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | 2022 | | 2021 | | 2022 | | 2021 |
| Senior notes | $ | 18,483 | | | $ | 6,658 | | | $ | 44,932 | | | $ | 19,977 | | |
| OFC Senior Secured Notes (1) | | OFC Senior Secured Notes (1) | $ | 10,487 | | | $ | 8,748 | | | $ | 20,883 | | | $ | 11,114 | |
| PHH and PMC senior notes | | PHH and PMC senior notes | 8,093 | | | 8,206 | | | 16,254 | | | 15,336 | |
| MSR financing facilities | | MSR financing facilities | 8,563 | | | 4,754 | | | 16,367 | | | 9,326 | |
| Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 8,985 | | | 3,932 | | | 20,673 | | | 10,531 | | Mortgage loan warehouse facilities | 6,737 | | | 6,404 | | | 13,789 | | | 11,688 | |
| MSR financing facilities | 8,623 | | | 3,919 | | | 17,950 | | | 12,655 | | |
| Advance match funded liabilities | Advance match funded liabilities | 2,809 | | | 6,565 | | | 11,570 | | | 19,541 | | Advance match funded liabilities | 2,795 | | | 4,265 | | | 5,503 | | | 8,761 | |
| SSTL | SSTL | — | | | 4,395 | | | 2,956 | | | 15,985 | | SSTL | — | | | — | | | — | | | 2,957 | |
| | Other | 1,723 | | | 1,346 | | | 4,510 | | | 4,868 | | |
| Escrow | | Escrow | 1,186 | | | 1,139 | | | 2,940 | | | 2,786 | |
| | | $ | 40,623 | | | $ | 26,815 | | | $ | 102,591 | | | $ | 83,557 | | | $ | 37,861 | | | $ | 33,516 | | | $ | 75,736 | | | $ | 61,968 | |
On March 27, 2020, the Coronavirus Aid, Relief,Notes issued to Oaktree affiliates, inclusive of amortization of debt issuance costs and Economic Security Act (CARES Act) was signed into law. The CARES Act includes several significant business tax provisions that, among other things, temporarily repealed the taxable income limitation for certain net operating losses (NOL) and allows businesses to carry back NOLs arising in 2018, 2019, and 2020 tax years to the five prior tax years, accelerated refundsdiscount of previously generated corporate Alternative Minimum Tax (AMT) credits, and adjusted the business interest expense limitation under section 163(j) from 30% to 50% of Adjusted Taxable Income (ATI) for 2019 and 2020 tax years.
Based on information available at the time, we estimated that modifications to the tax rules for the carryback of NOLs and business interest expense limitations would result in U.S. and USVI federal net tax refunds of approximately $70.3$2.0 million and $1.2 million, respectively, and as such we recognized an income tax benefit of $71.5 million in our unaudited consolidated financial statements for the nine months ended September 30, 2020.
The income tax benefit recognized represents the release of valuation allowances against certain NOL and Section 163(j) deferred tax assets that were realized as a result of certain provisions of the CARES Act as well as permanent income tax benefit related to the carryback of NOLs created in a tax year that was subject to U.S. federal tax at 21% to a tax year subject to tax at 35%.
We recognized income tax benefit of $11.3 million and $2.0$3.9 million for the three and six months ended SeptemberJune 30, 2021 and 2020,2022, respectively, and $20.1$1.1 million and $71.9$1.7 million for the ninethree and six months ended SeptemberJune 30, 2021, and 2020, respectively, primarily due to income tax benefits recognized under the provisions of the CARES Act and the favorable resolution of various uncertain tax positions during the nine months ended September 30, 2021 and 2020.respectively.
| | |
| Note 18 – Basic and Diluted Earnings (Loss) per Share |
Basic earnings or loss per share excludes common stock equivalents and is calculated by dividing net income or loss attributable to Ocwen common stockholders by the weighted average number of common shares outstanding during the period. We calculate diluted earnings or loss per share by dividing net income or loss attributable to Ocwen by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding restricted stock awards, stock options and warrants as determined using the treasury stock method. For the three and ninesix months ended SeptemberJune 30, 2020,2021, we have excluded the effect of all stock options and common stock awards and warrants from the computation of diluted loss per share because of the anti-dilutive effect of our reported net loss.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Basic earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | 21,552 | | | $ | (9,420) | | | $ | 19,773 | | | $ | (32,955) | |
| | | | | | | |
| Weighted average shares of common stock | 9,189,030 | | | 8,669,550 | | | 8,960,696 | | | 8,770,102 | |
| | | | | | | |
| Basic earnings (loss) per share | $ | 2.35 | | | $ | (1.09) | | | $ | 2.21 | | | $ | (3.76) | |
| | | | | | | |
| Diluted earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | 21,552 | | | $ | (9,420) | | | $ | 19,773 | | | $ | (32,955) | |
| | | | | | | |
| Weighted average shares of common stock | 9,189,030 | | | 8,669,550 | | | 8,960,696 | | | 8,770,102 | |
| Effect of dilutive elements | | | | | | | |
| Common stock warrants | 65,593 | | | — | | | 97,426 | | | — | |
| | | | | | | |
| Common stock awards | 147,235 | | | — | | | 161,049 | | | — | |
| Contingent issuance of common stock | — | | | — | | | 51,580 | | | — | |
| Dilutive weighted average shares of common stock | 9,401,858 | | | 8,669,550 | | | 9,270,751 | | | 8,770,102 | |
| | | | | | | |
| Diluted earnings (loss) per share | $ | 2.29 | | | $ | (1.09) | | | $ | 2.13 | | | $ | (3.76) | |
| | | | | | | |
| Stock options and common stock awards excluded from the computation of diluted earnings (loss) per share | | | | | | | |
| Anti-dilutive (1) | 166,153 | | | 193,144 | | | 155,213 | | | 218,020 | |
| Market-based (2) | 87,509 | | | 125,395 | | | 87,509 | | | 125,395 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Basic earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | 10,354 | | | $ | (10,322) | | | $ | 68,436 | | | $ | (1,779) | |
| | | | | | | |
| Weighted average shares of common stock | 9,257,089 | | | 8,999,544 | | | 9,236,221 | | | 8,844,637 | |
| | | | | | | |
| Basic earnings (loss) per share | $ | 1.12 | | | $ | (1.15) | | | $ | 7.41 | | | $ | (0.20) | |
| | | | | | | |
| Diluted earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | 10,354 | | | $ | (10,322) | | | $ | 68,436 | | | $ | (1,779) | |
| | | | | | | |
| Weighted average shares of common stock | 9,257,089 | | | 8,999,544 | | | 9,236,221 | | | 8,844,637 | |
| Effect of dilutive elements | | | | | | | |
| Common stock warrants | — | | | — | | | 139,160 | | | — | |
| Stock option awards | — | | | — | | | 37 | | | — | |
| Common stock awards | 109,517 | | | — | | | 138,784 | | | — | |
| | | | | | | |
| Dilutive weighted average shares of common stock | 9,366,606 | | | 8,999,544 | | | 9,514,202 | | | 8,844,637 | |
| | | | | | | |
| Diluted earnings (loss) per share | $ | 1.11 | | | $ | (1.15) | | | $ | 7.19 | | | $ | (0.20) | |
| | | | | | | |
| Stock options and common stock awards excluded from the computation of diluted earnings (loss) per share | | | | | | | |
| Anti-dilutive (1) | 460,512 | | | 119,262 | | | 279,516 | | | 149,744 | |
| Market-based (2) | 76,534 | | | 41,528 | | | 76,534 | | | 41,528 | |
(1)Includes stock options that are anti-dilutive because their exercise price was greater than the average market price of Ocwen’s stock, and stock awards that are anti-dilutive based on the application of the treasury stock method.
(2)Shares that are issuable upon the achievement of certain market-based performance criteria related to Ocwen’s stock price.
As disclosed in Note 14 – Equity, Ocwen implemented a reverse stock split in a ratio of one-for-15 effective on August 13, 2020. The above computations of earnings (loss) per share reflect the number of common stock shares after consideration for the reverse stock split. All common share and loss per share amounts have been adjusted retrospectively to give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
| | |
| Note 19 – Business Segment Reporting |
Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. Our reportable business segments consist of Servicing, Originations, and Corporate Items and Other. During the ninesix months ended SeptemberJune 30, 2021,2022, there have been no changes to our business segments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.2021, with the exception of certain reclassifications disclosed below.
Effective within the fourthfirst quarter of 2020,2022, we have reportedrecognize revaluation gains on Fannie Mae MSRs purchased through the results of Reverse ServicingAgency Cash Window Program within the Servicing segment. Previously, the Reverse Servicing business was includedsegment that were historically reported in the reported results of the Originations segment. This alignment of our businessMSR valuation adjustments, net for the Servicing and Originations segments is consistent with a change in the management of the business and a change in the internal management reporting to the chief operating decision maker. Segment results for 2020 have been recastrevised for prior periods to conform to the current segment
presentation. Reverse Servicing generated Revenue and Income (loss) before income taxes of $(0.5) million and $(5.6) million, respectively,Such revaluation gains were $— (nil) for the three and six months ended SeptemberJune 30, 2020, and $12.1 million and $(0.9) million for the nine months ended September 30, 2020. Reverse Servicing assets consist primarily of securitized Loans held for investment - Reverse Mortgages.2021.
Revenues and expenses directly associated with each respective business segments are included in determining its results of operations. We allocate certain expenses incurred by corporate support services that are not directly attributable to a segment to each business segment.segment using various methodologies intended to approximate the utilization of such services. We allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. Support services costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, costs related to our re-engineering initiatives, and other costs related to operating as a public company. We allocate a portion of interest income to each business segment, including interest earned on cash balances. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments. Beginning in the third quarter of 2020, we began allocatingWe allocate interest expense on corporate debt including the SSTL and Senior Notes, used to fund servicing advances and other servicing assets from Corporate Items and Other to the Servicing segment. Amortizationsegment and the Originations segment (starting in the fourth quarter of debt issuance costs and discount are excluded from2021) based on relative financing requirements. Effective in the first quarter of 2022, we no longer allocate interest expense allocation. The interest expense relatedon the OFC Senior Secured Notes to the corporate debt has beenServicing and Originations segments. Interest expense allocated to the Servicing segmentand Originations segments for prior
periods prior to the third quarter of 2020has been revised to conform to the current period presentation. The interest expense allocation adjustment for the three and six months ended June 30, 2021 is $5.9 million and $7.4 million, respectively, all in the Servicing segment.
As a result of our risk management strategy to hedge the interest rate risk of our net MSR portfolio, the fair value changes of third-party derivative instruments were reported within MSR valuation adjustments, net. For management segment reporting purposes, we established inter-segment derivative instruments to transfer the risks and allocate the associated fair value changes of derivatives between Servicing and Originations, and specifically between MSR valuation adjustments, net and Gain on loans held for sale, net (Gain/loss on economic hedge instruments). In the second quarter of 2021, we began separately hedging our MSR portfolio and pipeline. We may, from time to time, establish intersegment derivative instruments between our MSR and pipeline hedging strategies to optimize the use of third-party derivatives. The inter-segment derivative fair value changes are eliminated in the consolidated financial statements in the Corporate EliminationEliminations column in the table below.
Financial information for our segments is as follows:
| | | Three Months Ended September 30, 2021 | | Three Months Ended June 30, 2022 |
| Results of Operations | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 205,431 | | | $ | 1,155 | | | $ | — | | | $ | — | | | $ | 206,585 | | Servicing and subservicing fees | $ | 214,533 | | | $ | 598 | | | $ | — | | | $ | — | | | $ | 215,131 | |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | (13,032) | | | 18,067 | | | — | | | — | | | 5,035 | | Reverse mortgage revenue, net | (19,028) | | | 16,412 | | | — | | | — | | | (2,616) | |
| Gain on loans held for sale, net (1) | 31,555 | | | 29,604 | | | — | | | (1,457) | | | 59,702 | | |
| Gain (loss) on loans held for sale, net (1) | | Gain (loss) on loans held for sale, net (1) | (11,468) | | | 12,540 | | | — | | | (132) | | | 940 | |
| Other revenue, net | Other revenue, net | 303 | | | 9,947 | | | 1,529 | | | — | | | 11,779 | | Other revenue, net | 359 | | | 6,714 | | | 1,631 | | | — | | | 8,704 | |
| Revenue | Revenue | 224,257 | | | 58,773 | | | 1,529 | | | (1,457) | | | 283,101 | | Revenue | 184,396 | | | 36,264 | | | 1,632 | | | (132) | | | 222,159 | |
| | MSR valuation adjustments, net (1) | MSR valuation adjustments, net (1) | (10,577) | | | 2,800 | | | — | | | 1,457 | | | (6,320) | | MSR valuation adjustments, net (1) | 30,442 | | | 2,624 | | | — | | | 132 | | | 33,198 | |
| | Operating expenses | Operating expenses | 80,849 | | | 43,498 | | | 21,088 | | | — | | | 145,436 | | Operating expenses | 82,531 | | | 42,472 | | | 19,368 | | | — | | | 144,371 | |
| | Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest income | Interest income | 2,416 | | | 5,348 | | | 105 | | | — | | | 7,869 | | Interest income | 2,992 | | | 6,608 | | | 146 | | | — | | | 9,746 | |
| Interest expense | Interest expense | (28,979) | | | (6,711) | | | (4,933) | | | — | | | (40,623) | | Interest expense | (22,297) | | | (5,136) | | | (10,428) | | | — | | | (37,861) | |
| Pledged MSR liability expense | Pledged MSR liability expense | (91,120) | | | — | | | (41) | | | — | | | (91,160) | | Pledged MSR liability expense | (74,096) | | | — | | | 13 | | | — | | | (74,083) | |
| | Earnings of equity method investee | | Earnings of equity method investee | 3,932 | | | — | | | — | | | — | | | 3,932 | |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | — | | | — | | | 947 | | | — | | | 947 | |
| | Other | Other | 1,443 | | | 122 | | | 1,267 | | | — | | | 2,832 | | Other | (4,279) | | | 286 | | | (244) | | | — | | | (4,237) | |
| Other expense, net | (116,239) | | | (1,241) | | | (3,602) | | | — | | | (121,082) | | |
| Other income (expense), net | | Other income (expense), net | (93,748) | | | 1,758 | | | (9,566) | | | — | | | (101,556) | |
| | Income (loss) before income taxes | Income (loss) before income taxes | $ | 16,592 | | | $ | 16,833 | | | $ | (23,162) | | | $ | — | | | $ | 10,263 | | Income (loss) before income taxes | $ | 38,559 | | | $ | (1,826) | | | $ | (27,302) | | | $ | — | | | $ | 9,430 | |
|
| | | Three Months Ended September 30, 2020 | | Three Months Ended June 30, 2021 |
| Results of Operations | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 178,544 | | | $ | 3,178 | | | $ | — | | | $ | — | | | $ | 181,722 | | Servicing and subservicing fees | $ | 182,141 | | | $ | 2,300 | | | $ | — | | | $ | — | | | $ | 184,441 | |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | (1,116) | | | 15,615 | | | — | | | — | | | 14,499 | | Reverse mortgage revenue, net | 10,487 | | | 18,814 | | | — | | | — | | | 29,301 | |
| Gain on loans held for sale, net (1) | Gain on loans held for sale, net (1) | 6,758 | | | 31,295 | | | — | | | 7,833 | | | 45,886 | | Gain on loans held for sale, net (1) | 4,130 | | | 27,273 | | | — | | | 11,310 | | | 42,713 | |
| Other revenue, net | Other revenue, net | 1,248 | | | 4,125 | | | 1,555 | | | — | | | 6,928 | | Other revenue, net | 497 | | | 6,986 | | | 1,507 | | | — | | | 8,990 | |
| Revenue | Revenue | 185,434 | | | 54,213 | | | 1,555 | | | 7,833 | | | 249,035 | | Revenue | 197,255 | | | 55,373 | | | 1,507 | | | 11,310 | | | 265,445 | |
| | MSR valuation adjustments, net (1) | MSR valuation adjustments, net (1) | (38,351) | | | 12,370 | | | — | | | (7,833) | | | (33,814) | | MSR valuation adjustments, net (1) | (69,948) | | | 8,808 | | | — | | | (11,310) | | | (72,450) | |
| | Operating expenses | Operating expenses | 84,639 | | | 30,304 | | | 34,579 | | | — | | | 149,522 | | Operating expenses | 83,626 | | | 40,172 | | | 26,010 | | | — | | | 149,808 | |
| | Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest income | Interest income | 1,637 | | | 1,952 | | | 212 | | | — | | | 3,801 | | Interest income | 1,232 | | | 2,862 | | | 94 | | | — | | | 4,188 | |
| Interest expense | Interest expense | (22,179) | | | (2,405) | | | (2,231) | | | — | | | (26,815) | | Interest expense | (17,404) | | | (4,701) | | | (11,411) | | | — | | | (33,516) | |
| Pledged MSR liability expense | Pledged MSR liability expense | (57,434) | | | — | | | 30 | | | — | | | (57,404) | | Pledged MSR liability expense | (39,844) | | | — | | | 34 | | | — | | | (39,810) | |
| Earnings of equity method investee | | Earnings of equity method investee | 350 | | | — | | | — | | | — | | | 350 | |
| | Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | — | | | — | | | — | | | — | | | — | |
| Other | Other | 2,178 | | | 230 | | | 937 | | | — | | | 3,345 | | Other | 2,892 | | | (168) | | | 640 | | | — | | | 3,364 | |
| Other expense, net | (75,798) | | | (223) | | | (1,052) | | | — | | | (77,073) | | |
| Other income (expense), net | | Other income (expense), net | (52,774) | | | (2,007) | | | (10,643) | | | — | | | (65,424) | |
| | Income (loss) before income taxes | Income (loss) before income taxes | $ | (13,354) | | | $ | 36,056 | | | $ | (34,076) | | | $ | — | | | $ | (11,374) | | Income (loss) before income taxes | $ | (9,093) | | | $ | 22,002 | | | $ | (35,146) | | | $ | — | | | $ | (22,237) | |
| | | Nine Months Ended September 30, 2021 | | Six Months Ended June 30, 2022 |
| Results of Operations | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 556,927 | | | $ | 5,837 | | | $ | — | | | $ | — | | | $ | 562,764 | | Servicing and subservicing fees | $ | 426,701 | | | $ | 1,053 | | | $ | — | | | $ | — | | | $ | 427,754 | |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | (511) | | | 56,673 | | | — | | | — | | | 56,162 | | Reverse mortgage revenue, net | (30,881) | | | 41,375 | | | — | | | — | | | 10,494 | |
| Gain on loans held for sale, net (1) | Gain on loans held for sale, net (1) | 39,206 | | | 94,470 | | | — | | | (25,541) | | | 108,136 | | Gain on loans held for sale, net (1) | (14,169) | | | 25,313 | | | — | | | (13,410) | | | (2,266) | |
| Other revenue, net | Other revenue, net | 1,302 | | | 23,450 | | | 4,326 | | | — | | | 29,078 | | Other revenue, net | 764 | | | 13,542 | | | 3,433 | | | — | | | 17,740 | |
| Revenue | Revenue | 596,924 | | | 180,431 | | | 4,326 | | | (25,541) | | | 756,140 | | Revenue | 382,415 | | | 81,283 | | | 3,433 | | | (13,410) | | | 453,722 | |
| | MSR valuation adjustments, net (1) | MSR valuation adjustments, net (1) | (103,215) | | | 20,112 | | | — | | | 25,541 | | | (57,562) | | MSR valuation adjustments, net (1) | 78,732 | | | 3,688 | | | — | | | 13,410 | | | 95,830 | |
| | Operating expenses | Operating expenses | 247,228 | | | 120,514 | | | 67,131 | | | — | | | 434,873 | | Operating expenses | 156,783 | | | 88,710 | | | 25,896 | | | — | | | 271,389 | |
| | Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest income | Interest income | 4,905 | | | 10,776 | | | 312 | | | — | | | 15,993 | | Interest income | 7,052 | | | 9,582 | | | 225 | | | — | | | 16,858 | |
| Interest expense | Interest expense | (72,598) | | | (14,963) | | | (15,030) | | | — | | | (102,591) | | Interest expense | (45,398) | | | (9,370) | | | (20,967) | | | — | | | (75,736) | |
| | Loss on extinguishment of debt | — | | | — | | | (15,458) | | | — | | | (15,458) | | |
| | Pledged MSR liability expense | Pledged MSR liability expense | (168,847) | | | — | | | 27 | | | — | | | (168,820) | | Pledged MSR liability expense | (161,005) | | | — | | | 25 | | | — | | | (160,980) | |
| | Earnings of equity method investee | | Earnings of equity method investee | 15,935 | | | — | | | — | | | — | | | 15,935 | |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | (33) | | | — | | | 947 | | | — | | | 914 | |
| Other | Other | 4,787 | | | 4 | | | 2,045 | | | — | | | 6,836 | | Other | (3,564) | | | (1,126) | | | 291 | | | — | | | (4,399) | |
| Other expense, net | Other expense, net | (231,753) | | | (4,183) | | | (28,104) | | | — | | | (264,040) | | Other expense, net | (187,013) | | | (914) | | | (19,479) | | | — | | | (207,408) | |
| | Income (loss) before income taxes | Income (loss) before income taxes | $ | 14,728 | | | $ | 75,846 | | | $ | (90,909) | | | $ | — | | | $ | (335) | | Income (loss) before income taxes | $ | 117,351 | | | $ | (4,653) | | | $ | (41,942) | | | $ | — | | | $ | 70,755 | |
|
| | | Nine Months Ended September 30, 2020 | | Six Months Ended June 30, 2021 |
| Results of Operations | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated | Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 565,201 | | | $ | 3,186 | | | $ | 58 | | | $ | — | | | $ | 568,445 | | Servicing and subservicing fees | $ | 351,496 | | | $ | 4,683 | | | $ | — | | | $ | — | | | $ | 356,179 | |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | 12,837 | | | 38,218 | | | — | | | — | | | 51,055 | | Reverse mortgage revenue, net | 12,521 | | | 38,606 | | | — | | | — | | | 51,127 | |
| Gain on loans held for sale, net (1) | Gain on loans held for sale, net (1) | 10,768 | | | 74,163 | | | — | | | 7,833 | | | 92,764 | | Gain on loans held for sale, net (1) | 7,651 | | | 64,866 | | | — | | | (24,083) | | | 48,434 | |
| Other revenue, net | Other revenue, net | 3,223 | | | 9,234 | | | 5,180 | | | — | | | 17,637 | | Other revenue, net | 999 | | | 13,503 | | | 2,797 | | | — | | | 17,299 | |
| Revenue | Revenue | 592,029 | | | 124,801 | | | 5,238 | | | 7,833 | | | 729,901 | | Revenue | 372,667 | | | 121,658 | | | 2,797 | | | (24,083) | | | 473,039 | |
| | MSR valuation adjustments, net (1) | MSR valuation adjustments, net (1) | (249,873) | | | 26,338 | | | — | | | (7,833) | | | (231,368) | | MSR valuation adjustments, net (1) | (92,638) | | | 17,313 | | | — | | | 24,083 | | | (51,242) | |
| | Operating expenses | Operating expenses | 255,534 | | | 78,330 | | | 97,681 | | | — | | | 431,545 | | Operating expenses | 166,379 | | | 77,908 | | | 45,150 | | | — | | | 289,437 | |
| | Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest income | Interest income | 6,321 | | | 4,733 | | | 1,708 | | | — | | | 12,762 | | Interest income | 2,489 | | | 5,428 | | | 207 | | | — | | | 8,124 | |
| Interest expense | Interest expense | (69,755) | | | (6,591) | | | (7,211) | | | — | | | (83,557) | | Interest expense | (36,218) | | | (8,252) | | | (17,498) | | | — | | | (61,968) | |
| Pledged MSR liability expense | Pledged MSR liability expense | (105,771) | | | — | | | 87 | | | — | | | (105,684) | | Pledged MSR liability expense | (77,727) | | | — | | | 67 | | | — | | | (77,660) | |
| | Earnings of equity method investee | | Earnings of equity method investee | 350 | | | — | | | — | | | — | | | 350 | |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | — | | | — | | | (15,458) | | | — | | | (15,458) | |
| Other | Other | 8,300 | | | 198 | | | (3,882) | | | — | | | 4,616 | | Other | 3,345 | | | (119) | | | 428 | | | — | | | 3,654 | |
| Other expense, net | Other expense, net | (160,905) | | | (1,660) | | | (9,298) | | | — | | | (171,863) | | Other expense, net | (107,761) | | | (2,943) | | | (32,254) | | | — | | | (142,958) | |
| | Income (loss) before income taxes | Income (loss) before income taxes | $ | (74,283) | | | $ | 71,149 | | | $ | (101,741) | | | $ | — | | | $ | (104,875) | | Income (loss) before income taxes | $ | 5,889 | | | $ | 58,120 | | | $ | (74,607) | | | $ | — | | | $ | (10,598) | |
(1)Corporate Eliminations includes inter-segment derivatives eliminations of $0.1 million and $13.4 million for the three and ninesix months ended SeptemberJune 30, 2022, respectively, and $11.3 million and $24.1 million for the three and six months ended June 30, 2021, includes an inter-segment derivatives elimination of $1.5 million and $25.5 million, respectively, reported as Gain on loans held for sale, net with a corresponding offset in MSR valuation adjustments, net; and $7.8 million for the three and nine months ended September 30, 2020.net.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| September 30, 2021 | $ | 10,790,503 | | | $ | 865,011 | | | $ | 384,724 | | | | | $ | 12,040,238 | |
| | | | | | | | | |
| December 31, 2020 | $ | 9,847,603 | | | $ | 379,233 | | | $ | 424,291 | | | | | $ | 10,651,127 | |
| | | | | | | | | |
| September 30, 2020 | $ | 9,516,514 | | | $ | 437,304 | | | $ | 470,033 | | | | | $ | 10,423,851 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| June 30, 2022 | $ | 11,053,556 | | | $ | 694,120 | | | $ | 360,014 | | | | | $ | 12,107,690 | |
| | | | | | | | | |
| December 31, 2021 | $ | 10,999,204 | | | $ | 823,530 | | | $ | 324,389 | | | | | $ | 12,147,123 | |
| | | | | | | | | |
| June 30, 2021 | $ | 10,747,791 | | | $ | 641,946 | | | $ | 377,973 | | | | | $ | 11,767,710 | |
| | Depreciation and Amortization Expense | Depreciation and Amortization Expense | Servicing | | Originations | | Corporate Items and Other | | Business Segments Consolidated | Depreciation and Amortization Expense | Servicing | | Originations | | Corporate Items and Other | | Business Segments Consolidated |
| Three months ended September 30, 2021 | |
| Three months ended June 30, 2022 | | Three months ended June 30, 2022 |
| Depreciation expense | Depreciation expense | $ | 137 | | | $ | 77 | | | $ | 2,247 | | | $ | 2,461 | | Depreciation expense | $ | 253 | | | $ | 107 | | | $ | 2,207 | | | $ | 2,566 | |
| Amortization of debt issuance costs and discount | | Amortization of debt issuance costs and discount | 212 | | | — | | | 2,331 | | | 2,543 | |
| Amortization of intangibles | | Amortization of intangibles | 1,522 | | | — | | | — | | | 1,522 | |
| | Three months ended June 30, 2021 | | Three months ended June 30, 2021 |
| Depreciation expense | | Depreciation expense | $ | 168 | | | $ | 26 | | | $ | 2,015 | | | $ | 2,209 | |
| Amortization of debt issuance costs and discount | Amortization of debt issuance costs and discount | 129 | | | — | | | 2,076 | | | 2,205 | | Amortization of debt issuance costs and discount | 129 | | | — | | | 1,480 | | | 1,609 | |
| | Three months ended September 30, 2020 | |
| Six months ended June 30, 2022 | | Six months ended June 30, 2022 |
| Depreciation expense | Depreciation expense | $ | 219 | | | $ | 31 | | | $ | 4,055 | | | $ | 4,305 | | Depreciation expense | $ | 424 | | | $ | 214 | | | $ | 4,531 | | | $ | 5,169 | |
| Amortization of debt issuance costs and discount | | Amortization of debt issuance costs and discount | 415 | | | — | | | 4,667 | | | 5,082 | |
| Amortization of intangibles | | Amortization of intangibles | 2,125 | | | — | | | — | | | 2,125 | |
| | Six months ended June 30, 2021 | | Six months ended June 30, 2021 |
| Depreciation expense | | Depreciation expense | $ | 376 | | | $ | 49 | | | $ | 4,641 | | | $ | 5,066 | |
| Amortization of debt issuance costs and discount | Amortization of debt issuance costs and discount | 115 | | | — | | | 1,039 | | | 1,154 | | Amortization of debt issuance costs and discount | 258 | | | — | | | 2,974 | | | 3,232 | |
| | Nine Months Ended September 30, 2021 | |
| Depreciation expense | $ | 514 | | | $ | 125 | | | $ | 6,888 | | | $ | 7,527 | | |
| | Amortization of debt issuance costs and discount | 388 | | | — | | | 5,050 | | | 5,438 | | |
| | Nine months ended September 30, 2020 | |
| Depreciation expense | $ | 652 | | | $ | 102 | | | $ | 14,644 | | | $ | 15,398 | | |
| | Amortization of debt issuance costs and discount | 343 | | | — | | | 4,992 | | | 5,335 | | |
| | |
| Note 20 – Regulatory Requirements |
Our business is subject to extensive regulation and supervision by federal, state, local and foreign governmental authorities, including the Consumer Financial Protection Bureau (CFPB), HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the Federal Housing Finance Authority (FHFA)), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations, including, among others, the CARES Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Telephone Consumer Protection Act (TCPA), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state and local laws, and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, andhandling of unclaimed property, safeguarding of non-public personally identifiable information about our customers.customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced, and the requirements applicable to our business have been changing especially rapidly in response to the COVID-19 pandemic. In particular,Most recently, the CFPB promulgated certain amendments to RESPA (Regulation X)Regulation X (which implements RESPA) that became effective on August 31, 2021 and that impose certain additional COVID-19-related requirements with respect to loss mitigation, early intervention call requirements, and initiating new foreclosures.foreclosures before January 1, 2022. The CFPB also promulgated two sets of amendments to Regulation F (which implements the FDCPA), that each became effective on November 30, 2021 and that impose additional requirements regarding contacting borrowers and debt validation communications, among other things. In addition, the actions of legislative bodies and regulatory agencies relating to a particular matter or business practice may or may not be coordinated or consistent. The general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential real estate lenders and servicers.
In addition, a number of foreign laws and regulations apply to our operations outside of the U.S., including laws and regulations that govern licensing, privacy, employment, safety, payroll and other taxes and insurance and laws and regulations
that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Our foreign subsidiaries are subject to inquiries and examinations from foreign governmental regulators in the countries in which we operate outside of the U.S.
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements and satisfying minimum net worth requirements and non-financial requirements such as satisfactory
completion of examinations relating to the licensee’s compliance with applicable laws and regulations. We are also subject to seller/servicer obligations under agreements with the GSEs, HUD, FHA, VA and Ginnie Mae, including capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. We believe our licensed entities were in compliance with all of their minimum net worth requirements at SeptemberJune 30, 2021.2022. Our non-Agency servicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have a material adverse impact on our business. The most restrictive of the various net worth requirements for licensing and seller/servicer obligations referenced above is based on the UPB of assets serviced by PMC. Under the applicable formula, the required minimum net worth was $389.2$346.7 million at SeptemberJune 30, 2021.2022. PMC’s adjusted net worth was $557.7$623.2 million at SeptemberJune 30, 2021.2022. The most restrictive of the various liquidity requirements for licensing and seller/servicer obligations referenced above pertains to PMC and was $48.2$37.6 million at SeptemberJune 30, 2021.2022. PMC’s liquid assets were $216.6$202.8 million at SeptemberJune 30, 2021.2022
We face regulatory and public scrutiny as an organization and have entered into a number of significant settlements with federal and state regulators and state attorneys general that have imposed additional requirements on our business. Our failure to comply with our settlement obligations to our regulators or with applicable federal, state, local and foreign laws, regulations, licensing requirements and agency guidelines could lead to (i) administrative fines, penalties, sanctions or litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) additional costs to address these matters and comply with the terms of any resulting resolutions, (vii) suspension or termination of our approved agency seller/servicer status, (viii) inability to raise capital or otherwise fund our operations and (ix) inability to execute on our business strategy, which could have a material adverse impact on our business, reputation, results of operations, liquidity and financial condition.
New York Department of Financial Services (NY DFS). We operate pursuant to certain regulatory requirements with the NY DFS, including obligations arising under a consent order entered into in March 2017 (the NY Consent Order) and the terms of the NY DFS’ conditional approval in September 2018 of our acquisition of PHH. The conditional approval includes reporting obligations and record retention and other requirements relating to the transfer of loans collateralized by New York property (New York loans) onto our servicing system, the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP), and certain requirements with respect to the evaluation and supervision of management of both Ocwen and PMC. In addition, we were prohibited from boarding any additional loans onto the REALServicing system and we were required to transfer all New York loans off the REALServicing system by April 30, 2020. The conditional approval also restricts our ability to acquire MSRs with respect to New York loans, so that Ocwen may not increase its aggregate portfolio of New York loans serviced or subserviced by Ocwen by more than 2% per year. This restriction will remain in place until the NY DFS determines that all loans serviced on the REALServicing system have been successfully migrated to Black Knight MSP and that Ocwen has developed a satisfactory infrastructure to board sizable portfolios of MSRs. We transferred all loans onto Black Knight MSP in 2019 and no longer service any loans on the REALServicing system. We believe we have complied with all terms of the PHH acquisition conditional approval to date. We continue to work with the NY DFS to address matters they raise with us as well as to fulfill our commitments under the NY Consent Order and PHH acquisition conditional approval.
California Department of Financial Protection and Innovation (CA DFPI). In January 2015 and February 2017, Ocwen Loan Servicing, LLC (OLS) entered into consent orders with the CA DFPI (formerly known as the California Department of Business Oversight) relating to our alleged failure to produce certain information and documents during a routine licensing examination and relating to alleged servicing practices. We have completed all of our obligations under each of these consent orders. In October 2020, we entered into a consent order with the CA DFPI in order to resolve a legacy PHH examination finding and, in conjunction therewith, agreed to pay $62,000 (sixty-two thousand dollars) in penalties. We continue to work with the CA DFPI to address matters they raise with us, as well asincluding regarding the post-boarding process to fulfill our commitments under the consent order.verify loan and payment terms are properly implemented, calculated, and applied.
Unfunded Lending Commitments
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $2.1$1.7 billion at SeptemberJune 30, 2021.2022. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During the ninesix months ended SeptemberJune 30, 2021,2022, we funded $147.6$114.6 million out of the $2.0$1.5 billion borrowing capacity as of December 31, 2020.2021. We also had short-term commitments to lend $1.2 billion$526.2 million and $80.5$31.2 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at SeptemberJune 30, 2021.2022. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
HMBS Issuer Obligations
As an HMBS issuer, we are required to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of a reverse mortgage loan is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance
payments). Our subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice.
Activity with regard to HMBS repurchases, primarily MCA repurchases, are as follows:
| | | Nine Months Ended September 30, 2021 | | Six Months Ended June 30, 2022 |
| | Active | | Inactive | | Total | | Active | | Inactive | | Total |
| | Number | | Amount | | Number | | Amount | | Number | | Amount | | Number | | Amount | | Number | | Amount | | Number | | Amount |
| Beginning balance | Beginning balance | 141 | | | $ | 29,852 | | | 317 | | | $ | 56,449 | | | 458 | | | $ | 86,301 | | Beginning balance | 138 | | | $ | 35,322 | | | 448 | | | $ | 93,813 | | | 586 | | | $ | 129,135 | |
| Additions | Additions | 217 | | | 57,684 | | | 203 | | | 41,956 | | | 420 | | | 99,640 | | Additions | 262 | | | 70,611 | | | 106 | | | 26,014 | | | 368 | | | 96,625 | |
| Recoveries, net (1) | Recoveries, net (1) | (221) | | | (50,748) | | | (130) | | | (18,244) | | | (351) | | | (68,992) | | Recoveries, net (1) | (215) | | | (58,179) | | | (106) | | | (23,067) | | | (321) | | | (81,246) | |
| Transfers | Transfers | (18) | | | (6,261) | | | 18 | | | 6,261 | | | — | | | — | | Transfers | (11) | | | (3,656) | | | 11 | | | 3,656 | | | — | | | — | |
| Changes in value | Changes in value | — | | | 9 | | | — | | | (2,494) | | | — | | | (2,485) | | Changes in value | — | | | 69 | | | — | | | (1,836) | | | — | | | (1,767) | |
| Ending balance | Ending balance | 119 | | | $ | 30,536 | | | 408 | | | $ | 83,928 | | | 527 | | | $ | 114,464 | | Ending balance | 174 | | | $ | 44,167 | | | 459 | | | $ | 98,580 | | | 633 | | | $ | 142,747 | |
(1)Includes amounts received upon assignment of loan to HUD, loan payoff, REO liquidation and claim proceeds less any amounts charged off as unrecoverable.
NRZ Relationship
Our Servicing segment has exposure to concentration risk and client retention risk. As of SeptemberJune 30, 2021,2022, our servicing portfolio included significant client relationships with NRZ which represented 24%18% and 34%28% of our servicing portfolio UPB and loan count, respectively, and approximately 62%69% of all 30-day delinquent loans that Ocwen services. The current terms of our agreementsOur Subservicing Agreements and Servicing Addendum with NRZ extend through July 2022. Currently,are in their Second Terms that end December 31, 2023. At the end of the Second Term, subject to proper notice (generally 180 days’ notice), the payment of termination fees and certain other provisions,by October 1, 2023, NRZ has rightsthe right to terminate the legacy OcwenSubservicing Agreements and Servicing Addendum for convenience. If NRZ exercised its right to terminate all or some of the agreements for convenience.convenience at the end of the Second Term on December 31, 2023, we might need to right-size certain aspects of our servicing business as well as the related corporate support functions. Receivables and Other liabilities recorded on our consolidated balance sheets as well as the impacts to our consolidated statements of operations in connection with our NRZ agreements are disclosed in Note 8 — MSR Transfers Not Qualifying for Sale Accounting.
When we become aware of a matter involving uncertainty for which we may incur a loss, we assess the likelihood of any loss. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. If a reasonable estimate of loss cannot be made, we do not accrue for any loss or disclose any estimate of exposure to potential loss even if the potential loss could be material and adverse to our business, reputation, financial condition and results of operations. An assessment regarding the ultimate outcome of any such matter involves judgments about future events, actions and circumstances that are inherently uncertain. The actual outcome could differ materially. Where we have retained external legal counsel or other professional advisers, such advisers assist us in making such assessments.
Litigation
In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending legal proceedings, including proceedings brought by regulatory agencies (discussed further under “Regulatory” below), those brought on behalf of various classes of claimants, and those brought derivatively on behalf of Ocwen against certain current or former officers and directors or others.others, and those brought under the False Claims Act by private citizens on behalf of the U.S. In addition, we may be a party or potential party to threatened or pending legal proceedings brought by fair-housing advocates, current and former commercial counterparties and market competitors, including, among others, claims by counterparties in sales and purchasesrelated to the sale or purchase of loans, MSRs or other assets, and breach of contract actions, parties on whose behalf we service or serviced mortgage loans, parties who provide ancillary services including property preservation and other post-foreclosure related services, and parties who provide or provided consulting, subservicing, or other services to Ocwen.
The majority of these proceedings are based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities, including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the
FDCPA, the RESPA, the TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the TCPA, the Equal Credit Opportunity Act, as well as individual state
licensing and foreclosure laws and federal and local bankruptcy rules. Such proceedings include wrongful foreclosure and eviction actions, bankruptcy violation actions, payment misapplication actions, allegations of wrongdoing in connection with lender-placed insurance and mortgage reinsurance arrangements, claims relating to our property preservation activities, claims related to REO management, claims relating to our written and telephonic communications with our borrowers such as claims under the TCPA and individual state laws, claims related to our payment, escrow and other processing operations, claims relating to fees imposed on borrowers relating to inspection fees, foreclosure attorneys’ fees, reinstatement fees, foreclosure registration fees, payment processing, payment facilitation or payment convenience fees, claims related to ancillary products marketed and sold to borrowers, claims related to call recordings, claims regarding certifications of our legal compliance related to our participation in certain government programs, claims related to improper occupancy inspections, and claims related to untimely recording of mortgage satisfactions. In some of these proceedings, claims for substantial monetary damages are asserted against us. For example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation or payment convenience violate the FDCPA and similar state laws, (2) certain fees we assess on borrowers are improperly assessed and/or marked up improperly in violation of applicable state and federal law, (3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans, and (4) certain legacy mortgage reinsurance arrangements violated RESPA. In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business.
In view of the inherent difficulty of predicting the outcome of any threatened or pending legal proceedings, particularly where the claimants seek very large or indeterminate damages, including punitive damages, or where the matters present novel legal theories or involve a large number of parties, we generally cannot predict what the eventual outcome of such proceedings will be, what the timing of the ultimate resolution will be, or what the eventual loss, if any, will be. Any material adverse resolution could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Where we determine that a loss contingency is probable in connection with a pending or threatened legal proceeding and the amount of our loss can be reasonably estimated, we record an accrual for the loss. We have accrued for losses relating to threatened and pending litigation that we believe are probable and reasonably estimable based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $44.6$43.6 million at SeptemberJune 30, 2021.2022. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at SeptemberJune 30, 2021.2022.
As previously disclosed, we are subject to individual lawsuits relating to our FDCPA compliance and putative state law class actions based on the FDCPA and state lawsstatutes similar to the FDCPA. Ocwen agreed to a settlement in principle of a putative class action, Morris v. PHH Mortgage Corp., filed in March 2020 in the United States District Court for the Southern District of Florida, alleging that PMC’s and legacy Ocwen’s practices of charging a fee to borrowers who voluntarily use certain optional expedited payment options violates the FDCPA and its state law analogs. Several similar putative class actions have been filed against PMC and Ocwen since July 2019. Following mediation, PMC agreed to the terms of a settlement agreement to resolve all claims in the Morris matter. A motion requestingDuring the preliminary approval of the settlement was filed in August 2020. Severalprocess, several third parties, including a group of Statestate Attorneys General, have filed papers opposing preliminary approval, and these third parties could ultimately file objectionsexpressed opposition to the proposed settlement. As a result of this opposition, we have also received requests for information from various statesstate regulators and Attorneys General regarding our practices, to which we have responded in due course. Following the preliminary approval hearing, PMC and plaintiffs renegotiated portions of the settlement agreement to address several questions raised by the Court, and subsequently filed a renewed motion for preliminary approval. Ocwen expects final approval of the Morris settlement, if issued before other similar class actions proceed through class certification, will resolve the claims of the majority of the putative class members describedOn November 8, 2021, in the other similar cases that Ocwen is defending. In a similar lawsuit also challenging our convenience fees practices in California, Torliatt v. PHH Mortgage Corp. (pending in the Northern District of California), the Court recently held hearings on motionsgranted the plaintiff’s motion for class certification and summary judgment, but has not yet issuedcertified a decision on either. Ocwen cannot guarantee thatclass of California borrowers. Because the proposed settlementcertified Torliatt class overlaps with the putative class certified inMorris, the Morris settlement could not move forward in its current form. Following a mediation in the Torliattmatter, the parties reached an agreement on the terms of a settlement. The parties filed a stipulation of settlement and motion for preliminary approval on June 27, 2022, and on July 20, 2022, the Court entered an order granting preliminary approval of the settlement. Ocwen cannot predict whether the proposed settlement will receive final approval and in the absence of such approval, Ocwen cannot predict the eventual outcome of the MorrisTorliatt proceeding and similar putative class actions. Nor can Ocwen predict whether courts will agree with the CFPB’s recent Advisory Opinion, issued on June 29, 2022, which concludes that the charging of convenience fees violates the FDCPA where such fees are neither specifically permitted by the applicable loan documents nor by state law.
In addition, we continue to be involved in legacy matters arising prior to Ocwen’s October 2018 acquisition of PHH, including a putative class action filed in 2008 in the United States District Court for the Eastern District of California against PHH and related entities alleging that PHH’s legacy mortgage reinsurance arrangements between its captive reinsurer, Atrium
Insurance Corporation, and certain mortgage insurance providers violated RESPA. See Munoz v. PHH Mortgage Corp. et al. (Eastern District of California). In June 2015, the court certified a class of borrowers who obtained loans with private mortgage insurance through PHH’s captive reinsurance arrangement between June 2007 and December 2009. PHH has asserted numerous defenses to the merits of the case. InFollowing pre-trial developments in August 2020, the Court granted, in part, Plaintiffs’ Motion for Partial Summary
Judgment. The only issueissues remaining for trial iswere whether the plaintiffs had standing to bring their claims and whether the reinsurance services provided by PHH’s captive reinsurance subsidiary, Atrium, were actually provided in order for the safe harbor provision of RESPA to apply. Following pre-trial conferences held in the first half of 2021,On January 31, 2022, the Court scheduled trialdenied a motion by the plaintiffs to begin on February 15, 2022.enter new evidence and a motion by PHH accrued $2.5 million priorto decertify the class, which motion PHH may renew if the case ultimately goes to trial. Following the entry of this order, at the request of the parties, the Court dismissed all of the plaintiffs’ claims for lack of standing and entered judgment in favor of PHH. The plaintiffs appealed to the mergerUnited States Court of Appeals for the Ninth Circuit. Ocwen will continue to vigorously defend itself. Our current accrual with Ocwen when the case was filed in 2008 and that amountrespect to this matter is included in the $44.6$43.6 million legal and regulatory accrual referenced above. At this time, Ocwen is unable to predict the outcome of this lawsuit or any additional lawsuits that may be filed, the possible loss or range of loss, if any, associated with the resolution of such lawsuits or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against this lawsuit. If our efforts to defend this lawsuit are not successful, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
The same plaintiffs who filed a TCPA class action against Ocwen subsequently filed a similar class action against trustees of RMBS trusts based on vicarious liability for Ocwen’s alleged non-compliance with the TCPA. This class action filed against the trustees has settled, and while the trustees previously have indicated their intent to seek indemnification from Ocwen based on the vicarious liability claims, they have yet to take any formal action. Additional lawsuits have been and may be filed against us in relation to our TCPA compliance. However, a recent Supreme Court decision significantly undercuts the predominant theory of liability under the TCPA, and should provide even greater defenses on which Ocwen can rely when defending existing lawsuits or any additional lawsuits that may be filed. Nevertheless, given the recency of this Supreme Court decision, and the lack of opportunity for lower courts to interpret and apply it, it remains difficult to predict the possible loss or range of loss, if any, above the amount accrued or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against these lawsuits. If our efforts to defend these lawsuits are not successful, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Ocwen is a defendant in a certified class action in the U.S. District Court in the Eastern District of California where the plaintiffs claim Ocwen marked up fees for property valuations and title searches in violation of California state law. See Weiner v. Ocwen Financial Corp., et al. Ocwen’s motion for summary judgment, filed in June 2019, was denied in May 2020; however, the court ruled that plaintiff’s recoverable damages are limited to out-of-pocket costs, i.e., the amount of marked-up fees actually paid, rather than the entire cost of the valuation that plaintiffs sought. A jury trial is scheduled to commence March 7, 2022. Ocwen has moved to decertify the classclass. A jury trial was scheduled to commence March 7, 2022, but on December 22, 2021, the Court vacated the trial setting and anticipatesassociated pretrial conference due to a conflict with the Court’s trial schedule and indicated it would reset the dates after it issues a ruling prioron the decertification motion and a motion to trial.compel testimony filed by the plaintiffs. On August 2, 2022, the Court granted Ocwen’s motion for decertification. At this time, Ocwen is unable to predict the outcome of this lawsuit or any additional lawsuits that may be filed, the possible loss or range of loss, if any, associated with the resolution of such lawsuits or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against this lawsuit. If our efforts to defend this lawsuit are not successful, our business, financial condition liquidity and results of operations could be materially and adversely affected. Ocwen may have affirmative indemnification rights and/or other claims against third parties related to the allegations in the lawsuit. Although we may pursue these claims, we cannot currently estimate the amount, if any, of recoveries from these third parties.
We are currently involved in a dispute with a former subservicing client, HSBC Bank USA, N.A. (HSBC), which filed a complaint in the Supreme Court of the State of New York against PHH. See HSBC Bank USA, N.A. v. PHH Mortgage Corp. (Supreme Court of the State of New York). HSBC’s claims relate to alleged breaches of agreements entered into under a prior subservicing arrangement.arrangement and origination assistance agreement. In its complaint, HSBC also asserted a claim for fraud, which was dismissed by the Court. PHH has answered the complaint and has asserted counterclaims against HSBC for breach of contract. We believe we have strong factual and legal defenses to all of HSBC’sthe remaining claims and are vigorously defending the action. Ocwen is currently unable to predict the outcome of this dispute or estimate the size of any loss which could result from a potential resolution reached through litigation or otherwise.
We are also currently involved in three lawsuits pending in the Supreme Court of the State of New York with a purchaser of MSRs, Mr. Cooper (formerly Nationstar Mortgage Holdings Inc.), who alleges breaches of representations and warranties made by PHH in the MSR sale agreements. We are awaiting rulings on motions to dismiss two of these lawsuits. We believe we have strong factual and legal defenses to Mr. Cooper’s claims and are vigorously defending ourselves.
Over the past several years, lawsuits have been filed by RMBS trust investors alleging that the trustees and master servicers breached their contractual and statutory duties by (i) failing to require loan servicers to abide by their contractual obligations; (ii) failing to declare that certain alleged servicing events of default under the applicable contracts occurred; and (iii) failing to demand that loan sellers repurchase allegedly defective loans, among other things. Ocwen has received several letters from trustees and master servicers purporting to put Ocwen on notice that the trustees and master servicers may ultimately seek indemnification from Ocwen in connection with the litigations. Ocwen has not yet been impleaded into any of these cases, but it has produced and continues to produce documents to the parties in response to third-party subpoenas.
Ocwen has, however, been impleaded as a third-party defendant into five consolidated loan repurchase cases first filed against Nomura Credit & Capital, Inc. in 2012 and 2013. Ocwen is vigorously defending itself in those cases against allegations by the mortgage loan seller-defendant that Ocwen failed to inform its contractual counterparties that it had discovered defective loans in the course of servicing them and had otherwise failed to service the loans in accordance with accepted standards. Ocwen is unable at this time to predict the ultimate outcome of these matters, the possible loss or range of loss, if any, associated with the resolution of these matters or any potential impact they may have on us or our operations. If, however, we were required to compensate claimants for losses related to the alleged loan servicing breaches, then our business, reputation, financial condition, liquidity and results of operations could be adversely affected.
In addition, several RMBS trustees have received notices of events of default alleging material failures by servicers to comply with applicable servicing agreements. Although Ocwen has not been sued by an RMBS trustee in response to an event of default notice, there is a risk that Ocwen could be replaced as servicer as a result of said notices, that the trustees could take legal action on behalf of the trust certificate holders, or, under certain circumstances, that the RMBS investors who issue notices of event of default could seek to press their allegations against Ocwen, independent of the trustees. We are unable at this time to predict what, if any, actions any trustee will take in response to an event of default notice, nor can we predict at this time the potential loss or range of loss, if any, associated with the resolution of any event of default notice or the potential impact on our operations. If Ocwen were to be terminated as servicer, or other related legal actions were pursued against Ocwen, it could have an adverse effect on Ocwen’s business, reputation, financial condition, liquidity and results of operations.
Regulatory
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions. We may also on occasion be subject to foreign regulatory actions in the countries where we operate outside the U.S. Where we determine that a loss contingency is probable in connection with a regulatory matter and the amount of our loss can be reasonably estimated, we record an accrual for the loss. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to regulatory matters that materially exceed any accrued amount. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $43.6 million at June 30, 2022. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at June 30, 2022. Predicting the outcome of any regulatory matter is inherently difficult and we generally cannot predict the eventual outcome of any regulatory matter or the eventual loss, if any, associated with the outcome.
To the extent that an examination, audit or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fund our operations and (viii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, Ocwen Mortgage Servicing, Inc. (OMS) and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, handling of customer complaints, and marketing of optional products. The CFPB alleges violations of laws prohibiting unfair, deceptive or abusive acts or practices, as well as violations of other laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. The parties participated in mediation in October 2020 and subsequently held additional settlement discussions. However, the parties were unable to reach a resolution of the litigation.
On March 4, 2021, the court issued an order granting in part and reserving ruling in part on Ocwen’s motion for summary judgment. In that order, the court granted Ocwen summary judgment on 9 of 10 counts in the CFPB’s amended complaint,
finding that the CFPB’s allegations were barred under the principles of claim preclusion or res judicata to the extent those claims are premised on servicing activity occurring prior to February 26, 2017 and are covered by a 2014 Consent Judgment entered by the United States District Court for the District of Columbia. The CFPB subsequently filed its Second Amended Complaint to remove count 10 as well as allegations in counts 1-9 concerning servicing activity that occurred after February 26, 2017. On April 21, 2021, the court entered final judgment in our favor, denied all pending motions as moot, and closed the case. The CFPB thereafter filed a notice of appeal. Appellate briefing concluded August 26, 2021, and oral argument before the Eleventh Circuit is tentatively scheduled duringoccurred on February 10, 2022. On April 6, 2022, the weekEleventh Circuit issued its opinion, largely adopting the district court’s decision precluding the CFPB from bringing claims covered by the National Mortgage Settlement, but vacating and remanding the case back to the district court to determine which, if any, claims are not covered and may still be brought by the CFPB. Neither party sought rehearing of February 8 - 11, 2022.the Eleventh Circuit’s decision and therefore, the case has been remanded back to the trial court for further briefing. Ocwen will continue to vigorously defend itself.
Our current accrual with respect to this matter is included in the $44.6$43.6 million legal and regulatory accrual referenced above. The outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations.
State Licensing, State Attorneys General and Other Matters
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, entry into a consent order, a suspension or ultimately a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state financial regulators as part of their general regulatory oversight of our servicing and lending businesses. We also regularly engage withbusinesses, as well as from state attorneys general, and the CFPB and on occasion, we engage with other federal agencies, including the Department of Justice and various inspectors general on various matters, including respondinggeneral. For example, we have received requests regarding the charging of certain fees to information requestsborrowers; the post-boarding process to verify loan and other inquiries.payment terms are properly implemented, calculated, and applied; bankruptcy practices; COVID-19-related forbearance and post-forbearance options; and Homeowner Assistance Fund participation and implementation. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs (and their conservator, FHFA), HUD, FHA, VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits. We have in the past resolved, and may in the future resolve, matters via consent orders, payments of monetary amounts and other agreements in order to settle issues identified in connection with examinations or other oversight activities, and such resolutions could have material and adverse effects on our business, reputation, operations, results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took administrative actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities. We resolved the majority of these matters in 2017 and resolved the remaining matters in early 2018 An additional state regulator brought legal action together with that state’s attorney general, as described below. These administrative actions were applicable to OLS, but additional Ocwen entities were namedwhich we resolved in some actions, including Ocwen Financial Corporation, OMS, Homeward, Liberty, OFSPL and Ocwen Business Solutions, Inc. (OBS).
We have now resolved all of the state regulatory matters arising in April 2017.2020. In resolving these matters, we entered into agreements containingthat contained certain restrictions and commitments with respect to the operation of our business and our regulatory compliance activities, including certain restrictions and conditions relating to acquisitions of MSRs, a transition to an alternate loan servicing system from the REALServicing system, engagement of third-party auditors, escrow and data testing, error remediation, and financial condition reporting. We also provided certain borrower financial remediation and made payments to state regulators.
We believe we have taken substantial steps toward fulfilling our commitments under these agreements, including completing the transfer of loans to Black Knight MSP, completing pre-transfer and post-transfer data integrity audits, developing and implementing enhancements to our consumer complaint process, completing a third-party escrow review and ongoing reporting and information sharing. We continue to be subject tocompleted all material obligations under these agreements, including completing the final phase ofalthough a data integrity audit under our agreement with the State of Massachusetts, which is currently underway.
We have also incurred,few remaining reporting and will continue to incur, costs to comply with the terms of the settlements we have entered into, including the costs of conducting an escrow review, Maryland organizational assessments and Massachusetts data integrity audits, and costs relating to the transition to Black Knight MSP. With respect to the escrow review, the third-party auditor has issued its final report and we have completed all related remediation measures. It is possible that legal or other actions could be taken against us with respect to the identified escrow errors, which could result in additional costs or other adverse impacts. If we fail to comply with the terms of our settlements, additional legal or other actions could be taken against us. Such actions could have a materially adverse impact on our business, reputation, financial condition, liquidity and results of operations.
Certain of the state regulators’ cease and desist orders referenced a confidential supervisory memorandum of understanding (MOU) that we entered into with the Multistate Mortgage Committee (MMC) and 6 states relating to a servicing examination from 2013 to 2015. Among other things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We submitted a plan in 2016 that contained no stock repurchase restrictions and, therefore, we do not believe wesuch obligations are currently restricted from repurchasing stock. We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC and five states, and a response declining to take a legal position from the remaining state.ongoing.
On occasion, we engage with agencies of the federal government on various matters. For example, Ocwen was named as a defendant in a HUD administrative complaint filed by a non-profit organization in 2017 alleging discrimination in the manner in which Ocwen maintains REO properties in minority communities. In February 2018, this matter was administratively closed, and similar claims were filed in federal court. We believe these claims are without merit and intend to vigorously defend ourselves.
In 2017, Ocwen received a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program requesting documents and information related to Ocwen’s participation in the Treasury Department’s Making Home
Affordable Program. Ocwen has also received subpoenas that appear to relate to federal government agency initiatives relating to our industry generally, since we understand other lenders and servicers have received similar subpoenas. These include subpoenas in 2016 and 2017 from the Office of Inspector General of HUD requesting documentation related to HECM loans
and lender-placed insurance arrangements with a mortgage insurer and a 2019 subpoena from the VA Office of the Inspector General requesting documentation related to the origination and underwriting of loans guaranteed by the Veterans Benefits Administration. In each instance, we have provided documents and information in response to these subpoenas.
Loan Put-Back and Related Contingencies
We have exposure to representation, warranty and indemnification obligations relating to our Originations business, including lending, sales and securitization activities, and relating to our servicing practices.
At SeptemberJune 30, 20212022 and SeptemberJune 30, 2020,2021, we had outstanding representation and warranty repurchase demands of $59.6$51.9 million UPB (301(270 loans) and $45.2$50.7 million UPB (263(267 loans), respectively. We review each demand and monitor through resolution, primarily through rescission, loan repurchase or make-whole payment.
The following table presents the changes in our liability for representation and warranty obligations and similar indemnification obligations:
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Beginning balance (1) | Beginning balance (1) | $ | 40,374 | | | $ | 50,838 | | Beginning balance (1) | $ | 49,430 | | | $ | 40,374 | |
| Provision (reversal) for representation and warranty obligations | Provision (reversal) for representation and warranty obligations | 1,483 | | | (1,141) | | Provision (reversal) for representation and warranty obligations | (2,185) | | | 458 | |
| New production liability | New production liability | 3,227 | | | 1,361 | | New production liability | 1,393 | | | 1,993 | |
| | Charge-offs and other (2) | Charge-offs and other (2) | (2,530) | | | (8,130) | | Charge-offs and other (2) | (5,923) | | | (1,247) | |
| Ending balance (1) | Ending balance (1) | $ | 42,554 | | | $ | 42,928 | | Ending balance (1) | $ | 42,715 | | | $ | 41,578 | |
(1)The liability for representation and warranty obligations and compensatory fees for foreclosures is reported in Other liabilities (a component of Liability for indemnification obligations) on our unaudited consolidated balance sheets.
(2)Includes principal and interest losses realized in connection with repurchased loans, make-whole, indemnification and fee payments and settlements net of recoveries, if any.
We believe that it is reasonably possible that losses beyond amounts currently recorded for potential representation and warranty obligations and other claims described above could occur, and such losses could have an adverse impact on our results of operations, financial condition or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above amounts that have been recorded at SeptemberJune 30, 20212022.
Other
Ocwen, on its own behalf and on behalf of various mortgage loan investors, is engaged in a variety of activities to seek payments from mortgage insurers for unpaid claims, including claims where the mortgage insurers paid less than the full claim amount. Ocwen believes that many of the actions by mortgage insurers were in violation of the applicable insurance policies and insurance law. In some cases, Ocwen has entered into tolling agreements, initiated arbitration or litigation, engaged in settlement discussions, or taken other similar actions. To date, Ocwen has settled with five mortgage insurers, and expects the ultimate outcome to result in recovery of additional unpaid claims, although we cannot quantify the likely amount at this time.
We may, from time to time, have affirmative indemnification and other claims against service providers and parties from whom we purchased MSRs or other assets. Although we pursue these claims, we cannot currently estimate the amount, if any, of further recoveries. Similarly, from time to time, indemnification and other claims are made against us by parties to whom we sold MSRs or other assets or by parties on whose behalf we service mortgage loans. We cannot currently estimate the amount, if any, of reasonably possible loss above amounts recorded.
Note 23 – Subsequent Events
On October 1, 2021, PMCDuring July 2022, we completed the transaction entered into on June 17, 2021 with Reverse Mortgage Solutions, Inc. (RMS) and its parent, Mortgage Assets Management, LLC (MAM),repurchase of 490,317 shares of our common stock in the open market at prevailing market prices for a subsidiary of investment funds managed by Waterfall Asset Management, LLC, to acquire certain assets of RMS related to reverse mortgage subservicing, including subservicing contracts and related foreclosed properties. The aggregatetotal purchase price of $14.6 million and at closing was approximately $12.4an average price paid per share of $29.78. These shares were repurchased under the $50.0 million subject to certain holdbacks and adjustments. In addition, PMC has extended employment offers to approximately 350 former RMS employees. Concurrent with the closingprogram authorized by Ocwen’s Board of the transaction, PMC became the subservicer under a five-year subservicing agreementDirectors in May 2022. See Note 15 – Stockholders’ Equity for reverse mortgages owned by RMS and MAM. As a result, PMC became the subservicer for approximately
57,000 reverse mortgages, or approximately $14.3 billion in UPB, which were transferred to our reverse servicing platform concurrent with the closing.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts and unless otherwise indicated)
Effective February 10, 2021, the SEC issued Release No. 33-10890 adopting amendments to Regulation S-K to modernize, simplify and enhance certain financial disclosure requirements. This release amends, among other items, Item 303 of Regulation S-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A). While adoption is not required until fiscal years ending on or after August 9, 2021, we elected to adopt the amended Item 303 of Regulation S-K commencing with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. As a result, we compare our quarterly results to the immediately preceding quarter instead of the corresponding quarter of the preceding year. We believe it is helpful to compare our quarterly results to the immediately preceding quarter, because the mortgage industry and our business can be affected by a rapidly changing environment. In addition, we continuously transform our operations and internally measure our performance relative to the most recent period. Accordingly, we believe a comparison of our results of operations to the immediately preceding quarter provides a more relevant and meaningful analysis for investors to assess our performance than a comparison to the corresponding quarter of the preceding year. As required, we continue to compare our year-to-date results to the corresponding year-to-date results of the preceding year.
General
We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing approximately 1.31.4 million loans with a total UPB of $248.3$288.3 billion on behalf of more than 4,0003,900 investors and 11098 subservicing clients as of SeptemberJune 30, 2021.2022. We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window programs, bulk MSR purchase transactions, and subservicing agreements.
The table below summarizes the volume of Originations by channel, in the thirdsecond quarter of 2021,2022, compared with the preceding quarter, and the year-to-date volumesix months ended June 30, 2022 compared with the year-to-date volumecorresponding period of the prior year. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. Our non-bulk Originations volume increased $1.65 billion as compared to the prior quarter ($11.3 billion vs $9.6 billion or 17% increase) despite increased competition, including within the Correspondent channel and Agency Cash Window programs.
| | $ in billions | $ in billions | UPB | $ in billions | UPB |
| | Three Months Ended | | | Nine Months Ended | | Three Months Ended | | | Six Months Ended |
| | September 30, 2021 | | June 30, 2021 | | | September 30, 2021 | | September 30, 2020 | | June 30, 2022 | | March 31, 2022 | | | June 30, 2022 | | June 30, 2021 |
| Mortgage servicing originations | Mortgage servicing originations | | | | | | | | | Mortgage servicing originations | | | | | | | | |
| Retail - Consumer Direct MSR (1) | Retail - Consumer Direct MSR (1) | $ | 0.53 | | | $ | 0.61 | | | | $ | 1.71 | | | $ | 0.88 | | Retail - Consumer Direct MSR (1) | $ | 0.32 | | | $ | 0.66 | | | | $ | 0.99 | | | $ | 1.17 | |
| Correspondent MSR (1) | Correspondent MSR (1) | 5.39 | | | 2.49 | | | | 10.51 | | | 3.10 | | Correspondent MSR (1) | 3.94 | | | 2.67 | | | | 6.61 | | | 5.12 | |
| Flow and Agency Cash Window MSR purchases (2) | Flow and Agency Cash Window MSR purchases (2) | 4.90 | | | 6.17 | | | | 17.06 | | | 8.38 | | Flow and Agency Cash Window MSR purchases (2) | 3.21 | | | 4.09 | | | | 7.30 | | | 12.15 | |
| Reverse mortgage servicing (3) | Reverse mortgage servicing (3) | 0.43 | | | 0.34 | | | | 1.03 | | | 0.67 | | Reverse mortgage servicing (3) | 0.43 | | | 0.55 | | | | 0.98 | | | 0.60 | |
| Total servicing originations | 11.26 | | | 9.61 | | | | 30.30 | | | 13.04 | | |
| Bulk MSR purchases (2) | — | | | 55.13 | | | | 55.13 | | | 1.54 | | |
| Total servicing | | Total servicing | 7.90 | | | 7.98 | | | | 15.88 | | | 19.05 | |
| Bulk purchases (2) | | Bulk purchases (2) | — | | | — | | | | — | | | 55.13 | |
| Bulk purchases - reverse (2) | | Bulk purchases - reverse (2) | — | | | 0.21 | | | | 0.21 | | | — | |
| Total servicing additions | Total servicing additions | 11.26 | | | 64.74 | | | | 85.44 | | | 14.58 | | Total servicing additions | 7.90 | | | 8.18 | | | | 16.08 | | | 74.18 | |
| Subservicing additions (4) | Subservicing additions (4) | 15.22 | | | 3.93 | | | | 23.24 | | | 12.16 | | Subservicing additions (4) | 18.93 | | | 12.24 | | | | 31.18 | | | 8.47 | |
| Total servicing and subservicing UPB additions | Total servicing and subservicing UPB additions | $ | 26.48 | | | $ | 68.67 | | | | $ | 108.68 | | | $ | 26.74 | | Total servicing and subservicing UPB additions | $ | 26.83 | | | $ | 20.43 | | | | $ | 47.26 | | | $ | 82.65 | |
(1)Represents the UPB of loans that have been originated or purchased (funded UPB) during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.
(2)Represents the UPB of loans for which the MSR is purchased.
(3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs.
(4)Includes interim subservicing, excludingincluding the volume of UPB associated with short-term interim subservicing for somecertain clients as a support to their originate-to-sell business, where loans are boardedwith $5.3 billion and deboarded within$2.9 billion for the same quarter.three months ended June 30, 2022 and March 31, 2022, respectively, and $8.2 billion and $8.5 billion for the six months ended June 30, 2022 and June 30, 2021, respectively.
SubservicingIn addition to interim subservicing, subservicing additions for the third quarter 2021three months ended June 30, 2022 and March 31, 2022 in the table above include $7.9 billion ofreverse mortgage loan subservicing and new subservicing on behalf of MAV. WeOn October 1, 2021, in connection with the transaction with MAM (RMS), PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately $14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we added subservicing of approximately 40,000 reverse mortgage loans or approximately $9.1 billion in UPB in the first quarter of 2022, and approximately 19,000 reverse mortgage loans with a UPB of $4.1 billion in the second quarter of 2022. In the second quarter of 2021, we launched our joint venture MSR investment with Oaktree in the second quarter 2021 with MAV. MAV purchasingpurchased approximately $8.5 billion and $—(nil) GSE MSRMSRs from unrelated third parties that PMC began subservicing in the thirdsecond quarter of 2021.
On October 1, 2021, with the purchase agreement with RMS2022 and its parent, MAM, PMC became the subservicer under a five-year subservicing agreement for approximately 57,000 reverse mortgages owned by RMS and MAM, or approximately $14.3 billion in UPB.
first quarter of 2022, respectively.The following table summarizes the average volume of our Servicing segment during the currentsecond quarter and year-to-date period,of 2022, compared with the preceding quarter, and year-to-datethe six months ended June 30, 2022 compared with the corresponding period of the prior year, respectively.year. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans also drives the gross revenue and expenses, and their timing. In the thirdsecond quarter of 2021,2022, we have increased our total average servicing portfolio by $45.3$15.5 billion, net of runoff as compared to the first quarter of 2022, mostly with large GSE MSRadditional forward and reverse subservicing volume, and bulk acquisitions driving the growth of our owned MSR portfolio, and the new subservicing volume generated from our MSR investment joint venture with Oaktree throughby MAV. In addition to runoff, the NRZ portfolio declined as a result of the termination by NRZ of the PMC servicing agreement resulting in the deboarding of loans with $34.2 billion of UPB in September and October 2020. This quarter established the foundation of a transformed servicing portfolio, with the significant addition of a high credit quality GSE MSR portfolio and the continued reduction of our non-Agency servicing through runoff, also reducing our concentration with NRZ servicing agreements.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in billions | Average UPB |
| Three Months Ended | | | | Nine Months Ended |
| September 30, 2021 | | June 30, 2021 | | | | September 30, 2021 | | September 30, 2020 |
| Owned MSR | $ | 145.7 | | $ | 108.3 | | | | $ | 113.6 | | $ | 69.4 |
| NRZ | 59.9 | | 62.9 | | | | 62.9 | | 74.2 |
| MAV | 7.4 | | — | | | | 7.4 | | — |
| Subservicing | 20.6 | | 17.9 | | | | 21.0 | | 54.0 |
| Reverse mortgage loans | 6.8 | | 6.7 | | | | 6.7 | | 6.5 |
| Commercial and other servicing | 1.6 | | 1.0 | | | | 1.1 | | 1.0 |
| Total serviced UPB (average) | $ | 242.0 | | $ | 196.7 | | | | $ | 212.7 | | $ | 205.0 |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in billions | Average UPB |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | March 31, 2022 | | June 30, 2022 | | June 30, 2021 |
| Owned MSR | $ | 115.6 | | $ | 124.9 | | $ | 120.9 | | $ | 100.5 |
| NRZ | 52.6 | | 54.7 | | 53.6 | | 64.3 |
| MAV | 42.3 | | 34.0 | | 38.6 | | — |
| Subservicing | 67.5 | | 48.8 | | 57.5 | | 20.9 |
| Reverse mortgage loans (owned) | 7.4 | | 7.2 | | 7.3 | | 6.7 |
| Commercial and other servicing | 0.8 | | 0.9 | | 0.8 | | 0.8 |
| Total serviced and subserviced UPB (average) | $ | 286.1 | | $ | 270.5 | | $ | 278.7 | | $ | 193.2 |
As of SeptemberJune 30, 2021,2022, the total serviced and subserviced UPB amounted to $248.3$288.3 billion. Refer to Note 7 – Mortgage Servicingfor further detail of the MSR UPB.
Financial Highlights
Results of operations for the thirdsecond quarter of 20212022
•Net income of $22$10 million, or $2.35$1.12 per share basic and $2.29$1.11 per share diluted
•Servicing fee revenue of $207$215 million
•Originations gain on sale of $30$13 million
•$358 million MSR valuation lossgain on our owned MSRs attributable to rate and assumption changes, net of hedging
Financial condition at the end of the thirdsecond quarter of 20212022
•Stockholders’ equity of $470$544 million, or $51.13$59.19 book value per common share
•MSR investment of $2.2$2.5 billion, with $104 million net additionsa $15.5 billion increase in the average serviced and subserviced UPB in the quarter
•LiquidityCash liquidity position of $236$256 million
•Total assets of $12.0$12.1 billion
Business Initiatives
In 2021, weWe have established fivethe following key operating objectives to return to sustainable profitability and drive improved value for shareholders as our near-term priority remains to return to sustainable profitability. We continue to execute our strategy around these objectives:in 2022:
•Accelerating growth,Growing prudently and profitably, by expanding our client base and our product offerings, and by leveraging our MSR asset vehicle with Oaktree;
•Strengthening recaptureConsumer Direct performance, by expanding our operating capacity;capacity and new customer acquisition capabilities;
•Improving our cost leadership position, by driving productivity and efficiencies, with our technology and continuous improvement initiatives;
•Expanding revenue opportunities, through an increased mix of higher margin products, services and channels; and
•Maintaining high quality operational execution and service excellence, through our technology and continuous improvement initiatives, and our commitment to employee engagement and customer satisfaction; andsatisfaction.
During the first six months of 2022, market interest rates rose faster and higher than the industry consensus, significantly reducing the production volumes and margins of our Consumer Direct channel and adversely affecting Originations profitability. To achieve our profitability goals for 2022, we have responded to the market shift by rapidly scaling down our Consumer Direct operations in the first six months of 2022 and we expect to continue to reduce headcount, marketing and third-party spending in the third quarter of 2022. We are also accelerating our goals relating to business process rationalization and optimization, including further off-shoring of operations, enterprise-wide.
•Our growth strategy includes acquiring assets and/or operations of complementary businesses, by means of acquisition, merger or other transaction forms. Our strategy may also include pursuing large transactions, including bulk purchases or sales of MSRsExpanding servicing. We have engaged in such transactions in the past, and other revenue opportunities.
MAVwe continue to explore opportunities that may be accretive to our business and Oaktree Relationship
On May 3, 2021, we formally launched MAV, our MSR asset vehicle and entered into a number of definitive agreements with Oaktree. Oaktree and Ocwen committed 85% and 15%, respectively, to fund GSE MSR investments on a pro rata basis upstockholders’ value.
to a total aggregate commitment of $250 million over a term of three years following closing (subject to extension). This joint venture is structured to provide Oaktree with MSR investment opportunities and returns, while providing PMC scale and income through subservicing and recapture services. Additionally, PMC earns direct MSR investment income through its 15% ownership stake and potential carried interest on investment returns exceeding certain thresholds. Under the arrangement, MAV has a non-compete to purchase certain GSE MSRs through specific channels in cooperation with PMC. In addition, Ocwen must offer MAV the first opportunity to purchase GSE MSRs sold by Ocwen or its affiliates that meet certain criteria, which we refer to as the right of first offer. Both the non-compete and the right of first offer are subject to various restrictions and in effect until MAV has been fully funded, or, if earlier, in the case of the right of first offer, until May 3, 2024 (subject to extension by mutual consent). In exchange, PMC receives exclusive subservicing and recapture rights, subject generally to ongoing performance and financial standards.
During the third quarter of 2021, PMC recognized $2.3 million of total servicing and subservicing fees, including ancillary income, under its agreement with MAV.
COVID-19 Pandemic Update
Our financial performance in 2020 was affected by the Coronavirus Disease 2019 (COVID-19) pandemic, mostly due to large losses on MSRs and lower revenue in our Servicing business, partially offset by the growth and profitability of our Originations business. Furthermore, the CARES Act allowed us to recognize income tax benefits in 2020 mostly due to the carryback of a portion of our prior net operating losses.
In 2021, our Servicing business continued to be impacted by the COVID-19 pandemic, with the large number of loans placed under forbearance and the moratorium on foreclosures. The collection and recognition of servicing fees and ancillary income related to forbearance loans are delayed or reduced. In addition, the foreclosure moratorium delayed our collection and recognition of deferred service fees. While the foreclosure moratorium ended on July 31, 2021, the eviction moratorium was extended through September 30, 2021 for foreclosed borrowers. In addition, extensions of forbearance plans remain available until the maximum number of months of extensions is reached. The majority of borrowers who entered into forbearance in the second quarter of 2020 and subsequently extended will start exiting forbearance in the fourth quarter of 2021.
As of September 30, 2021, we managed 53,300 loans under forbearance, (or 4.1% of our total portfolio), 13,400 of which related to our owned MSRs (excluding NRZ), or 2.0% of our owned MSR servicing portfolio (excluding NRZ). As of September 30, 2021, the number of loans under forbearance continued to trend down, as illustrated by the below chart of forbearance plans by investor for our owned MSR portfolio (excluding NRZ). We expect an increase in loan modifications in the near term, including in the fourth quarter of 2021, as borrowers reach their available extensions of forbearance plans.
We continue to operate through a secure remote workforce model for substantially all of our global workforce and continue to adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. We monitor the impact of the pandemic on our workforce and have established business resiliency plans for all our locations. At September 30, 2021, we had approximately 5,200 employees, of which approximately 3,200 were located in India and approximately 400 were based in the Philippines. While we have contingency and continuity plans in place, we cannot guarantee that our operations will not be negatively impacted. To date, our operations have not been significantly affected.
Uncertainties related to the duration and severity of the pandemic and related economic impact remain and make it difficult for us to determine the continued ongoing effect the pandemic may have on us and our business, financial condition, liquidity or results of operations.
Results of Operations and Financial Condition
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto and management’s discussion and
analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
| | Results of Operations Summary | Results of Operations Summary | Three Months Ended | | | % Change | | Nine Months Ended | | | % Change | Results of Operations Summary | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| September 30, | | June 30, | | | September 30, | | September 30, | | | June 30, | | March 31 | | | | June 30, | | June 30, | | | % Change |
| 2021 | | 2021 | | | 2021 | | 2020 | | | 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Revenue | Revenue | | | | | | | | | | | | | | Revenue | | | | | | | | | | | | | |
| Servicing and subservicing fees | Servicing and subservicing fees | $ | 206.6 | | $ | 184.4 | | | 12 | % | | $ | 562.8 | | $ | 568.4 | | | (1) | % | Servicing and subservicing fees | $ | 215.1 | | $ | 212.6 | | | 1 | % | | $ | 427.8 | | $ | 356.2 | | | 20 | % |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | 5.0 | | 29.3 | | | (83) | | | 56.2 | | 51.1 | | | 10 | | Reverse mortgage revenue, net | (2.6) | | 13.1 | | | (120) | | | 10.5 | | 51.1 | | | (79) | |
| Gain on loans held for sale, net | 59.7 | | 42.7 | | | 40 | | | 108.1 | | 92.8 | | | 17 | | |
| Gain (loss) on loans held for sale, net | | Gain (loss) on loans held for sale, net | 0.9 | | (3.2) | | | (129) | | | (2.3) | | 48.4 | | | (105) | |
| | Other revenue, net | Other revenue, net | 11.8 | | 9.0 | | | 31 | | | 29.1 | | 17.6 | | | 65 | | Other revenue, net | 8.7 | | 9.0 | | | (4) | | | 17.7 | | 17.3 | | | 3 | |
| Total revenue | Total revenue | 283.1 | | 265.4 | | | 7 | | | 756.1 | | 729.9 | | | 4 | | Total revenue | 222.2 | | 231.6 | | | (4) | | | 453.7 | | 473.0 | | | (4) | |
| | MSR valuation adjustments, net | MSR valuation adjustments, net | (6.3) | | (72.5) | | | (91) | | | (57.6) | | (231.4) | | | (75) | | MSR valuation adjustments, net | 33.2 | | 62.6 | | | (47) | | | 95.8 | | (51.2) | | | (287) | |
| | Operating expenses | Operating expenses | | | | | | Operating expenses | | | | | |
| Compensation and benefits | Compensation and benefits | 69.0 | | 72.2 | | | (4) | | | 209.4 | | 195.4 | | | 7 | | Compensation and benefits | 83.9 | | 68.0 | | | 23 | | | 151.9 | | 140.5 | | | 8 | |
| Servicing and origination | Servicing and origination | 27.9 | | 26.6 | | | 5 | | | 82.0 | | 60.5 | | | 36 | | Servicing and origination | 19.1 | | 14.2 | | | 35 | | | 33.3 | | 54.1 | | | (39) | |
| Technology and communications | | Technology and communications | 14.7 | | 14.9 | | | (1) | | | 29.6 | | 26.3 | | | 13 | |
| Professional services | Professional services | 18.4 | | 25.5 | | | (28) | | | 61.2 | | 77.8 | | | (21) | | Professional services | 8.7 | | 12.2 | | | (29) | | | 20.9 | | 42.9 | | | (51) | |
| Technology and communications | 14.7 | | 13.2 | | | 12 | | | 41.1 | | 47.2 | | | (13) | | |
| Occupancy and equipment | Occupancy and equipment | 9.0 | | 7.9 | | | 14 | | | 25.7 | | 37.7 | | | (32) | | Occupancy and equipment | 9.7 | | 10.1 | | | (4) | | | 19.7 | | 16.7 | | | 18 | |
| Other expenses | Other expenses | 6.5 | | 4.4 | | | 47 | | | 15.4 | | 13.0 | | | 19 | | Other expenses | 8.4 | | 7.7 | | | 9 | | | 16.1 | | 9.0 | | | 79 | |
| Total operating expenses | Total operating expenses | 145.4 | | 149.8 | | | (3) | | | 434.9 | | 431.5 | | | 1 | | Total operating expenses | 144.4 | | 127.0 | | | 14 | | | 271.4 | | 289.4 | | | (6) | |
| | Other income (expense) | Other income (expense) | | | | | | | | | | | Other income (expense) | | | | | | | | | | |
| Interest income | Interest income | 7.9 | | 4.2 | | | 88 | | | 16.0 | | 12.8 | | | 25 | | Interest income | 9.7 | | 7.1 | | | 37 | | | 16.9 | | 8.1 | | | 108 | |
| Interest expense | Interest expense | (40.6) | | (33.5) | | | 21 | | | (102.6) | | (83.6) | | | 23 | | Interest expense | (37.9) | | (37.9) | | | — | | | (75.7) | | (62.0) | | | 22 | |
| Pledged MSR liability expense, net | (91.2) | | (39.8) | | | 129 | | | (168.8) | | (105.7) | | | 60 | | |
| Loss on extinguishment of debt | — | | — | | | n/m | | (15.5) | | — | | | n/m | |
| Pledged MSR liability expense | | Pledged MSR liability expense | (74.1) | | (86.9) | | | (15) | | | (161.0) | | (77.7) | | | 107 | |
| Earnings of equity method investee | | Earnings of equity method investee | 3.9 | | 12.0 | | | (67) | | 15.9 | | 0.4 | | | n/m |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | 0.9 | | — | | | n/m | | 0.9 | | (15.5) | | | (106) | |
| | Earnings of equity method investee | 0.9 | | 0.4 | | | 166 | | 1.3 | | — | | | n/m | |
| Other, net | Other, net | 1.9 | | 3.4 | | | (44) | | 5.6 | | 4.6 | | | 20 | | Other, net | (4.2) | | (0.2) | | | n/m | | (4.4) | | 3.7 | | | (220) | |
| Total other expense, net | (121.1) | | (65.4) | | | 85 | | | (264.0) | | (171.9) | | | 54 | | |
| Total other income (expense), net | | Total other income (expense), net | (101.6) | | (105.9) | | | (4) | | | (207.4) | | (143.0) | | | 45 | |
| | Income (loss) before income taxes | Income (loss) before income taxes | 10.3 | | (22.2) | | | (146) | | (0.3) | | (104.9) | | | (100) | | Income (loss) before income taxes | 9.4 | | 61.3 | | | (85) | | 70.8 | | (10.6) | | | (769) | |
| Income tax benefit | (11.3) | | (11.9) | | | (5) | | | (20.1) | | (71.9) | | | (72) | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | (0.9) | | 3.2 | | | (128) | | | 2.3 | | (8.8) | | | (126) | |
| Net income (loss) | Net income (loss) | $ | 21.6 | | $ | (10.3) | | | (309) | | | $ | 19.8 | | $ | (33.0) | | | (160) | | Net income (loss) | $ | 10.4 | | $ | 58.1 | | | (82) | | | $ | 68.4 | | $ | (1.8) | | | n/m |
| | | Segment income (loss) before income taxes | Segment income (loss) before income taxes | | | | | | Segment income (loss) before income taxes | | | | | |
| Servicing | Servicing | $ | 16.6 | | $ | (15.4) | | | (208) | % | | $ | 14.7 | | $ | (74.3) | | | (120) | % | Servicing | $ | 38.6 | | $ | 78.8 | | | (51) | % | | $ | 117.4 | | $ | 5.9 | | | n/m |
| Originations | Originations | 16.8 | | 22.5 | | | (25) | | | 75.8 | | 71.1 | | | 7 | Originations | (1.8) | | (2.8) | | | (35) | | | (4.7) | | 58.1 | | | (108) | |
| Corporate Items and Other | Corporate Items and Other | (23.2) | | (29.4) | | | (21) | | | (90.9) | | (101.7) | | | (11) | | Corporate Items and Other | (27.3) | | (14.6) | | | 86 | | | (41.9) | | (74.6) | | | (44) | |
| | $ | 10.3 | | $ | (22.2) | | | (146)% | | $ | (0.3) | | $ | (104.9) | | | (100) | % | | $ | 9.4 | | $ | 61.3 | | | (85)% | | $ | 70.8 | | $ | (10.6) | | | (768) | |
| n/m: not meaningful | n/m: not meaningful | | | | | | | | | | | n/m: not meaningful | | | | | | | | | | | | |
Total Revenue
The below table presents total revenue by segment and at the consolidated level:
| | Revenue | Revenue | Three Months Ended | | | % Change | | Nine Months Ended | | | % Change | Revenue | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| September 30, | | June 30, | | | | September 30, | | September 30, | | | June 30, | | March 31 | | | | June 30, | | June 30, | | |
| 2021 | | 2021 | | | | 2021 | | 2020 | | | 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Servicing | Servicing | $ | 224.3 | | $ | 197.3 | | | 14 | % | | $ | 596.9 | | $ | 592.0 | | | 1 | % | Servicing | $ | 184.4 | | $ | 198.0 | | | (7) | % | | $ | 382.4 | | $ | 372.7 | | | 3 | % |
| Originations | Originations | 58.8 | | 55.4 | | | 6 | | | 180.4 | | 124.8 | | | 45 | | Originations | 36.3 | | 45.0 | | | (19) | | | 81.3 | | 121.7 | | | (33) | |
| Corporate | Corporate | 1.5 | | 1.5 | | | 1 | | | 4.3 | | 5.2 | | | (17) | | Corporate | 1.6 | | 1.8 | | | (10) | | | 3.4 | | 2.8 | | | 23 | |
| Total segment revenue | Total segment revenue | 284.6 | | 254.1 | | | 12 | | | 781.7 | | 722.1 | | | 8 | | Total segment revenue | 222.3 | | 244.8 | | | (9) | | | 467.1 | | 497.1 | | | (6) | |
| Inter-segment elimination (1) | Inter-segment elimination (1) | (1.5) | | 11.3 | | | (113) | | | (25.5) | | 7.8 | | | (426) | Inter-segment elimination (1) | (0.1) | | (13.3) | | | (99) | | | (13.4) | | (24.1) | | | (44) |
| Total revenue | Total revenue | $ | 283.1 | | $ | 265.4 | | | 7 | | | $ | 756.1 | | $ | 729.9 | | | 4 | | Total revenue | $ | 222.2 | | $ | 231.6 | | | (4) | | | $ | 453.7 | | $ | 473.0 | | | (4) | |
(1)The fair value change of inter-segment economic hedge derivatives reported within Total revenue (gain(Gain on loans held for sale)sale, net) is eliminated at the consolidated level with an offset in MSR valuation adjustments, net. Refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk for further detail.
Total segment revenue was $284.6$222.3 million for the third quarter of 2021, $30.5three months ended June 30, 2022, $22.5 million or 12% higher9% lower than the second quarter of 2021,three months ended March 31, 2022, driven by a $27.0$13.6 million revenue increasedecrease from Servicing and a $3.4an $8.7 million revenue increasedecrease from Originations. The Servicing revenue increasedecrease is mostly due to $23.3an $8.8 million incremental servicing fees due toloss on repurchased delinquent loans in connection with the net growthGinnie Mae EBO program during the second quarter of our owned MSR portfolio, including the large MSR bulk acquisitions in June 2021,2022, and a $22.5 million gain on sale of loans acquired through the exercise of call rights, offset in part by a $23.5$7.1 million decline in Reverse mortgage revenue, net driven by unrealized fair value losses on our net reversethe HECM loan portfolio dueattributable to increasingunfavorable market interest ratesrate and spread widening.conditions. The increasedecrease in Originations revenue is mostly due to higheran $8.6 million decrease in Reverse mortgage revenue, net driven by both lower loan production volume.volume and lower margins attributable to the same unfavorable market interest rate and spread conditions.
As compared to the ninesix months ended SeptemberJune 30, 2020,2021, total segment revenue for the ninesix months ended SeptemberJune 30, 20212022 was $59.6$30.0 million or 8% higher,6% lower, due to a $55.6$40.4 million increasedecrease in Originations revenue andoffset by a $4.9$9.7 million increase in Servicing revenue. The increasedecrease in Originations revenue is primarily due to an increasea $37.0 million decline in forward and reverse production volume, partially offsetGain on loans held for sale, net in our Consumer Direct channel driven by lower margins.recapture volume in the context of rising interest rates at a historic pace during the six months ended June 30, 2022. The increase in Servicing revenue is primarilyincludes a $75.2 million increase in Servicing and subservicing fees due to the $22.5 million gain on saleportfolio growth, the launch of loans acquired throughMAV and the exerciseacquisition of call rights in the third quarter of 2021,reverse subservicing from MAM (RMS), offset by a $13.3$43.4 million decline in Reverse mortgage revenue, net due to increasing interest rates. In addition, servicing fees declined by $8.3 million driven by a reduction in fees collectedunrealized losses on behalf of NRZ after the termination of the PMC servicing agreement by NRZ in February 2020,HECM loan portfolio, net attributable to market conditions, and a reduction$21.9 million decline in ancillary income, mostlyGain on loans held for sale, net due to lower average servicing volume, the COVID-19 environment and lower interest rates, partially offset by the growth in our owned MSR portfolio.
Total revenue (after elimination of inter-segment derivative fair value changes) was $283.1 million for the third quarter of 2021, $17.7 million or 7% higher than the second quarter of 2021, driven by the factors described above and in part by the presentation of macro-hedging derivativeredelivery gains and losses reported within MSR valuation adjustments, net aton repurchased and sold delinquent loans in connection with the consolidated level, as disclosed in Note 4 – Loans Held for Sale, Note 15 – Derivative Financial Instruments and Hedging Activities and Note 19 – Business Segment Reporting. Effective May 2021, we replaced our macro-hedging strategies with two distinct strategies to separately hedge the pipeline and our MSR exposure with third party derivatives. However, we have and may continue to use inter-segment derivatives between the two strategies. Refer to Item 3 - Quantitative and qualitative disclosures about market risk for further detail.Ginnie Mae EBO program.
See the respective Segment Results of Operations for additional information.
MSR Valuation Adjustments, Net
The table below presents the key components of MSR valuation adjustments, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Results | Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | June 30, | | | | September 30, | | September 30, | | |
| 2021 | | 2021 | | | | 2021 | | 2020 | | |
| MSR realization of expected cash flows (1) | $ | (68.9) | | $ | (57.0) | | | | $ | (175.1) | | $ | (127.9) | | |
| MSR fair value changes due to interest rate and assumption updates | 72.4 | | (47.2) | | | | 100.7 | | (169.0) | | |
| Derivative fair value gain (loss) | (14.1) | | 34.3 | | | | (28.9) | | 47.1 | | |
| Total Servicing | (10.6) | | (69.9) | | | | (103.2) | | (249.8) | | |
| Originations - MSR fair value changes | 2.8 | | 8.8 | | | | 20.1 | | 26.3 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Inter-segment elimination - derivative fair value gain (loss) (2) | 1.5 | | (11.3) | | | | 25.5 | | (7.8) | | |
| MSR valuation adjustments, net | $ | (6.3) | | $ | (72.4) | | | | $ | (57.6) | | $ | (231.3) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Results | Three Months Ended | | % Change | | | Six Months Ended | | % Change | |
| June 30, | | March 31 | | | | June 30, | | June 30, | | |
| 2022 | | 2022 | | | | 2022 | | 2021 | | |
| MSR realization of expected cash flows (1) | $ | (67.6) | | $ | (72.8) | | (7) | % | | | $ | (140.4) | | $ | (106.2) | | 32 | % | |
| MSR fair value changes due to interest rate and assumption updates | 115.1 | | 201.2 | | (43) | % | | | 316.2 | | 28.3 | | n/m | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Derivative fair value gain (loss) | (17.0) | | (80.0) | | (79) | % | | | (97.1) | | (14.8) | | 556 | % | |
| Total Servicing | 30.5 | | 48.4 | | (37) | % | | | 78.7 | | (92.6) | | (185) | % | |
| Originations - MSR fair value changes | 2.6 | | 1.1 | | 136 | % | | | 3.7 | | 17.3 | | (79) | % | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Inter-segment elimination - derivative fair value gain (loss) | 0.1 | | 13.3 | | (99) | % | | | 13.4 | | 24.1 | | (44) | % | |
| MSR valuation adjustments, net | $ | 33.2 | | $ | 62.7 | | (47) | % | | | $ | 95.8 | | $ | (51.2) | | (287) | % | |
(1) The terms realization of expected cash flows and runoff may be used interchangeably within this discussion.
(2) The fair value change of inter-segment economic hedge derivatives reported within MSR valuation adjustments, net is eliminated at the consolidated level with an offset in Gain on loans held for sale, net (Total Revenue). Also refer to the description of the inter-segment derivative elimination in Note 19 – Business Segment Reporting.
We reported a $6.3$33.2 million lossgain in MSR valuation adjustments, net in the third quarter of 2021, that mostly comprised $68.9three months ended June 30, 2022, $29.4 million MSR portfolio runoff, $72.4 million fair value gains oflower than the MSR portfolio attributable to interest rate and assumption updates and $14.1 million hedging derivative loss. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled and unscheduled amortization of the loan UPB.three months ended March 31, 2022. The MSR portfolio runoff increased by $11.9 million between the second and third quarters of 2021 mostly due to a higher MSR UPB. The $72.4 million fair value gains of the MSR portfolio attributable to interest rate and assumption updates includes $11.1 million gain on our owned MSR and $61.3 million gain on the MSR portfolio sold to NRZ and MAV. This NRZ and MAV MSRnet gain is mostly driven by assumption updates relating to a PLS model calibration by our third party valuation expert, and is offset by a corresponding loss separately reported with MSR pledged liability expense.
Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates, with $11.1 million fair value gains of our owned MSR portfolio attributable to interest rate and assumption updates and $14.1 million hedging derivative loss. The quarter-over-quarter fair value changes are mostly explained by interest rate changes, with a 34 basis point decrease and 6 basis point increase in the 10-year swap rate during the second and third quarter of 2021, respectively. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. In addition, we established a higher hedge coverage on a committed MSR sale to MAV during the third quarter of 2021. Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional information regarding our hedging programs.
The $6.0 million decline in the quarter infavorable MSR fair value changes reported in Originations, from $8.8 million to $2.8 million, is due to a declinefast rising interest rates, net of hedging. The decrease in our cash window MSR originations volume and margin. The change from $11.3 million lossthe net gain in the second quarter of 20212022 as compared to $1.5the first quarter of 2022 is mostly driven by a lower increase in rates during the respective periods. The 10-year swap rate increased by 65 basis points in the second quarter of 2022 and 83 basis points in the first quarter of 2022.
For the six months ended June 30, 2022, we reported a $95.8 million gain on Originations inter-segment derivativesin MSR valuation adjustments, net, as compared to a $51.2 million loss for the six months ended June 30, 2021. The loss in the third quarter ofsix months ended June 30, 2021 is mostly due to the change in interest rates. These inter-segment derivatives economically hedge the fair value changes of the Originations pipeline.
For the nine months ended September 30, 2021, we reported a $57.6 million loss in MSR valuation adjustments, net. As detailed in the above table, the loss is mostly due to $175.1 million MSR portfolio runoff $100.7 millionand the lack of offset by MSR fair value gain due to interest rate and assumption update, $28.9 million loss on MSR hedging derivative instruments, $20.1 million revaluation gain on MSR purchases reported in Originations and a $25.5 million gain on derivatives hedging the pipeline within the Originations segment.updates, net of hedging. The $100.7 millionhigher net fair value gains duegain in the six months ended June 30, 2022 as compared to interestthe six months ended June 30, 2021 is mostly driven by a higher increase in rates during the respective periods. The 10-year swap rate and assumption update comprises $29.4 million gain on our owned MSRs and $71.3 million gain on MSRs sold to NRZ and MAV. The factors described above for the third quarter of 2021 and the comparison with prior period similarly apply. The MSR portfolio runoff increased by $47.2 million between148 basis points in the ninesix months ended SeptemberJune 30, 20202022 and nine52 basis points in the six months ended SeptemberJune 30, 2021 mostly due to a higher MSR portfolio driven by MSR acquisitions and continued elevated levels of prepayments.2021.
See the respective Segment Results of Operations - Servicing and Originationssections for additional information.
Compensation and Benefits
Compensation and benefits expense for the third quarter of 2021 decreased $3.2three months ended June 30, 2022 increased $15.9 million, or 4%23%, as compared to the second quarter of 2021. Incentive compensation decreased $3.2 million, mostlythree months ended March 31, 2022, primarily due to a $14.7 million increase in incentive compensation and a $1.9 million increase in severance expense. The expense of cash-settled share-based awards increased by $12.9 million as a result of our common stock price appreciation during the second quarter and forfeitures recognized in the first quarter of 2022. Our total average headcount was unchanged as compared to the three months ended March 31, 2022. The decrease in Originations average headcount, mostly Consumer Direct, as part of our efforts to right size our resources to market opportunities was offset by an increase in Servicing average headcount, mostly in support of the growth in our reverse mortgage subservicing business.
As compared to the six months ended June 30, 2021, Compensation and benefits expense for the six months ended June 30, 2022 increased $11.4 million, or 8%. The $15.2 million increase in salaries and benefits primarily due to a 15% increase in total average headcount, primarily attributed to a 17% increase in Servicing average headcount reflecting the hiring of employees to support the growth of our reverse mortgage subservicing platform, $3.6 million increase in severance, and $2.4 million increase in commissions driven by higher Originations volumes were partially offset by a $10.9 million decline in the fair value of cash-settled share-based awards as a result of a decrease in our common stock price during the quarter. While our total average headcount increased by 4% from the second quarter of 2021 to the third quarter of 2021 due to our initiative to expand our Originations platform and increase volumes, the related increase in salaries expense was offset by a reduction in COVID-19 related benefits. Overall, our offshore-to-total average headcount ratio remained constant at 69% for bothexpense due to forfeitures recognized in the thirdfirst quarter of 2021 and second quarter of 2021.
As compared to the nine months ended September 30, 2020, compensation and benefits expense for the nine months ended September 30, 2021 increased $14.0 million, or 7%. Salaries and benefits, commissions, and incentive compensation increased $5.0 million, $6.0 million, and $3.0 million, respectively. Originations segment compensation and benefits expense increased by $28.4 million, mostly due to additional commissions and salaries driven by additional headcount to support higher loan production levels. Servicing segment compensation and benefits expense decreased by $10.7 million, mostly driven by a decline in average headcount that was largely due to the scaling down of our workforce to our loan count and our cost re-engineering initiatives.2022. Our total average headcount declined by 6%, and overall, our offshore-to-total average headcount ratio decreased from 72% in the nine months ended September 30, 2020 to 69% in the ninesix months ended SeptemberJune 30, 2021.2021 to 65% in the six months ended June 30, 2022.
Servicing and Origination Expense
Servicing and origination expense for the third quarter of 2021three months ended June 30, 2022 increased $1.3$4.9 million, or 5%35%, as compared to the secondthree months ended March 31, 2022 due to a $4.0 million release of provision for indemnification recorded in the first quarter of 2021. Net servicing expenses increased $1.5 million largely2022 due to $2.5a favorable settlement, and a $1.0 million additional interim subservicing expenses on MSR bulk acquisitions.increase in provision expense due to increased government-insured claim loss volumes.
As compared to the six months ended June 30, 2021, Servicing and origination expense for the ninesix months ended SeptemberJune 30, 2021 increased $21.52022 decreased $20.8 million, or 36%39%, as comparedmostly attributed to the nine months ended September 30, 2020,Servicing segment. The decline is primarily due to an increase in volumes. Servicing expense for the nine months ended September 30, 2021 increased $17.4a $6.9 million or 32%, as compared to the nine months ended September 30, 2020, primarily due to an $11.8 million increase in provision expense for servicing related reserves driven by significant recoveries during the nine months ended September 30, 2020 which did not recur in 2021, a $4.5 million increase in interim subservicing expense on MSR bulk acquisitions, a $2.6 million increase in our subservicer expenses primarily attributable to growth in the reverse portfolio, and a $2.2 million increasedecrease in satisfaction and interest on payoff expense attributedattributable to higherlower payoff volume. These increases were partially offset byvolume, a $5.9$5.7 million release of provisions for indemnification recorded in the six months ended June 30, 2022 related to favorable litigation settlements, a $4.7 million decrease in provisions associatedreverse subservicing expenses with the volumetransfer of government-insured claim receivables duea subservicer to our reverse servicing platform beginning in the foreclosure moratorium duringfourth quarter of 2021, and a $2.3 million reduction in interim subservicing costs incurred on bulk acquisitions in the nine months ended September 30,first half of 2021. Originations expenses increased by $4.9 million due to the increase in loan production volume in all channels.
See Segment Results of Operations - Servicing for additional information.
Other Operating Expenses
Professional services expense for the third quarter of 2021three months ended June 30, 2022 decreased $7.1$3.5 million, or 28%29%, as compared to the three months ended March 31, 2022, primarily due to an increase in the recovery of legal expenses related to litigation settlements, which were $11.1 million in the second quarter of 2022 as compared to $9.9 million in the first quarter of 2022, and a $2.0 million decrease in expenses related to other legal matters
As compared to the six months ended June 30, 2021, primarily due to a $6.9 million decline in legal expenses. The decline in legal expenses is primarily due to a $6.8 million lower provision for litigation settlements.
Professional services expense for the ninesix months ended SeptemberJune 30, 20212022 decreased $16.6$22.0 million, or 21%51%, as compared to the nine months ended September 30, 2020, primarily due to a $9.8$24.6 million decline in legal expenses offset in part by a $2.3 million increase in other professional services. The net decrease in legal expenses is largely due to $21.0 million of recoveries of prior year expenses during the six months ended June 30, 2022 related to litigation settlements and a $3.4 million decrease in expenses related to other legal matters. The net increase in other professional services and a $6.3is driven by $7.3 million decline in legal expenses. Cost reduction initiatives and higher utilization of professional services in 2020, including strategic vendor sourcing, cloud migration and consulting, resulted in lower other professional fees in 2021. In addition, professional services for the nine months ended September 30, 2021 includeadditional expense related to our reverse subservicing business offset by $3.2 million of advisory fees recorded in the six months ended June 30, 2021 related to the launch of our MSR investment joint venture with Oaktree, MAV Canopy. Professional services forCanopy and a $1.8 million decline in Originations outsourced surge resources utilized during the ninesix months ended SeptemberJune 30, 2020 include $4.7 million of COVID-19 related expenses. The decline in legal expenses is primarily due to expenses recorded in the first nine months of 2020 related to the CFPB and Florida matters.2021.
Occupancy and equipment expense for the third quarter of 2021 increased $1.1 million, or 14%,three months ended June 30, 2022 remained flat as compared to the second quarter ofthree months ended March 31, 2022. As compared to the six months ended June 30, 2021, primarily due toOccupancy and equipment expense for the six months ended June 30, 2022 increased $3.0 million, or 18%, largely driven by an increase in postage and mailing expenses associated with an increased average number of loans serviced and record storage costs, mostlythe acquisition of reverse mortgage subservicing.
Technology and communication expense for the three months ended June 30, 2022 remained flat as a result of ancompared to the three months ended March 31, 2022. As compared to the six months ended June 30, 2021, Technology and communication expense for the six months ended June 30, 2022 increased $3.3 million, or 13%, largely driven by higher servicing system expenses due to the increase in the average number of loans serviced.
Occupancyserviced and equipment expense for the nine months ended September 30, 2021 decreased $12.0 million, or 32%, as compared to the nine months ended September 30, 2020. Depreciation expense, facility maintenance and utilityhigher technology expenses and interest on lease liabilities decreased $5.4 million, $2.6 million and $1.5 million, respectively, compared to the nine months ended September 30, 2020, largely due to our cost reduction efforts in 2020 which included closing and consolidating certain facilities. Postage and mailing expenses decreased $1.8 million compared to the nine months ended September 30, 2020, largely due to a decline in letter volume attributed to COVID-19, timing of mailings and a decline in the average number of loans serviced, partially offset by an increase in letter volume due to growth in the Originations segment.
Technology and communication expense for the third quarter of 2021 increased $1.6 million, or 12%, as compared to the second quarter of 2021 primarily driven by the growth of our Originations segment.
Technology and communication expense for the nine months ended September 30, 2021 decreased $6.1 million, or 13%, as compared to the nine months ended September 30, 2020. Telephone expense declined $4.0 million as compared to the nine months ended September 30, 2020, largely driven by facility closures, our transition to a more cost-effective alternative telephone system, consolidation of telecommunication vendors and other cost savings initiatives. Depreciation expense decreased $2.4 million compared to the nine months ended September 30, 2020.higher loan production volume.
Other expenses for the third quarter of 2021 increased $2.1 millionthree months ended June 30, 2022 remained mostly flat as compared to the second quarter of 2021, primarily due to reversal of $1.2 million of provisions related to miscellaneous items in the second quarter of 2021. For the ninethree months ended September 30, 2021, other expenses increased $2.5 million asMarch 31, 2022. As compared to the ninesix months ended SeptemberJune 30, 20202021, Other expenses for the six months ended June 30, 2022 increased $7.1 million mainly due to a $2.2$2.0 million increase in advertising expense in our Reverse Originations segment as partbusiness, $2.1 million of our initiative to expand our origination platformamortization expense on the reverse subservicing contract intangible asset recognized in October 2021 and April 2022, and a $1.3 million increase volumes.in miscellaneous other expenses, including travel expenses.
Other Income (Loss)
The $3.7Interest income increased $2.6 million increase in interest income during the third quarter of 2021three months ended June 30, 2022 as compared to the second quarter of 2021, and the $3.2 million increase in interest income during the ninethree months ended September 30, 2021 asMarch 31, 2022 primarily attributable to higher loan production volumes in Originations, partially offset by lower loans held for sale average balances in our Servicing segment. As compared to the ninesix months ended SeptemberJune 30, 2020, is2021, interest income for the six months ended June 30, 2022 increased $8.8 million, primarily attributable to the Originations segment and as a result of the increase inhigher loan production volumes.
Interest Expense
Interest expense for the third quarter of 2021 increased $7.1 million, or 21%,three months ended June 30, 2022 was unchanged as compared to the second quarterthree months ended March 31, 2022, as the effects of 2021, due to an increaseda $141.5 million lower average debt balance partially offset by a lower cost of funds. The $1.1 billion or 47% higher debt balance is driven by a higher MSR portfolio - largely due to bulk acquisitions - and additional warehouse loans. The reduction in our average cost of funds is primarily driven byon our asset backed financing, facilities with a 70 basis pointprimarily driven by lower effectiveloans held for sale average balances, was offset by an average 33 bps higher cost of funds driven by increased underlying reference interest rate.rates.
As compared to the six months ended June 30, 2021, Interest expense for the ninesix months ended SeptemberJune 30, 20212022 increased $19.0$13.7 million, or 23%22%, as compared to the nine months ended September 30, 2020, due to a $0.7 billion increased$739.9 million or 47% higher average debt balance on our asset backed financing, primarily to finance our increased loan production volumes and MSR portfolio partially offset by a lower cost of funds. The lower cost of funds on asset backed financing facilities is partially offset bygrowth, and $64.9 million or 8% higher average corporate debt with the issuance of higher rate senior secured notes as part of our corporate debt refinancing on March 4, 2021.
Pledged MSR liability expense for the third quarter of 2021 increased $51.4 million, as compared to the second quarter of 2021, largely due to a $52.1 million unfavorable fair value adjustment attributable to interest rate and assumption update offset by a $0.8 million decline in servicing fee remittance due to runoff of the portfolio. Fair value adjustments attributable to interest rate and assumption update and runoff are offset by corresponding fair value adjustments of the transferred MSR not qualifying for sale accounting.
Pledged MSR liability expense for the nine months ended September 30, 2021 increased $63.1 million as compared to the nine months ended September 30, 2020, primarily due to an $82.2 million unfavorable fair value change due to interest rate and assumption update. Also, the lump-sum cash payments received from NRZ in 2017 and 2018 were fully amortized as of the end of the second quarter of 2020 ($34.2 million in the nine months ended September 30, 2020). These increases in expense werefirst and second quarters of 2021, partially offset by a $52.6 million decline in servicing fee remittance. The decline in net servicing fee remittance was60 bps or 11% lower cost of funds primarily driven by the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020.improved pricing across our asset backed financing facilities.
See Segment Results of Operations - Servicing for additional information.information regarding Pledged MSR liability expense.
Gain on debt extinguishment of $0.9 million for the three and six months ended June 30, 2022 resulted from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 at a discount. Loss on debt extinguishment of $15.5 million for the ninesix months ended SeptemberJune 30, 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the SSTL due May 2022, PHH 6.375% senior unsecured notes due August 2021, and PMC 8.375% senior secured notes due November 2022. The loss includes the write-off of unamortized debt issuance costs and discount, as well as contractual prepayment premiums totaling $9.8 million on the SSTL and PMC 8.375% senior secured notes.
Earnings of equity method investee represent our 15% share of MAV Canopy from May 3, 2021. The higher earnings in the first quarter of 2022 as compared to the second quarter of 2022 is mostly due to the fair value gain recorded by MAV Canopy on its MSR portfolio due to rising interest rates. See Note 10 - Investment in Equity Method Investee and Related Party Transactions for further detail.
Income Tax Benefit (Expense)
During the third quarter of 2021, we recognized $11.3 million of tax benefit on $10.3 million of pre-tax income. During the second quarter of 2021, we recognized $11.9 million of income tax benefit on a $22.2 million pre-tax loss. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | March 31, | | % Change | | June 30, | | June 30, | | % Change |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Income tax expense (benefit) | $ | (0.9) | | | $ | 3.2 | | (128) | % | | $ | 2.3 | | | $ | (8.8) | | | (126) | |
| | | | | | | | | | | |
| Income (loss) before income taxes | $ | 9.4 | | | $ | 61.3 | | | (85) | % | | $ | 70.8 | | | $ | (10.6) | | | (768) | |
| | | | | | | | | | | | |
| Effective tax rate | (9.8) | % | | 5.3 | % | | (285) | % | | 3.3 | % | | 83.2 | % | | (96) | |
Our effective tax ratesrate for the third quarterperiods indicated in the table above differs from the federal statutory income tax rate primarily due to the full valuation allowance recorded on our net federal and state deferred tax assets. Also refer to Note 21 - Income Taxes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for further details on deferred tax assets. Ocwen evaluated all positive and negative evidence and determined that a full valuation allowance at June 30, 2022 remains appropriate. The income tax expense (benefit) is primarily comprised of 2021income taxes in foreign jurisdictions and second quarter of 2021 were (110.0)%and 53.6%, respectively, and were affected by the factors described below. changes in uncertain tax positions.
The $0.9 million income tax benefit recognized in the third quarter of 2021three months ended June 30, 2022 was driven primarily by additional estimateda decrease in the projected annual effective tax benefit relatedrate applied to the carryback of our 2020 NOL under the CARES Act.year-to-date pre-tax earnings. The income tax benefitexpense recognized in the second quarter of
2021 was primarily due to the favorable resolution of various uncertain tax positions as well as the income tax benefit recognized on the pre-tax loss for the quarter.
For the ninethree months ended September 30, 2021 and 2020, we recognized an income tax benefit of $20.1 million and $71.9 million on pre-tax losses of $0.3 million and $104.9 million, respectively. For the nine months ended September 30, 2021, the income tax benefitMarch 31, 2022 was driven primarily by $12.9 million of additionalprojected income tax benefit recognizedexpense related to our CARES Act claims and $8.6 million ofpre-tax earnings, partially offset by income tax benefit recognized related to the favorable resolution of variousan uncertain tax positions during the period. position.
For the ninesix months ended SeptemberJune 30, 2020, the2022, income tax benefitexpense of $2.3 million was driven by the $71.5 million of estimatedprojected income tax benefit recognized under the CARES Act. Income tax benefits of $21.5 million and $65.0 million recognized during the nine months ended September 30, 2021 and 2020, respectively,expense related solely to prior period uncertain tax positions and prior period losses with no relationship to operating results of those periods. This in turn resulted in the high effective tax rates of 6,002.4% and 68.6% for the nine months ended September 30, 2021 and 2020, respectively.
The $51.8 million reduction in income tax benefit for the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, is primarily due to $71.5 million of estimated income tax benefit recognized under the CARES Act during the nine months ended September 30, 2020 as a result of modification of the tax rules to allow the carryback of NOLs arising in 2018, 2019 and 2020 tax years to the five prior tax years and the increase to the business interest expense limitation under IRC Section 163(j). The reduction in income tax benefit for the 2021 period attributed to the $71.5 million income tax benefit recognized in 2020 waspre-tax earnings, partially offset by $12.9 million of additionalan income tax benefit recognized in 2021 related to our CARES Act claims and $8.6million related to the favorable resolution of variousan uncertain tax positions during 2021. In 2020, we collected $51.4 million, which represents the tax refund associatedposition. As compared with the NOLs generatedsix months ended June 30, 2021, income tax expense for the six months ended June 30, 2022 increased $11.1 million primarily due to higher pre-tax earnings and a $7.3 million reduction in 2018 carried backthe amount of income tax benefit related to priorthe favorable resolution of uncertain tax years,positions. The decline in the effective tax rate is primarily due to the $81.4 million increase in pre-tax earnings in the six months ended June 30, 2022 compared to the same period in 2021, as well as the reduction in the income tax benefit related to the favorable resolution of uncertain tax positions.
Under our transfer pricing agreements, our operations in India and recognizedPhilippines are compensated on a $24.0 million receivablecost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which represents theis subject to statutory tax refund associated with the NOLs generatedrates in 2019. We collected this $24.0 million tax refund receivable fromthese jurisdictions that are higher than the U.S. Internal Revenue Service in January 2021. See Note 17 – Income Taxes for additional information.statutory rate of 21%.
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Condition Summary | September 30, 2021 | | December 31, 2020 | | $ Change | | % Change |
| Cash | $ | 236.1 | | $ | 284.8 | | $ | (48.7) | | (17) | % |
| Restricted cash | 85.3 | | 72.5 | | 12.8 | | 18 | |
| MSRs, at fair value | 2,176.3 | | 1,294.8 | | 881.4 | | 68 | |
| Advances, net | 739.6 | | 828.2 | | (88.6) | | (11) | |
| Loans held for sale | 933.7 | | 387.8 | | 545.9 | | 141 | |
| Loans held for investment, at fair value | 7,108.7 | | 7,006.9 | | 101.8 | | 1 | |
| Receivables | 183.1 | | 187.7 | | (4.6) | | (2) | |
| Investment in equity method investee | 19.8 | | — | | 19.8 | | n/m |
| Other assets | 557.7 | | 588.4 | | (30.7) | | (5) | |
| Total assets | $ | 12,040.2 | | $ | 10,651.1 | | $ | 1,389.1 | | 13 | % |
| | | | | | | |
| Total Assets by Segment | | | | | | | |
| Servicing | $ | 10,790.5 | | $ | 9,847.6 | | $ | 942.9 | | 10 | % |
| Originations | 865.0 | | 379.2 | | 485.8 | | 128 | |
| Corporate Items and Other | 384.7 | | 424.3 | | (39.6) | | (9) | |
| $ | 12,040.2 | | $ | 10,651.1 | | $ | 1,389.1 | | 13 | % |
| | | | | | | |
| HMBS-related borrowings, at fair value | $ | 6,782.6 | | $ | 6,772.7 | | $ | 9.9 | | — | % |
| Other financing liabilities, at fair value | 710.9 | | 576.7 | | 134.2 | | 23 | |
| Advance match funded liabilities | 516.6 | | 581.3 | | (64.7) | | (11) | |
| Mortgage loan warehouse facilities | 1,069.2 | | 451.7 | | 617.5 | | 137 | |
| MSR financing facilities, net | 945.7 | | 437.7 | | 508.1 | | 116 | |
| Senior secured term loan | — | | 179.8 | | (179.8) | | (100) | |
| Senior notes, net | 612.7 | | 311.9 | | 300.8 | | 96 | |
| Other liabilities | 932.7 | | 924.0 | | 8.8 | | 1 | |
| Total liabilities | 11,570.4 | | 10,235.8 | | 1,334.6 | | 13 | % |
| | | | | | | |
| Total stockholders’ equity | 469.9 | | 415.4 | | 54.5 | | 13 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total liabilities and equity | $ | 12,040.2 | | $ | 10,651.1 | | $ | 1,389.1 | | 13 | % |
| | | | | | | |
| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 10,005.8 | | $ | 9,163.5 | | $ | 842.2 | | 9 | % |
| Originations | 819.3 | | 428.5 | | 390.8 | | 91 | |
| Corporate Items and Other | 745.3 | | 643.7 | | 101.6 | | 16 | |
| $ | 11,570.4 | | $ | 10,235.8 | | $ | 1,334.6 | | 13 | % |
| | | | | | | |
| Book value per share | $ | 51.13 | | | $ | 47.81 | | | $ | 3.32 | | | 7 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Condition Summary | June 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Cash | $ | 255.9 | | $ | 192.8 | | $ | 63.1 | | 33 | % |
| Restricted cash | 66.7 | | 70.7 | | (4.0) | | (6) | |
| MSRs, at fair value | 2,485.7 | | 2,250.1 | | 235.5 | | 10 | |
| Advances, net | 647.2 | | 772.4 | | (125.3) | | (16) | |
| Loans held for sale | 687.5 | | 928.5 | | (241.1) | | (26) | |
| Loans held for investment, at fair value | 7,383.8 | | 7,207.6 | | 176.2 | | 2 | |
| Receivables | 178.5 | | 180.7 | | (2.2) | | (1) | |
| Investment in equity method investee | 38.8 | | 23.3 | | 15.5 | | 67 | |
| Other assets | 363.7 | | 520.9 | | (157.2) | | (30) | |
| Total assets | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| Total Assets by Segment | | | | | | | |
| Servicing | $ | 11,053.6 | | $ | 10,999.2 | | $ | 54.4 | | — | % |
| Originations | 694.1 | | 823.5 | | (129.4) | | (16) | |
| Corporate Items and Other | 360.0 | | 324.4 | | 35.6 | | 11 | |
| $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| HMBS-related borrowings, at fair value | $ | 7,155.3 | | $ | 6,885.0 | | $ | 270.2 | | 4 | % |
| Other financing liabilities, at fair value | 913.6 | | 805.0 | | 108.7 | | 13 | |
| Advance match funded liabilities | 477.0 | | 512.3 | | (35.3) | | (7) | |
| Mortgage loan warehouse facilities | 779.3 | | 1,085.1 | | (305.8) | | (28) | |
| MSR financing facilities, net | 987.7 | | 900.8 | | 87.0 | | 10 | |
| | | | | | | |
| Senior notes, net | 594.9 | | 614.8 | | (19.9) | | (3) | |
| Other liabilities | 656.0 | | 867.5 | | (211.5) | | (24) | |
| Total liabilities | 11,563.8 | | 11,670.4 | | (106.7) | | (1) | % |
| | | | | | | |
| Total stockholders’ equity | 543.9 | | 476.7 | | 67.2 | | 14 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total liabilities and equity | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 10,534.2 | | $ | 10,474.5 | | $ | 59.7 | | 1 | % |
| Originations | 696.1 | | 832.7 | | (136.6) | | (16) | |
| Corporate Items and Other | 333.5 | | 363.3 | | (29.7) | | (8) | |
| $ | 11,563.8 | | $ | 11,670.4 | | $ | (106.7) | | (1) | % |
| | | | | | | |
| Book value per share | $ | 59.19 | | | $ | 51.77 | | | $ | 7.42 | | | 14 | % |
| | | | | | | |
| | | | | | | |
Total assets increased $1.4 billiondecreased $39.4 million, or 0.3%, between December 31, 20202021 and SeptemberJune 30, 2021, mostly2022 due to the $545.9a $241.1 million or 141%, increasedecline in our loans held for sale portfolio - driven by higherlower forward loan production volumes, - and an $881.4 million, or 68%, increase in our MSR portfolio - mostly driven by MSR bulk acquisitions and new capitalized MSRs. Loans held for investment increased by $101.8 million mostly due to the continued growth of our reverse mortgage business. Servicing advances declined $88.6 million mostly due to heightened payoff activity and lower delinquencies. The $30.7a $157.2 million decrease in other assets is mostly attributable to the decrease in contingent repurchase rights related to delinquent loans that have been repurchased fromunder the Ginnie Mae.Mae EBO program, and a $125.3 million decline in servicing advances, mainly due to seasonal reduction of escrow balances, increased recoveries on delinquent and default loans, and loan repurchases under the Ginnie Mae EBO program. These declines were offset by a $235.5 million increase in our MSR portfolio mostly attributed to fair value gains due to rising interest rates and additions through purchases and retained servicing on loan sales, partially offset by a sale of MSRs to an unrelated third party, and a $176.2 million increase in Loans held for investment, mostly driven by our reverse mortgage origination and bulk acquisition.
Total liabilities increaseddecreased by $1.3 billion$106.7 million, or 1%, as compared to December 31, 2020,2021, with similar effects as described above. Our borrowings under warehouse lines and MSR financing facilities increased $617.5 million and $508.1 million, respectively, due to higher loan production volumes and MSR bulk acquisitions, respectively. Our senior notes increased $300.8declined $305.8 million due to the refinancing transactions completed on March 4, 2021 and May 3, 2021. We issued $627.1 million of new senior notes, net
of discount, repaid in full $313.1 million of existing senior notes and repaid the $185.0 million SSTL.lower loan production volumes. Advance match funded liabilities decreased $64.7$35.3 million consistent with the decline in servicingServicing advances. Further,Senior notes, net decreased $19.9 million due to our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 in the $8.8second quarter of 2022. Other liabilities declined $211.5 million increase in other liabilities is driven by the increase in derivatives and purchase price holdback on MSR bulk acquisitions, partially offset bymostly due to a decrease in the Ginnie Mae contingent repurchase rights of loansdelinquent loans. Our HMBS-related borrowings increased by $270.2 million due to the continued growth of our reverse mortgage business and its securitization. The $108.7 million increase in Other financing liabilities is primarily due to additional transfers of MSRs to MAV in the six months ended June 30, 2022 which did not qualify for sale accounting and related fair value changes. Borrowings under forbearance.our MSR financing facilities increased $87.0 million to fund the increase in our MSR portfolio.
Total equity increased $54.5$67.2 million during the ninesix months ended SeptemberJune 30, 20212022 mostly due to the $32.1 million issuance of common stock and warrants to Oaktree in March and May 2021, and $19.8$68.4 million net income. Under a $50.0 million repurchase program approved in May 2022, we repurchased and retired shares of our common stock for a total $2.3 million during the six months ended June 30, 2022. See Note 1415 – Stockholders’ Equity for additional information.
OutlookKey Trends
The following discussion provides outlook information forregarding certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.
Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform and through MAV for the remainder of 2021.2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume. The expected volume increase is also intended to exceed the portfolio serviced on behalf of NRZ that may end in July 2022. Servicing revenue and ancillary income have been adversely impacted by COVID-19, which may persist throughout 2021 and beyond, until forbearance plan exits and the end of foreclosure and eviction moratoria or related restrictions.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with consumer directConsumer Direct generating relatively higher margins than correspondent. While we continue to increase our recapture rate by expanding our channel operating capacity, theCorrespondent. We expect volume mix is expected to shift to purchase as the volume of refinance activity by borrowers is expected to continue to decline consistent with expectedin our Consumer Direct channel due to significant interest rate increases, driving the industry trends. Intense competition is expected to perdure inpivot from refinance to customer acquisitions. We expect lower margins due to heightened competition. We expect to continue to prudently grow our Correspondent volume at margins that are accretive to the correspondent channel and Agency Cash Window and co-issue programs for the remainder of 2021 imposing a trade-off between volumes and margins.business.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our volumes at similar margins in each channel, however thealbeit with some channel mix may vary. Withchanges. We expect increased volatility and a downward trend in our margins due to continued uncertain market interest rate and spread conditions. The fair value of the assignment of RMS subservicing agreement to PMC on October 1, 2021,net reverse mortgage servicing revenueasset is expected to grow significantly, absent any significant change in interest rates.continue to follow market conditions, and is part of our forward MSR hedging strategy.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, the MSR realization of cash flows is effectively an amortization of our investment as the underlying loans amortize and payoff and is a function of the UPB, capitalized value of the MSR.MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments,prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our now largerinterest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise. Refer to the sensitivity analysis in Item 3 - Quantitative and Qualitative Disclosures About Market Risk for further detail.
Operating expenses - Compensation and benefits isare a significant component of our cost-to-service and cost-per-loancost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to modestly increase (see above), we expect ana modest increase in our workforce with partial offset from an increased relative share of performing loans through our MSR acquisitions.loans. We expect to continue to right size and prudently manage our Originations workforceheadcount and operating expenses to remain largely stable or moderately increase in the near term to accompany the growth of the channels.align with funded volume. Other operating expenses are expected to favorably correlate with volumes, aswith some productivity and efficiencies are expected withthrough our technology and continuous improvement initiatives.
Stockholders’ equity - With the above considerations and uncertainties, specifically in the third quarter of 2022, we expect our businesses to generate net income and increase our equity, for the remainder of 2021, absent any significant adverse change in interest rates.rates and if we continue to be successful in our business initiatives.
| | |
| SEGMENT RESULTS OF OPERATIONS |
Our activities are organized into two reportable business segments that reflect our primary lines of business - Servicing and Originations - as well as a Corporate Items and Other segment.
We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and Speedpay/convenience or other loan collection fees. In addition, we earn performance or incentive fees, depending on operational and other metrics exceeding certain service level agreement targets.where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including MAV, that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per-loanSubservicing per-loan fees typically vary based on type of investor and on loan delinquency status.
As of SeptemberJune 30, 2021,2022, we serviced approximately 1.31.4 million mortgage loans with an aggregate UPB of $248.3$288.3 billion. The average UPB of loans serviced during the thirdsecond quarter of 20212022 increased by 23%6% or $45.3$15.5 billion compared to the secondfirst quarter of 2021,2022, mostly due todriven by the two large bulk MSR acquisitions that aggregated to $55.1 billion closedgrowth in June 2021.our subservicing portfolio. Compared to the ninesix months ended SeptemberJune 30, 2020,2021, the average UPB of loans serviced during the ninesix months ended SeptemberJune 30, 20212022 increased by 4%44% or $7.8$85.5 billion mostly due to MSR acquisitions, subservicing additions and increased MSR originations, offset in part by portfolio runoff. We manage the large bulk acquisitions described abovesize of our servicing portfolio with our Originations business and our portfolio replenishmentby selectively purchasing MSRs based on capital allocation and growth strategy, partially offsetfinancial return targets.
In May 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by the terminationMAV. MAV provides us with a source of the PMC servicing agreement by NRZadditional subservicing volume, either with the transferMSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC but the transactions do not achieve sale accounting. We are currently discussing with Oaktree an upsize of $34.2 billion UPBMAV capacity currently capped at $250 million of loans completedcapital and other modifications of our different agreements.
In addition, in October 2020,2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. PMC boarded approximately 40,000 and 19,000 additional reverse mortgage loans onto our servicing platform in the heightened portfolio runoff.first quarter of 2022 and second quarter of 2022, respectively.
NRZ isremains our largest subservicing client, accounting for 24%18% and 34%, respectively,28% of the UPB and loan count, respectively, in our servicing portfolio as of SeptemberJune 30, 2021.2022. NRZ servicing fees retained by Ocwen represented approximately 14%11% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ, and excluding ancillary income, for the third quarter of 2021, and 17% for the second quarter of 2021.2022 and 12% the first quarter of 2022. This compares to 11% and 19% for the six months ended June 30, 2022 and 2021, respectively. NRZ’s portfolio represents approximately 62%69% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. However, consistentConsistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ.
The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings within MSR valuation adjustments, net. The fair value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds.speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 1617 years, exhibiting little response to movements in market interest rates. ValuationOur hedging strategy is also impacted by loan delinquency rates whereby as delinquency rates rise,designed to reduce the valuevolatility of the servicing portfolio declines. The MSR portfolio is an investment that decreases in value over time, through portfolio runoff, as we realize its cash flows and yield. MSR portfolio runoff is an expense to our Servicing segment as a fair value loss, and represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with prepayments.interest rates.
For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the pledgedtransferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability at fair value on our balance sheet. The changes in fair value of the pledged MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense, without any significant net earnings impact. In addition,expense. Similarly, we present on a gross basis the total servicing fees collected on transactions that do not qualify for sale accounting are reportedbehalf of NRZ and MAV within Servicing and subservicing fees, net and the total servicing fees remitted on these transactions, net of our subservicing fees, are presentedfee remittance to NRZ and MAV within Pledged MSR liability expense.
Our Servicing business continues to be adversely affectedAs of June 30, 2022, we managed 17,757 loans under forbearance associated with borrowers impacted by the COVID-19 pandemic with the loans placed under forbearance, the moratorium on foreclosures and elevated prepayments(or 1.3% of our total portfolio), 4,277 of which related to our owned MSRs, or 0.7% of our owned MSR servicing portfolio due(excluding NRZ and MAV), a reduction of 38% and 37%%, respectively, compared to interest rates. See further discussion within Overview, COVID-19 Pandemic Update.December 31, 2021.
Loan ResolutionsCompensation and Benefits
We haveCompensation and benefits expense for the three months ended June 30, 2022 increased $15.9 million, or 23%, as compared to the three months ended March 31, 2022, primarily due to a strong track record$14.7 million increase in incentive compensation and a $1.9 million increase in severance expense. The expense of successcash-settled share-based awards increased by $12.9 million as a leaderresult of our common stock price appreciation during the second quarter and forfeitures recognized in the servicing industryfirst quarter of 2022. Our total average headcount was unchanged as compared to the three months ended March 31, 2022. The decrease in foreclosure prevention and loss mitigation that helps homeowners stayOriginations average headcount, mostly Consumer Direct, as part of our efforts to right size our resources to market opportunities was offset by an increase in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modificationServicing average headcount, mostly in support of the loan terms, (ii) repayment plan alternatives, (iii)growth in our reverse mortgage subservicing business.
As compared to the six months ended June 30, 2021, Compensation and benefits expense for the six months ended June 30, 2022 increased $11.4 million, or 8%. The $15.2 million increase in salaries and benefits primarily due to a discounted payoff15% increase in total average headcount, primarily attributed to a 17% increase in Servicing average headcount reflecting the hiring of employees to support the loan (e.g.growth of our reverse mortgage subservicing platform, $3.6 million increase in severance, and $2.4 million increase in commissions driven by higher Originations volumes were partially offset by a $10.9 million decline in the fair value of cash-settled share-based awards as a result of a decrease in our common stock price and a reduction in expense due to forfeitures recognized in the first quarter of 2022. Our offshore-to-total average headcount ratio decreased from 69% in the six months ended June 30, 2021 to 65% in the six months ended June 30, 2022.
Servicing and Origination Expense
Servicing and origination expense for the three months ended June 30, 2022 increased $4.9 million, or 35%, as compared to the three months ended March 31, 2022 due to a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure$4.0 million release of provision for indemnification recorded in the first quarter of 2022 due to a favorable settlement, and sale of the resulting REO. Loan modifications must be madea $1.0 million increase in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinionsprovision expense due to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.increased government-insured claim loss volumes.
Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing feesAs compared to the six months ended June 30, 2021, Servicing and origination expense for the six months ended June 30, 2022 decreased $20.8 million, or 39%, mostly attributed to the Servicing segment. The decline is primarily due to a $6.9 million decrease in satisfaction and interest on payoff expense attributable to lower payoff volume, a $5.7 million release of provisions for indemnification recorded in the six months ended June 30, 2022 related to delinquent borrower paymentsfavorable litigation settlements, a $4.7 million decrease in reverse subservicing expenses with the transfer of a subservicer to our reverse servicing platform beginning in the fourth quarter of 2021, and a $2.3 million reduction in interim subservicing costs incurred on bulk acquisitions in the first half of 2021.
See Segment Results of Operations - Servicing for additional information.
Other Operating Expenses
Professional services expense for the three months ended June 30, 2022 decreased $3.5 million, or 29%, as compared to the three months ended March 31, 2022, primarily due to an increase in the recovery of legal expenses related to litigation settlements, which were $152.7$11.1 million at Septemberin the second quarter of 2022 as compared to $9.9 million in the first quarter of 2022, and a $2.0 million decrease in expenses related to other legal matters
As compared to the six months ended June 30, 2021, Professional services expense for the six months ended June 30, 2022 decreased $22.0 million, or 51%, primarily due to a $24.6 million decline in legal expenses offset in part by a $2.3 million increase in other professional services. The net decrease in legal expenses is largely due to $21.0 million of which $120.5recoveries of prior year expenses during the six months ended June 30, 2022 related to litigation settlements and a $3.4 million were attributabledecrease in expenses related to NRZ agreements.
Advance Obligation
As a servicer, we are generally obligatedother legal matters. The net increase in other professional services is driven by $7.3 million additional expense related to advance fundsour reverse subservicing business offset by $3.2 million of advisory fees recorded in the event borrowers are delinquent on their monthly mortgagesix months ended June 30, 2021 related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.
Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights.
Third-Party Servicer Ratings
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s, S&P and Fitch. Favorable ratings from these agencies are important to the conductlaunch of our loan servicingMAV Canopy and lending businesses.a $1.8 million decline in Originations outsourced surge resources utilized during the six months ended June 30, 2021.
The following table summarizes our key servicer ratings:
| | | | | | | | | | | | | | | | | |
| PHH Mortgage Corporation (PMC) |
| Moody’s | | S&P | | Fitch |
Residential Prime Servicer | SQ3 | | Average | | RPS3 |
Residential Subprime Servicer | SQ3 | | Average | | RPS3 |
Residential Special Servicer | SQ3 | | Average | | RSS3 |
Residential Second/Subordinate Lien Servicer | SQ3 | | Average | | RPS3 |
Residential Home Equity Servicer | — | | — | | RPS3 |
Residential Alt-A Servicer | — | | — | | RPS3 |
Master Servicer | SQ3+ | | Above Average | | RMS3 |
Ratings Outlook | N/A | | Stable | | Stable |
| | | | | |
| | | | | |
Date of last action | September 28, 2021 | | June 29, 2021 | | April 28, 2021 |
In addition to servicer ratings, each ofOccupancy and equipment expense for the agencies will from time to time assign an outlook (or a ratings watch suchthree months ended June 30, 2022 remained flat as Moody’s review status)compared to the rating statusthree months ended March 31, 2022. As compared to the six months ended June 30, 2021, Occupancy and equipment expense for the six months ended June 30, 2022 increased $3.0 million, or 18%, largely driven by an increase in postage and mailing expenses associated with an increased average number of aloans serviced and the acquisition of reverse mortgage servicer. A negative outlook is generally usedsubservicing.
Technology and communication expense for the three months ended June 30, 2022 remained flat as compared to indicate that a rating “may be lowered,” while a positive outlook is generally usedthe three months ended March 31, 2022. As compared to indicate a rating “may be raised. On September 28,the six months ended June 30, 2021, Moody’s upgradedTechnology and communication expense for the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+six months ended June 30, 2022 increased $3.3 million, or 13%, reflecting solid reporting and remitting processes and proactive servicer oversight. On June 29, 2021, S&P affirmed PMC’s servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC’s master servicer rating from Average to Above Average reflecting the industry experience of PMC’s management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, among other factors mentionedlargely driven by S&P. On March 24, 2020, Fitch placed all U.S. RMBS servicer ratings on Negative outlook resulting from a rapidly evolving economic and operating environmenthigher servicing system expenses due to the sudden impactincrease in the average number of loans serviced and higher technology expenses attributed to higher loan production volume.
Other expenses for the COVID-19 virus. On April 28, 2021, Fitch affirmed PMC’s servicer ratings and revised its outlook from Negative to Stablethree months ended June 30, 2022 remained mostly flat as PMC’s performance in this evolving environment has not raised any elevated concerns. According to Fitch, the affirmation and stable outlook reflected PMC’s diligent responsecompared to the coronavirus pandemicthree months ended March 31, 2022. As compared to the six months ended June 30, 2021, Other expenses for the six months ended June 30, 2022 increased $7.1 million mainly due to a $2.0 million increase in advertising expense in our Reverse Originations business, $2.1 million of amortization expense on the reverse subservicing contract intangible asset recognized in October 2021 and its impactApril 2022, and a $1.3 million increase in miscellaneous other expenses, including travel expenses.
Other Income (Loss)
Interest income increased $2.6 million during the three months ended June 30, 2022 as compared to the three months ended March 31, 2022 primarily attributable to higher loan production volumes in Originations, partially offset by lower loans held for sale average balances in our Servicing segment. As compared to the six months ended June 30, 2021, interest income for the six months ended June 30, 2022 increased $8.8 million, primarily attributable to higher loan production volumes.
Interest Expense
Interest expense for the three months ended June 30, 2022 was unchanged as compared to the three months ended March 31, 2022, as the effects of a $141.5 million lower average debt balance on servicing operations, effective enterprise-wide risk environmentour asset backed financing, primarily driven by lower loans held for sale average balances, was offset by an average 33 bps higher cost of funds driven by increased underlying reference interest rates.
As compared to the six months ended June 30, 2021, Interest expense for the six months ended June 30, 2022 increased $13.7 million, or 22%, due to a $739.9 million or 47% higher average debt balance on our asset backed financing, primarily to finance our increased loan production volumes and compliance management framework, satisfactory loan servicing performance metrics, special servicing expertise,MSR portfolio growth, and efficient servicing technology. The ratings also consider$64.9 million or 8% higher average corporate debt with the financial conditionissuance of PMC’s parent, OFC.senior secured notes as part of our corporate debt refinancing in the first and second quarters of 2021, partially offset by 60 bps or 11% lower cost of funds primarily driven by improved pricing across our asset backed financing facilities.
See Segment Results of Operations - Servicing for information regarding Pledged MSR liability expense.
The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | % Change | | Nine Months Ended | | % Change |
| September 30, | | June 30, | | | September 30, | | September 30, | |
| 2021 | | 2021 | | | 2021 | | 2020 | |
| Revenue | | | | | | | | | | | |
| Servicing and subservicing fees | | | | | | | | | | | |
| Residential | $ | 204.6 | | $ | 181.3 | | 13 | % | | $ | 554.5 | | $ | 562.7 | | (1) | % |
| Commercial | 0.9 | | 0.9 | | (2) | | | 2.4 | | 2.5 | | (4) | |
| 205.4 | | 182.1 | | 13 | | | 556.9 | | 565.2 | | (1) | |
| Gain on loans held for sale, net | 31.6 | | 4.1 | | 664 | | | 39.2 | | 10.8 | | 264 | |
| Reverse mortgage revenue, net | (13.0) | | 10.5 | | (224) | | | (0.5) | | 12.8 | | (104) | |
| Other revenue, net | 0.3 | | 0.5 | | (39) | | | 1.3 | | 3.2 | | (60) | |
| Total revenue | 224.3 | | 197.3 | | 14 | | | 596.9 | | 592.0 | | 1 | |
| | | | | | | | | | | |
| MSR valuation adjustments, net | (10.6) | | (69.9) | | (85) | | | (103.2) | | (249.9) | | (59) | |
| | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | |
| Compensation and benefits | 23.8 | | 26.1 | | (9) | | | 74.9 | | 85.7 | | (13) | |
| Servicing and origination | 24.5 | | 23.0 | | 6 | | | 72.0 | | 54.6 | | 32 | |
| Occupancy and equipment | 6.6 | | 5.5 | | 20 | | | 18.7 | | 24.2 | | (23) | |
| Professional services | 6.7 | | 10.3 | | (35) | | | 24.2 | | 19.8 | | 22 | |
| Technology and communications | 5.8 | | 5.4 | | 8 | | | 17.0 | | 20.0 | | (15) | |
| Corporate overhead allocations | 11.9 | | 12.4 | | (4) | | | 36.5 | | 48.3 | | (24) | |
| Other expenses | 1.6 | | 0.9 | | 84 | | | 4.0 | | 2.9 | | 37 | |
| Total operating expenses | 80.8 | | 83.6 | | (3) | | | 247.2 | | 255.5 | | (3) | |
| | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | |
| Interest income | 2.4 | | 1.2 | | 96 | | | 4.9 | | 6.3 | | (22) | |
| Interest expense | (29.0) | | (23.3) | | 24 | | | (72.6) | | (69.8) | | 4 | |
| Pledged MSR liability expense | (91.1) | | (39.8) | | 129 | | | (168.8) | | (105.8) | | 60 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other, net | 1.4 | | 2.9 | | (50) | | | 4.8 | | 8.3 | | (42) | |
| Total other expense, net | (116.2) | | (59.0) | | 97 | | | (231.8) | | (160.9) | | 44 | |
| | | | | | | | | | | |
| Income (loss) before income taxes | $ | 16.6 | | $ | (15.4) | | (208) | % | | $ | 14.7 | | $ | (74.3) | | (120) | % |
| n/m: not meaningful | | | | | | | | | | | |
The following tables provide selected operating statistics:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, | | June 30, | | % Change | | | | September 30, | | % Change |
| | 2021 | | 2021 | | | | | 2020 | |
| Residential Assets Serviced | | | | | | | | | | | |
| Unpaid principal balance (UPB) in billions: | | | | | | | | | | | |
| Performing loans (1) | $ | 239.7 | | | $ | 228.3 | | | 5 | % | | | | $ | 173.6 | | | 38 | % |
| Non-performing loans | 7.7 | | | 8.3 | | | (7) | | | | | 11.1 | | | (30) | |
| Non-performing real estate | 0.8 | | | 0.7 | | | 11 | | | | | 1.2 | | | (35) | |
| Total | 248.3 | | | 237.3 | | | 5 | | | | | 185.9 | | | 34 | % |
| | | | | | | | | | | |
| Conventional loans (2) | $ | 145.9 | | | $ | 133.7 | | | 9 | % | | | | $ | 72.9 | | | 100 | % |
| Government-insured loans | 33.4 | | | 31.9 | | | 5 | | | | | 33.9 | | | (1) | |
| Non-Agency loans | 69.0 | | | 71.7 | | | (4) | | | | | 79.0 | | | (13) | |
| Total | $ | 248.3 | | | $ | 237.3 | | | 5 | % | | | | $ | 185.9 | | | 34 | % |
| | | | | | | | | | | |
| Servicing portfolio (5) | $ | 144.6 | | | $ | 156.8 | | | (8) | % | | | | $ | 78.5 | | | 84 | % |
| Subservicing portfolio | 23.9 | | | 19.2 | | | 25 | | | | | 21.8 | | | 9 | |
| MAV (3) | 21.4 | | | — | | | n/m | | | | — | | | n/m |
| NRZ (3) (6) | 58.4 | | | 61.4 | | | (5) | | | | | 85.6 | | | (32) | |
| Total | $ | 248.3 | | | $ | 237.3 | | | 5 | % | | | | $ | 185.9 | | | 34 | |
| | | | | | | | | | | |
| Number (in 000’s): | | | | | | | | | | | |
| Performing loans (1) | 1,255.6 | | | 1,220.7 | | | 3 | % | | | | 1,138.0 | | | 10 | % |
| Non-performing loans | | | | | | | | | | | |
| Non-performing loans - NRZ | 27.4 | | | 28.7 | | | (5) | % | | | | 37.2 | | | (27) | % |
| Non-performing loans - Other | 13.7 | | | 14.6 | | | (6) | | | | | 18.7 | | | (26) | |
| 41.1 | | | 43.3 | | | (5) | | | | | 55.9 | | | (26) | |
| Non-performing real estate | 5.2 | | | 5.9 | | | (12) | | | | | 8.3 | | | (38) | |
| Total | 1,301.9 | | | 1,269.9 | | | 3 | % | | | | 1,202.2 | | | 8 | % |
| | | | | | | | | | | |
| Conventional loans (2) | 608.6 | | | 561.3 | | | 8 | % | | | | 430.8 | | | 41 | % |
| Government-insured loans | 190.6 | | | 188.1 | | | 1 | | | | | 198.9 | | | (4) | |
| Non-Agency loans | 502.7 | | | 520.4 | | | (3) | | | | | 572.5 | | | (12) | |
| Total | 1,301.9 | | | 1,269.9 | | | 3 | % | | | | 1,202.2 | | | 8 | % |
| | | | | | | | | | | |
| Servicing portfolio | 675.9 | | | 729.3 | | | (7) | % | | | | 462.9 | | | 46 | % |
| Subservicing portfolio | 93.2 | | | 77.3 | | | 21 | | | | | 88.1 | | | 6 | |
| MAV (3) | 90.1 | | | — | | | n/m | | | | — | | | n/m |
| NRZ (3) (6) | 442.8 | | | 463.3 | | | (4) | | | | | 651.3 | | | (32) | |
| Total | 1,301.9 | | | 1,269.9 | | | 3 | % | | | | 1,202.2 | | | 8 | % |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | % Change | | Nine Months Ended September 30, | | % Change | |
| September 30, 2021 | | June 30, 2021 | | | 2021 | | 2020 | | |
| Prepayment speed (CPR) (4): | | | | | | | | | | | | |
| % Voluntary CPR | 17.3 | % | | 15.6 | % | | 11 | % | | 18.2 | % | | 14.2 | % | | 28 | % | |
| | | | | | | | | | | | |
| % Involuntary CPR | 0.4 | | | 1.0 | | | (60) | | | 0.7 | | | 1.4 | | | (50) | | |
| | | | | | | | | | | | |
| % Total CPR | 20.6 | | | 19.6 | | | 5 | | | 21.8 | | | 19.1 | | | 14 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Number of completed modifications (in 000’s) | 4.5 | | | 4.1 | | | 11 | % | | 13.4 | | | 22.6 | | | (41) | % | |
| Revenue recognized in connection with loan modifications | $ | 7.1 | | | $ | 7.2 | | | (1) | % | | $ | 20.5 | | | $ | 20.5 | | | — | % | |
(1)Performing loans include those loans that are less than 90 days pastGain on debt extinguishment of $0.9 million for the three and six months ended June 30, 2022 resulted from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due and those loansMarch 2026 at a discount. Loss on debt extinguishment of $15.5 million for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.
(2)Conventional loans include 77,522 and 81,193 prime loans with a UPB of $14.2 billion and $14.6 billion at September 30, 2021 andthe six months ended June 30, 2021 respectively, that we service or subservice. This compares to 98,461 prime loans with a UPB of $18.0 billion at September 30, 2020. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Loans serviced or subserviced pursuant to our agreements with NRZ or MAV.
(4)Average CPR includes voluntary and involuntary prepayments and scheduled principal amortization (not reflectedwas recognized in the above table).
(5)Includes $6.8 billion UPB of reverse mortgage loans - securitized and unsecuritized - that are recognized in our consolidated balance sheet at September 30, 2021.
(6)Includes $2.3 billion UPB of subserviced loans at September 30, 2021.
The following table provides selected operating statistics related to our reverse mortgage loans reported within our Servicing segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, | | June 30, | | % Change | | September 30, | | % Change |
| 2021 | | 2021 | | | 2020 | |
| Reverse Mortgage Loans | | | | | | | | | |
| Unpaid principal balance (UPB) in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 6,390.0 | | | $ | 6,341.2 | | | 1 | % | | $ | 6,849.9 | | | (7) | % |
| Active Buyouts (2) | 31.6 | | | 24.5 | | | 29 | | | 41.1 | | | (23) | % |
| Inactive Buyouts (2) | 91.3 | | | 81.0 | | | 13 | | | 45.2 | | | 102 | % |
| Total | $ | 6,512.9 | | | $ | 6,446.7 | | | 1 | | | $ | 6,936.2 | | | (6) | % |
| | | | | | | | | |
| Inactive buyouts % to total | 1.40 | % | | 1.26 | % | | 12 | | | 0.65 | % | | 115 | % |
| | | | | | | | | |
| Future draw commitments (UPB) in millions: | 2,064.7 | | | 2,045.5 | | | 1 | | | 1,618.2 | | | 28 | % |
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| Fair value in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 6,874.0 | | | $ | 6,928.5 | | | (1) | | | $ | 6,715.1 | | | 2 | % |
| HMBS related borrowings | 6,782.6 | | | 6,823.9 | | | (1) | | | 6,606.5 | | | 3 | |
| Net asset value | $ | 91.5 | | | $ | 104.5 | | | (13) | | | $ | 108.6 | | | (16) | % |
(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.
The following table provides a breakdown of our servicer advances:
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| September 30, 2021 | | December 31, 2020 |
| Advances by investor type | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total | | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total |
| Conventional | $ | 2 | | $ | 29 | | $ | 6 | | $ | 37 | | $ | 4 | | $ | 30 | | $ | 5 | | $ | 38 |
| Government-insured | 1 | | 48 | | 24 | | 73 | | 1 | | 55 | | 28 | | 84 |
| Non-Agency | 235 | | 254 | | 141 | | 630 | | 272 | | 279 | | 155 | | 705 |
| Total, net | $ | 238 | | $ | 331 | | $ | 171 | | $ | 740 | | $ | 277 | | $ | 365 | | $ | 187 | | $ | 828 |
The following table provides information regarding the changes in our portfolio of residential assets serviced or subserviced:
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| Amount of UPB ($ in billions) | | Count (000’s) |
| 2021 | | 2020 | | 2021 | | 2020 |
| Portfolio at January 1 | $ | 188.8 | | | $ | 212.4 | | | 1,107.6 | | | 1,419.9 | |
| Additions | 13.5 | | | 6.9 | | | 49.4 | | | 28.8 | |
| Sales | — | | | (0.1) | | | (0.1) | | | (0.7) | |
| Servicing transfers | (10.9) | | | (2.2) | | | (42.5) | | | (8.5) | |
| Runoff | (12.1) | | | (8.2) | | | (51.2) | | | (43.2) | |
| Portfolio at March 31 | $ | 179.4 | | | $ | 208.8 | | | 1,063.2 | | | 1,396.3 | |
| Additions (1) | 68.7 | | | 8.5 | | | 256.8 | | | 28.9 | |
| Sales | — | | | (0.1) | | | — | | | (0.7) | |
| Servicing transfers (2) | — | | | (0.9) | | | (0.2) | | | (3.9) | |
| Runoff | (10.7) | | | (10.2) | | | (49.9) | | | (53.3) | |
| Portfolio at June 30 | $ | 237.3 | | | $ | 206.0 | | | 1,269.9 | | | 1,367.4 | |
| Additions (1) (2) | 26.5 | | | 11.7 | | | 97.9 | | | 39.9 | |
| Sales | — | | | — | | | — | | | (0.1) | |
| Servicing transfers (2) | (1.8) | | | (20.4) | | | (6.7) | | | (149.6) | |
| Runoff | (13.7) | | | (11.4) | | | (59.2) | | | (55.4) | |
| Portfolio at September 30 | $ | 248.3 | | | $ | 185.9 | | | 1,301.9 | | | 1,202.2 | |
(1)Additions include purchased MSRs on portfolios consisting of 2,323 loans with a UPB of $0.6 billion that have not yet transferred to the Black Knight MSP servicing system as of September 30, 2021. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis until the servicing transfer date.
(2) Excludes the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and deboarded within the same quarter.
Servicing and Subservicing Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | Nine Months Ended | | | |
| September 30, | | June 30, | | | % Change | | September 30, | | September 30, | | | % Change |
| 2021 | | 2021 | | | | 2021 | | 2020 | | |
| Loan servicing and subservicing fees: | | | | | | | | | | | | | |
| Servicing | $ | 103.1 | | | $ | 79.4 | | | | 30 | % | | $ | 246.4 | | | $ | 161.1 | | | | 53 | % |
| Subservicing | 2.9 | | | 2.6 | | | | 10 | | | 9.0 | | | 26.1 | | | | (66) | |
| MAV | 1.6 | | | — | | | | n/m | | 1.6 | | | — | | | | n/m |
| NRZ | 75.0 | | | 77.7 | | | | (3) | | | 233.1 | | | 299.1 | | | | (22) | |
| Servicing and subservicing fees | 182.6 | | | 159.7 | | | | 14 | | | 490.0 | | | 486.3 | | | | 1 | |
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| Ancillary income | 22.9 | | | 22.4 | | | | 2 | | | 66.9 | | | 78.9 | | | | (15) | |
| $ | 205.4 | | | $ | 182.1 | | | | 13 | % | | $ | 556.9 | | | $ | 565.2 | | | | (1) | % |
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We reported $205.4 million total servicing and subservicing fees in the thirdfirst quarter of 2021 a $23.3 million, or 13% increaseand resulted from our early repayment of the SSTL due May 2022, PHH 6.375% senior unsecured notes due August 2021, and PMC 8.375% senior secured notes due November 2022.
Earnings of equity method investee represent our 15% share of MAV Canopy from May 3, 2021. The higher earnings in the first quarter of 2022 as compared to the second quarter of 2021. 2022 is mostly due to the fair value gain recorded by MAV Canopy on its MSR portfolio due to rising interest rates. See Note 10 - Investment in Equity Method Investee and Related Party Transactions for further detail.
Income Tax Benefit (Expense)
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| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | March 31, | | % Change | | June 30, | | June 30, | | % Change |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Income tax expense (benefit) | $ | (0.9) | | | $ | 3.2 | | (128) | % | | $ | 2.3 | | | $ | (8.8) | | | (126) | |
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| Income (loss) before income taxes | $ | 9.4 | | | $ | 61.3 | | | (85) | % | | $ | 70.8 | | | $ | (10.6) | | | (768) | |
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| Effective tax rate | (9.8) | % | | 5.3 | % | | (285) | % | | 3.3 | % | | 83.2 | % | | (96) | |
Our feeeffective tax rate for the periods indicated in the table above differs from the federal statutory income increasetax rate primarily due to the full valuation allowance recorded on our net federal and state deferred tax assets. Also refer to Note 21 - Income Taxes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for further details on deferred tax assets. Ocwen evaluated all positive and negative evidence and determined that a full valuation allowance at June 30, 2022 remains appropriate. The income tax expense (benefit) is primarily comprised of income taxes in foreign jurisdictions and changes in uncertain tax positions.
The $0.9 million income tax benefit recognized in the three months ended June 30, 2022 was driven primarily by a decrease in the projected annual effective tax rate applied to year-to-date pre-tax earnings. The income tax expense recognized in the three months ended March 31, 2022 was driven primarily by projected income tax expense related to pre-tax earnings, partially offset by income tax benefit recognized related to the favorable resolution of an uncertain tax position.
For the six months ended June 30, 2022, income tax expense of $2.3 million was driven by projected income tax expense related to pre-tax earnings, partially offset by an income tax benefit related to the favorable resolution of an uncertain tax position. As compared with the six months ended June 30, 2021, income tax expense for the six months ended June 30, 2022 increased $11.1 million primarily due to higher pre-tax earnings and a $7.3 million reduction in the amount of income tax benefit related to the favorable resolution of uncertain tax positions. The decline in the effective tax rate is primarily due to the $81.4 million increase in pre-tax earnings in the six months ended June 30, 2022 compared to the same period in 2021, as well as the reduction in the income tax benefit related to the favorable resolution of uncertain tax positions.
Under our transfer pricing agreements, our operations in India and Philippines are compensated on a $23.7cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.
FinancialCondition
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| Financial Condition Summary | June 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Cash | $ | 255.9 | | $ | 192.8 | | $ | 63.1 | | 33 | % |
| Restricted cash | 66.7 | | 70.7 | | (4.0) | | (6) | |
| MSRs, at fair value | 2,485.7 | | 2,250.1 | | 235.5 | | 10 | |
| Advances, net | 647.2 | | 772.4 | | (125.3) | | (16) | |
| Loans held for sale | 687.5 | | 928.5 | | (241.1) | | (26) | |
| Loans held for investment, at fair value | 7,383.8 | | 7,207.6 | | 176.2 | | 2 | |
| Receivables | 178.5 | | 180.7 | | (2.2) | | (1) | |
| Investment in equity method investee | 38.8 | | 23.3 | | 15.5 | | 67 | |
| Other assets | 363.7 | | 520.9 | | (157.2) | | (30) | |
| Total assets | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
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| Total Assets by Segment | | | | | | | |
| Servicing | $ | 11,053.6 | | $ | 10,999.2 | | $ | 54.4 | | — | % |
| Originations | 694.1 | | 823.5 | | (129.4) | | (16) | |
| Corporate Items and Other | 360.0 | | 324.4 | | 35.6 | | 11 | |
| $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
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| HMBS-related borrowings, at fair value | $ | 7,155.3 | | $ | 6,885.0 | | $ | 270.2 | | 4 | % |
| Other financing liabilities, at fair value | 913.6 | | 805.0 | | 108.7 | | 13 | |
| Advance match funded liabilities | 477.0 | | 512.3 | | (35.3) | | (7) | |
| Mortgage loan warehouse facilities | 779.3 | | 1,085.1 | | (305.8) | | (28) | |
| MSR financing facilities, net | 987.7 | | 900.8 | | 87.0 | | 10 | |
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| Senior notes, net | 594.9 | | 614.8 | | (19.9) | | (3) | |
| Other liabilities | 656.0 | | 867.5 | | (211.5) | | (24) | |
| Total liabilities | 11,563.8 | | 11,670.4 | | (106.7) | | (1) | % |
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| Total stockholders’ equity | 543.9 | | 476.7 | | 67.2 | | 14 | |
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| Total liabilities and equity | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
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| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 10,534.2 | | $ | 10,474.5 | | $ | 59.7 | | 1 | % |
| Originations | 696.1 | | 832.7 | | (136.6) | | (16) | |
| Corporate Items and Other | 333.5 | | 363.3 | | (29.7) | | (8) | |
| $ | 11,563.8 | | $ | 11,670.4 | | $ | (106.7) | | (1) | % |
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| Book value per share | $ | 59.19 | | | $ | 51.77 | | | $ | 7.42 | | | 14 | % |
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Total assets decreased $39.4 million, or 30% increase0.3%, between December 31, 2021 and June 30, 2022 due to a $241.1 million decline in our loans held for sale portfolio driven by lower forward loan production volumes, a $157.2 million decrease in other assets mostly attributable to the decrease in contingent repurchase rights related to delinquent loans that have been repurchased under the Ginnie Mae EBO program, and a $125.3 million decline in servicing feesadvances, mainly due to seasonal reduction of escrow balances, increased recoveries on our owned MSRs drivendelinquent and default loans, and loan repurchases under the Ginnie Mae EBO program. These declines were offset by a 33%$235.5 million increase in our average UPB serviced.MSR portfolio mostly attributed to fair value gains due to rising interest rates and additions through purchases and retained servicing on loan sales, partially offset by a sale of MSRs to an unrelated third party, and a $176.2 million increase in Loans held for investment, mostly driven by our reverse mortgage origination and bulk acquisition.
Total liabilities decreased by $106.7 million, or 1%, as compared to December 31, 2021, with similar effects as described above. Our borrowings under warehouse lines declined $305.8 million due to lower loan production volumes. Advance match funded liabilities decreased $35.3 million consistent with the decline in Servicing advances. Senior notes, net decreased $19.9 million due to our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 in the second quarter of 2022. Other liabilities declined $211.5 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of delinquent loans. Our HMBS-related borrowings increased by $270.2 million due to the continued growth of our reverse mortgage business and its securitization. The $108.7 million increase in Other financing liabilities is primarily due to additional transfers of MSRs to MAV in the six months ended June 30, 2022 which did not qualify for sale accounting and related fair value changes. Borrowings under our MSR financing facilities increased $87.0 million to fund the increase in our MSR portfolio.
Total equity increased $67.2 million during the six months ended June 30, 2022 mostly due to $68.4 million net income. Under a $50.0 million repurchase program approved in May 2022, we repurchased and retired shares of our common stock for a total $2.3 million during the six months ended June 30, 2022. See Note 15 – Stockholders’ Equity for additional information.
Key Trends
The following discussion provides information regarding certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.
Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB servicedfor servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform and through MAV for the remainder of 2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume.
Gain on sale of loans held for sale - Our gain on sale is largely driven by bulk acquisitionsboth volume and margin and is channel-sensitive, with Consumer Direct generating relatively higher margins than Correspondent. We expect volume to continue to decline in our Consumer Direct channel due to significant interest rate increases, driving the industry to pivot from refinance to customer acquisitions. We expect lower margins due to heightened competition. We expect to continue to prudently grow our Correspondent volume at margins that are accretive to the business.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our volumes albeit with some channel mix changes. We expect increased volatility and a downward trend in our margins due to continued uncertain market interest rate and spread conditions. The fair value of the net reverse servicing asset is expected to continue to follow market conditions, and is part of our forward MSR hedging strategy.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is a function of the UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our interest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise. Refer to the sensitivity analysis in Item 3 - Quantitative and Qualitative Disclosures About Market Risk for further detail.
Operating expenses - Compensation and benefits are a significant component of our cost-to-service and cost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to modestly increase (see above), we expect a modest increase in our workforce with partial offset from an increased relative share of performing loans. We expect to continue to right size and prudently manage our Originations headcount and operating expenses to align with funded volume. Other operating expenses are expected to correlate with volumes, with some productivity and efficiencies expected through our technology and continuous improvement initiatives.
Stockholders’ equity - With the above considerations and uncertainties, specifically in the third quarter of 2022, we expect our businesses to generate net income and increase our equity, absent any significant adverse change in interest rates and if we continue to be successful in our business initiatives.
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| SEGMENT RESULTS OF OPERATIONS |
Our activities are organized into two reportable business segments that reflect our primary lines of business - Servicing and Originations - as well as a Corporate Items and Other segment.
We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including MAV, that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Subservicing per-loan fees typically vary based on type of investor and on loan delinquency status.
As of June 30, 2022, we serviced 1.4 million mortgage loans with an aggregate UPB of $288.3 billion. The average UPB of loans serviced during the second quarter of 2021. Partially offsetting this increase, fees collected on behalf2022 increased by 6% or $15.5 billion compared to the first quarter of NRZ declined2022, mostly driven by $2.7 millionthe growth in our subservicing portfolio. Compared to the six months ended June 30, 2021, the average UPB of loans serviced during the six months ended June 30, 2022 increased by 44% or $85.5 billion mostly due to MSR acquisitions, subservicing additions and increased MSR originations, offset in part by portfolio runoff. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on capital allocation and financial return targets.
In May 2021, PMC entered into a 5% declinesubservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC but the transactions do not achieve sale accounting. We are currently discussing with Oaktree an upsize of MAV capacity currently capped at $250 million of capital and other modifications of our different agreements.
In addition, in average UPB.October 2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. PMC boarded approximately 40,000 and 19,000 additional reverse mortgage loans onto our servicing platform in the first quarter of 2022 and second quarter of 2022, respectively.
The $8.3 million, or 1% declineNRZ remains our largest subservicing client, accounting for 18% and 28% of the UPB and loan count, respectively, in our servicing portfolio as of June 30, 2022. NRZ servicing fees retained by Ocwen represented approximately 11% of the total servicing and subservicing fees in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 is primarily drivenearned by our successful, gradual replacementOcwen, net of the NRZ volumes with new relationships and volumes sourced by our Originations business. Specifically, the $66.0 million reduction inservicing fees collected on behalf of NRZ due to portfolio runoff and the PMC servicing termination, the $17.2 million decrease in subservicing fees mostly dueremitted to NRZ, fees being reported as subservicing fees from the termination date through the loan deboarding date instead of as NRZ MSR servicing fees in prior periods, and the $12.0 million reduction in ancillary income due to the COVID-19 environment and lower interest rates, were largely offset by the $85.3 million or 53% increase in our owned MSR servicing fee income. The increase in servicing fees on our owned MSR as compared to the nine months ended September 30, 2020 is due to a 58% increase in our average volume serviced, primarily driven by bulk acquisitions and the growth in our correspondent lending volumes.
The following table below presents the respective drivers of residential loan servicing (owned MSR) and subservicing fees.
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| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | June 30, | | % Change | | September 30, | | % Change |
| | 2021 | | 2021 | | | 2021 | | 2020 | |
| Servicing and subservicing fee | | | | | | | | | | | |
| Servicing fee | $ | 103.1 | | $ | 79.4 | | 30 | % | | $ | 246.4 | | $ | 161.1 | | 53 | % |
| Average servicing fee (% of UPB) | 0.27 | | 0.27 | | (2) | % | | 0.27 | | 0.28 | | (3) | % |
| | | | | | | | | | | |
| Subservicing fee | $ | 2.9 | | $ | 2.6 | | 10 | | | $ | 9.0 | | $ | 26.1 | | (66) | % |
| Average monthly fee per loan (in dollars) | $ | 12 | | $ | 12 | | (2) | | | $ | 12 | | $ | 8 | | 43 | % |
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| Residential assets serviced | | | | | | | | | | | |
| Average UPB ($ in billions): | | | | | | | | | | | |
| Servicing portfolio | $ | 154.1 | | $ | 116.0 | | 33 | % | | $ | 121.5 | | $ | 76.7 | | 58 | % |
| Subservicing portfolio | 20.6 | | 17.9 | | 15 | | | 21.0 | | 54.0 | | (61) | % |
| MAV | 7.4 | | — | | n/m | | 7.4 | | — | | n/m |
| NRZ | 59.9 | | 62.9 | | (5) | | | 62.9 | | 74.2 | | (15) | % |
| Total | $ | 242.0 | | $ | 196.7 | | 23 | % | | $ | 212.7 | | $ | 205.0 | | 4 | % |
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| Average number (in 000’s): | | | | | | | | | | | |
| Servicing portfolio | 716.2 | | 576.0 | | 24 | % | | 596.6 | | 469.7 | | 27 | % |
| Subservicing portfolio | 82.0 | | 73.0 | | 12 | | | 83.6 | | 348.9 | | (76) | % |
| MAV | 31.8 | | — | | n/m | | 31.8 | | — | | n/m |
| NRZ | 453.5 | | 473.1 | | (4) | | | 472.6 | | 543.2 | | (13) | % |
| 1,283.4 | | 1,122.1 | | 14 | % | | 1,184.6 | | 1,361.9 | | (13) | % |
The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements, together with the previously recognized amortization gain of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements (throughfor the second quarter of 2020 only):
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| NRZ servicing and subservicing fees | Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | June 30, 2021 | | September 30, 2021 | | September 30, 2020 |
| Servicing fees collected on behalf of NRZ | $ | 75.0 | | | $ | 77.7 | | | $ | 233.1 | | | $ | 299.1 | |
| Servicing fees remitted to NRZ (1) | (53.6) | | | (55.2) | | | (165.1) | | | (218.6) | |
| Retained subservicing fees on NRZ agreements (2) | $ | 21.5 | | | $ | 22.5 | | | $ | 68.0 | | | $ | 80.5 | |
| Amortization gain of lump-sum cash payments received (including fair value change) (1)(3) | — | | | — | | | — | | | 34.2 | |
| Total retained subservicing fees and amortization gain of lump-sum cash payments (including fair value change) | $ | 21.5 | | | $ | 22.5 | | | $ | 68.0 | | | $ | 114.7 | |
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| Average NRZ UPB ($ in billions) (4) | $ | 59.9 | | | $ | 62.9 | | | $ | 62.9 | | | $ | 74.2 | |
| Average annualized retained subservicing fees as a % of NRZ UPB (excluding amortization gain of lump-sum cash payments) | 0.14 | % | | 0.14 | % | | 0.14 | % | | 0.14 | % |
(1)Reported within Pledged MSR liability expense. The NRZ servicing fee includes2022 and 12% the total servicing fees collected on behalffirst quarter of NRZ relating2022. This compares to 11% and 19% for the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fee collectedsix months ended June 30, 2022 and remitted on a gross basis, with2021, respectively. NRZ’s portfolio represents approximately 69% of all delinquent loans that Ocwen serviced, for which the servicing fee remittedcost to NRZ reported as Pledged MSR liability expense.
(2)Excludesservice and the servicing fees of loans under the PMC servicing agreement after February 20, 2020 due to the notice of termination by NRZ, and subservicing fees earned under subservicing agreements.
(3)In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely alignassociated risks are higher. Consistent with a typical subservicing arrangement wherebyrelationship, NRZ is responsible for funding the advances we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020). See Note 8 — MSR Transfers Not Qualifyingservice for Sale Accounting for further information.
(4)Excludes the UPB of loans subserviced under the PMC servicing agreement after February 20, 2020 due to the notice of termination by NRZ, and excludes the UPB of loans under subservicing agreements.NRZ.
The net retained feefinancial performance of our NRZ portfolio declined $1.0 million, or 5%, in the third quarter of 2021 as compared to the second quarter of 2021 primarily due to the 5% decline in UPB serviced associated with portfolio runoff and prepayments.
The net retained fee of our NRZ portfolio decreased by $12.5 million, or 16%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The decline in the NRZ fee collection and remittanceservicing segment is primarily drivenimpacted by the decline in the average UPB of 15%, explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement by NRZ on February 20, 2020. As the NRZ relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.
The following table presents the detail of our ancillary income:
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| Ancillary Income | Three Months Ended | | | | Nine Months Ended | | |
| September 30, 2021 | | June 30, 2021 | | % Change | | September 30, 2021 | | September 30, 2020 | | % Change |
| Late charges | $ | 10.7 | | | $ | 11.4 | | | (7) | % | | $ | 31.3 | | | $ | 38.3 | | | (18) | % |
| Custodial accounts (float earnings) | 1.2 | | | 1.3 | | | (6) | | | 3.5 | | | 8.8 | | | (60) | |
| Loan collection fees | 2.9 | | | 2.8 | | | 4 | | | 8.6 | | | 10.0 | | | (15) | |
| | | | | | | | | | | |
| Recording fees | 3.7 | | | 3.2 | | | 16 | | | 10.6 | | | 9.8 | | | 8 | |
| Boarding and deboarding fees | 0.6 | | | 0.2 | | | 284 | | | 1.6 | | | 5.6 | | | (71) | |
| Other | 3.8 | | | 3.6 | | | 6 | | | 11.2 | | | 6.3 | | | 79 | |
| Ancillary income | $ | 22.9 | | | $ | 22.4 | | | 2 | % | | $ | 66.9 | | | $ | 78.9 | | | (15) | % |
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As compared to the nine months ended September 30, 2020, ancillary income for the nine months ended September 30, 2021 declined by $12.0 million, or 15%, due to the combined effect of lower boarding and deboarding fees, the COVID-19 environment restricting late fees or collection fees on loans under forbearance, and lower interest rates on float earnings.
Gain on Loans Held for Sale, Net
Gain on loans held for sale, net for the third quarter of 2021 increased $27.5 million as compared to the second quarter of 2021 primarily due to a $22.5 million gain recognized in the third quarter of 2021 on the sale of loans acquired in connection with the exercise of call rights relating to certain Non-Agency trusts.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net is the net changechanges in fair value of securitized loans held for investment and HMBS-related borrowings. The following table presents the components of the netMSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, change and is comprised of net interest income and otherwith changes in fair value gains or losses. Net interest income is primarily driven by the volumerecorded in earnings within MSR valuation adjustments, net. The fair value of securitized UPB as it is the interest income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents our compensation for servicing the portfolio, thatMSRs is typically a percentage of the outstanding UPB. Other fair value changes are primarily driven bycorrelated to changes in market-based inputs or assumptions. Lowermarket interest rates; as interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans anddecrease, the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts.
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| Three Months Ended | | | | Nine Months Ended | | |
| September 30, 2021 | | June 30, 2021 | | % Change | | September 30, 2021 | | September 30, 2020 | | % Change |
| Net interest income | $ | 5.0 | | | $ | 5.0 | | | — | % | | $ | 14.9 | | | $ | 14.4 | | | 4 | % |
| Other fair value changes | (18.0) | | | 5.5 | | | (426) | | | (15.4) | | | (1.5) | | | 915 | |
| Reverse mortgage revenue, net (Servicing) | $ | (13.0) | | | $ | 10.5 | | | (224) | % | | $ | (0.5) | | | $ | 12.8 | | | (104) | |
The decrease in Reverse mortgage revenue, net of $23.5 million, or 224%, for the third quarter of 2021 as compared to the second quarter of 2021 is primarily attributable to increasing interest rates observed in the market during the third quarter of 2021 and opposite rate movements in the second quarter of 2021, and unfavorable yield spread widening in the third quarter of 2021 directly impacting the tail value of the HECMservicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse mortgage loans.
As comparedis true. The sensitivity of MSR fair value to the nine months ended September 30, 2020, Reverse mortgage revenue for the nine months ended September 30, 2021 decreased $13.3 million, or 104%, primarily due to the impact of increasing interest rates and unfavorable impactsis typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of yield spread tightening as comparedapproximately 17 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the 2020 period.
MSR Valuation Adjustments, Net
The following tables summarizevolatility of the MSR valuation adjustments, net reported in our Servicing segment, with the breakdown of the total MSRs recorded on our balance sheet between our owned MSRs and the pledged MSRs transferredportfolio to NRZ and MAV that did not achieve sale accounting treatment:interest rates.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | | Three Months Ended June 30, 2021 |
| Total (1) | Owned MSR (1) | Pledged MSR (NRZ and MAV) (2) | | Total (1) | Owned MSR (1) | Pledged MSR (NRZ) (2) |
| | | | | | | |
| Runoff (3) | $ | (68.9) | | $ | (47.1) | | $ | (21.8) | | | $ | (57.0) | | $ | (36.1) | | $ | (20.9) | |
| Rate and assumption change (1) | 72.4 | | 11.1 | | 61.3 | | | (47.2) | | (55.6) | | 8.4 | |
| Hedging gain (loss) | (14.1) | | (14.1) | | — | | | 34.3 | | 34.3 | | — | |
| Total | $ | (10.6) | | $ | (50.1) | | $ | 39.5 | | | $ | (69.9) | | $ | (57.4) | | $ | (12.5) | |
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| Nine Months Ended September 30, |
| 2021 | | 2020 |
| Total (1) | Owned MSR | Pledged MSR (NRZ and MAV) (2) | | Total (1) | Owned MSR | Pledged MSR (NRZ) (2) |
| | | | | | | |
| Runoff (3) | $ | (175.1) | | $ | (114.8) | | $ | (60.3) | | | $ | (127.9) | | $ | (71.3) | | $ | (56.6) | |
| Rate and assumption change (1) | 100.7 | | 29.4 | | 71.3 | | | (169.0) | | (154.4) | | (14.6) | |
| Hedging gain (loss) | (28.9) | | (28.9) | | — | | | 47.1 | | 47.1 | | — | |
| Total | $ | (103.2) | | $ | (114.2) | | $ | 11.0 | | | $ | (249.9) | | $ | (178.6) | | $ | (71.3) | |
(1)Excludes gains of $2.8 million, $8.8 million, $20.1 million and $26.3 million in the third quarter of 2021, second quarter of 2021, nine months ended September 30, 2021 and nine months ended September 30, 2020, respectively, on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net.
(2)For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the pledgedtransferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability on our balance sheet. Because we record both our pledged MSRs with NRZ and the associated MSR liability at fair value on our balance sheet. The changes in fair value of the MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are largely offset byreported within Pledged MSR liability expense. Similarly, we present on a gross basis the changes in fair valuetotal servicing fees collected on behalf of NRZ and MAV within Servicing and subservicing fees, net and the associated pledged MSR asset, presented in MSR valuation adjustments, net. Although fair value changes are separately presented in our statement of operations, we are not exposed to any fair value changes of the MSR pledgedtotal servicing fee remittance to NRZ and we are only exposed to fair value changes of theMAV within Pledged MSR pledged to MAV net of the MSR pledged liability to MAV. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.expense.
(3)As of June 30, 2022, we managed 17,757 loans under forbearance associated with borrowers impacted by the COVID-19 pandemic (or 1.3% of our total portfolio), 4,277 of which related to our owned MSRs, or 0.7% of our owned MSR servicing portfolio (excluding NRZ and MAV)The terms runoff, a reduction of 38% and realization of expected future cash flows may be used interchangeably within this discussion.37%%, respectively, compared to December 31, 2021.
We reported a $10.6 million loss in MSR valuation adjustments, net for the third quarter of 2021, comprised of a $50.1 million loss on our owned MSRs and a $39.5 million gain on the MSRs transferred to NRZ and MAV. The $50.1 million loss on our owned MSRs for the third quarter of 2021 is mainly comprised of $47.1 million MSR portfolio runoff. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with actual prepayments. In addition, MSR valuation adjustments, net includes a $11.1 million gain on the MSR portfolio attributed to rate and assumption change and a $14.1 million hedging loss. The gain on rate and assumption change is primarily due to a $15.1 million increase in market interest rates (the 10 year swap rate increased by 6 basis points in the third quarter of 2021), partially offset by a loss on assumption updates driven by prepayment model variance and calibration. Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. In addition, we established a higher hedge coverage on a committed MSR sale to MAV during the third quarter of 2021. Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional information regarding our MSR hedging strategy.
During the nine months ended September 30, 2021, we reported a $103.2 million loss in MSR valuation adjustments, net, comprised of a $114.2 million loss on our owned MSRs and a $11.0 million gain on the MSRs transferred to NRZ and MAV. The $114.2 million loss on our owned MSRs is mostly comprised of a $114.8 million MSR portfolio runoff, and includes 29.4 million gain on the MSR portfolio attributed to rate and assumption change, offset by $28.9 million hedging loss. The factors described above for the third quarter of 2021 similarly apply. The gain on rate and assumption change is primarily due to an increase in market interest rates (the 10 year swap rate increased by 58 basis points in the nine months ended September 30, 2021), partially offset by a loss on assumption updates driven by prepayment model calibration.
The following table provides information regarding the changes in the fair value and the UPB of our portfolio of owned MSRs during the third quarter of 2021, with the breakdown by investor type. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | UPB ($ in billions) |
| GSEs | | Ginnie Mae | | Non-
Agency | | Total | | GSEs | | Ginnie Mae | | Non-
Agency | | Total |
| Beginning balance | $ | 1,311.7 | | | $ | 101.4 | | | $ | 123.9 | | | $ | 1,537.0 | | | $ | 116.5 | | | $ | 12.6 | | | $ | 19.8 | | $ | 148.9 |
| Additions | | | | | | | | | | | | | | | |
| New cap. | 57.8 | | | 8.6 | | | 0.8 | | | 67.2 | | | 5.2 | | 0.6 | | — | | 5.8 |
| Purchases | 36.6 | | | (0.4) | | | — | | | 36.2 | | | 4.9 | | — | | — | | 4.9 |
| Sales/servicing transfers | — | | | — | | | (1.3) | | | (1.3) | | | — | | — | | — | | — |
| Sales/calls | (132.1) | | | — | | | — | | | (132.1) | | | (13.7) | | — | | (0.2) | | (13.9) |
| Change in fair value: | | | | | | | | | | | | | | | |
| Inputs and assumptions (1) | 10.7 | | | (1.1) | | | 3.9 | | | 13.5 | | | — | | — | | — | | — |
| Realization of cash flows | (35.7) | | | (2.0) | | | (9.4) | | | (47.1) | | | (7.2) | | (1.0) | | (1.1) | | (9.3) |
| Ending balance | $ | 1,249.0 | | | $ | 106.5 | | | $ | 117.9 | | | $ | 1,473.4 | | | $ | 105.7 | | $ | 12.2 | | $ | 18.4 | | $ | 136.3 |
Fair value
(% of UPB) | 1.18 | % | | 0.87 | % | | 0.64 | % | | 1.08 | % | | | | | | | | |
Fair value
multiple (2) | 4.56 | x | | 2.46 | x | | 1.95 | x | | 3.90 | x | | | | | | | | |
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(1)Mostly changes in interest rates, except for gains of $2.8 million on the revaluation of purchased MSRs, that are reported in the Originations segment.
(2)Multiple of average servicing fee and UPB.
The $39.5 million and $11.0 million gains on the transferred MSRs not qualifying for sale accounting (transferred to NRZ and MAV) for the third quarter of 2021 and the nine months ended September 30, 2021, respectively, do not affect our net income as offset by a corresponding loss on the pledged MSR liability, reported as Pledged MSR liability expense. The factors underlying the fair value gain of the MSRs not qualifying for sale accounting are similar to our owned MSR, discussed above, including rate and assumption changes and runoff, noting the transfers of MSRs to MAV in the third quarter of 2021 which did not qualify for sale accounting and the decline in the NRZ MSR portfolio, with a $34.2 billion lower UPB due to the termination of the PMC servicing agreement by NRZ in February 2020. In addition, the $61.3 million fair value gain attributable to rates and assumptions-offset by a corresponding MSR pledged liability expense-in the third quarter of 2021 is mostly driven by assumption updates relating to a PLS model calibration by our third party valuation expert.
Compensation and Benefits
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| Three Months Ended | | | | Nine Months Ended | | |
| September 30, 2021 | | June 30, 2021 | | % Change | | September 30, 2021 | | September 30, 2020 | | % Change |
| Compensation and benefits | $ | 23.8 | | | $ | 26.1 | | (9) | % | | $ | 74.9 | | | $ | 85.7 | | | (13) | % |
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| Average Employment | | | | | | | | | | | |
| India and other | 2,453 | | | 2,410 | | | 2 | % | | 2,429 | | | 2,968 | | | (18) | |
| U.S. | 639 | | | 643 | | | (1) | | | 657 | | | 736 | | | (11) | |
| Total | 3,092 | | | 3,053 | | | 1 | | | 3,086 | | | 3,704 | | | (17) | |
Compensation and benefits expense for the third quarter of 2021 declined $2.3three months ended June 30, 2022 increased $15.9 million, or 9%23%, as compared to the second quarter of 2021. Salaries and benefit expenses decreased $1.7 million,three months ended March 31, 2022, primarily due to a reduction$14.7 million increase in COVID-19 related benefits, and incentive compensation decreased $0.7and a $1.9 million increase in severance expense. The expense of cash-settled share-based awards increased by $12.9 million as a result of our common stock price appreciation during the second quarter and forfeitures recognized in the first quarter of 2022. Our total average headcount was unchanged as compared to the three months ended March 31, 2022. The decrease in Originations average headcount, mostly Consumer Direct, as part of our efforts to right size our resources to market opportunities was offset by an increase in Servicing average headcount, mostly in support of the growth in our reverse mortgage subservicing business.
As compared to the six months ended June 30, 2021, Compensation and benefits expense for the six months ended June 30, 2022 increased $11.4 million, or 8%. The $15.2 million increase in salaries and benefits primarily due to a decrease15% increase in total average headcount, primarily attributed to a 17% increase in Servicing average headcount reflecting the hiring of employees to support the growth of our reverse mortgage subservicing platform, $3.6 million increase in severance, and $2.4 million increase in commissions driven by higher Originations volumes were partially offset by a $10.9 million decline in the fair value of cash-settled share-based awards as a result of a decrease in our common stock price and a reduction in expense due to forfeitures recognized in the first quarter of 2022. Our offshore-to-total average headcount ratio decreased from 69% in the six months ended June 30, 2021 to 65% in the six months ended June 30, 2022.
Servicing and Origination Expense
Servicing and origination expense for the three months ended June 30, 2022 increased $4.9 million, or 35%, as compared to the three months ended March 31, 2022 due to a $4.0 million release of provision for indemnification recorded in the first quarter of 2022 due to a favorable settlement, and a $1.0 million increase in provision expense due to increased government-insured claim loss volumes.
As compared to the six months ended June 30, 2021, Servicing and origination expense for the six months ended June 30, 2022 decreased $20.8 million, or 39%, mostly attributed to the Servicing segment. The decline is primarily due to a $6.9 million decrease in satisfaction and interest on payoff expense attributable to lower payoff volume, a $5.7 million release of provisions for indemnification recorded in the six months ended June 30, 2022 related to favorable litigation settlements, a $4.7 million decrease in reverse subservicing expenses with the transfer of a subservicer to our reverse servicing platform beginning in the fourth quarter of 2021, and a $2.3 million reduction in interim subservicing costs incurred on bulk acquisitions in the first half of 2021.
See Segment Results of Operations - Servicing for additional information.
Other Operating Expenses
Professional services expense for the three months ended June 30, 2022 decreased $3.5 million, or 29%, as compared to the three months ended March 31, 2022, primarily due to an increase in the recovery of legal expenses related to litigation settlements, which were $11.1 million in the second quarter of 2022 as compared to $9.9 million in the first quarter of 2022, and a $2.0 million decrease in expenses related to other legal matters
As compared to the six months ended June 30, 2021, Professional services expense for the six months ended June 30, 2022 decreased $22.0 million, or 51%, primarily due to a $24.6 million decline in legal expenses offset in part by a $2.3 million increase in other professional services. The net decrease in legal expenses is largely due to $21.0 million of recoveries of prior year expenses during the six months ended June 30, 2022 related to litigation settlements and a $3.4 million decrease in expenses related to other legal matters. The net increase in other professional services is driven by $7.3 million additional expense related to our reverse subservicing business offset by $3.2 million of advisory fees recorded in the six months ended June 30, 2021 related to the launch of MAV Canopy and a $1.8 million decline in Originations outsourced surge resources utilized during the six months ended June 30, 2021.
Occupancy and equipment expense for the three months ended June 30, 2022 remained flat as compared to the three months ended March 31, 2022. As compared to the six months ended June 30, 2021, Occupancy and equipment expense for the six months ended June 30, 2022 increased $3.0 million, or 18%, largely driven by an increase in postage and mailing expenses associated with an increased average number of loans serviced and the acquisition of reverse mortgage subservicing.
Technology and communication expense for the three months ended June 30, 2022 remained flat as compared to the three months ended March 31, 2022. As compared to the six months ended June 30, 2021, Technology and communication expense for the six months ended June 30, 2022 increased $3.3 million, or 13%, largely driven by higher servicing system expenses due to the increase in the average number of loans serviced and higher technology expenses attributed to higher loan production volume.
Other expenses for the three months ended June 30, 2022 remained mostly flat as compared to the three months ended March 31, 2022. As compared to the six months ended June 30, 2021, Other expenses for the six months ended June 30, 2022 increased $7.1 million mainly due to a $2.0 million increase in advertising expense in our Reverse Originations business, $2.1 million of amortization expense on the reverse subservicing contract intangible asset recognized in October 2021 and April 2022, and a $1.3 million increase in miscellaneous other expenses, including travel expenses.
Other Income (Loss)
Interest income increased $2.6 million during the three months ended June 30, 2022 as compared to the three months ended March 31, 2022 primarily attributable to higher loan production volumes in Originations, partially offset by lower loans held for sale average balances in our Servicing segment. As compared to the six months ended June 30, 2021, interest income for the six months ended June 30, 2022 increased $8.8 million, primarily attributable to higher loan production volumes.
Interest Expense
Interest expense for the three months ended June 30, 2022 was unchanged as compared to the three months ended March 31, 2022, as the effects of a $141.5 million lower average debt balance on our asset backed financing, primarily driven by lower loans held for sale average balances, was offset by an average 33 bps higher cost of funds driven by increased underlying reference interest rates.
As compared to the six months ended June 30, 2021, Interest expense for the six months ended June 30, 2022 increased $13.7 million, or 22%, due to a $739.9 million or 47% higher average debt balance on our asset backed financing, primarily to finance our increased loan production volumes and MSR portfolio growth, and $64.9 million or 8% higher average corporate debt with the issuance of senior secured notes as part of our corporate debt refinancing in the first and second quarters of 2021, partially offset by 60 bps or 11% lower cost of funds primarily driven by improved pricing across our asset backed financing facilities.
See Segment Results of Operations - Servicing for information regarding Pledged MSR liability expense.
Gain on debt extinguishment of $0.9 million for the three and six months ended June 30, 2022 resulted from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 at a discount. Loss on debt extinguishment of $15.5 million for the six months ended June 30, 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the SSTL due May 2022, PHH 6.375% senior unsecured notes due August 2021, and PMC 8.375% senior secured notes due November 2022.
Earnings of equity method investee represent our 15% share of MAV Canopy from May 3, 2021. The higher earnings in the first quarter of 2022 as compared to the second quarter of 2022 is mostly due to the fair value gain recorded by MAV Canopy on its MSR portfolio due to rising interest rates. See Note 10 - Investment in Equity Method Investee and Related Party Transactions for further detail.
Income Tax Benefit (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | March 31, | | % Change | | June 30, | | June 30, | | % Change |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Income tax expense (benefit) | $ | (0.9) | | | $ | 3.2 | | (128) | % | | $ | 2.3 | | | $ | (8.8) | | | (126) | |
| | | | | | | | | | | |
| Income (loss) before income taxes | $ | 9.4 | | | $ | 61.3 | | | (85) | % | | $ | 70.8 | | | $ | (10.6) | | | (768) | |
| | | | | | | | | | | | |
| Effective tax rate | (9.8) | % | | 5.3 | % | | (285) | % | | 3.3 | % | | 83.2 | % | | (96) | |
Our effective tax rate for the periods indicated in the table above differs from the federal statutory income tax rate primarily due to the full valuation allowance recorded on our net federal and state deferred tax assets. Also refer to Note 21 - Income Taxes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for further details on deferred tax assets. Ocwen evaluated all positive and negative evidence and determined that a full valuation allowance at June 30, 2022 remains appropriate. The income tax expense (benefit) is primarily comprised of income taxes in foreign jurisdictions and changes in uncertain tax positions.
The $0.9 million income tax benefit recognized in the three months ended June 30, 2022 was driven primarily by a decrease in the projected annual effective tax rate applied to year-to-date pre-tax earnings. The income tax expense recognized in the three months ended March 31, 2022 was driven primarily by projected income tax expense related to pre-tax earnings, partially offset by income tax benefit recognized related to the favorable resolution of an uncertain tax position.
For the six months ended June 30, 2022, income tax expense of $2.3 million was driven by projected income tax expense related to pre-tax earnings, partially offset by an income tax benefit related to the favorable resolution of an uncertain tax position. As compared with the six months ended June 30, 2021, income tax expense for the six months ended June 30, 2022 increased $11.1 million primarily due to higher pre-tax earnings and a $7.3 million reduction in the amount of income tax benefit related to the favorable resolution of uncertain tax positions. The decline in the effective tax rate is primarily due to the $81.4 million increase in pre-tax earnings in the six months ended June 30, 2022 compared to the same period in 2021, as well as the reduction in the income tax benefit related to the favorable resolution of uncertain tax positions.
Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.
FinancialCondition
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Condition Summary | June 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Cash | $ | 255.9 | | $ | 192.8 | | $ | 63.1 | | 33 | % |
| Restricted cash | 66.7 | | 70.7 | | (4.0) | | (6) | |
| MSRs, at fair value | 2,485.7 | | 2,250.1 | | 235.5 | | 10 | |
| Advances, net | 647.2 | | 772.4 | | (125.3) | | (16) | |
| Loans held for sale | 687.5 | | 928.5 | | (241.1) | | (26) | |
| Loans held for investment, at fair value | 7,383.8 | | 7,207.6 | | 176.2 | | 2 | |
| Receivables | 178.5 | | 180.7 | | (2.2) | | (1) | |
| Investment in equity method investee | 38.8 | | 23.3 | | 15.5 | | 67 | |
| Other assets | 363.7 | | 520.9 | | (157.2) | | (30) | |
| Total assets | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| Total Assets by Segment | | | | | | | |
| Servicing | $ | 11,053.6 | | $ | 10,999.2 | | $ | 54.4 | | — | % |
| Originations | 694.1 | | 823.5 | | (129.4) | | (16) | |
| Corporate Items and Other | 360.0 | | 324.4 | | 35.6 | | 11 | |
| $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| HMBS-related borrowings, at fair value | $ | 7,155.3 | | $ | 6,885.0 | | $ | 270.2 | | 4 | % |
| Other financing liabilities, at fair value | 913.6 | | 805.0 | | 108.7 | | 13 | |
| Advance match funded liabilities | 477.0 | | 512.3 | | (35.3) | | (7) | |
| Mortgage loan warehouse facilities | 779.3 | | 1,085.1 | | (305.8) | | (28) | |
| MSR financing facilities, net | 987.7 | | 900.8 | | 87.0 | | 10 | |
| | | | | | | |
| Senior notes, net | 594.9 | | 614.8 | | (19.9) | | (3) | |
| Other liabilities | 656.0 | | 867.5 | | (211.5) | | (24) | |
| Total liabilities | 11,563.8 | | 11,670.4 | | (106.7) | | (1) | % |
| | | | | | | |
| Total stockholders’ equity | 543.9 | | 476.7 | | 67.2 | | 14 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total liabilities and equity | $ | 12,107.7 | | $ | 12,147.1 | | $ | (39.4) | | — | % |
| | | | | | | |
| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 10,534.2 | | $ | 10,474.5 | | $ | 59.7 | | 1 | % |
| Originations | 696.1 | | 832.7 | | (136.6) | | (16) | |
| Corporate Items and Other | 333.5 | | 363.3 | | (29.7) | | (8) | |
| $ | 11,563.8 | | $ | 11,670.4 | | $ | (106.7) | | (1) | % |
| | | | | | | |
| Book value per share | $ | 59.19 | | | $ | 51.77 | | | $ | 7.42 | | | 14 | % |
| | | | | | | |
| | | | | | | |
Total assets decreased $39.4 million, or 0.3%, between December 31, 2021 and June 30, 2022 due to a $241.1 million decline in our loans held for sale portfolio driven by lower forward loan production volumes, a $157.2 million decrease in other assets mostly attributable to the decrease in contingent repurchase rights related to delinquent loans that have been repurchased under the Ginnie Mae EBO program, and a $125.3 million decline in servicing advances, mainly due to seasonal reduction of escrow balances, increased recoveries on delinquent and default loans, and loan repurchases under the Ginnie Mae EBO program. These declines were offset by a $235.5 million increase in our MSR portfolio mostly attributed to fair value gains due to rising interest rates and additions through purchases and retained servicing on loan sales, partially offset by a sale of MSRs to an unrelated third party, and a $176.2 million increase in Loans held for investment, mostly driven by our reverse mortgage origination and bulk acquisition.
Total liabilities decreased by $106.7 million, or 1%, as compared to December 31, 2021, with similar effects as described above. Our borrowings under warehouse lines declined $305.8 million due to lower loan production volumes. Advance match funded liabilities decreased $35.3 million consistent with the decline in Servicing advances. Senior notes, net decreased $19.9 million due to our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 in the second quarter of 2022. Other liabilities declined $211.5 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of delinquent loans. Our HMBS-related borrowings increased by $270.2 million due to the continued growth of our reverse mortgage business and its securitization. The $108.7 million increase in Other financing liabilities is primarily due to additional transfers of MSRs to MAV in the six months ended June 30, 2022 which did not qualify for sale accounting and related fair value changes. Borrowings under our MSR financing facilities increased $87.0 million to fund the increase in our MSR portfolio.
Total equity increased $67.2 million during the six months ended June 30, 2022 mostly due to $68.4 million net income. Under a $50.0 million repurchase program approved in May 2022, we repurchased and retired shares of our common stock for a total $2.3 million during the six months ended June 30, 2022. See Note 15 – Stockholders’ Equity for additional information.
Key Trends
The following discussion provides information regarding certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.
Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform and through MAV for the remainder of 2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with Consumer Direct generating relatively higher margins than Correspondent. We expect volume to continue to decline in our Consumer Direct channel due to significant interest rate increases, driving the industry to pivot from refinance to customer acquisitions. We expect lower margins due to heightened competition. We expect to continue to prudently grow our Correspondent volume at margins that are accretive to the business.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our volumes albeit with some channel mix changes. We expect increased volatility and a downward trend in our margins due to continued uncertain market interest rate and spread conditions. The fair value of the net reverse servicing asset is expected to continue to follow market conditions, and is part of our forward MSR hedging strategy.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is a function of the UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our interest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise. Refer to the sensitivity analysis in Item 3 - Quantitative and Qualitative Disclosures About Market Risk for further detail.
Operating expenses - Compensation and benefits are a significant component of our cost-to-service and cost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to modestly increase (see above), we expect a modest increase in our workforce with partial offset from an increased relative share of performing loans. We expect to continue to right size and prudently manage our Originations headcount and operating expenses to align with funded volume. Other operating expenses are expected to correlate with volumes, with some productivity and efficiencies expected through our technology and continuous improvement initiatives.
Stockholders’ equity - With the above considerations and uncertainties, specifically in the third quarter of 2022, we expect our businesses to generate net income and increase our equity, absent any significant adverse change in interest rates and if we continue to be successful in our business initiatives.
| | |
| SEGMENT RESULTS OF OPERATIONS |
Our activities are organized into two reportable business segments that reflect our primary lines of business - Servicing and Originations - as well as a Corporate Items and Other segment.
We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including MAV, that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Subservicing per-loan fees typically vary based on type of investor and on loan delinquency status.
As of June 30, 2022, we serviced 1.4 million mortgage loans with an aggregate UPB of $288.3 billion. The average UPB of loans serviced during the second quarter of 2022 increased by 6% or $15.5 billion compared to the first quarter of 2022, mostly driven by the growth in our subservicing portfolio. Compared to the six months ended June 30, 2021, the average UPB of loans serviced during the six months ended June 30, 2022 increased by 44% or $85.5 billion mostly due to MSR acquisitions, subservicing additions and increased MSR originations, offset in part by portfolio runoff. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on capital allocation and financial return targets.
In May 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC but the transactions do not achieve sale accounting. We are currently discussing with Oaktree an upsize of MAV capacity currently capped at $250 million of capital and other modifications of our different agreements.
In addition, in October 2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. PMC boarded approximately 40,000 and 19,000 additional reverse mortgage loans onto our servicing platform in the first quarter of 2022 and second quarter of 2022, respectively.
NRZ remains our largest subservicing client, accounting for 18% and 28% of the UPB and loan count, respectively, in our servicing portfolio as of June 30, 2022. NRZ servicing fees retained by Ocwen represented approximately 11% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ, for the second quarter of 2022 and 12% the first quarter of 2022. This compares to 11% and 19% for the six months ended June 30, 2022 and 2021, respectively. NRZ’s portfolio represents approximately 69% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ.
The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings within MSR valuation adjustments, net. The fair value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 17 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio to interest rates.
For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the transferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability at fair value on our balance sheet. The changes in fair value of the MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense. Similarly, we present on a gross basis the total servicing fees collected on behalf of NRZ and MAV within Servicing and subservicing fees, net and the total servicing fee remittance to NRZ and MAV within Pledged MSR liability expense.
As of June 30, 2022, we managed 17,757 loans under forbearance associated with borrowers impacted by the COVID-19 pandemic (or 1.3% of our total portfolio), 4,277 of which related to our owned MSRs, or 0.7% of our owned MSR servicing portfolio (excluding NRZ and MAV), a reduction of 38% and 37%%, respectively, compared to December 31, 2021.
Loan Resolutions
We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.
Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing fees related to delinquent borrower payments were $137.2 million at June 30, 2022, of which $111.7 million were attributable to NRZ agreements.
Advance Obligation
As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.
Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights.
Third-Party Servicer Ratings
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s, S&P and Fitch. Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.
The following table summarizes our key servicer ratings:
| | | | | | | | | | | | | | | | | |
| PHH Mortgage Corporation (PMC) |
| Moody’s | | S&P | | Fitch |
| Forward | | | | | |
| Residential Prime Servicer | SQ3 | | Average | | RPS3+ |
| Residential Subprime Servicer | SQ3 | | Average | | RPS3+ |
| Residential Special Servicer | SQ3 | | Average | | RSS3 |
| Residential Second/Subordinate Lien Servicer | SQ3 | | Average | | RPS3 |
| Residential Home Equity Servicer | — | | — | | RPS3 |
| Residential Alt-A Servicer | — | | — | | RPS3 |
| Master Servicer | SQ3+ | | Above Average | | RMS3 |
| Ratings Outlook | N/A | | Stable | | Positive / Stable |
| | | | | |
| | | | | |
| Date of last action | September 28, 2021 | | June 29, 2021 | | August 2, 2022 |
| Reverse | | | | | |
| Residential Reverse Servicer | — | | Above Average | | — |
| Ratings Outlook | — | | Stable | | — |
| Date of initial rating | — | | May 27, 2022 | | — |
In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised. On September 28, 2021, Moody’s upgraded the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+, reflecting solid reporting and remitting processes and proactive servicer oversight. On June 29, 2021, S&P affirmed PMC’s servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC’s master servicer rating from Average to Above Average reflecting the industry experience of PMC’s management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, among other factors mentioned by S&P. On August 2, 2022, Fitch affirmed and upgraded PMC’s servicer ratings and upgraded its outlook from Stable to Positive for prime and subprime products. The ratings for the other products remain the same and the related rating outlook remains Stable. The ratings reflect PMC’s strong post-pandemic performance, effective enterprise-wide risk environment and compliance management framework, competitive loan servicing performance metrics, and highly automated technology environment. The ratings also consider the financial condition of PMC’s parent, Ocwen Financial Corporation. The upgrades and positive outlook on PMC’s prime and subprime servicer ratings are reflective of the company’s continued portfolio growth, diversified sourcing strategies and improved performance with respect to these loan types, which represent 85% of the total servicing portfolio.
On May 27, 2022, S&P assigned an Above Average ranking to PMC as a residential reverse mortgage loan servicer. The ranking outlook is Stable. This is the initial rating for PMC as a reverse mortgage loan servicer. S&P’s ranking reflects i) PMC’s highly experienced management teams and staff with sound overall levels of turnover, ii) well-designed information technology infrastructure, cybersecurity controls, and business continuity and disaster recovery processes, iii) sound internal control environment, with multiple lines of defense and automated systems to support each function, iv) lack of material internal or external audit findings noted, based on provided reports, v) good focus on systems and workflow automation throughout loan administration processes, vi) robust default management function and claims processes, vii) scale as one of the largest reverse mortgage servicer’s in the country, with highly experienced management and staff and technology largely from prior established legacy reverse servicers; ix) and good overall reverse servicing performance metrics, except for the elevated home retention department management and staff turnover rates and call center metrics in the contact center operations.
The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | % Change | | Six Months Ended | | % Change | | |
| June 30, | | March 31 | | | June 30, | | June 30, | |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Revenue | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Servicing and subservicing fees | $ | 214.5 | | $ | 212.2 | | 1 | % | | 426.7 | | $ | 351.5 | | 21 | % | | |
| Gain (loss) on loans held for sale, net | (11.5) | | (2.7) | | 325 | | | (14.2) | | 7.7 | | (285) | | | |
| Reverse mortgage revenue, net | (19.0) | | (11.9) | | 61 | | | (30.9) | | 12.5 | | (347) | | | |
| Other revenue, net | 0.4 | | 0.4 | | (11) | | | 0.8 | | 1.0 | | (24) | | | |
| Total revenue | 184.4 | | 198.0 | | (7) | | | 382.4 | | 372.7 | | 3 | | | |
| | | | | | | | | | | | | |
| MSR valuation adjustments, net | 30.4 | | 48.3 | | (37) | | | 78.7 | | (92.6) | | (185) | | | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | |
| Compensation and benefits | 34.9 | | 29.0 | | 20 | | | 64.0 | | 51.2 | | 25 | | | |
| Servicing expense | 15.6 | | 10.8 | | 45 | | | 26.4 | | 47.5 | | (44) | | | |
| Occupancy and equipment | 7.7 | | 7.9 | | (2) | | | 15.6 | | 12.1 | | 29 | | | |
| Professional services | 3.4 | | 6.8 | | (50) | | | 10.3 | | 17.5 | | (41) | | | |
| Technology and communications | 6.6 | | 6.6 | | — | | | 13.1 | | 11.2 | | 18 | | | |
| Corporate overhead allocations | 11.7 | | 11.1 | | 5 | | | 22.8 | | 24.6 | | (7) | | | |
| Other expenses | 2.6 | | 2.0 | | 27 | | | 4.6 | | 2.4 | | 91 | | | |
| Total operating expenses | 82.5 | | 74.2 | | 11 | | | 156.8 | | 166.4 | | (6) | | | |
| | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | |
| Interest income | 3.0 | | 4.1 | | (26) | | | 7.1 | | 2.5 | | 183 | | | |
| Interest expense | (22.3) | | (23.1) | | (3) | | | (45.4) | | (36.2) | | 25 | | | |
| Pledged MSR liability expense | (74.1) | | (86.9) | | (15) | | | (161.0) | | (77.7) | | 107 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings of equity method investee | 3.9 | | 12.0 | | (67) | | | 15.9 | | 0.4 | | n/m | | |
| Other, net | (4.3) | | 0.7 | | (699) | | | (3.6) | | 3.3 | | (207) | | | |
| Total other income (expense), net | (93.7) | | (93.3) | | 1 | | | (187.0) | | (107.8) | | 74 | | | |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | $ | 38.6 | | $ | 78.8 | | (51) | % | | $ | 117.4 | | $ | 5.9 | | n/m | | |
| n/m: not meaningful | | | | | | | | | | | | | |
The following table provides selected operating statistics:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, | | March 31, | | % Change | | | | June 30, | | % Change |
| | 2022 | | 2022 | | | | | 2021 | |
| Assets Serviced | | | | | | | | | | | |
| Unpaid principal balance (UPB) in billions: | | | | | | | | | | | |
| Performing loans (1) | $ | 273.4 | | | $ | 259.9 | | | 5 | % | | | | $ | 228.3 | | | 20 | % |
| Non-performing loans | 14.2 | | | 14.7 | | | (3) | | | | | 8.3 | | | 71 | |
| Non-performing real estate | 0.7 | | | 0.7 | | | (6) | | | | | 0.7 | | | (8) | |
| Total | $ | 288.3 | | | $ | 275.3 | | | 5 | | | | | $ | 237.3 | | | 22 | % |
| | | | | | | | | | | |
| Conventional loans (2) | $ | 185.5 | | | $ | 173.4 | | | 7 | % | | | | $ | 133.7 | | | 39 | % |
| Government-insured loans | 29.3 | | | 27.6 | | | 6 | | | | | 31.9 | | | (8) | |
| Non-Agency loans | 73.5 | | | 74.4 | | | (1) | | | | | 71.7 | | | 2 | |
| Total | $ | 288.3 | | | $ | 275.3 | | | 5 | % | | | | $ | 237.3 | | | 22 | % |
| | | | | | | | | | | |
| Servicing portfolio (3) | $ | 124.4 | | | $ | 123.9 | | | — | % | | | | $ | 156.8 | | | (21) | % |
| Subservicing portfolio | | | | | | | | | | | |
| Subservicing - forward | 42.2 | | | 40.4 | | | 4 | | | | | 19.2 | | | 120 | |
| Subservicing - reverse | 25.0 | | | 22.2 | | | 13 | | | | | — | | | n/m |
| Total subservicing | 67.2 | | | 62.6 | | | 7 | | | | | 19.2 | | | 251 | |
| MAV (4) | 45.1 | | | 35.3 | | | 28 | | | | | — | | | n/m |
| NRZ (5) (6) | 51.7 | | | 53.6 | | | (3) | | | | | 61.4 | | | (16) | |
| Total | $ | 288.3 | | | $ | 275.3 | | | 5 | % | | | | $ | 237.3 | | | 22 | |
| | | | | | | | | | | |
| Number (in 000’s): | | | | | | | | | | | |
| Performing loans (1) | 1,335.2 | | | 1,302.8 | | | 2 | % | | | | 1,220.7 | | | 9 | % |
| Non-performing loans | | | | | | | | | | | |
| Non-performing loans - NRZ | 29.0 | | | 30.4 | | | (5) | % | | | | 28.7 | | | 1 | % |
| Non-performing loans - Other | 35.0 | | | 37.2 | | | (6) | | | | | 14.6 | | | 140 | |
| 63.9 | | | 67.6 | | | (5) | | | | | 43.3 | | | 48 | |
| Non-performing real estate | 4.3 | | | 4.8 | | | (9) | | | | | 5.9 | | | (27) | |
| Total | 1,403.4 | | | 1,375.1 | | | 2 | % | | | | 1,269.9 | | | 11 | % |
| | | | | | | | | | | |
| Conventional loans (2) | 745.6 | | | 713.2 | | | 5 | % | | | | 561.3 | | | 33 | % |
| Government-insured loans | 167.5 | | | 161.7 | | | 4 | | | | | 188.1 | | | (11) | |
| Non-Agency loans | 490.3 | | | 500.2 | | | (2) | | | | | 520.4 | | | (6) | |
| Total | 1,403.4 | | | 1,375.1 | | | 2 | % | | | | 1,269.9 | | | 11 | % |
| | | | | | | | | | | |
| Servicing portfolio | 581.9 | | | 589.3 | | | (1) | % | | | | 729.3 | | | (20) | % |
| Subservicing portfolio | | | | | | | | | | | |
| Subservicing - forward | 148.5 | | | 142.9 | | | 4 | | | | | 77.3 | | | 92 | |
| Subservicing - reverse | 104.2 | | | 91.8 | | | 13 | | | | | — | | | n/m |
| Total subservicing | 252.7 | | | 234.7 | | | 8 | | | | | 77.3 | | | 227 | |
| MAV | 169.6 | | | 139.7 | | | 21 | | | | | — | | | n/m |
| NRZ (5) | 399.2 | | | 411.3 | | | (3) | | | | | 463.3 | | | (14) | |
| Total | 1,403.4 | | | 1,375.1 | | | 2 | % | | | | 1,269.9 | | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | % Change | | Six Months Ended | | % Change | |
| June 30, | | March 31 | | | June 30, | | June 30, | | |
| 2022 | | 2022 | | | 2022 | | 2021 | | |
| Prepayment speed (CPR) (7): | | | | | | | | | | | | |
| % Voluntary CPR | 8.9 | % | | 11.4 | % | | (22) | % | | 10.1 | % | | 18.6 | % | | (46) | % | |
| | | | | | | | | | | | |
| % Involuntary CPR | 0.4 | | | 0.3 | | | 33 | | | 0.4 | | | 0.9 | | | (56) | | |
| | | | | | | | | | | | |
| % Total CPR | 12.5 | | | 14.8 | | | (16) | | | 13.7 | | | 22.4 | | | (39) | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Number of completed modifications (in 000’s) | 4.8 | | | 4.0 | | | 18 | % | | 8.8 | | | 8.9 | | | (1) | % | |
| Revenue recognized in connection with loan modifications | $ | 5.7 | | | $ | 6.4 | | | (11) | % | | $ | 12.1 | | | $ | 15.2 | | | (20) | % | |
(1)Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.
(2)Conventional loans include 68,985 and 70,938 prime loans with a UPB of $13.4 billion and $13.4 billion at June 30, 2022 and March 31, 2022, respectively, that we service or subservice. This compares to 81,193 prime loans with a UPB of $14.6 billion at June 30, 2021. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Includes $7.4 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at June 30, 2022.
(4)Includes $16.6 billion UPB subserviced and $28.5 billion UPB of MSRs sold to MAV that did not achieve sale accounting treatment at June 30, 2022. Excludes subserviced loans with a UPB of $1.6 billion that have not yet transferred onto the PMC servicing system as of June 30, 2022.
(5)Loans serviced or subserviced pursuant to our agreements with NRZ or MAV.
(6)Includes $2.0 billion UPB of subserviced loans at June 30, 2022.
(7)Total 3-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.
The following table provides the rollforward of activity of our portfolio of mortgage loans serviced that includes MSRs, whole loans and subserviced loans, both forward and reverse:
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| Amount of UPB ($ in billions) | | Count (000’s) |
| 2022 | | 2021 | | 2022 | | 2021 |
| Portfolio at January 1 | $ | 268.0 | | | $ | 188.8 | | | 1,353.2 | | | 1,107.6 | |
| Additions (1) (2) (3) | 31.5 | | | 13.5 | | | 78.1 | | | 49.4 | |
| MSR sales (3) | (11.1) | | | — | | | (0.1) | | | (0.1) | |
| Servicing transfers | (2.3) | | | (10.9) | | | (9.0) | | | (42.5) | |
| Runoff | (10.8) | | | (12.1) | | | (47.1) | | | (51.2) | |
| Portfolio at March 31 | $ | 275.3 | | | $ | 179.4 | | | 1,375.1 | | | 1,063.2 | |
| Additions (1) | 26.8 | | | 68.7 | | | 89.0 | | | 256.8 | |
| Sales | — | | | — | | | (0.1) | | | — | |
| Servicing transfers (2) | (4.0) | | | — | | | (16.1) | | | (0.2) | |
| Runoff | (9.8) | | | (10.7) | | | (44.5) | | | (49.9) | |
| Portfolio at June 30 | $ | 288.3 | | | $ | 237.3 | | | 1,403.4 | | | 1,269.9 | |
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(1)Additions include purchased MSRs on portfolios consisting of 115 loans with a UPB of $39.5 million that have not yet transferred to the PMC servicing system as of June 30, 2022. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.
(2)Includes the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and deboarded within the same quarter.
(3)Includes MSRs sold to an unrelated third party consisting of 38,236 loans with a UPB of $10.8 billion that have not yet transferred out of the PMC servicing system as of June 30, 2022, and for which PMC is performing interim subservicing.
The following table provides a breakdown of our servicer advances:
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| June 30, 2022 | | December 31, 2021 |
| Advances by investor type | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total | | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total |
| Conventional | $ | 5 | | $ | 40 | | $ | 5 | | $ | 50 | | $ | 2 | | $ | 66 | | $ | 7 | | $ | 75 |
| Government-insured | 1 | | 24 | | 18 | | 43 | | 1 | | 55 | | 23 | | 79 |
| Non-Agency | 206 | | 230 | | 118 | | 554 | | 225 | | 261 | | 133 | | 618 |
| Total, net | $ | 212 | | $ | 294 | | $ | 141 | | $ | 647 | | $ | 228 | | $ | 381 | | $ | 164 | | $ | 772 |
The following table provides selected operating statistics related to our reverse mortgage loans reported within our Servicing segment:
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| June 30, | | March 31, | | % Change | | June 30, | | % Change |
| 2022 | | 2022 | | | 2021 | |
| Reverse Mortgage Loans | | | | | | | | | |
| Unpaid principal balance (UPB) in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 6,990.9 | | | $ | 6,849.1 | | | 2 | % | | $ | 6,341.2 | | | 10 | % |
| Active Buyouts (2) | 46.7 | | | 57.8 | | | (19) | | | 24.5 | | | 90 | % |
| Inactive Buyouts (2) | 108.9 | | | 108.5 | | | — | | | 81.0 | | | 34 | % |
| Total | $ | 7,146.4 | | | $ | 7,015.4 | | | 2 | | | $ | 6,446.7 | | | 11 | % |
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| Inactive buyouts % to total | 1.52 | % | | 1.55 | % | | (2) | | | 1.26 | % | | 21 | % |
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| Future draw commitments (UPB) in millions: | 1,745.0 | | | 1,659.9 | | | 5 | | | 1,208.8 | | | 44 | % |
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| Fair value in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 7,220.8 | | | $ | 7,202.0 | | | — | | | $ | 6,928.5 | | | 4 | % |
| HMBS related borrowings | 7,155.3 | | | 7,118.8 | | | 1 | | | 6,823.9 | | | 5 | |
| Net asset value | $ | 65.5 | | | $ | 83.2 | | | (21) | | | $ | 104.6 | | | (37) | % |
| Net asset value to UPB | 0.94 | % | | 1.21 | % | | | | 1.65 | % | | |
(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.
Servicing and Subservicing Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | Six Months Ended | | | |
| June 30, | | March 31, | | | % Change | | June 30, | | June 30, | | | % Change |
| 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Loan servicing and subservicing fees: | | | | | | | | | | | | | |
| Servicing | $ | 80.9 | | | $ | 88.5 | | | | (9) | % | | $ | 169.4 | | | $ | 143.3 | | | | 18 | % |
| Subservicing | 20.4 | | | 14.7 | | | | 39 | | | 35.0 | | | 6.1 | | | | 474 | |
| MAV | 18.8 | | | 16.6 | | | | 13 | | | 35.5 | | | — | | | | n/m |
| NRZ | 64.7 | | | 67.1 | | | | (4) | | | 131.9 | | | 158.1 | | | | (17) | |
| Servicing and subservicing fees | 184.8 | | | 187.0 | | | | (1) | | | 371.8 | | | 307.5 | | | | 21 | |
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| Ancillary income | 29.7 | | | 25.2 | | | | 18 | | | 54.9 | | | 44.0 | | | | 25 | |
| $ | 214.5 | | | $ | 212.2 | | | | 1 | % | | $ | 426.7 | | | $ | 351.5 | | | | 21 | % |
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The $2.3 million, or 1% increase in total servicing and subservicing fees for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022 is primarily driven by the increase in our average subservicing and MAV portfolios partially offset by the decrease in our average owned servicing portfolio, as further discussed below.
The $75.2 million, or 21% increase in total servicing and subservicing fees in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 is primarily driven by our successful volume growth strategy, selectively balanced between servicing and subservicing, and the gradual replacement of the NRZ volumes with new relationships and volumes sourced by our Originations business, as further discussed below.
The following table presents the respective drivers of residential loan servicing (owned MSR) and subservicing fees.
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| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | March 31, | | % Change | | June 30, | | June 30, | | % Change |
| | 2022 | | 2022 | | | 2022 | | 2021 | |
| Servicing and subservicing fee | | | | | | | | | | | |
| Servicing fee (owned MSR) | $ | 80.9 | | $ | 88.5 | | (9) | % | | $ | 169.4 | | $ | 143.3 | | 18 | % |
| Average servicing fee (% of UPB) (1) | 0.28 | | 0.28 | | (1) | % | | 0.28 | | 0.28 | | (2) | % |
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| Subservicing fee (excluding MAV and NRZ) | $ | 20.4 | | $ | 14.7 | | 39 | | | $ | 35.0 | | $ | 6.1 | | 474 | % |
| Average monthly fee per loan (in dollars) (2) | $ | 27 | | $ | 27 | | (1) | | | $ | 27 | | $ | 12 | | 122 | % |
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| Residential assets serviced | | | | | | | | | | | |
| Average UPB ($ in billions): | | | | | | | | | | | |
| Servicing portfolio - Owned | $ | 123.7 | | $ | 133.0 | | (7) | % | | $ | 129.0 | | $ | 108.0 | | 19 | % |
| Subservicing portfolio | | | | | | | | | | | |
| Subservicing - forward | 42.9 | | 32.6 | | 32 | | | 37.3 | | 20.9 | | 79 | % |
| Subservicing - reverse | 24.6 | | 16.3 | | 51 | | | 20.2 | | — | | n/m |
| Total subservicing | 67.5 | | 48.8 | | 38 | | | 57.5 | | 20.9 | | 175 | % |
| MAV | 42.3 | | 34.0 | | 24 | | | 38.6 | | — | | n/m |
| NRZ | 52.6 | | 54.7 | | (4) | | | 53.6 | | 64.3 | | (17) | % |
| Total | $ | 286.1 | | $ | 270.5 | | 6 | % | | $ | 278.7 | | $ | 193.2 | | 44 | % |
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| Average number (in 000’s): | | | | | | | | | | | |
| Servicing portfolio | 583.9 | | 623.6 | | (6) | % | | 605.8 | | 547.7 | | 11 | % |
| Subservicing portfolio | | | | | | | | | | | |
| Subservicing - forward | 152.2 | | 116.1 | | 31 | | | 132.9 | | 83.7 | | 59 | % |
| Subservicing - reverse | 102.7 | | 65.1 | | 58 | | | 82.8 | | — | | n/m |
| Total subservicing | 254.9 | | 181.2 | | 41 | | | 215.7 | | 83.7 | | 158 | % |
| MAV | 160.9 | | 135.4 | | 19 | | | 149.3 | | — | | n/m |
| NRZ | 405.1 | | 422.3 | | (4) | | | 414.0 | | 482.2 | | (14) | % |
| 1,404.8 | | 1,362.4 | | 3 | % | | 1,384.9 | | 1,113.6 | | 24 | % |
(1)Excludes owned reverse mortgages effective with the three months ended June 30, 2022, Prior periods have been recast to conform to the current presentation.
(2)Excludes MAV portfolio and includes reverse subservicing in the three and six months ended June 30, 2022 and three months ended March 31, 2022.
The table above and fee structure reflects our strategy to grow our subservicing business, with a $5.7 million, or 39% increase in subservicing fees and the increased use of MAV to grow our servicing volume when comparing the first and second quarters of 2022. The $7.6 million, or 9% decline in servicing fee income on our owned MSRs is due to a 7% decrease in our average UPB serviced, primarily driven by the transfer of owned MSRs to MAV with a UPB of $2.4 billion (that did not achieve sale accounting). Subservicing fees increased primarily due to the boarding of approximately 19,000 additional reverse mortgage loans in the second quarter of 2022 under the subservicing agreement with MAM (RMS). This boarding is in addition to approximately 40,000 reverse mortgage loans boarded during the first quarter of 2022.
Year over year, when comparing the six months ended June 30, 2022 with the six months ended June 30, 2021, our servicing fee income increased by $26.2 million or 18% in our owned MSR portfolio, our subservicing fee income grew by $28.9 million, and we generated a new source of fee income with the $35.5 million servicing fee from MAV. We achieved a total $64.3 million fee increase, or 21%, despite a $26.2 million reduction in fees collected on behalf of NRZ due to portfolio runoff. The increase in servicing fees on our owned MSRs is due to a 19% increase in our average volume serviced, primarily driven by bulk acquisitions and the growth in our correspondent lending volumes. The $28.9 million increase in subservicing fees is mostly due to boarding of reverse mortgage loans under the subservicing agreement with MAM (RMS). The average subservicing fee per loan increased from $12 to $27 dollars, driven by the inclusion of reverse mortgage loans that yield relatively higher compensation for both active and inactive loans.
The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for additional information.
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| NRZ servicing and subservicing fees | Three Months Ended | | Six Months Ended |
| June 30, | | March 31, | | June 30, | | June 30, |
| 2022 | | 2022 | | 2022 | | 2021 |
| Servicing fees collected on behalf of NRZ | $ | 64.7 | | | $ | 67.1 | | | $ | 131.9 | | | $ | 158.1 | |
| Servicing fees remitted to NRZ (1) | (46.0) | | | (47.8) | | | (93.7) | | | (111.6) | |
| Retained subservicing fees on NRZ agreements (2) | $ | 18.8 | | | $ | 19.4 | | | $ | 38.1 | | | $ | 46.5 | |
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| Average NRZ UPB ($ in billions) | $ | 52.6 | | | $ | 54.7 | | | $ | 53.6 | | | $ | 64.3 | |
| Average annualized retained subservicing fees as a % of NRZ UPB | 0.14 | % | | 0.14 | % | | 0.14 | % | | 0.14 | % |
(1)Reported within Pledged MSR liability expense. The NRZ servicing fee includes the total servicing fees collected on behalf of NRZ relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense.
(2)Excludes ancillary income.
For the three months ended June 30, 2022, the net retained fee on our NRZ portfolio declined $0.6 million as compared to the three months ended March 31, 2022. The net retained fee on our NRZ portfolio decreased $8.4 million in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decline in the NRZ fee collection and remittance is primarily driven by the decline in the average UPB of 4% and 17% in the three and six months ended June 30, 2022, respectively, due to portfolio runoff and prepayments. As the NRZ relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.
The following table presents the detail of our ancillary income:
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| Ancillary Income | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| June 30, | | March 31, | | | | June 30, | | June 30, | | |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Late charges | $ | 11.7 | | | $ | 10.0 | | | | 17 | % | | $ | 21.8 | | | $ | 20.7 | | | | 5 | % |
| Reverse subservicing ancillary fees | 6.3 | | | 3.1 | | | | 100 | | | 9.4 | | | — | | | | n/m |
| Loan collection fees | 2.9 | | | 2.9 | | | | (3) | | | 5.8 | | | 5.7 | | | | 2 | |
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| Recording fees | 2.6 | | | 3.3 | | | | (19) | | | 5.9 | | | 6.9 | | | | (14) | |
| Custodial accounts (float earnings) | 1.8 | | | 1.0 | | | | 83 | | | 2.8 | | | 2.3 | | | | 20 | |
| Boarding and deboarding fees | 1.3 | | | 1.3 | | | | 1 | | | 2.7 | | | 1.0 | | | | 161 | |
| GSE forbearance fees | 0.2 | | | 0.2 | | | | (2) | | | 0.4 | | | 0.6 | | | | (33) | |
| Other | 2.9 | | | 3.3 | | | | (13) | | | 6.2 | | | 6.9 | | | | (9) | |
| Ancillary income | $ | 29.7 | | | $ | 25.2 | | | | 18 | % | | $ | 54.9 | | | $ | 44.0 | | | | 25 | % |
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Ancillary income for the three months ended June 30, 2022 increased by $4.5 million as compared to the three months ended March 31, 2022 primarily because of a $3.2 million increase in reverse subservicing ancillary fees due to the additional boarding of reverse mortgage loans during the second quarter of 2022 under the subservicing agreement with MAM (RMS) and a $1.7 million increase in late charges due to borrower payment behavior.
As compared to the six months ended June 30, 2021, ancillary income increased by $10.9 million largely due to $9.4 million of reverse subservicing fees recognized during the six months ended June 30, 2022 on reverse mortgage loans boarded during the first and second quarters of 2022 and the fourth quarter of 2021.
Gain (loss) on Loans Held for Sale, Net
Loss on loans held for sale, net for the three months ended June 30, 2022 increased $8.8 million as compared to the three months ended March 31, 2022 due to the loss on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program, net of the associated Ginnie Mae MSR fair value adjustment and advances.
Loss on loans held for sale, net for the six months ended June 30, 2022 was $14.2 million, a $21.9 million unfavorable change as compared to Gain on loans held for sale, net of $7.7 million recognized in the six months ended June 30, 2021. Losses on repurchased loans in connection with Ginnie Mae loan modifications and EBO activities increased $18.0 million due to the $8.8 million loss recognized in the second quarter of 2022 as disclosed above, and the decreased volume and margins on redelivery gains that became minimal in 2022, as a result of higher market interest rates.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net reported in the Servicing segment is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. Reverse mortgage revenue, net excludes reverse subservicing that is reflected in Servicing and subservicing fees. The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents a component of our compensation for servicing the portfolio, that is a percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts.
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| Three Months Ended | | | | | Six Months Ended | | | |
| June 30, | | March 31, | | | % Change | | June 30, | | June 30, | | | % Change |
| 2022 | | 2022 | | | 2022 | | 2021 | |
| Net interest income (servicing fee) | $ | 5.4 | | | $ | 5.3 | | | | 2 | % | | $ | 10.7 | | | $ | 9.9 | | | | 8 | % |
| Other fair value changes (1) | (24.5) | | | (17.2) | | | | 42 | | | (41.6) | | | 2.6 | | | | n/m |
| Reverse mortgage revenue, net (Servicing) | $ | (19.0) | | | $ | (11.9) | | | | 60 | % | | $ | (30.9) | | | $ | 12.5 | | | | (347) | |
(1)Includes $2.8 million and $3.8 million of realized gains on tail securitization for the three months ended June 30, 2022 and March 31, 2022, respectively, and $6.7 million and $12.0 million for the six months ended June 30, 2022 and 2021, respectively.
Reverse mortgage revenue, net declined $7.1 million for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022, and declined $43.4 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The declines are primarily due to unrealized fair value losses on the HECM loan portfolio, net of HMBS, attributable to market conditions. Specifically, fair value losses are driven by increasing interest rates and widening yield spread directly impacting projected asset life and the tail value of the HECM reverse mortgage loans. Tail value declined by $1.0 million and $5.3 million in the three and six months ended June 30, 2022, respectively. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization. Note that the fair value changes of the net asset value between securitized HECM loans and HMBS (referred to as our reverse MSR) attributable to interest rate changes are effectively used as a hedge of our forward MSR portfolio. See further description of our hedging strategy in Item 3. Quantitative and Qualitative Disclosures about Market Risk.
MSR Valuation Adjustments, Net
The following tables summarize the MSR valuation adjustments, net reported in our Servicing segment, with the breakdown of the total MSRs recorded on our balance sheet between our owned MSRs and the MSRs transferred to NRZ and MAV that did not achieve sale accounting treatment:
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| Three Months Ended June 30, 2022 | | Three Months Ended March 31, 2022 |
| Total (1) | Owned MSR (1) | Pledged MSR (NRZ and MAV) (2) | | Total (1) | Owned MSR (1) | Pledged MSR (NRZ and MAV) (2) |
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| Runoff (3) | $ | (67.6) | | $ | (38.8) | | $ | (28.8) | | | $ | (72.8) | | $ | (44.6) | | $ | (28.3) | |
| Rate and assumption change (1) | 115.1 | | 75.2 | | 39.9 | | | 201.2 | | 145.7 | | 55.5 | |
| Hedging gain (loss) | (17.0) | | (17.0) | | — | | | (80.0) | | (80.0) | | — | |
| Total | $ | 30.4 | | $ | 19.3 | | $ | 11.1 | | | $ | 48.3 | | $ | 21.1 | | $ | 27.2 | |
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| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| Total (1) | Owned MSR | Pledged MSR (NRZ and MAV) (2) | | Total (1) | Owned MSR (1) | Pledged MSR (NRZ) (2) |
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| Runoff (3) | $ | (140.4) | | $ | (83.4) | | $ | (57.0) | | | $ | (106.2) | | $ | (67.6) | | $ | (38.5) | |
| Rate and assumption change (1) | 316.2 | | 220.9 | | 95.3 | | | 28.3 | | 18.4 | | 9.9 | |
| Hedging gain (loss) | (97.1) | | (97.1) | | — | | | (14.8) | | (14.8) | | — | |
| Total | $ | 78.7 | | $ | 40.4 | | $ | 38.3 | | | $ | (92.6) | | $ | (64.0) | | $ | (28.6) | |
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(1)Excludes gains of $2.6 million and $1.1 million in the three months ended June 30, 2022 and March 31, 2022, respectively, and $3.7 million and $17.3 million in the six months ended June 30, 2022 and 2021, respectively, on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net. Effective in the first quarter of 2022, we recognize revaluation gains or losses on Fannie Mae MSRs purchased through the Agency Cash Window Program within the Servicing segment that were historically reported in the Originations segment. Segment results for prior periods have been recast to conform to the current segment presentation. Such revaluation gains were $— (nil) for the three and six months ended June 30, 2021.
(2)MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.
(3)The terms runoff and realization of expected future cash flows may be used interchangeably within this discussion.
We reported a $30.4 million gain in MSR valuation adjustments, net for the three months ended June 30, 2022, comprised of a $19.3 million gain on our owned MSRs and an $11.1 million gain on the MSRs transferred to NRZ and MAV. The $19.3 million gain on our owned MSRs for the three months ended June 30, 2022 is comprised of a $75.2 million gain on the MSR portfolio attributable to rate and assumption changes, a $17.0 million hedging loss and $38.8 million MSR portfolio runoff. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The fair value gain due to rate and assumption changes is primarily due to an increase in market interest rates (e.g., the 10-year swap rate increased by 65 basis points in the three months ended June 30, 2022).
The $17.9 million decline in gain on MSR valuation adjustments, net for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022 is primarily due to an $86.1 million decrease in the gain attributed to rate and assumption change, partially offset by a $63.0 million decrease in the hedging loss. The lower fair value gains attributed to rate and assumption change are driven by lower increases in rates in the respective periods. The 10-year swap rate increased by 65 basis points in the second quarter of 2022 and 83 basis points in the first quarter of 2022. Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging sensitivity measures in the first quarter of 2022, mainly due to non-parallel changes in the interest rate curve, the basis risk inherent in the MSR profile and the available hedging instruments, and an over-hedge sensitivity profile. Refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk for further detail on our hedging strategy and its effectiveness.
For the six months ended June 30, 2022, we reported a $78.7 million gain in MSR valuations, net as compared to a loss of $92.6 million for the six months ended June 30, 2021. This favorable variance of $171.3 million is due to a $287.9 million increase in the gain attributed to rate and assumption change offset by an $82.3 million increase in the hedging loss and a $34.3 million increase in runoff. The increase in gain on rate and assumption change is primarily due to an increase in market interest rates (e.g., the 10-year swap rate increased by 148 basis points in the six months ended June 30, 2022 and increased by 52 basis points in the six months ended June 30, 2021). The increase in runoff is due to an increase in MSR portfolio size due to significant bulk MSR acquisitions in 2021 partially offset by lower prepayment speeds in 2022.
The following table provides information regarding the changes in the fair value and the UPB of our portfolio of owned MSRs (excluding NRZ and MAV related MSRs) during the second quarter of 2022, with the breakdown by investor type. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owned MSR Fair Value (1) | | Owned MSR UPB ($ in billions) (1) |
| GSEs | | Ginnie Mae | | Non-
Agency | | Total | | GSEs | | Ginnie Mae | | Non-
Agency | | Total |
| Beginning balance | $ | 1,204.4 | | | $ | 120.1 | | | $ | 110.7 | | | $ | 1,435.2 | | | $ | 87.6 | | | $ | 11.6 | | | $ | 16.6 | | $ | 115.7 |
| Additions | | | | | | | | | | | | | | | |
| New cap. | 50.1 | | | 10.1 | | | — | | | 60.2 | | | 3.6 | | 0.5 | | — | | 4.1 |
| Purchases | 32.7 | | | 4.2 | | | — | | | 36.9 | | | 3.0 | | 0.2 | | — | | 3.2 |
| Sales/servicing transfers | — | | | — | | | — | | | — | | | — | | — | | — | | — |
| Sales/calls (3) | (33.4) | | | 14.7 | | | — | | | (18.7) | | | (2.4) | | (0.3) | | — | | (2.7) |
| Change in fair value: | | | | | | | | | | | | | | | |
| Inputs and assumptions (2) | 59.0 | | | 11.0 | | | 7.2 | | | 77.2 | | | — | | — | | — | | — |
| Realization of cash flows | (31.4) | | | (1.6) | | | (5.1) | | | (38.1) | | | (2.8) | | (0.5) | | (0.8) | | (4.1) |
| Ending balance | $ | 1,281.4 | | | $ | 158.5 | | | $ | 112.7 | | | $ | 1,552.6 | | | $ | 88.9 | | $ | 11.6 | | $ | 15.8 | | $ | 116.3 |
Fair value
(% of UPB) | 1.44 | % | | 1.37 | % | | 0.71 | % | | 1.34 | % | | | | | | | | |
Fair value
multiple (4) | 5.63 | x | | 3.81 | x | | 2.17 | x | | 4.83 | x | | | | | | | | |
| | | | | | | | | | | | | | | |
(1)See Note 7 – Mortgage Servicing and Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information on the NRZ and MAV portfolios.
(2)Mostly changes in interest rates, except for gains of $2.6 million on the revaluation of purchased MSRs, that are reported in the Originations segment.
(3)Includes $33.4 million fair value and $2.4 billion UPB of MSR sales to MAV that did not achieve sale accounting treatment.
(4)Multiple of average servicing fee and UPB.
The $11.1 million gain on the transferred MSRs not qualifying for sale accounting (transferred to NRZ and MAV) for the three months ended June 30, 2022 includes $39.9 million fair value gain attributable to rates and assumptions and $28.8 million runoff. The $39.9 million fair value gain attributable to rates and assumptions during the three months ended June 30, 2022 is mostly driven by the increase in market rates during the quarter. This MSR fair value gain is partially offset by a fair value loss recorded on the associated NRZ and MAV MSR pledged liability. The runoff is explained by the same factors underlying our owned MSR, discussed above, the transfers of MSRs to MAV beginning in the third quarter of 2021 and the decline in the NRZ MSR portfolio.
Compensation and Benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | % Change | | Six Months Ended | | | | % Change |
| June 30, | | March 31, | | | | June 30, | | June 30, | | |
| 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Compensation and benefits | $ | 34.9 | | | $ | 29.0 | | | | 20 | % | | $ | 64.0 | | | $ | 51.2 | | | | | 25 | % |
| | | | | | | | | | | | | | | |
| Average Employment | | | | | | | | | | | | | | | |
| India and other | 2,637 | | | 2,463 | | | | | 7 | % | | 2,554 | | | 2,421 | | | | | 5 | |
| U.S. | 1,082 | | | 1,023 | | | | | 6 | | | 1,052 | | | 661 | | | | | 59 | |
| Total | 3,719 | | | 3,486 | | | | | 7 | % | | 3,606 | | | 3,082 | | | | | 17 | % |
Compensation and benefits expense for the three months ended June 30, 2022 increased $5.9 million, or 20%, as compared to the three months ended March 31, 2022 primarily due to a $3.1 million increase in the fair value of cash-settled share-based awards associated with the increase in our common stock price during the quarter. In addition, salaries and benefit expense increased $2.6 million due to a 7% increase in our average Servicing headcount, mostly in support of the growth in our reverse mortgage subservicing business.
As compared to the six months ended June 30, 2021, Compensation and benefits expense for the ninesix months ended SeptemberJune 30, 2021 declined $10.82022 increased $12.8 million, or 13%25%, primarily due to a 17% increase in our average Servicing headcount, mostly onshore. The increase in servicing headcount primarily reflects the hiring of employees to support the growth of the reverse servicing platform, specifically the acquisition of reverse mortgage subservicing from MAM (RMS). Incentive compensation decreased $1.5 million primarily due to a $2.2 million decrease in the fair value of cash-settled share-based awards associated with the decrease in our common stock price at June 30, 2022 as compared to the nine months ended SeptemberJune 30, 2020, primarily due to an $8.7 million decrease in salaries and benefit expenses as a result of the 17% decline in our average servicing headcount. A $1.4 million decrease in commissions and incentive compensation also contributed to the decline in Compensation and benefits. The decline in servicing headcount reflects the scaling down of our platform to the number of loans being serviced and our cost re-engineering initiatives. During the nine months ended September 30, 2021, we serviced 13% fewer loans, on average, as compared to the nine months ended September 30, 2020.2021.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan-volume related expenses.
Servicing expense increased in the third quarter of 2021three months ended June 30, 2022 by $1.5$4.8 million or 6%, as compared to the second quarter of 2021,three months ended March 31, 2022, primarily due to $2.5a $4.0 million release of interim subservicing expenses on MSR bulk acquisitions.
Servicing expenseprovision for indemnification recorded in the nine months ended September 30, 2021 increased $17.4 million, or 32%, as compared to the nine months ended September 30, 2020, primarilyfirst quarter of 2022 due to an $11.8a favorable settlement and a $1.0 million increase in provision expense for servicing related reserves driven by improved recoveries duringon government-insured claims receivables due to increased government-insured claim loss volumes.
As compared to the ninesix months ended SeptemberJune 30, 2020,2021, Servicing expense for the six months ended June 30, 2022 declined $21.1 million. The decline is primarily due to a $4.5$6.9 million increase in interim subservicing expense on MSR bulk acquisitions, a $2.6 million increase in our subservicer expenses primarily attributable to growth in the reverse portfolio, and a $2.2 million increasedecrease in satisfaction and interest on payoff expense attributedattributable to higherlower payoff volume. These increases were partially offset byvolume, a $5.9$5.7 million release of provision for indemnification recorded in the six months ended June 30, 2022 related to favorable settlements, a $4.7 million decrease in provisions associated withreverse subservicing expenses driven by the volumetransfer of government-insured claim receivables due toour owned reverse portfolio from a subservicer onto our platform beginning in the foreclosure moratorium duringfourth quarter of 2021, and a $2.3 million reduction in interim subservicing costs incurred on bulk acquisitions in the nine months ended September 30,first half of 2021.
Other Operating Expenses
Other operating expenses (total operating expenses less compensationCompensation and benefit expense and servicerServicing expense) remained mostly constant duringfor the third quarter of 2021three months ended June 30, 2022 decreased $2.5 million as compared to the second quarter of 2021, with the exception ofthree months ended March 31, 2022 primarily due to a $3.6$3.4 million decline in Professional services expense. The decline in Professional services expense is mostly driven by a $3.9 million decrease inthe recovery of legal expenses in the third quarter of 2021 that was primarily duerelated to a higher provision expensefavorable settlement, partially offset by the increase in the second quarter associated with a larger volume of settlements.other professional fees, including costs incurred related to MSR sales.
Other operating expenses decreased by $15.0$1.3 million infor the ninesix months ended SeptemberJune 30, 20212022 as compared to the ninesix months ended SeptemberJune 30, 2020,2021. The net $7.2 million decline in large partProfessional services includes a $15.0 million decrease in legal expenses, mostly due to the effectrecovery of legal expenses in the first and second quarter of 2022 totaling $14.1 million related to a favorable settlement, offset by a $7.2 million increase in other professional fees primarily related to our reverse sub-servicing business. Overhead allocations decreased $1.8 million largely due to a decline in operating expenses in the technology support function as a result of headcount reduction and other cost saving initiatives with an $11.8 million reduction of Corporate overhead allocations attributable to the decline in support group operating expenses, including technology savings, and the lower relative weight of Servicing headcount to the consolidated organization (due to growth of the Originations segment).efforts. Offsetting these decreases, Occupancy and equipment expense decreased $5.5increased $3.5 million primarily due to a $3.7 million decrease resulting from a reductionan increase in servicing headcount and office space (and thus lower allocations from the Corporate segment) and a $1.9 million decrease in postageprinting and mailing expenses mostly as a result of the decline in letter volume attributed to COVID-19, timing of mailings and the declineincrease in the average number of loans serviced.serviced and additional mailing driven by acquisition of reverse mortgage subservicing, Technology and communications expense declined $3.0increased $1.9 million primarily due to cost savings associated withhigher fees related to our forward loan servicing system due to the implementation of data solutions as well as consolidation of telecommunication vendorsincrease in the second quarteraverage number of 2020. These declines in expenses were partially offsetloans serviced, and Other expense increased by a $4.4$2.2 million increase in Professional services,driven primarily due to $6.4 million higher legal expenses, offset by $2.1 million lower other professional services fee mostly as a result of lower COVID-19 related outsourcing expenses. The increase in legal expenses is due to a higher provision for litigation settlements in the nineamortization expense recognized during the six months ended SeptemberJune 30, 2022 on the reverse subservicing contract intangible asset recorded in October 2021 and a provision reversal duringApril 2022 as part of the nine months ended September 30, 2020.transactions with MAM (RMS).
Other Income (Expense)
Other income (expense) primarily includes primarily net interest expense and the pledged MSR liability expense.
| | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| | September 30, | | June 30, | | September 30, | | September 30, | | | June 30, | | March 31 | | | | June 30, | | June 30, | | | % Change |
| | 2021 | | 2021 | | 2021 | | 2020 | | | 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Interest Expense | | | | | | | | | | | | |
| Interest expense | | Interest expense | | | | | | | | | | | | | |
| Advance match funded liabilities | Advance match funded liabilities | $ | 2.8 | | | $ | 4.3 | | | (34) | % | | $ | 11.6 | | | $ | 19.5 | | | (41) | % | Advance match funded liabilities | $ | 2.8 | | | $ | 2.7 | | | | 3 | % | | $ | 5.5 | | | $ | 8.8 | | | | (37) | % |
| | Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 2.6 | | | 1.7 | | | 51 | % | | 6.0 | | | 3.9 | | | 53 | % | Mortgage loan warehouse facilities | 1.8 | | | 3.1 | | | | (42) | | | 4.9 | | | 3.4 | | | | 42 | |
| MSR financing facilities | MSR financing facilities | 8.6 | | | 4.8 | | | 81 | % | | 17.9 | | | 12.7 | | | 42 | % | MSR financing facilities | 8.6 | | | 7.8 | | | | 10 | | | 16.4 | | | 9.3 | | | | 75 | |
Corporate debt interest expense allocation | Corporate debt interest expense allocation | 13.2 | | | 11.4 | | | 16 | | 32.6 | | | 28.8 | | | 13 | Corporate debt interest expense allocation | 8.0 | | | 7.8 | | | | 2 | | 15.7 | | | 11.9 | | | | 32 |
| Escrow and other | 1.7 | | | 1.1 | | | 51 | | | 4.5 | | | 4.9 | | | (7) | | |
| Escrow | | Escrow | 1.2 | | | 1.8 | | | | (32) | | | 2.9 | | | 2.8 | | | | 6 | |
| Total interest expense | Total interest expense | $ | 29.0 | | | $ | 23.3 | | | 24 | % | | $ | 72.6 | | | $ | 69.8 | | | 4 | % | Total interest expense | $ | 22.3 | | | $ | 23.1 | | | | (3) | % | | $ | 45.4 | | | $ | 36.2 | | | | 25 | % |
| | Average balances | Average balances | | Average balances | | | | | |
| Average balance of advances | $ | 737.1 | | | $ | 757.3 | | | (3) | % | | $ | 755.6 | | | $ | 924.2 | | | (18) | % | |
| Advances | | Advances | $ | 692.2 | | | $ | 745.8 | | | | (7) | % | | $ | 718.4 | | | $ | 766.0 | | | | (6) | % |
| Advance match funded liabilities | Advance match funded liabilities | 496.5 | | | 502.3 | | | (1) | | | 511.9 | | | 626.8 | | | (18) | | Advance match funded liabilities | 467.9 | | | 488.2 | | | | (4) | | | 478.0 | | | 519.8 | | | | (8) | |
| | Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 373.5 | | | 203.4 | | | 84 | | | 245.4 | | | 111.7 | | | 120 | | Mortgage loan warehouse facilities | 205.1 | | | 369.8 | | | | (45) | | | 287.0 | | | 180.3 | | | | 59 | |
| MSR financing facilities | MSR financing facilities | 996.7 | | | 476.6 | | | 109 | | | 629.2 | | | 316.6 | | | 99 | | MSR financing facilities | 901.6 | | | 925.8 | | | | (3) | | | 913.6 | | | 442.5 | | | | 106 | |
| | Effective average interest rate | Effective average interest rate | | Effective average interest rate | | | | | |
| Advance match funded liabilities | Advance match funded liabilities | 2.26 | % | | 3.40 | % | | (33) | % | | 3.01 | % | | 4.16 | % | | (28) | % | Advance match funded liabilities | 2.39 | % | | 2.22 | % | | | 8 | % | | 2.30 | % | | 3.37 | % | | | (32) | % |
| | Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 2.76 | | | 3.35 | | | (18) | % | | 3.27 | | | 4.70 | | | (31) | % | Mortgage loan warehouse facilities | 3.50 | | | 3.32 | | | | 5 | | | 3.39 | | | 3.81 | | | | (11) | |
| MSR financing facilities | MSR financing facilities | 3.46 | | | 3.99 | | | (13) | % | | 3.80 | | | 5.33 | | | (29) | % | MSR financing facilities | 3.80 | | | 3.37 | | | | 13 | | | 3.58 | | | 4.22 | | | | (15) | |
| | Facility costs included in interest expense | Facility costs included in interest expense | $ | 2.1 | | | $ | 3.0 | | | (28) | % | | $ | 7.8 | | | $ | 9.9 | | | (21) | % | Facility costs included in interest expense | $ | 2.3 | | | $ | 2.2 | | | | 8 | | | $ | 4.5 | | | $ | 5.7 | | | | (20) | |
| | Average 1ML | Average 1ML | 0.09 | % | | 0.10 | % | | (9) | % | | 0.10 | % | | 0.65 | % | | (84) | % | Average 1ML | 1.01 | % | | 0.23 | % | | | 348 | % | | 0.61 | % | | 0.11 | % | | | 467 | |
| Average 1M Term SOFR | | Average 1M Term SOFR | 0.92 | % | | 0.16 | % | | | 475 | % | | 0.54 | % | | 0.03 | % | | | n/m |
|
(1)Effective in the first quarter of 2022, interest expense on the OFC Senior Secured Notes is no longer allocated to the Servicing segment. Corporate debt interest expense allocation for prior periods has been recast to conform to the current period presentation. The interest expense allocation adjustment for the six months ended June 30, 2021 is $7.4 million.
Interest expense for the third quarter of 2021 increasedthree months ended June 30, 2022 was mostly flat (declined by $5.7$0.8 million or 24%,3%) as compared to the second quarter ofthree months ended March 31, 2022, with the decrease in our average debt balances mostly offset by a higher average funding cost. The decrease in our average debt balances was mostly due our efforts to reduce the loans held for sale portfolio, including repurchased loans from Ginnie Mae securitizations.
As compared to the six months ended June 30, 2021, primarilyinterest expense for the six months ended June 30, 2022 increased $9.2 million, or 25%, due to an overall increase in the average debt balances to finance the growth of the business, partially offset by a $3.8lower funding cost. The $7.1 million increase in interest expense on MSR financing facilities, and a $1.8 million increase in the corporate debt interest expense allocation, both associated with a larger owned MSR portfolio partially offset by a decline in the average funding cost. Interest expense on advance match funded facilities declined $1.5 million primarily due to lower average funding cost.
As compared to the nine months ended September 30, 2020, interest expense for the nine months ended September 30, 2021 increased $2.8 million, or 4%, due to a $5.2 million increase in interest expense on MSR financing facilities, a $3.8 million increase in the corporate debt interest expense allocation and a $2.1$1.4 million increase on mortgage loan warehouse facilities, are mostly the result of a larger MSR and Loans held for sale portfolio, partially offset by lower funding costs. These increases in interest expense were partially offset by an $7.9a $3.3 million decline in interest expense on advance match funded facilities as thedue to a lower average balancesbalance of advances and borrowings and fundinga lower cost were all lower.of funds.
Interest income for the three months ended June 30, 2022 decreased $1.1 million as compared to the three months ended March 31, 2022 mostly due to lower loans held for sale average balance driven by a significant sale of Ginnie Mae repurchased loans in the second quarter of 2022. As compared to the six months ended June 30, 2021, interest income for the six months ended June 30, 2022 increased $4.6 million primarily due to higher loans held for sale average balances driven by higher Ginnie Mae EBO repurchases during 2021 and the first quarter of 2022.
Pledged MSR liability expense relates to the MSR transfers that do not qualify for sale accounting and are presented on a gross basis in our financial statements. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting to the Unaudited
Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance for these transfers and the fair value changes of the pledged MSR liability.
The following table provides information regarding Pledged MSR liability expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| | Three Months Ended | $ Change | | Nine Months Ended | $ Change | | June 30, | | March 31 | | | June 30, | | June 30, | | % Change |
| | September 30, 2021 | | June 30, 2021 | | | September 30, 2021 | | September 30, 2020 | | | 2022 | | 2022 | | 2022 | | 2021 | |
| Net servicing fee remittance (1) | Net servicing fee remittance (1) | $ | 54.4 | | | $ | 55.2 | | | $ | (0.8) | | | $ | 166.0 | | | $ | 218.6 | | | $ | (52.6) | | Net servicing fee remittance (1) | $ | 61.2 | | | $ | 61.4 | | | | — | % | | $ | 122.6 | | | $ | 111.6 | | | 10 | % |
| Pledged MSR liability fair value (gain) loss (2) | 39.5 | | | (12.5) | | | 52.1 | | | 11.0 | | | (71.3) | | | 82.2 | | |
| 2017/2018 lump sum amortization gain | — | | | — | | | — | | | — | | | (34.2) | | | 34.2 | | |
| Pledged MSR liability fair value (gain) loss (1) | | Pledged MSR liability fair value (gain) loss (1) | 11.1 | | | 27.2 | | | | (59) | | | 38.3 | | | (28.6) | | | | (234) | |
| | Other | Other | (2.9) | | | (2.9) | | | — | | | (8.0) | | | (7.3) | | | (0.7) | | Other | 1.8 | | | (1.7) | | | | (206) | | | 0.1 | | | (5.3) | | | | (102) | |
| Pledged MSR liability expense | Pledged MSR liability expense | $ | 91.1 | | | $ | 39.8 | | | $ | 51.3 | | | $ | 168.9 | | | $ | 105.8 | | | $ | 63.1 | | Pledged MSR liability expense | $ | 74.1 | | | $ | 86.9 | | | | (15) | % | | $ | 161.0 | | | $ | 77.7 | | | | 107 | % |
(1)Offset by corresponding amountSee Note 8 — MSR Transfers Not Qualifying for Sale Accounting.
Pledged MSR liability expense for the three months ended June 30, 2022 decreased $12.8 million, as compared to the three months ended March 31, 2022, largely due to a $14.1 million fair value loss recorded in Servicingthe first quarter of 2022 as a result of the amendment in March 2022 of the MAV Subservicing agreement (as a change in the present value of future contractual cash flows). Effective March 1, 2022, PMC and MAV amended certain provisions of the subservicing fee. See table below.
(2)agreement to adjust down the ancillary fee retained by PMCOffset. Fair value adjustments of our MSR pledged liability (losses in the first and second quarter of 2022 driven by corresponding amountrising interest rates) are partially offset by fair value adjustments (gains) to the related MSR asset, which are recorded in MSR valuation adjustments, net. See table below.
Pledged MSR liability expense for the third quarter of 2021 increased $51.3 million, as compared to the second quarter of 2021, largely due to unfavorable fair value adjustment of the liability, driven by interest rates. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR) and Servicing and subservicing fees (NRZ and MAV).
Pledged MSR liability expense for the ninesix months ended SeptemberJune 30, 20212022 increased $63.1$83.3 million, as compared to the ninesix months ended SeptemberJune 30, 2020,2021, primarily due to a $82.2$66.9 million increase in unfavorable fair value change on the Pledgedpledged MSR liability driven by interest rates. In addition, we recognized a $34.2and an $11.0 million amortization gain recorded in the nine months ended September 30, 2020, nil in 2021, related to the lump-sum cash payments received from NRZ in 2017 and 2018. These increases in the expense were partially offset by a $52.6 million declineincrease in net servicing fee remittance,remittance. These changes are largely driven by rising interest rates in the runoffsix months ended June 30, 2022, as well as the launch of MAV in the portfolio and the terminationsecond half of the PMC agreement by NRZ in February 2020. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ) and Servicing and subservicing fees (NRZ).
The table below reflects the condensed consolidated statement of operations together with the amounts related to the pledged MSRs that largely offset each other. The table provides information related to the impact of the accounting for the MSR transfers that did not qualify for sale accounting treatment, and is not intended to reflect the profitability of these MSR transfers. Net servicing fee remittance and pledged MSR fair value changes are presented on a gross basis and are offset by corresponding amounts presented in other statement of operations line items. In addition, because we record both our pledged MSRs2021 and the associated recognition of the MAV pledged MSR liability at fair value,that is more interest rate sensitive than the changes in fair value of theNRZ pledged MSR liability were largely offset by the changes in fair value of the MSRs pledged, presented in MSR valuation adjustments, net. The net revaluation impact in the third quarter of 2021 relates to the MAV transactions - Refer to Note 8 — MSR Transfers Not Qualifying for Sale Accounting. Until the second quarter of 2020, only the NRZ lump sum amortization gain and the amount reported in “Other” in the table above affected our net earnings.liability.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | June 30, 2021 | | September 30, 2021 | | September 30, 2020 |
| Statement of Operations | | Pledged MSR-related Amounts | | Statement of Operations | | Pledged MSR-related Amounts | | Statement of Operations | | Pledged MSR-related Amounts | | Statement of Operations | | Pledged MSR-related Amounts |
| Total revenue | $ | 283.1 | | | $ | 54.4 | | | $ | 265.4 | | | $ | 55.2 | | | $ | 756.1 | | | $ | 166.0 | | | $ | 729.9 | | | $ | 218.6 | |
| MSR valuation adjustments, net | (6.3) | | | 39.5 | | | (72.5) | | | (12.5) | | | (57.6) | | | 11.0 | | | (231.4) | | | (71.3) | |
| Total operating expenses | 145.4 | | | — | | | 149.8 | | | — | | | 434.9 | | | — | | | 431.5 | | | — | |
| Total other expense, net | (121.1) | | | (89.7) | | | (65.4) | | | (42.7) | | | (264.0) | | | (172.7) | | | (171.9) | | | (147.3) | |
| Income (loss) before income taxes | $ | 10.3 | | | $ | 4.2 | | | $ | (22.2) | | | $ | — | | | $ | (0.3) | | | $ | 4.2 | | | $ | (104.9) | | | $ | — | |
We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.
We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA, VA or VA)USDA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations, respectively.securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HMBS that are guaranteed by Ginnie Mae.
Within retail, our consumer direct channel for forward mortgage loans (previously called recapture) focuses on targeting existing Ocwenservicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV Subservicing Agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the Joint-Marketing Agreement. In addition to refinance activities, our Consumer Direct channel targets cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.
Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them.them, on a servicing retained basis. We offer correspondent sellers the choice to take out mandatory or best efforts contracts, under which the seller's obligation to deliver the mortgage loan becomes mandatory only when and if the mortgage is closed and funded. As of SeptemberJune 30, 2021,2022, we have relationships with 419506 approved correspondent sellers, or 28868 new sellers since December 31, 2020. On June 1, 2021, we expanded our network through the assignment by Texas Capital Bank (TCB), and the assumption by us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers).2021.
We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.
After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis. Origination revenuesrevenue mostly includeincludes interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date.
We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.
We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRMSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs. As of June 30, 2022, we have relationships with 202 approved sellers through the Agency Cash Window co-issue programs, or 48 new sellers since December 31, 2021.
We initially recognize our MSR origination with the associated economics in our Originations business,segment, and subsequently transfer the MSR to our Servicing segment at fair value. Our Servicing segment reflectsvalue once the MSR is initially recognized on our balance sheet with all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes.changes reflected in our Servicing segment. However, effective first quarter of 2022, we report MSRs purchased through the Fannie Mae Cash Window program and the associated economics in our Servicing segment upon acquisition, as such MSRs are transferred to MAV monthly under an MSR flow sale agreement and subserviced by PMC. Segment results for prior periods have been recast as applicable to conform to the current segment presentation. See the “MSR Valuations Adjustments, net” section below for additional information.
We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales’sales initiatives. We further grow our subservicing volume through our subservicing agreement with MAV, as MAV continues to acquire MSRs. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.
For the thirdsecond quarter of 2021,2022, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $5.9$4.3 billion and $428$431.5 million, respectively. In addition, we purchased $4.9$3.2 billion UPB MSR through the Agency Cash Window and flow purchase programs during the thirdsecond quarter of 2021.2022.
The following table presents the results of operations of our Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | | % Change | | Six Months Ended | | % Change |
| September 30, | | June 30, | | September 30, | | September 30, | | June 30, | | March 31, | | June 30, | | June 30, | | % Change |
| 2021 | | 2021 | | 2021 | | 2020 | | 2022 | | 2022 | | 2022 | | 2021 | |
| Revenue | Revenue | | | | | | | | | | | | Revenue | | | | | | | | | | |
| Gain on loans held for sale, net | Gain on loans held for sale, net | $ | 29.6 | | $ | 27.3 | | 9 | % | | $ | 94.5 | | $ | 74.2 | | 27 | % | Gain on loans held for sale, net | $ | 12.5 | | $ | 12.8 | | | (2) | % | | $ | 25.3 | | $ | 64.9 | | (61) | % |
| Reverse mortgage revenue, net | Reverse mortgage revenue, net | 18.1 | | 18.8 | | (4) | | | 56.7 | | 38.2 | | 48 | | Reverse mortgage revenue, net | 16.4 | | 25.0 | | | (34) | | | 41.4 | | 38.6 | | 7 | |
| Other revenue, net (1) | Other revenue, net (1) | 11.1 | | 9.3 | | 20 | | | 29.3 | | 12.4 | | 136 | | Other revenue, net (1) | 7.3 | | 7.3 | | | — | | | 14.6 | | 18.2 | | (20) | |
| Total revenue | Total revenue | 58.8 | | 55.4 | | 6 | | | 180.4 | | 124.8 | | 45 | | Total revenue | 36.3 | | 45.0 | | | (19) | | | 81.3 | | 121.7 | | (33) | |
| MSR valuation adjustments, net | MSR valuation adjustments, net | 2.8 | | 8.8 | | (68) | | 20.1 | | 26.3 | | (24) | MSR valuation adjustments, net | 2.6 | | 1.1 | | | 146 | | 3.7 | | 17.3 | | (79) |
| | Operating expenses | Operating expenses | | Operating expenses | | | |
| Compensation and benefits | Compensation and benefits | 25.3 | | 23.9 | | 6 | | | 70.8 | | 42.4 | | 67 | | Compensation and benefits | 24.6 | | 28.5 | | | (14) | | | 53.0 | | 46.2 | | 15 | |
| Servicing and origination | 3.6 | | 3.2 | | 11 | | | 9.6 | | 4.7 | | 104 | | |
| Origination expense | | Origination expense | 3.5 | | 3.5 | | | (1) | | | 7.0 | | 6.0 | | 17 | |
| Occupancy and equipment | Occupancy and equipment | 1.7 | | 1.6 | | 4 | | | 4.8 | | 4.1 | | 16 | | Occupancy and equipment | 1.3 | | 1.6 | | | (17) | | | 2.9 | | 3.1 | | (7) | |
| Technology and communications | Technology and communications | 2.9 | | 2.0 | | 46 | | | 6.6 | | 3.5 | | 87 | | Technology and communications | 2.6 | | 2.5 | | | 4 | | | 5.1 | | 3.7 | | 38 | |
| Professional services | Professional services | 2.5 | | 1.9 | | 37 | | 7.5 | | 5.7 | | 33 | | Professional services | 1.5 | | 1.7 | | | (13) | | 3.2 | | 5.0 | | (36) | |
| Corporate overhead allocations | Corporate overhead allocations | 5.1 | | 4.6 | | 10 | | | 14.8 | | 13.6 | | 8 | | Corporate overhead allocations | 5.5 | | 5.3 | | | 4 | | | 10.7 | | 9.7 | | 11 | |
| Other expenses | Other expenses | 2.3 | | 2.4 | | (2) | | | 6.5 | | 4.3 | | 52 | | Other expenses | 3.6 | | 3.2 | | | 11 | | | 6.8 | | 4.3 | | 59 | |
| Total operating expenses | Total operating expenses | 43.5 | | 39.7 | | 10 | | | 120.5 | | 78.3 | | 54 | | Total operating expenses | 42.5 | | 46.2 | | | (8) | | | 88.7 | | 77.9 | | 14 | |
| | Other income (expense) | Other income (expense) | | Other income (expense) | | | |
| Interest income | Interest income | 5.3 | | 2.9 | | 87 | | | 10.8 | | 4.7 | | 128 | | Interest income | 6.6 | | 3.0 | | | 122 | | | 9.6 | | 5.4 | | 77 | |
| Interest expense | Interest expense | (6.7) | | (4.7) | | 43 | | | (15.0) | | (6.6) | | 127 | | Interest expense | (5.1) | | (4.2) | | | 21 | | | (9.4) | | (8.3) | | 14 | |
| | Other, net | Other, net | 0.1 | | (0.2) | | (173) | | | — | | 0.2 | | (98) | | Other, net | 0.3 | | (1.4) | | | (120) | | | (1.1) | | (0.1) | | 846 | |
| Total other expense, net | (1.2) | | (2.0) | | (38) | | | (4.2) | | (1.7) | | 152 | | |
| Total other income (expense), net | | Total other income (expense), net | 1.8 | | (2.7) | | | (166) | | | (0.9) | | (2.9) | | (69) | |
| | Income before income taxes | $ | 16.8 | | $ | 22.5 | | (25) | % | | $ | 75.8 | | $ | 71.1 | | 7 | % | |
| Income (loss) before income taxes | | Income (loss) before income taxes | $ | (1.8) | | $ | (2.8) | | | (35) | % | | $ | (4.7) | | $ | 58.1 | | (108) | % |
|
(1)Includes $1.2 million, $2.3 million, $5.8 million and $3.2 million ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level of $0.6 million and $0.5 million for the three months ended SeptemberJune 30, 20212022 and March 31, 2022, respectively, and $1.1 million and $4.7 million for the six months ended June 30, 2022 and June 30, 2021, respectively.
(2)Effective first quarter of 2022, we report MSRs purchased through the Fannie Mae Cash Window program and the nineassociated economics in our Servicing segment upon acquisition, as such MSRs are transferred to MAV monthly under an MSR flow sale agreement and subserviced by PMC. Segment results for prior periods have been recast as applicable to conform to the current segment presentation. The MSR valuation adjustments, net reclassified to the Servicing segment for the six months ended SeptemberJune 30, 2021 and September 30, 2020, respectively.was nil.
The following table provides selected operating statistics for our Originations segment:
| | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | % Change | | Six Months Ended | | % Change |
| September 30, | | June 30, | | September 30, | | September 30, | | June 30, | | March 31, | | June 30, | | June 30, | |
| 2021 | | 2021 | | 2021 | | 2020 | | 2022 | | 2022 | | 2022 | | 2021 | |
| | Originations by Channel | | |
| Loan Production by Channel | | Loan Production by Channel | |
| Forward loans | Forward loans | | Forward loans | |
| Correspondent | Correspondent | $ | 5,393 | | | $ | 2,489 | | | 117% | | $ | 10,509 | | | $ | 3,100 | | | 239% | Correspondent | $ | 3,937.4 | | | $ | 2,674.0 | | | 47% | | $ | 6,611.4 | | | $ | 5,116.3 | | | 29% |
| | Consumer Direct | Consumer Direct | 534 | | | 609 | | | (12) | % | | 1,706 | | | 884 | | | 93 | | Consumer Direct | 323.7 | | | 662.8 | | | (51)% | | 986.4 | | | 1,172.1 | | | (16) | |
| | $ | 5,928 | | | $ | 3,098 | | | 91% | | $ | 12,216 | | | $ | 3,984 | | | 207% | | $ | 4,261.1 | | | $ | 3,336.7 | | | 28% | | $ | 7,597.8 | | | $ | 6,288.3 | | | 21% |
| | % Purchase production | % Purchase production | 36 | % | | 28 | % | | 25 | | | 28 | % | | 22 | % | | 26 | | % Purchase production | 69 | % | | 40 | % | | 73 | | | 55 | % | | 21 | % | | 158 | |
| | % Refinance production | % Refinance production | 64 | | | 72 | | | (10) | | | 72 | | | 78 | | | (7) | | % Refinance production | 31 | | | 60 | | | (48) | | | 45 | | | 79 | | | (43) | |
| | Reverse loans (1) | Reverse loans (1) | | Reverse loans (1) | |
| Correspondent | Correspondent | $ | 226 | | | $ | 188 | | | 20 | % | | $ | 564 | | | $ | 336 | | | 68 | % | Correspondent | $ | 206.0 | | | $ | 281.5 | | | (27) | % | | $ | 487.5 | | | $ | 338.4 | | | 44 | % |
| Wholesale | Wholesale | 70 | | | 57 | | | 21 | | | 180 | | | 226 | | | (20) | | Wholesale | 90.2 | | | 118.2 | | | (24) | | | 208.4 | | | 110.9 | | | 88 | |
| Retail | Retail | 133 | | | 94 | | | 41 | | | 286 | | | 108 | | | 165 | | Retail | 135.3 | | | 147.3 | | | (8) | | | 282.6 | | | 153.8 | | | 84 | |
| | $ | 428 | | | $ | 340 | | | 26 | % | | $ | 1,031 | | | $ | 670 | | | 54 | % | | $ | 431.5 | | | $ | 547.0 | | | (21) | % | | $ | 978.5 | | | $ | 603.2 | | | 62 | % |
| | MSR Purchases by Channel (Forward only) | | |
| MSR Purchases by Channel | | MSR Purchases by Channel | |
| Agency Cash Window / Flow MSR | Agency Cash Window / Flow MSR | 4,902 | | | 6,168 | | | (21)% | | 17,055 | | | 8,382 | | | 103% | Agency Cash Window / Flow MSR | $ | 3,207.9 | | | $ | 4,091.5 | | | (22)% | | 7,299.4 | | | $ | 12,153.5 | | | (40)% |
| Bulk MSR purchases | Bulk MSR purchases | — | | | 55,133 | | | (100) | | 55,133 | | | 1,541 | | | n/m | Bulk MSR purchases | — | | | — | | | n/m | | — | | | 55,133.5 | | | (100) |
| Bulk reverse purchases | | Bulk reverse purchases | — | | | 209.1 | | | (100) | | 209.1 | | | — | | | n/m |
| | $ | 4,902 | | | $ | 61,302 | | | (92) | | $ | 72,189 | | | $ | 9,923 | | | 627 | | $ | 3,207.9 | | | $ | 4,300.6 | | | (25) | | $ | 7,508.4 | | | $ | 67,287.0 | | | (89) |
| | Total | Total | $ | 11,258 | | | $ | 64,740 | | | (83)% | | $ | 85,436 | | | $ | 14,577 | | | 486% | Total | $ | 7,900.6 | | | $ | 8,184.3 | | | (3)% | | $ | 16,084.8 | | | $ | 74,178.5 | | | (78)% |
| | Short term loan commitment (at period end) | Short term loan commitment (at period end) | | Short term loan commitment (at period end) | |
| Forward loans | Forward loans | $ | 1,221 | | | $ | 995 | | | 23 | % | | $ | 1,221 | | | $ | 857 | | | 42 | % | Forward loans | $ | 526.2 | | | $ | 569.8 | | | (8) | % | | $ | 526.2 | | | $ | 995.0 | | | (47) | % |
| Reverse loans | Reverse loans | 80 | | | 68 | | | 18 | | | 80 | | | 31 | | | 160 | | Reverse loans | 31.2 | | | 47.8 | | | (35) | | | 31.2 | | | 68.4 | | | (54) | |
| | Average Employment | Average Employment | | Average Employment | |
| Forward | | Forward | |
| U.S. | U.S. | 689 | | | 635 | | | 9 | | | 632 | | | 440 | | | 44 | | U.S. | 365 | | | 519 | | | (30) | | | 445 | | | 454 | | | (2) | |
| India and other | India and other | 444 | | | 345 | | | 29 | | | 359 | | | 152 | | | 136 | | India and other | 413 | | | 488 | | | (15) | | | 446 | | | 288 | | | 55 | |
| Total | 1,133 | | | 980 | | | 16 | % | | 991 | | | 592 | | | 67 | % | |
| | | 778 | | | 1,007 | | | (23) | | | 891 | | | 742 | | | 20 | |
| Reverse | | Reverse | | | | | | | | |
| U.S. | | U.S. | 220 | | | 215 | | | 2 | | | 216 | | | 152 | | | 42 | |
| India and other | | India and other | 81 | | | 91 | | | (11) | | | 86 | | | 24 | | | 258 | |
| | | 301 | | | 306 | | | (2) | | | 302 | | | 176 | | | 72 | |
| Total Originations | | Total Originations | 1,079 | | | 1,313 | | | (18) | % | | 1,193 | | | 918 | | | 30 | % |
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination.origination that are reported within the Servicing segment.
Gain on Loans Held for Sale, Net
The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volume and margins:margins (excluding fees that are presented in Other revenue, net):
| | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| September 30, | | June 30, | | September 30, | | September 30, | | June 30, | | March 31 | | | | June 30, | | June 30, | | | % Change |
| 2021 | | 2021 | | 2021 | | 2020 | | 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Gain on Loans Held for Sale (1) | Gain on Loans Held for Sale (1) | | | | | | | | | | | | Gain on Loans Held for Sale (1) | | | | | | | | | | | | | |
| Correspondent | Correspondent | $ | 5.5 | | | $ | 4.7 | | | 16 | % | | $ | 13.7 | | | $ | 13.8 | | | (1) | % | Correspondent | $ | 5.6 | | | $ | 0.1 | | | | n/m | | $ | 5.7 | | | $ | 8.2 | | | | (31) | % |
| Consumer Direct | Consumer Direct | 24.1 | | | 22.5 | | | 7 | | | 80.8 | | | 60.4 | | | 34 | | Consumer Direct | 7.0 | | | 12.6 | | | | (45) | | | 19.6 | | | 56.6 | | | | (65) | |
| | $ | 29.6 | | | $ | 27.3 | | | 9 | % | | $ | 94.5 | | | $ | 74.2 | | | 27 | % | | $ | 12.5 | | | $ | 12.8 | | | | (2) | % | | $ | 25.3 | | | $ | 64.9 | | | | (61) | % |
| | % Gain on Sale Margin (2) | % Gain on Sale Margin (2) | | % Gain on Sale Margin (2) | | | | | |
| Correspondent | Correspondent | 0.10 | % | | 0.18 | % | | (45) | % | | 0.12 | % | | 0.39 | % | | (68) | % | Correspondent | 0.14 | % | | 0.01 | % | | | n/m | | 0.09 | % | | 0.16 | % | | | (46) | % |
| Consumer Direct | Consumer Direct | 4.48 | | | 4.42 | | | 1 | | | 4.71 | % | | 5.41 | | | (13) | | Consumer Direct | 2.15 | | | 1.91 | | | | 13 | | | 1.99 | % | | 4.83 | | | | (59) | |
| | 0.48 | % | | 0.86 | % | | (44) | % | | 0.74 | % | | 1.60 | % | | (54) | % | | 0.29 | % | | 0.38 | % | | | (23) | % | | 0.33 | % | | 1.03 | % | | | (68) | % |
| | Origination UPB (3) | Origination UPB (3) | | Origination UPB (3) | | | | | |
| Correspondent | Correspondent | $ | 5,616 | | | $ | 2,665 | | | 111 | % | | $ | 11,103 | | | $ | 3,521 | | | 215 | % | Correspondent | $ | 3,937.4 | | | $ | 2,674.0 | | | | 47 | % | | $ | 6,611.4 | | | $ | 5,116.3 | | | | 29 | % |
| Consumer Direct | Consumer Direct | 539 | | | 510 | | | 6 | | | 1,715 | | | 1,115 | | | 54 | | Consumer Direct | $ | 323.7 | | | $ | 662.8 | | | | (51) | | | $ | 986.4 | | | $ | 1,172.1 | | | | (16) | |
| | $ | 6,154 | | | $ | 3,175 | | | 94 | % | | $ | 12,817 | | | $ | 4,636 | | | 176 | % | | $ | 4,261.1 | | | $ | 3,336.7 | | | | 28 | % | | $ | 7,597.8 | | | $ | 6,288.3 | | | | 21 | % |
|
(1)Includes realized gains on loan sales and related new MSR capitalization, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses.
(2)Ratio of gain on Loans held for sale to volumeOrigination UPB. See (3) below. Note that the ratio differs from the day-one gain on sale margin upon lock.lock and includes gains or losses on interest rate lock commitments.
(3)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.period.
We recognized a $29.6 million gain on loans held for sale, net for the third quarter of 2021, a $2.3 million, or 9% increase as compared to the second quarter of 2021. The increase is primarily driven by our consumer direct channel, with an increase in margin and loan production volume. The significantly higher loan production volume in our correspondent channel generated additional gain on sale, largely offset by lower margin. The correspondent channel margin declined primarily due to a $1.3 million gain recognized in the second quarter of 2021 on certain loans favorably acquired in a bulk transaction, while consumer direct margin increased slightly through enhanced execution. Overall, the average gain on sale margin for forward loans declined from 86 basis points in the second quarter of 2021 to 48 basis points in the third quarter of 2021, mostly due to the change in the channel mix, with higher volume in correspondent, a lower margin channel.
Gain on loans held for sale, net for the ninethree months ended SeptemberJune 30, 2021 increased $20.3 million, or 27%,2022 was mostly flat as compared to the ninethree months ended September 30, 2020, all attributed to our consumer direct channel,March 31, 2022 (decreased by $0.3 million, or 2%) with an increasethe reduction in our loan production volume partiallyin the Consumer direct channel mostly offset by improved margins in both channels and a lower margin. The effect of higher production volume in our correspondent channel was offset by lower margin. The combined $8.2 billion, or 176% newloan production volume increase in our correspondent and consumer direct channelsthe Correspondent channel, as detailed in the above table. The Consumer Direct new production volume decrease is driven by rising interest rates during 2022, significantly reducing opportunities for existing borrowers to refinance. Gain on sale increased in the Correspondent channel primarily due to favorablethe increase in loan production volume. As interest rates rapidly increased during the first quarter of 2022 and the range of pricing widened in different markets, we intentionally constrained our volume when valuations did not align with our expectations. In the second quarter of 2022, with our efforts to prudently manage market conditions, we were able to grow volume at margin levels that met our targets.
As compared to the six months ended June 30, 2021, Gain on loans held for sale, net for the six months ended June 30, 2022 declined $39.6 million, or 61% primarily due to a $37.0 million decrease in our Consumer Direct channel, driven by a 59% decline in margin and 16% decrease in loan production attributed to this channel, as detailed in the above table. Our Consumer Direct channel benefited from historical low rate conditions during the first six months of 2021 and was exposed to rapidly changing and unfavorable market conditions for borrower refinancing due to rising interest rates during the successful integrationfirst six months of the TCB correspondent lending resources, and the demonstrated capability2022. Our loan production volume for our Correspondent channel increased $1.5 billion, or 29% as a result of our Originations platform. We havechannel growth strategy. On June 1, 2021, we expanded our network of correspondent seller network from 119lenders through the assignment by Texas Capital Bank (TCB) to 419, a 252% increase in twelve months. In addition,us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers). Margins of our Correspondent channel declined when comparing the increasefirst six months of 2022 with the first six months of 2021 due to our prudent pricing and growth in the new production volume of our consumer direct channel ismarket during the result of investments in staffing we made to develop the capabilities of our platform. Overall, the average gain on sale margin for forward loans declined from 160 basis points in the nine months ended September 30, 2020 to 74 basis points in the nine months ended September 30, 2021, mostly due to the change in the channel mix, with higher volume in correspondent, a lower margin channel.first quarter 2022,as discussed above.
Reverse Mortgage Revenue, Net
The following table provides information regarding Reverse mortgage revenue, net of the Originations segment that comprises fair value changes of the pipeline and unsecuritized reverse mortgage loans held for investment, at fair value, together with volume and margin:
| | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | | % Change | | Six Months Ended | | | % Change |
| | September 30, | | June 30, | | September 30, | | September 30, | | | June 30, | | March 31 | | | | June 30, | | June 30, | | | % Change |
| | 2021 | | 2021 | | 2021 | | 2020 | | | 2022 | | 2022 | | | | 2022 | | 2021 | | |
| Origination UPB (1) | Origination UPB (1) | $ | 435.3 | | | $ | 347.2 | | | 25 | % | | $ | 1,079.2 | | | $ | 660.8 | | | 63 | % | Origination UPB (1) | $ | 431.5 | | | $ | 547.0 | | | | (21) | % | | $ | 978.5 | | | $ | 603.2 | | | | 62 | % |
| Origination margin (2) | Origination margin (2) | 4.15 | % | | 5.42 | % | | (23) | | | 5.25 | % | | 5.78 | % | | (9) | | Origination margin (2) | 3.80 | % | | 4.56 | % | | | (17) | | | 4.23 | % | | 6.40 | % | | | (34) | |
| | Reverse mortgage revenue, net (Originations) (3) | Reverse mortgage revenue, net (Originations) (3) | $ | 18.1 | | | $ | 18.8 | | | (4) | % | | $ | 56.7 | | | $ | 38.2 | | | 48 | % | Reverse mortgage revenue, net (Originations) (3) | $ | 16.4 | | | $ | 25.0 | | | | (34) | % | | $ | 41.4 | | | $ | 38.6 | | | | 7 | % |
|
(1)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.period.
(2)Ratio of origination gain and fees - see (3) below - to origination UPB - see (1) above.UPB. Note that the ratio includes gains or losses on interest rate lock commitments.
(3)Includes gain on new origination, and loan fees and other. Includes non-cash gain on securitization of newly originated loans of $10.2 million and $21.3 million during the three and six months ended June 30, 2022, respectively, $11.1 million for the three months ended March 31, 2022, and $14.1 million during the six months ended June 30, 2021.
We reported $18.1$16.4 million Originations Reverse mortgage revenue, net for the third quarter of 2021, a $0.7three months ended June 30, 2022, an $8.6 million, or 4%34% decrease as compared to the second quarter of 2021.three months ended March 31, 2022. As detailed in the above table, the decrease is driven by a lower average margin that was largely offset by aand lower volume increase.across the three channels. Our higher-margin reverse retail channel generated a net $4.7 million revenue increasesdecrease quarter over quarter. Although our reverse wholesale and correspondent channels generated higher volumes, margins were lower inquarter due to the quarter resulting in a decline in net revenue.volume as well as margin. The decrease in margin during the third quarterthree months ended June 30, 2022 is primarily attributabledue to unfavorable yield spreadthe increase in market interest rates and the widening observed inof spreads during the market.second quarter of 2022.
As compared to the six months ended June 30, 2021, Reverse mortgage revenue, net for the ninesix months ended SeptemberJune 30, 20212022 increased $18.5$2.8 million, or 48% as compared to the nine months ended September 30, 2020,7%, The increase is primarily driven by our volumean increase in the reverse retail channel.volume in all three channels, offset by lower margins in all channels. The significant increase in the volume of ourin all reverse correspondent channelchannels was largely offset by a lower average margin mostly due to unfavorablethe increase in market interest rates in the second quarter of 2022 and higher level of yield spread widening observed in the market. NetOur higher-margin reverse Retail channel generated a net $5.7 million revenue of our reverse wholesale channel declined duringincrease in the ninesix months ended SeptemberJune 30, 2021 mostly due to lower volume.
Other Revenue
Other revenue for the third quarter of 2021 increased $1.8 million as compared to the second quarter of 2021, primarily driven by higher loan production volumes in the forward correspondent channel. Other revenue increased $16.9 million for the nine months ended September 30, 20212022 as compared to the same period of 2020,2021.
Other Revenue, net
Other revenue for the three months ended June 30, 2022 was unchanged as compared to the three months ended March 31, 2022. As compared to the six months ended June 30, 2021, Other revenue for the six months ended June 30, 2022 declined $3.6 million, primarily due to a decline in setup fees earned for loans boarded on our servicing platform driven by higher loan production volumesthe decrease in the forward correspondent and consumer direct channels.Consumer Direct origination volume as well as a decline in ancillary fee income related to MSR acquisitions.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes a gain of $2.8 million for the third quarter of 2021three months ended June 30, 2022 increased $1.5 million as compared to the three months ended March 31, 2022 due to theadditional revaluation gains on certain MSRs opportunistically purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net within the Originations segment since the segment’s business objective is the sourcing of new MSRs at targeted returns. We transfer the MSR from the Originations segment to the Servicing segment at fair value.
As compared to the six months ended June 30, 2021, MSR valuation adjustments, net for the third quarter of 2021 decreased $6.0 million as compared to the second quarter of 2021, mostly due to a decline in the volume purchased and, to a lesser extent a decline in margin. For the ninesix months ended SeptemberJune 30, 2021, MSR valuation adjustments, net2022 decreased $6.2 million as compared to the same period of 2020.$13.6 million. Opportunities for fair value discount or margins were largergreater in the early period of the pandemic and have reduced as markets normalize.normalized.
Operating Expenses
Operating expenses for the third quarter of 2021 increased $3.8three months ended June 30, 2022 decreased $3.7 million, or 10%8%, as compared to the second quarter of 2021, includingthree months ended March 31, 2022, primarily due to a $1.4$3.9 million, or 6% increase14% decrease in Compensation and benefits.benefits that was mostly attributed to an 18% lower average total headcount. Forward Originations headcount, mostly Consumer Direct, declined in the three months ended June 30, 2022 by 23% as part of our efforts to right size our resources to market opportunities.
As compared to the six months ended June 30, 2021, Operating expenses for the six months ended June 30, 2022 increased $10.8 million, or 14%. Compensation and benefits increased $6.8 million, or 15% with a $4.3 million increase in salary and
benefits due to increased headcount in both Forward and Reverse, a $2.4 million increase in commissions driven by higher Forward and Reverse origination volumes and a $2.1 million increase in severance expense, partially offset by a $1.5 million decline in incentive compensation and retention bonuses. The decline in incentive compensation and retention bonuses is primarily due to a decrease in the fair value of cash-settled share-based awards associated with the decrease in our common stock price at June 30, 2022 as compared to June 30, 2021, and a reduction in employee retentions during the six months ended June 30, 2022. Originations average total headcount increased 16%30% as compared to the second quarter ofsix months ended June 30, 2021, reflecting an increase in loan production levels and the integration of the TCB correspondent lending resources as partin the second half of our initiative to expand our origination platform and increase volumes. The net $2.4 million increase in other operating expenses is primarily driven by a $0.9 million increase in Technology and communications, a $0.6 million increase in Professional services, a $0.4 million increase in origination expenses and a $0.5 million increase in corporate overhead allocations reflecting the growth in our Originations business.
Operating expenses for the nine months ended September 30, 2021 increased $42.2 million, or 54%, as compared to the nine months ended September 30, 2020, largely due to a $28.4 million, or 67% increase in Compensation and benefits (including a $6.7 million increase in commissions). Originations average headcount increased 67% as compared to the nine months ended September 30, 2020, reflecting an increase in staffing levels, including through the integration of the TCB correspondent lending resources, as part of our initiative to expand our origination platform and increase volumes.2021. The offshore-to-total average headcount ratio for Originations increased from 26%34% for the ninesix months ended SeptemberJune 30, 20202021 to 36%45% for the ninesix months ended SeptemberJune 30, 2021.2022. Other operating expenses increased $4.0 million primarily due to increased volume and Originations business expansion, including a $4.9$2.0 million increase in origination expenses dueadvertising expense mostly attributed to increased volumes, a $3.1Reverse Originations. The $1.0 million increase in Origination expense and $1.4 million increase in Technology and communications dueattributed to additional software licensing costs related to lending, capital markets and hedging systems, a $2.2 million increase in advertising expense, andhigher loan production volume is mostly offset by a $1.8 million increasedecrease in Professional services, inexplained by outsourced surge resources utilized during the six months ended June 30, 2021 to support of increasedhigher production volumes.
Certain other operating expenses are variable, and as a result, as origination volume increased or decreased so did the related expenses. Examples include credit reports, includedappraisals, settlement fees, and tax service fees recorded in originationOrigination expenses or certain outsourced services including surge resources recorded in Professional services.
Other Income (Expense)
Interest income consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors. Interest expense is incurred to finance the mortgage loans. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. The increase in interest income and interest expense during the third quarter of 2021three months ended June 30, 2022 as compared to the second quarter of 2021, and the ninethree months ended September 30, 2021 as compared to the nine months ended September 30, 2020,March 31, 2022 is primarily the result of the increase in the average held for sale loan and warehouse debt balances due to increasedhigher loan production volumes.volumes, and an increase in average interest rates driven by base rate increases. As compared to the six months ended June 30, 2021, interest income and interest expense for the six months ended June 30, 2022 increased primarily due to the increase in average held for sale loan and warehouse debt balances due to higher loan production volumes, offset in part by a decline in average interest rates driven by lower margins on warehouse lines across all asset fundings.
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| CORPORATE ITEMS AND OTHER |
Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses.
Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments. Interest expense on the SSTL and the Senior Notescorporate debt is allocated to the Servicing segment and the Originations segment based on funding needs. Prior torelative financing requirements. Effective in the thirdfirst quarter of 2020,2022, we did notno longer allocate the corporate debtOFC Senior Secured Notes and the associatedrelated interest expense to the Servicing segment. The interestand Originations segments. Accordingly, the financing cost of the Servicing and Originations segments reflects and is consistent with the financing structure of the licensed entity PMC that carries out these businesses and does not depend on the financing structure strategy of its parent, as a holding company. Interest expense related to the corporate debt for periods prior to the third quarter of 2020 has been allocated to the Servicing segmentand Originations segments for prior periods has been recast to conform to the current period presentation. Our cash balances are included in Corporate Items and Other.The interest expense allocation adjustment for the six months ended June 30, 2021 is $7.4 million.
Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other also includes severance, retention, facility-relatedsegment along with certain other costs including certain litigation and settlement related expenses or recoveries, and other expenses incurred in 2020costs related to our re-engineering initiatives and have not been allocated to other segments.operating as a public company.
CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 50% quote60% quota share of premiums and all related losses and loss adjustment expenses incurred by the third-party insurer, effective June 2020, and 40%March 2021, with a 50% quota through May 2020.February 2021. The reinsurance agreement expires December 31, 2023, but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 60 days advance written notice prior to renewal.
Certain expenses incurred by corporate support services that are not directly attributable to a segment are allocated to the Servicing and Originations segments. We allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which now incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, costs related to our 2020 re-engineering initiatives, and other costs related to operating as a public company.
The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | Three Months Ended | | % Change | | Nine Months Ended | | % Change | | Three Months Ended | | % Change | | Six Months Ended | | % Change | |
| September 30, | | June 30, | | September 30, | | September 30, | | June 30, | | March 31 | | June 30, | | June 30, | |
| 2021 | | 2021 | | 2021 | | 2020 | | 2022 | | 2022 | | 2022 | | 2021 | |
| Revenue | Revenue | | | | | | | | | | | | Revenue | | | | | | | | | | | | |
| Premiums (CRL) | Premiums (CRL) | $ | 0.9 | | $ | 1.4 | | (39) | % | | $ | 3.5 | | $ | 5.2 | | (31) | % | Premiums (CRL) | $ | 1.5 | | $ | 1.7 | | (9) | % | | $ | 3.2 | | $ | 2.7 | | 19 | % | |
| Other revenue | Other revenue | 0.7 | | 0.1 | | 829 | | | 0.8 | | 0.1 | | n/m | Other revenue | 0.1 | | 0.1 | | (14) | | | 0.3 | | 0.1 | | 98 | | |
| Total revenue | Total revenue | 1.5 | | 1.5 | | 1 | | | 4.3 | | 5.2 | | (17) | | Total revenue | 1.6 | | 1.8 | | (10) | | | 3.4 | | 2.8 | | 23 | | |
| | Operating expenses | Operating expenses | | Operating expenses | | |
| Compensation and benefits | Compensation and benefits | 19.9 | | 22.1 | | (10) | | | 63.7 | | 67.3 | | (5) | | Compensation and benefits | 24.4 | | 10.5 | | 132 | | | 34.9 | | 43.1 | | (19) | | |
| Professional services | Professional services | 9.1 | | 13.4 | | (32) | | | 29.6 | | 52.3 | | (43) | | Professional services | 3.8 | | 3.6 | | 4 | | | 7.4 | | 20.4 | | (64) | | |
| Technology and communications | Technology and communications | 6.0 | | 5.8 | | 4 | | | 17.5 | | 23.7 | | (26) | | Technology and communications | 5.5 | | 5.9 | | (6) | | | 11.4 | | 11.5 | | (1) | | |
| Occupancy and equipment | Occupancy and equipment | 0.6 | | 0.7 | | (11) | | | 2.2 | | 9.3 | | (76) | | Occupancy and equipment | 0.6 | | 0.6 | | 4 | | | 1.2 | | 1.6 | | (21) | | |
| Servicing and origination | Servicing and origination | (0.2) | | 0.4 | | (149) | | | 0.4 | | 1.2 | | (66) | | Servicing and origination | — | | (0.2) | | (72) | | | (0.2) | | 0.6 | | (134) | | |
| Other expenses | Other expenses | 2.6 | | 1.2 | | 121 | | | 5.0 | | 5.8 | | (14) | | Other expenses | 2.2 | | 2.5 | | (10) | | | 4.7 | | 2.3 | | 104 | | |
| Total operating expenses before corporate overhead allocations | Total operating expenses before corporate overhead allocations | 38.1 | | 43.5 | | (12) | | | 118.4 | | 159.6 | | (26) | | Total operating expenses before corporate overhead allocations | 36.5 | | 22.9 | | 59 | | | 59.4 | | 79.4 | | (25) | | |
| Corporate overhead allocations | Corporate overhead allocations | | Corporate overhead allocations | | |
| Servicing segment | Servicing segment | (11.9) | | (12.4) | | (4) | | | (36.5) | | (48.3) | | (24) | | Servicing segment | (11.7) | | (11.1) | | 5 | | | (22.8) | | (24.6) | | (7) | | |
| Originations segment | Originations segment | (5.1) | | (4.6) | | 10 | | | (14.8) | | (13.7) | | 8 | | Originations segment | (5.5) | | (5.3) | | 4 | | | (10.7) | | (9.7) | | 11 | | |
| Total corporate overhead allocations | (17.0) | | (17.0) | | — | | | (51.3) | | (61.9) | | (17) | | |
| | Total operating expenses | Total operating expenses | 21.1 | | 26.5 | | (20) | | | 67.1 | | 97.7 | | (31) | | Total operating expenses | 19.4 | | 6.5 | | 196 | | | 25.9 | | 45.2 | | (43) | | |
| | Other income (expense), net | Other income (expense), net | | Other income (expense), net | | |
| Interest income | Interest income | 0.1 | | 0.1 | | 12 | | | 0.3 | | 1.7 | | (82) | | Interest income | 0.1 | | 0.1 | | 84 | | | 0.2 | | 0.2 | | 8 | | |
| Interest expense | Interest expense | (4.9) | | (5.5) | | (10) | | | (15.0) | | (7.2) | | 108 | | Interest expense | (10.4) | | (10.5) | | (1) | | | (21.0) | | (17.5) | | 20 | | |
| Loss on extinguishment of debt | — | | — | | n/m | | (15.5) | | — | | n/m | |
| Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | 0.9 | | — | | n/m | | 0.9 | | (15.5) | | (106) | | |
| | Other, net | Other, net | 1.2 | | 1.0 | | 20 | | | 2.1 | | (3.8) | | (155) | | Other, net | (0.2) | | 0.5 | | (142) | | | 0.3 | | 0.5 | | (36) | | |
| Total other expense, net | (3.6) | | (4.4) | | (18) | | | (28.1) | | (9.3) | | 202 | | |
| Total other income (expense), net | | Total other income (expense), net | (9.6) | | (9.9) | | (4) | | | (19.5) | | (32.3) | | (40) | | |
| | Loss before income taxes | $ | (23.2) | | $ | (29.4) | | (21) | % | | $ | (90.9) | | $ | (101.7) | | (11) | % | |
| Income (loss) before income taxes | | Income (loss) before income taxes | $ | (27.3) | | $ | (14.6) | | 86 | % | | $ | (41.9) | | $ | (74.6) | | (44) | % | |
| n/m: not meaningful | n/m: not meaningful | | | | | | | | | n/m: not meaningful | | | | | | | | | |
Compensation and Benefits
Compensation and benefits expense for the third quarter of 2021 declined $2.2three months ended June 30, 2022 increased $13.9 million, or 10%132%, as compared to the second quarter of 2021three months ended March 31, 2022 primarily as a result of a $2.1$10.3 million increase in incentive compensation and a $1.7 million increase in severance. The increase in incentive compensation is mostly due to an $8.4 million increase in the fair value of cash-settled share-based awards associated with the increase in our common stock price during the quarter and forfeitures of unvested awards in the first quarter of 2022. The average Corporate headcount declined 2% and the mix between onshore and offshore was mostly unchanged.
As compared to the six months ended June 30, 2021, Compensation and benefits expense for the six months ended June 30, 2022 decreased $8.2 million, or 19%, primarily as a result of an $8.3 million decrease in incentive compensation mostlyand a $2.0 million decrease in salaries and benefit expense, partially offset by a $1.9 million increase in severance. The decline in incentive compensation is primarily due to a $7.7 million decrease in the fair value of cash-settled share-based awards associated with the decrease in our common stock price during the quarter. The average corporate headcount and the mix between onshore and offshore was mostly unchanged.
Asat June 30, 2022 as compared to the nine months ended SeptemberJune 30, 2020, compensation and benefits expense for the nine months ended September 30, 2021 decreased $3.6 million, or 5%, primarily as a result of a $3.8 million decrease2021. The decline in salaries and benefit expenses due to the effects ofexpense is driven by a 9%4% decline in average corporateCorporate headcount. The Corporate offshore-to-total average headcount including an 18% decrease in average onshore headcountratio declined from 32274% for the six months ended June 30, 2021 to 263. In addition,71% for the variance in compensation and benefits expenses included a $3.3 million increase in share-based compensation, offset by a $1.7 million decline in severance expense and a $1.5 million decrease in annual incentive compensation.six months ended June 30, 2022 .
Professional Services
Professional services expense for the third quarter of 2021 declined $4.2 million, or 32%,three months ended June 30, 2022 was unchanged as compared to the second quarter of 2021, primarily due to a $3.0three months ended March 31, 2022 as the $1.1 million decreaseincrease in legal expenses andwas offset by a $1.0 million decrease in other professional fees. The net decreaseincrease in legal expenses is largely due to a $2.8$2.7 million decreaselower recovery of expenses in provision forthe second quarter of 2022 related to litigation settlements.matters, partially offset by a reduction in expenses related to other legal matters. The
decrease in other professional fees is primarily due to $3.2 million of advisory fees incurred during second quarter of 2021 related to the setup of our MSR investment joint venture with Oaktree, MAV Canopy, partially offset by $2.4 million strategic consulting expense incurred during the third quarter of 2021.
As compared to the nine months ended September 30, 2020, Professional services expense for the nine months ended September 30, 2021 declined $22.7 million, or 43%, primarily due to a $12.7 million decrease in legal expenses and a $9.7 million decline in other professional services. The net decrease in legal expenses is largely due to expenses and provision for litigation settlement recorded in the first nine months of 2020 related to the CFPB and Florida matters. Cost reduction initiatives and higher utilization of professional services in 2020,the first quarter of 2022, including strategic vendor sourcing, cloud migrationconsulting services related to corporate strategy and consulting, resultedbusiness initiatives.
As compared to the six months ended June 30, 2021, Professional services expense for the six months ended June 30, 2022 declined $13.0 million, or 64%, primarily due to a $9.7 million decrease in lowerlegal expenses due to the $6.8 million recovery of expenses related to a litigation matter in the six months ended June 30, 2022 and a decrease in expenses related to other legal matters. Other professional fees in 2021. Other professional services for the nine months ended September 30, 2021 includesdeclined $3.3 million primarily due to $3.2 million of advisory fees related to the setup of our MSR investment joint venture with Oaktree, MAV Canopy, which closed on May 3, 2021. Professional services
Other operating expenses for the ninethree months ended SeptemberJune 30, 2020 include $3.2 million of COVID-19 related expenses.
Other Operating Expenses
Technology and communications and Occupancy and equipment expenses2022 remained mostly constant in the third quarter of 2021flat as compared to the second quarter of 2021.
Technology and communications expensethree months ended March 31, 2022. Other operating expenses for the ninesix months ended SeptemberJune 30, 2021 declined $6.2 million, or 26%, as compared to the nine months ended September 30, 2020, primarily due to a $3.1 million decrease in telephone expense, and a $3.7 million decrease in hardware and software depreciation and related expenses. Cost re-engineering initiatives in 2020 resulted in lower Technology and communications expenses in 2021 through facility closure and the transition to a more cost-effective alternative telephone system. During the nine months ended September 30, 2020, we recognized accelerated depreciation for certain of our hardware and software assets and incurred additional expenses related to COVID-19.
Occupancy and equipment expense for the nine months ended September 30, 2021 decreased $7.1 million, or 76%, as compared to the nine months ended September 30, 2020, primarily due to the recognition of facility-related costs in the second quarter of 2020, mainly accelerated depreciation and exit costs of leased properties we partially abandoned. Depreciation expense for the nine months ended September 30, 2021 declined $5.42022 increased $2.4 million as compared to the ninesix months ended SeptemberJune 30, 2020.2021 primarily due to an increase in license fees and franchise taxes (non-income related).
Corporate overhead allocationsOther Income (Expense)
Interest expense remained mostly constant inflat for the third quarter of 2021three months ended June 30, 2022 as compared to the second quarter of 2021, and decreased $10.6 million for the ninethree months ended September 30, 2021 as compared to the nine months ended September 30, 2020.March 31, 2022. The nine month decline is mostly due to the benefits of cost savings achieved at the corporate level, specifically technology expenses, achieved through our cost re-engineering initiatives in 2020.
Other Income (Expenses)
Interest expensedebt balance of the Corporate segment relatesis comprised mostly of the OFC Senior Secured Notes issued by Ocwen (parent company) as the PMC Senior Secured Notes are largely allocated to the remaining corporate debt unallocated to otherServicing and Originations segments. Interest expense increased $7.8 million, or 108%, for the nine months ended September 30, 2021 as
As compared to the ninesix months ended SeptemberJune 30, 2020.2021, interest expense for the six months ended June 30, 2022 increased $3.5 million, or 20%. The increase is primarily driven by a higher cost of corporate debt that is mostly due to the OFC senior secured notes issued at a discount on March 4, 2021 and May 3, 2021. The notes were issued to Oaktree together with warrants that resulted in an additional discount, the accretion of which is reported as interest expense.
OnDuring the second quarter of 2022, we recognized a gain on debt extinguishment of $0.9 million resulting from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 4,2026 at a discount, net of the proportionate write-off of unamortized discount and debt issuance costs. In March 2021, we recognized a loss on debt extinguishment of $15.5 million resulting from our early repayment of the SSTL due May 2022 and our early redemption of our 6.375% PHH senior unsecured notes due August 2021 and our 8.375% PMC senior secured notes due November 2022. The loss on debt extinguishment includes the write-off of unamortized debt issuance costs and discount, as well as contractual prepayment premiums.
We reported $2.1 million Other income in the nine months ended September 30, 2021, as compared to $3.8 million Other expense in the nine months ended September 30, 2020. The net $5.9 million favorable variance in Other, net is primarily driven by a $1.7 million loss on sale of a vacant office facility reported in the second quarter of 2020, a $1.6 million decrease in CRL loss adjustment expense due to a decline in the number of covered REO properties due to the COVID-19 foreclosure moratorium and a $1.4 million increase in foreign currency remeasurement gains related to our operations in India and the Philippines.
| | |
| LIQUIDITY AND CAPITAL RESOURCES |
Overview
On March 4, 2021, we successfully completed a comprehensive refinancing of our corporate debt and a capital contribution to our licensed entity PMC, through the following transactions:
•We redeemed all of PHH’s outstanding 6.375% Senior Notes due August 2021 at a price of 100% of the $21.5 million principal amount, plus accrued and unpaid interest, and all of PMC’s 8.375% Senior Secured Notes due November 2022 at a price of 102.094% of the $291.5 million principal amount, plus accrued and unpaid interest.
•We repaid in full the $185.0 million outstanding principal balance of the SSTL due May 2022, with a 2% prepayment premium of the outstanding principal balance, or $3.7 million.
•PMC completed the issuance and sale of $400.0 million aggregate principal amount of 7.875% senior secured notes due March 15, 2026 (the PMC Senior Secured Notes).
•Ocwen Financial Corporation, completed the private placement of $199.5 million aggregate principal amount of senior secured notes due March 4, 2027 (the OFC Senior Secured Notes) together with the issuance of warrants to certain entities owned by funds and accounts managed by Oaktree Capital Management, L.P. (the Oaktree Investors).
•Ocwen Financial Corporation contributed the $175.0 million net proceeds from the issuance of the OFC Senior Secured Notes to its wholly owned subsidiary, PHH, and PHH contributed $153.4 million to its wholly owned subsidiary PMC, as permanent equity, after redeeming PHH’s 6.375% Senior Notes disclosed above.
With the completion of the corporate debt refinancing, we have reduced corporate indebtedness at the PHH and PMC level by approximately $100 million and extended overall corporate debt maturities by over three years resulting in a better alignment of the debt profile with our investments. We now have greater financial flexibility than with the prior capital structure, and we believe, an opportunity to negotiate better terms for our future financing needs.
On May 3, 2021, concurrent with the closing of the MAV transaction, we issued to Oaktree the second tranche of the OFC Senior Secured Notes due March 4, 2027 in an aggregate principal amount of $85.5 million, together with the issuance of common shares and additional warrants.
In addition, in the normal course of business, we are actively engaged with our lenders and as a result, have successfully completed at market termsrenew, replace or extend our debt agreements to the following with respect to our current and anticipated financing needs:
•On March 29, 2021, we entered into a gestation repurchase agreement which provides borrowing at our discretion up to a certain maximum amount of capacity on a rolling 30-day committed basis. Under this facility, dry Agency mortgage loans are sold to a trust which issues a trust certificate that is pledged as the collateral for any borrowings. On March 31, 2021, the trust issued the first certificate of $50.0 million which was increased to $75.0 million on May 28, 2021 and further increased to $225.0 million on July 29, 2021. The second trust certificate of $50.0 million was issued on April 12, 2021 and increased to $100.0 million on July 13, 2021. Additional trust certificates of $25.0 million and $100.0 million were issued for borrowing on June 25, 2021 and July 23, 2021, respectively, under this agreement. In July 2021, the interest rate was reduced to 1ML + 200 bps.
•On March 30, 2021, the borrowing capacity on a reverse mortgage loan facility was temporarily increased from $100.0 million to $150.0 million effective April 1, 2021 until the increase was made permanent on April 29, 2021. On September 27, 2021, the borrowing capacity of this facility was increased to $175.0 million until maturity. On October 14, 2021, the facility was extended to November 23, 2021.
•On March 31, 2021, we extended the maturity date on a $275.0 million repurchase facility to June 30, 2022.
•On April 29, 2021, we entered into a revolving facility which provides up to $30.0 million of committed borrowing capacity secured by eligible HECM loans.
•On May 17, 2021, we increased the total borrowing capacity of a $100.0 million uncommitted facility to $150.0 million through the addition of a $50.0 million participation interest. We use this facilityextent necessary to finance the purchase of EBO loans from Ginnie Mae.
•On June 2, 2021, we temporarily upsized committed Agency MSR financing facility capacity to $425.0 million for a period of 90 calendar days ending no later than September 1, 2021. On August 26, 2021 and later on October 25, 2021, the temporary upsize was extended until November 1, 2021.
•On June 23, 2021, we renewed a $210.0 million mortgage loan warehouse agreement for one year to June 23, 2022 and increased the total borrowing capacity to $250.0 million ($150.0 million uncommitted and $100.0 million committed).
•On June 28, 2021, we entered into an Agency MSR financing facility which includes a $135.0 million term loan and a $285.0 million revolving loan. The original maturity of the revolving loan is June 28, 2026, and the term loan is scheduled to mature on June 28, 2023.
•On June 30, 2021, we extended the amortization date of the OMART variable funding facility by one year to June 30, 2022. The interest rate margin on the lender’s cost of funds was reduced from 400 bps to 200 bps, and the total borrowing capacity was reduced from $250.0 million to $80.0 million.
•On June 30, 2021, we extended the amortization date of the OFAF variable funding facility for 60 days to August 27, 2021. On August 26, 2021, we further extended the amortization date to August 26, 2022, reduced the interest rate to the lender’s cost of funds plus a margin of 200 bps and reduced the borrowing capacity from $70.0 million to $40.0 million.
•On July 23, 2021, we temporarily increased the total borrowing capacity of a $150.0 million uncommitted warehouse facility to $300.0 million, until September 15, 2021, that we further extended to November 15, 2021.
•On July 23, 2021, we entered into a repurchase agreement warehouse facility with borrowing capacity of $210.0 million to fund purchased loans from the exercise of our servicer call rights for a period of three months. We repaid the facility in full upon sale of the loans in September and the facility expired in October.
•On September 1, 2021, we increased the total borrowing capacity of a $150.0 million uncommitted warehouse facility to $200.0 million.
•On October 26, 2021, we increased the borrowing capacity of a $125.0 million uncommitted Ginnie Mae MSR financing facility to $150.0 million.
operations. See Note 1213 – Borrowings to the Unaudited Consolidated Financial Statements for additional information. We actively monitor and, during the six months ended June 30, 2022, we have adjusted our borrowing capacity on our various collateralized debt agreements to align with our financing needs and to optimize our financing costs.
A summary of borrowing capacity under our advance facilities, mortgage warehouse facilities and MSR financing facilities is as follows at the dates indicated:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) | | Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) | | Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) | | Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) |
| Advance facilities | Advance facilities | $ | 595.0 | | $ | 78.4 | | $ | — | | $ | 795.0 | | $ | 213.7 | | $ | — | Advance facilities | $ | 570.0 | | $ | 74.5 | | $ | 18.5 | | $ | 595.0 | | $ | 82.7 | | $ | — |
| Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 2,106.0 | | 344.3 | | 692.5 | | 1,037.0 | | 186.9 | | 398.4 | Mortgage loan warehouse facilities | 2,109.1 | | 288.5 | | 1,041.3 | | 2,119.3 | | 240.3 | | 794.0 |
| MSR financing facilities | MSR financing facilities | 835.0 | | 83.6 | | 6.9 | | 375.0 | | 39.2 | | 13.0 | MSR financing facilities | 910.0 | | 68.9 | | 49.5 | | 785.0 | | 40.4 | | 18.3 |
| Total | Total | $ | 3,536.0 | | $ | 506.4 | | $ | 699.4 | | $ | 2,207.0 | | $ | 439.8 | | $ | 411.4 | Total | $ | 3,589.1 | | $ | 432.0 | | $ | 1,109.3 | | $ | 3,499.3 | | $ | 363.4 | | $ | 812.3 |
| | Total Capacity increase (decrease) | | Total Capacity increase (decrease) | $ | 89.8 | | $ | 68.6 | | $ | 297.0 | | 3% | | 19% | | 37% |
| Advance facilities | | Advance facilities | (25.0) | | (8.2) | | 18.5 | | (4) | | (10) | | — |
| Mortgage loan warehouse facilities | | Mortgage loan warehouse facilities | (10.2) | | 48.2 | | 247.3 | | — | | 20 | | 31 |
| MSR financing facilities | | MSR financing facilities | 125.0 | | 28.5 | | 31.2 | | 16 | | 71 | | 170 |
(1)Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.
Our total borrowing capacity increased by approximately $1.3 billion$89.8 million (or 60%3%) in ninethe six months ended June 30, 2022, mostly driven by a $1.1 billion (103%$125.0 million (16%) increase in our mortgage loan warehouse capacity to fund the growth in our Originations business and finance our loans purchased through the exercise of our servicer call rights. In addition, we increased the capacity of our MSR financing facilities by $460.0 million to fund our MSR bulk acquisitions and portfolio growth. The available borrowing capacity under our advance financing facilities decreased by $135.3 million as compared to December 31, 2020 due toPartially offsetting this increase is a $170.0 million reduction in total borrowing capacity of the OMART variable funding notes and a $30.0 million reduction in total borrowing capacity of the OFAF facility, offset in part by a $64.7$25.0 million decrease in outstanding borrowings,capacity on our advance facilities, consistent with athe decrease in our servicer advances. At SeptemberJune 30, 2021,2022, none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances at SeptemberJune 30, 20212022 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral.
We may utilize committed borrowing capacity under our mortgage warehouse facilities and MSR financing facilities to the extent we have sufficient eligible collateral to borrow against and otherwise satisfy the applicable conditions to funding. At SeptemberJune 30, 2021,2022, we had $3.3$1.9 million committed borrowing capacity under our mortgage loan warehouse facilities and $10.6 million committed borrowing capacity under our MSR financing facilities, based on the amount of eligible collateral. Uncommitted amounts can be advanced at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.
At SeptemberJune 30, 2021,2022, our unrestricted cash position was $236.1$255.9 million compared to $284.8$192.8 million at December 31, 2020.2021. We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets.
We strive to optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk.
In assessing our liquidity outlook, our primary focus is on available cash on hand, unused available funding and the following forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan repurchases;
•Requirements for amortizing and maturing liabilities;
•The projected change in advances compared to the projected borrowing capacity to fund such advances under our facilities, including capacity for monthly peak needs;
•Projected funding requirements for acquisitions of MSRs and other investment opportunities;opportunities, including our equity contributions to MAV Canopy;
•Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements;
•Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and others; and
•Margining requirements associated with our borrowing facilities and hedging program.
Use of Funds
Our primary near-term uses of funds in the normal course include:
•Payment of operating costs and corporate expenses;
•Payments for advances in excess of collections;
•Investing in our servicing and originations businesses, including MSR andMSRs, other asset acquisitions;acquisitions and MAV Canopy equity contributions;
•Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans;
•Payment of margin calls under our MSR financing facilities and derivative instruments;
•Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and
•Net negative working capital and other general corporate cash outflows.
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $2.1$1.7 billion at SeptemberJune 30, 2021.2022. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During the ninesix months ended SeptemberJune 30, 2021,2022, we funded $147.6$114.6 million out of the $2.0$1.5 billion borrowing capacity available as of December 31, 2020.2021. We also had short-term commitments to lend $1.2 billion$526.2 million and $80.5$31.2 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at SeptemberJune 30, 2021.2022. As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments). Our subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
Regarding the current maturities of our borrowings, as of SeptemberJune 30, 2021,2022, we have approximately $2.1$1.9 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $1.07 billion$779.3 million of borrowings under forward and reverse mortgage warehouse facilities, $516.6$475.5 million of notes under advance financing facilities that will enter their respective amortization periods, $467.4$608.7 million outstanding under our Agency and Ginnie Mae MSR financing facilities maturing in the next 12 months and $48.2$19.7 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.
In our liquidity management, we consider two factors more specifically as a result of the COVID-19 environment and the volatile interest rate environment: our increased advancing requirements as servicer during each investor remittance period, and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments due to interest rate fluctuations.
First, as servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance plans. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. Refer to Note 25 — Commitments to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for further description of our servicer advance obligations. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by NRZ the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements.
Second, we are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. Our exposure to changes in fair value of our MSRs and the associated liquidity risk have increased
as a result of the GSE MSR bulk acquisitions in June 2021. Refer to the sensitivity analysis in Item 3, Quantitative and qualitative disclosures about market risk.
On May 20, 2022, Ocwen’s Board of Directors authorized a share repurchase program for an aggregate amount of up to $50.0 million of Ocwen’s issued and outstanding shares of common stock. Through July 2022, we completed the repurchase of 490,317 shares of our common stock under this program for a total purchase price of $14.6 million. Unless Ocwen amends the share repurchase program or repurchases the full $50.0 million amount by an earlier date, the share repurchase program will continue through November 20, 2022. We intend to finance the remaining share repurchases through available cash.
Our medium- and long-term requirements for cash include:
•Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027;
•Any payments associated with the confirmation of loss contingencies; and
•Any other payments required under contractual obligations discussed above that extend beyond one year, e.g., lease payments.year.
Under the terms of the $210.0 million warehouse facility entered into on July 23, 2021, PMC was required to maintain a minimum of $100.0 million in consolidated liquidity on a daily basis. On September 1, 2021, the consolidated daily liquidity requirement was reduced to $75.0 million, with a requirement to maintain $100.0 million as of the last business day of each calendar quarter. We believe we are in compliance with this liquidity covenant and have cash management strategies in place to ensure we remain compliant during the entire period of the facility.
We are focused on ensuring that we have sufficient liquidity sources to continue to operate through the pandemic as well as after. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. See “Sources of Funds” below.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing and subservicing fees and ancillary revenues;
•Collections of advances in excess of new advances;
•Proceeds from match funded advance financing facilities;
•Proceeds from other borrowings, including warehouse facilities and MSR financing facilities;
•Proceeds from sales and securitizations of originated loans and repurchased loans; and
•Net positive working capital from changes in other assets and liabilities.
Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued byunder our advance financing facilities to financial institutions typically have a revolving period of 12 months. Term notes are generally issued to institutional investors with one-, two- or three-year revolving periods. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity.
We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated loans on a short-term basis until they are sold or securitized to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certain Ginnie Mae forward loans, HECM loans, second-lien loans and other types of loans. Warehouse facilities are structured as repurchase or participation agreements under which ownership of the loans is temporarily transferred to the lender. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our master repurchase and participation agreements generally have maximum terms of 364 days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days.
We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA, VA or United States Department of Agriculture (USDA).USDA.
We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. As noted above, we completed a significant refinancing on March 4, 2021. Our subsidiary PMC issued $400.0 million of senior secured notes maturing in 2026, and Ocwen issued $199.5 million of senior secured notes maturing in 2027 and warrants to Oaktree. We used the proceeds received from these note issuances to prepay the $185.0 million outstanding balance of our SSTL and $313.1 million outstanding balance of senior notes maturing in 2021 and 2022, as well as the related prepayment premiums. The remainder of the proceeds were used for general corporate purposes. On May 3, 2021, Ocwen issued an additional $85.5 million of senior secured notes maturing in 2027 and warrants to Oaktree. The proceeds were used to fund our investment in MAV, investments in MSRs and for general corporate purposes. Our financing structure actions are targeted at optimizing
access to capital and debt financing, improving our cost of funds, enhancing financial flexibility, bolstering liquidity and reducing funding risk while maintaining leverage within our risk tolerances.
We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. While our investment in MAV Canopy exposes us to additional capital contributions, the relationship may provide PMC with an additional means to finance MSRs and maintain liquidity while maintaining servicing volume. With the launch of MAV and our relationships with other clients, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in the sale of MSRs while we would perform subservicing for the sold portfolio.
Oaktree Investment and Strategic Relationship
In December 2020, we agreed to create a strategic alliance with Oaktree to launch MAV pursuant to which we and Oaktree each agreed to contribute our pro rata share of an aggregate $250.0 million contribution to MAV. Specifically, Oaktree agreed to fund $212.5 million into MAV and we agreed to invest up to $37.5 million into MAV. In addition, on February 9, 2021, Oaktree agreed to invest into Ocwen up to $250.0 million. A portion of the investment by Oaktree facilitated the refinancing of our corporate debt on March 4, 2021 and the remainder of the investment is expected to accelerate the growth of our Originations and Servicing businesses.
The $250.0 million investment by Oaktree is structured as senior secured notes issued by Ocwen Financial Corporation, in two tranches, for an aggregate of $285.0 million principal, with $35.0 million of original issue discount (OID). The $175.0 million first tranche of the investment was completed on March 4, 2021 and resulted in the issuance of $199.5 million OFC Senior Secured Notes, with a $24.5 million OID, and warrants. The $75.0 million second investment ($85.5 million principal and $10.5 million OID) was completed following the launch of MAV on May 3, 2021.
As part of the first tranche investment on March 4, 2021, we issued 1,184,768 warrants to the Oaktree Investors to purchase shares of our common stock equal to 12.0% of our then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.In addition, Oaktree purchased 4.9%, or 426,705 shares of our fully diluted outstanding common stock at the closing of the MAV transaction on May 3, 2021 at a purchase price of $23.15 per share, and Oaktree was issued 261,248 warrants to purchase additional common stock equal to 3% of our then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
Collateral
The following table presents selected assets on our consolidated balance sheet held as collateral for secured borrowings and other unencumbered assets which may be subject to a lien under various collateralized borrowings at September 30, 2021:
| | | | | | | | | | | | | | | | | | | | |
| $ in millions | Total Assets (Consolidated) | Pledged
Assets | Collateralized Borrowings | Net (1) | Unencumbered Assets (1) | Total (1) |
| Cash | $ | 236.1 | — | — | — | 236.1 | $ | 236.1 |
| Restricted cash | 85.3 | 85.3 | — | 85.3 | — | 85.3 |
| Loans held for sale | 933.7 | 871.0 | 865.9 | 5.1 | 62.7 | 67.8 |
| Loans held for investment - unsecuritized | 226.7 | 194.8 | 174.7 | 20.1 | 31.9 | 52.0 |
| MSR (2) | 1,473.4 | 1,440.7 | 864.9 | 575.7 | 32.7 | 608.4 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Advances | 739.6 | 621.1 | 598.4 | 22.6 | 118.5 | 141.2 |
| Receivables, net | 183.1 | 26.9 | 24.7 | 2.2 | 156.2 | 158.4 |
| REO | 8.6 | 6.7 | 3.9 | 2.8 | 1.9 | 4.7 |
| Total - Consolidated (3) | $ | 3,886.4 | 3,246.4 | 2,532.6 | 713.9 | 640.0 | $ | 1,353.8 |
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| | | | |
(1)Certain assets are pledged as collateral to the $400.0 million PMC Senior Secured Notes and $285.0 million OFC Senior Secured (second lien) Notes.
(2)Excludes MSR pledged to NRZ and MAV and associated pledged MSR liability recorded as sale accounting criteria are not met.
(3)The total of selected assets disclosed in the above table does not represent the total consolidated assets of Ocwen. For example, the total excludes reverse mortgage loans, premises and equipment and certain other assets.
In addition, as part of our reverse mortgage securitization activities, $6.9 billion in UPB of reverse mortgage loans and real estate owned was pledged as collateral to the HMBS beneficial interest holders, and are not available to satisfy the claims of our creditors. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of PMC’s default on its servicing obligations, or if the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to PMC in connection with certain claims relating to the performance and obligations of PMC as both issuer of HMBS and servicer of HECMs underlying HMBS.
The OFC Senior Secured Notes due 2027 have a second lien priority on specified assets carried on PMC’s balance sheet, as defined under the OFC Senior Secured Note Agreement and listed in the table below, and have a priority lien on the following assets: investments by our holding company in subsidiaries not guaranteeing the $400.0 million PMC Senior Secured Notes, including PHH and MAV; cash and investment accounts at the holding company; and certain other assets, including receivables.
| | | | | |
| $ in millions | As of September 30, 2021 |
| Specified net servicing advances | $ | 144.9 |
| Specified deferred servicing fee | — |
| Specified MSR value less borrowings | 718.7 |
| Specified unrestricted cash balances (1) | — |
| Specified advance facility reserves | 7.2 |
| Specified loan value | 60.2 |
| Specified residual value | 68.8 |
| Specified fair value of marketable securities | — |
| Total Value - PMC (1) | $ | 999.9 |
(1)Unrestricted cash was not subject to a priority lien as of September 30, 2021 under the PMC Senior Secured Note agreement.
Covenants
Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming
capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 1213 – Borrowings to the Unaudited Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of $125.0$87.5 million in consolidated liquidity, as defined, under certain of our advance match funded debt and MSR financing facilities agreements. At SeptemberJune 30, 2021,2022, we held unrestricted cash in excess of this minimum amount.
In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of the date this Quarterly Report on Form 10-Q is filed with the SEC.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligations. Lower ratings generally result in higher borrowing costs and reduced access to capital markets. The following table summarizes our current
ratings and outlook by the respective nationally recognized rating agencies. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
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| Rating Agency | | | Long-term Corporate Rating | | | | Review Status / Outlook | | Date of last action |
| Moody’s | | | Caa1 | | | | Stable | | February 24, 2021 |
| S&P | | | B- | | | | Stable | | FebruaryJanuary 24, 20212022 |
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On February 24, 2021, concurrent with the launch of the $400.0 million PMC Senior Secured Notes offering, both Moody’s and S&P reaffirmed the corporate ratings at Caa1 and B-, respectively. In addition, both agencies revised the outlook of the corporate ratings to Stable from Negative. This change in outlook was driven by the elimination of the short debt maturity runway and refinancing risk, which was listed as an area of concern by both Moody’s and S&P. On January 24, 2022, S&P affirmed the corporate rating at B-.
On January 24, 2022, S&P raised the assigned rating to the PMC Senior Secured Notes from ‘B-’ to ‘B’ and maintained a stable outlook citing improved profitability and increase in assets. It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Cash Flows
Our operating cash flow is primarily impacted by operating results, including Originations gains on loan sales, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify purchasepurchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions as investing activity. MSR investments represent a key indicator of our ability to generate future income in our Servicing business, together with originated MSR.MSRs. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity.
Our NRZ agreements represent an important component of our liquidity and our liquidity management, and have a significant impact on consolidated statements of cash flows. Because the lump-sum payments we received in connection with our 2017 Agreements and New RMSR Agreements were recorded as secured financings, additions to, and reductions in, the balance of those secured financings were recognized as financing activity in our consolidated statements of cash flows through April 2020. Excluding the impact of changes to the secured financings attributed to changes in fair value, changes in the balance of these secured financings are reflected in cash flows from operating activities despite having no impact on our consolidated cash balance. Net cash provided by operating activities for the nine months ended September 30, 2020 includes $35.1 million of such cash flows and they were offset by corresponding amounts in net cash used in financing activities in the same periods.
Our cash flows may beare summarized as follows:
| | $ in millions | $ in millions | For the Nine Months Ended September 30, | $ in millions | For the Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Net cash (used in) provided by operating activities | $ | (413) | | $ | 248 | |
| Net cash used in investing activities | (845) | | (328) | |
| Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | $ | 299 | | $ | (216) |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | (125) | | (722) |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 1,222 | | (29) | Net cash provided by (used in) financing activities | (114) | | 893 |
| Net decrease in cash, cash equivalents and restricted cash | $ | (36) | | $ | (109) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 59 | | $ | (46) |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 321 | | $ | 383 | Cash, cash equivalents and restricted cash at end of period | $ | 323 | | $ | 312 |
Cash flows for the ninesix months ended SeptemberJune 30, 20212022
Our operating activities used $413provided $298.9 million of cash largely due to the growth of our new Originations production with net cash paidreceived on loans held for sale of $576$120.6 million for the ninesix months ended SeptemberJune 30, 2021, partially offset by $70 million of2022 due to higher forward loan production volumes. In addition, net collections of servicing advances were $105.9 million, mostly PT&I advances.
Our investing activities used $845$125.3 million of cash. The primary uses of cash in our investing activities include $785$149.1 million to purchase MSRs, mostly through bulk acquisitions, and $19 million of capital contributions to our equity method investee MAV Canopy. These cash outflows were partly net cash outflows in connection with our HECM reverse mortgages, $6.9 million acquisition of $43 million.reverse subservicing agreement and $103.5 million to purchase MSRs. Offsetting cash inflows include $134.5 million proceeds from the sale of MSRs to an unrelated third party. Capital distributions of $16.9 million received from our equity method investee MAV Canopy were offset by $16.5 million of capital contributions.
Our financing activities provided $1.222 billionused $114.4 million of cash. Cash inflowsoutflows include $648$217.0 million net repayments of borrowings under our mortgage warehouse and MSR financing facilities due to the decline in loans held for sale, $35.3 million of proceeds fromnet repayments on advance match funded liabilities due to the issuancedecline in servicing advances, $57.0 million of net payments on the
financing liabilities related to MSRs transferred due to runoff. We also paid $23.6 million to repurchase $25.0 million of our 7.875%PMC Senior Secured Notes and the OFC Senior Secured Notes, warrants and$2.3 million to repurchase 84,087 shares of our common stock to Oaktree and $1.120stock. Cash inflows include $1.1 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, partially offset by repayments on the related financing liability of $1.162 billion, $130$993.5 million, and $66.2 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV.
Cash flows for the six months ended June 30, 2021
Our operating activities used $216.2 million of cash largely due to the growth of our new Originations production with net cash paid on loans held for sale of $333.5 million for the six months ended June 30, 2021, partially offset by $56.5 million of net collections of servicing advances, mostly P&I advances.
Our investing activities used $722.5 million of cash. The primary uses of cash in our investing activities include $712.6 million to purchase MSRs, mostly through bulk acquisitions, and $11.5 million of contributions to our equity method investee MAV Canopy. These cash outflows were partially offset by net cash inflows in connection with our HECM reverse mortgages of $1.7 million.
Our financing activities provided $893.0 million of cash. Cash inflows include $647.9 million from the issuance of the PMC Senior Secured Notes and a $1.126 billionthe OFC Senior Secured Notes, warrants and common stock to Oaktree and $667.5 million received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, partially offset by repayments on the related financing liability of $715.3 million, and an $897.6 million net increase in borrowings under our mortgage warehouse and MSR financing facilities. Cash outflows include $319$319.2 million to repay our 6.375% senior unsecured notes and 8.375% senior secured notes, $189$188.7 million repayment of the SSTL, $65$51.1 million of net repayments on advance match funded liabilities and $60 million of net payments on the financing liabilities related to MSRs pledged.
Cash flows for the nine months ended September 30, 2020
Our operating activities provided $248 million of cash including $349.9 million net collections of servicing and ancillary income, $211 million of net collections of servicing advances, partially offset by net cash paid on loans held for sale of $120 million for the nine months ended September 30, 2020.
Our investing activities used $328 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of $248 million. Cash outflows also include $83 million to purchase MSRs.
Our financing activities used $29 million of cash. Cash outflows include the partial prepayment of $136 million on the SSTL, $99 million of net repayments on advance match funded liabilities and $84$38.5 million of net payments on the financing liabilities related to MSRs pledged. In addition, we also paid $7.4 million of debt issuance costs related to our SSTL facility amendment and repurchased 5.7of $16.0 million shares of our common stock for $5 million. Cash inflows include $886 million received in connection with our reverse mortgage securitizations less repayments on the related financing liabilityissuance of $613 million,the PMC Senior Secured Notes and a $28 million increase in borrowings under our mortgage warehouse and MSR financing facilities.
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| CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. The following is a summary of certain
Our accounting policies and estimates involving significant judgments. judgments primarily relate to fair value measurements, income taxes, allowance for losses on assets, and the provision for losses that may arise from contingencies, including indemnification obligations and litigation proceedings. We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures, including but not limited to MSRs, Pledged MSR liabilities and Reverse mortgage loans held for investment. As of June 30, 2022, 87% of our assets and 70% of our liabilities were reported at fair value, with fair value changes reported in our statement of operations. Substantially all our assets and liabilities at fair value were classified as Level 3 instruments due to unobservable inputs.
Our significant accounting policies and critical accounting estimates are disclosed in our Annual Report on Form 10-K for the
year ended December 31, 20202021 in Note 1 to the Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Critical Accounting Policies and Estimates.” There have not been any material changes to our critical accounting policies and the methods we used and judgments we made relating to estimates as disclosed in the Annual Report on Form 10-K.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures. As of September 30, 2021, 85% of our assets and 65% of our liabilities were reported at fair value, with fair value changes reported in our statement of operations. Substantially all our assets and liabilities at fair value were classified as Level 3 instruments due to unobservable inputs. The determination of the fair value of these Level 3 financial assets and liabilities and MSRs requires significant management judgment and estimation. See Part I., Item 3. Quantitative and Qualitative Disclosures about Market Risk below for a sensitivity analysis reflecting the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale carried at fair value as well as any related derivatives at September 30, 2021, given hypothetical instantaneous parallel shifts in the yield curve.
Valuation of Reverse Mortgage Loans Held for Investment
During the nine months ended September 30, 2021, we recorded a net $0.5 million fair value gain in reverse mortgage revenue in our Servicing segment. The fair value of both reverse mortgage loans held for investment and corresponding HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail spread gains, voluntary prepayments, defaults and discount rate.The determination of fair value requires management judgment due to the significant unobservable assumptions, including voluntary prepayment speeds, defaults and discount rate.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
Valuation of MSRs and Transferred MSR Liability
During the nine months ended September 30, 2021, we recorded a $54.7 million fair value loss on the revaluation of our MSRs. We determine the fair value of MSRs and transferred MSR liabilities primarily using discounted cash flow methodologies. The significant estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees, and cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. The determination of the fair value of MSRs and transferred MSR liabilities requires management judgment relating to the significant unobservable assumptions that underlie the valuation, including prepayment speed, delinquency rates, cost to service and discount rate. Our judgement is informed by the transactions we observe in the market, by our actual portfolio performance and by the advice and information we obtain from our valuation experts, amongst other factors.
To assist in the determination of fair value, we engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and a prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, incorporating available industry survey results, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts, and we perform additional verification and analytical procedures. We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions and benchmarks with third-party expert valuation and market participant surveys. We believe that our procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
Allowance for Losses on Servicing Advances and Receivables
During the nine months ended September 30, 20211, we recorded a $5.5 million provision expense for losses on servicing advances. At September 30, 2021, the allowance was $6.7 million, which represented 0.9% of total servicing advances. We record an allowance for losses on servicing advances to the extent we believe that a portion of advances are uncollectible under the provisions of each servicing contract taking into consideration, among other factors, our historical collection rates, probability of default, cure or modification, length of delinquency and the amount of the advance. We continually assess collectability using proprietary cash flow projection models that incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, the probable loan liquidation path, estimated time to a
foreclosure sale, estimated costs of foreclosure action, estimated future property tax payments and the estimated value of the underlying property net of estimated carrying costs, commissions and closing costs.
During the nine months ended September 30, 2021, we recorded a $10.5 million provision expense on receivables related to government-insured claims. At September 30, 2021, the allowance for losses on receivables related to government-insured claims was $41.1 million, which represents 32% of total government-insured claims receivables. The allowance for losses relates to defaulted FHA or VA insured loans repurchased from Ginnie Mae guaranteed securitizations. This allowance is based upon continuing assessments of collectability, historical loss experience, current conditions and reasonable and supportable forecasts.
Determining an allowance for losses involves management judgment and assumptions that, given similar information at any given point, may result in a different but reasonable estimate.
Indemnification Obligations
During the nine months ended September 30, 2021, we recorded a $1.5 million provision expense for indemnification. As of September 30, 2021, we have recorded a liability for representation and warranty obligations, and similar indemnification obligations of $42.6 million. We have exposure to representation, warranty and indemnification obligations because of our lending, sales and securitization activities, our acquisitions to the extent we assume one or more of these obligations, and in connection with our servicing practices. We initially recognize these obligations at fair value. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination, to the extent applicable, and estimated loss severity based on current loss rates for similar loans, our historical rescission rates and the current pipeline of unresolved demands. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan as well as current market conditions. We monitor the adequacy of the overall liability and make adjustments, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with our counterparties. See Note 22 – Contingencies to the Unaudited Consolidated Financial Statements for additional information.
Litigation
During the nine months ended September 30, 2021, we recorded an $8.5 million provision expense for loss contingencies. Our total accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $44.6 million as of September 30, 2021. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded as of September 30, 2021. In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending litigation matters. We monitor our litigation matters, including advice from external legal counsel, and regularly perform assessments of these matters for potential loss accrual and disclosure. We establish liabilities for settlements, judgments on appeal and filed and/or threatened claims for which we believe it is probable that a loss has been or will be incurred and the amount can be reasonably estimated based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. Management’s assessment involves the use of estimates, assumptions, and judgments, including progress of the matter, prior experience, available defenses, and the advice of legal counsel and other experts. Accruals are adjusted as more information becomes available or when an event occurs requiring a change.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses.
For the three-year periods ended December 31, 2020 and 2019, the US and USVI filing jurisdictions were in material cumulative loss positions. We recognize that cumulative losses in recent years is an objective form of negative evidence in
assessing the need for a valuation allowance and that such negative evidence is difficult to overcome. Other factors considered in these evaluations are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted.
As a result of these evaluations, we recognized a full valuation allowance of $182.7 million and $199.5 million on our U.S. deferred tax assets at December 31, 2020 and 2019, respectively, and a full valuation allowance of $0.4 million on our USVI deferred tax assets at both December 31, 2020 and 2019. The U.S. and USVI jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend to continue maintaining a full valuation allowance on our deferred tax assets in both the U.S. and USVI until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the profitability that we achieve.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate our NOL and tax credit carryforwards and whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize a portion of our NOL and tax credit carryforwards. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL and tax credit carryforwards under Sections 382 and 383 (or comparable provisions of foreign or state law).
Ocwen and PHH have both experienced historical ownership changes that have caused the use of certain tax attributes to be limited and have resulted in the write-off of certain of these attributes based on our inability to use them in the carryforward periods defined under the tax laws. Ocwen continues to monitor the ownership in its stock to evaluate whether any additional ownership changes have occurred that would further limit its ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
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| RECENT ACCOUNTING DEVELOPMENTS |
See Note 1 - Organization and Basis of Presentation to the Unaudited Consolidated Financial Statements for information related to recent accounting standards updates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in millions unless otherwise indicated)
Interest Rates
Our principal market risk exposure is the impact of interest rate changes on our mortgage-related assets and commitments, including MSRs, loans held for sale, loans held for investment, IRLCs and IRLCs.other derivative instruments. In addition, changes in
interest rates could materially and adversely affect ourthe amount of escrow and float income, the volume of mortgage loan originations or result in MSR fair value changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including MSR and advance financing facilities.
Our management-level Market Risk Committee establishes and maintains policies that govern our risk appetite and associated hedging programs, including such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the hedge instruments that we are permitted to use in our hedging activities and the counterparties with whom we are permitted to enter into hedging transactions and our liquidity risk profile. See Note 1516 – Derivative Financial Instruments and Hedging Activities to the Unaudited Consolidated Financial Statements for additional information regarding our use of derivatives.
Our market risk exposure may also be affected by the replacement of LIBOR, which is expected to be phased out and completely replaced by June 30, 2023. The LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Many of our debt facilities incorporate LIBOR. These facilities either mature prior to the end of 2021 or have terms in place that provide for an alternative to LIBOR upon its phase-out. As we renew or replace these debt facilities, we are working with our counterparties to incorporate alternative benchmarks.
MSR Hedging Strategy
MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates and prepayment speeds.
Through May 2021,Our risk management implemented a macro-hedging strategyMSR policy’s objective is to reduce the volatilityprovide partial hedge coverage of the MSR portfolio attributable to interest rate changes. As a general matter, the impact of interest rates on the fair value of our MSR portfolio is naturally offset by other exposures, including our loan pipeline and our economic MSR value embedded in our reverse mortgage loan portfolio. Our hedging strategy was targeted at mitigating the residual exposure, which we referred to as our net MSR portfolio exposure. We defined our net MSR portfolio exposure as follows:
•our more interest rate-sensitive Agency MSR portfolio,
•less the Agency MSRs subject to our agreements with NRZ (See Note 8 — MSR Transfers Not Qualifying for Sale Accounting),
•less the unsecuritized reverse mortgage loans and tails classified as held for investment,
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related liability, and
•less the net value of our held for sale loan portfolio and lock commitments (pipeline).
In the first and second quarters of 2021, we also included in our MSR portfolio the exposure related to expected future MSR bulk acquisitions subject to letters of intent.
Effective May 2021, management started hedging its MSR portfolio and its pipeline separately (see below for further description of pipeline hedging), effectively ending the macro hedge strategy previously in place. Under the new MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The interest-rate sensitive MSR portfolio exposure is now defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements with NRZ and MAV (See Note 8 — MSR Transfers Not Qualifying for Sale Accounting),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (Reverse).
Our MSR policy’s objective is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio, defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement, is subject to lower and upper thresholds, as modeled, of 40% and 60%, respectively.respectively in order to preserve liquidity and optimize asset returns. MSRs subject to LOI may be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes.
The table below presents We periodically evaluate the performance40-60% coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the MSR interest rate hedging strategy during the third quarter of 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | Net MSR Agency Portfolio Exposure (1) | | Reverse Exposure | | Hedging Derivatives | | Total | | Hedge Coverage Ratio (2) |
| DV01 parallel interest rate change | $ | 20.6 | | $ | (1.0) | | $ | (8.3) | | $ | 11.3 | | (45)% |
| Non-parallel rate movement, basis risk and other | (5.5) | | (0.4) | | (5.8) | | (11.7) | | |
| Estimated fair value changes attributable to interest rates | $ | 15.1 | | $ | (1.4) | | $ | (14.1) | | $ | (0.4) | | |
(1) Interest rate Agency MSR portfolio, including LOI, less MAV and NRZ transferred MSR.
(2) Reverse Exposure plus Hedging Derivatives divided by net MSR Agency Portfolio Exposure
While theMarket Risk Committee, in order to preserve liquidity and/or optimize asset returns. In addition, while DV01 measures remainedmay remain within the range of our hedging strategy’s objective, during the third quarter of 2021, the actual changes in fair value of the derivatives and MSR portfolio weremay not offset to the same extent, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments. In addition, we established a higher hedge coverage on a committed MSR sale to MAV during the third quarter of 2021.instruments, among other factors. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy.
Effective October 2021, we refined the scope of the hedge policy to allow for MSRs subject to LOI to be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions.
The following table illustrates the interest rate sensitivity of theour MSR portfolio exposure and associated hedges at SeptemberJune 30, 2021.2022. Hypothetical change in values of the MSR and hedges are presented under a set instantaneous +/- 25 basis point parallel move in rates. Refer to the description below under Sensitivity Analysis for more details. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear. The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only.
| | | Fair value at September 30, 2021 | | Hypothetical change in fair value due to 25 bps rate decrease | | Hypothetical change in fair value due to 25 bps rate increase | | Fair value at June 30, 2022 | | Hypothetical change in fair value due to 25 bps rate decrease (1) | | Hypothetical change in fair value due to 25 bps rate increase (1) |
| Agency MSRs - interest rate sensitive (excl. NRZ) | $ | 1,479.8 | | $ | (74.5) | | | $ | 75.3 | | |
| Agency MSRs - interest rate sensitive (excluding NRZ and MAV) | | Agency MSRs - interest rate sensitive (excluding NRZ and MAV) | $ | 1,439.9 | | $ | (34.8) | | | $ | 32.4 | |
| | | Asset value of securitized HECM loans, net of HMBS-related borrowing | Asset value of securitized HECM loans, net of HMBS-related borrowing | 91.5 | | 3.4 | | | (3.5) | | Asset value of securitized HECM loans, net of HMBS-related borrowing | 65.5 | | 3.9 | | | (4.0) | |
| MSR hedging derivative instruments | MSR hedging derivative instruments | $ | (19.5) | | 39.1 | | | (40.5) | | MSR hedging derivative instruments | $ | 3.7 | | 12.0 | | | (8.9) | |
| Total hedge position | Total hedge position | | $ | 42.5 | | | $ | (43.9) | | Total hedge position | | $ | 15.9 | | | $ | (12.9) | |
Hypothetical hedge coverage ratio (1)(2) | Hypothetical hedge coverage ratio (1)(2) | | 57 | % | | 58 | % | Hypothetical hedge coverage ratio (1)(2) | | 46 | % | | 40 | % |
| | Hypothetical residual exposure to changes in interest rates | Hypothetical residual exposure to changes in interest rates | | $ | (32.0) | | | $ | 31.4 | | Hypothetical residual exposure to changes in interest rates | | $ | (19.0) | | | $ | 19.5 | |
(1)The baseline for the hypothetical change in fair value is based on a 10-year Treasury Rate of 3.05% at June 30, 2022.
(2)The hypothetical hedge coverage ratio above is calculated as the change in fair value of the total hedge position divided by the change in value of the Agency MSR position.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements,statements.
The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Loans Held for Investment and HMBS-related Borrowings
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation.
The fair value of our HECM loan portfolio net of the fair value of the HMBS-related borrowings comprise the fair value of reverse mortgage loans and tails that are unsecuritized at the balance sheet date (reverse pipeline) and the fair value of securitized HECM loans net of the corresponding HMBS-related borrowings that represent the reverse mortgage economic MSR (HMSR) for risk management purposes. The HMSR acts as a partial hedge for our forward MSR value sensitivity. This HMSR exposure is used as an offset to our forward MSR exposure and managed as part of our MSR hedging strategy described above. Reverse pipeline is hedged under the same principles as described below, for unsecuritized loans held for investment.
Pipeline Hedging Strategy - Loans Held for Sale and IRLCs
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 60 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 53 to 20 days. This interest rate exposure was not individually hedged until May 2021, but rather used as an offset to our MSR exposure and managed as part of our MSR macro-hedging strategy described above. Effective May 2021, we implemented a new pipeline hedging strategy, whereby theThe interest rate exposure of loans held for sale and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The objective of our pipeline hedging strategy’s objectivestrategy is to provide hedge coverage of locks and loans within certain tolerance levels. The net daily market risk position of net pull-though adjusted locks and loans held for sale, less the offsetting hedges of the forward and reverse pipelines, is monitored daily and its daily limit is the greater of +/- 15%5% or +/- $15 million. We report changes in fair value of these derivative instruments in gain on loans held for sale in our consolidated statements of operations, within the Originations segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. Reverse pipeline is hedged under the same principles as described below, for unsecuritized loans held for investment.
During the first six months of 2022, management hedged certain Ginnie Mae EBO loans purchased out of securitizations for modification and reperformance with TBAs to manage the market risk (price impact) due to increasing interest rates while these loans await redelivery.
Advance Match Funded Liabilities
We monitor the effect of increases in interest rates on the interest paid on our variable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. We purchase interest rate caps as economic hedges (not designated as a hedge for accounting purposes) when required by our advance financing arrangements.
Interest Rate-Sensitive Financial Instruments
The tables below present the notional amounts of our financial instruments that are sensitive to changes in interest rates and the related fair value of these instruments at the dates indicated. We use certain assumptions to estimate the fair value of these instruments. See Note 3 – Fair Value to the Unaudited Consolidated Financial Statements for additional information regarding fair value of financial instruments.
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | Balance | | Fair Value (1) | | Balance | | Fair Value (1) | | Balance | | Fair Value (1) | | Balance | | Fair Value (1) |
| Rate-Sensitive Assets: | Rate-Sensitive Assets: | | | | | | | | Rate-Sensitive Assets: | | | | | | | |
| Interest-earning cash | Interest-earning cash | $ | 213.3 | | $ | 213.3 | | $ | 261.5 | | $ | 261.5 | Interest-earning cash | $ | 191.8 | | $ | 191.8 | | $ | 136.7 | | $ | 136.7 |
| Loans held for sale, at fair value | Loans held for sale, at fair value | 921.6 | | 921.6 | | 366.4 | | 366.4 | Loans held for sale, at fair value | 683.1 | | 683.1 | | 917.5 | | 917.5 |
| Loans held for sale, at lower of cost or fair value (2) | Loans held for sale, at lower of cost or fair value (2) | 12.1 | | 12.1 | | 21.5 | | 21.5 | Loans held for sale, at lower of cost or fair value (2) | 4.3 | | 4.3 | | 11.0 | | 11.0 |
| Loans held for investment, at fair value | Loans held for investment, at fair value | 7,100.7 | | 7,100.7 | | 6,997.1 | | 6,997.1 | Loans held for investment, at fair value | 7,376.5 | | 7,376.5 | | 7,199.8 | | 7,199.8 |
| | Debt service accounts and time deposits | Debt service accounts and time deposits | 13.3 | | 13.3 | | 20.7 | | 20.7 | Debt service accounts and time deposits | 14.2 | | 14.2 | | 10.6 | | 10.6 |
| Total rate-sensitive assets | Total rate-sensitive assets | $ | 8,261.0 | | $ | 8,261.0 | | $ | 7,667.2 | | $ | 7,667.2 | Total rate-sensitive assets | $ | 8,270.0 | | $ | 8,270.0 | | $ | 8,275.5 | | $ | 8,275.5 |
| | Rate-Sensitive Liabilities (3): | Rate-Sensitive Liabilities (3): | | Rate-Sensitive Liabilities (3): | |
| Advance match funded liabilities | Advance match funded liabilities | $ | 516.6 | | $ | 515.4 | | $ | 581.3 | | $ | 582.0 | Advance match funded liabilities | $ | 477.0 | | $ | 471.4 | | $ | 512.3 | | $ | 512.0 |
| HMBS-related borrowings, at fair value | HMBS-related borrowings, at fair value | 6,782.6 | | 6,782.6 | | 6,772.7 | | 6,772.7 | HMBS-related borrowings, at fair value | 7,155.3 | | 7,155.3 | | 6,885.0 | | 6,885.0 |
| Mortgage loan warehouse facilities | Mortgage loan warehouse facilities | 1,069.2 | | 1,069.2 | | 451.7 | | 451.7 | Mortgage loan warehouse facilities | 779.3 | | 779.3 | | 1,085.1 | | 1,085.1 |
| MSR financing facilities, net (4) | MSR financing facilities, net (4) | 946.8 | | 918.2 | | 438.6 | | 406.9 | MSR financing facilities, net (4) | 988.9 | | 965.1 | | 901.7 | | 873.8 |
| Senior secured term loan, net (4) | — | | — | | 185.0 | | 184.6 | |
| | Senior notes (4) | Senior notes (4) | 685.0 | | 662.3 | | 313.1 | | 320.9 | Senior notes (4) | 660.0 | | 556.9 | | 685.0 | | 674.9 |
| Total rate-sensitive liabilities | Total rate-sensitive liabilities | $ | 10,000.1 | | $ | 9,947.7 | | $ | 8,742.3 | | $ | 8,718.8 | Total rate-sensitive liabilities | $ | 10,060.4 | | $ | 9,927.9 | | $ | 10,069.1 | | $ | 10,030.8 |
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | Notional
Balance | | Fair
Value | | Notional
Balance | | Fair
Value | | Notional
Balance | | Fair
Value (1) | | Notional
Balance | | Fair
Value (1) |
| Rate-Sensitive Derivative Financial Instruments: | Rate-Sensitive Derivative Financial Instruments: | | | | | | | | Rate-Sensitive Derivative Financial Instruments: | | | | | | | |
| Derivative assets (liabilities): | Derivative assets (liabilities): | | Derivative assets (liabilities): | |
| IRLCs | IRLCs | $ | 1,302.9 | | $ | 14.0 | | $ | 631.4 | | $ | 22.7 | IRLCs | $ | 557.4 | | $ | 5.7 | | $ | 1,085.3 | | $ | 18.1 |
| Forward trades | 140.0 | | 0.4 | | 50.0 | | (0.1) | |
| Forward sales of reverse loans | | Forward sales of reverse loans | 93.0 | | 0.6 | | 175.0 | | 0.4 |
| Interest rate swap futures | Interest rate swap futures | 952.5 | | (8.2) | | 593.5 | | 0.5 | Interest rate swap futures | 250.0 | | 0.7 | | 792.5 | | 1.7 |
| TBA / Forward MBS trades | 2,665.0 | | (6.0) | | 400.0 | | (4.6) | |
| TBA forward MBS trades | | TBA forward MBS trades | 1,183.0 | | (4.1) | | 1,782.0 | | (0.2) |
| | Interest rate option contracts | | Interest rate option contracts | 1,250.0 | | 1.2 | | 575.0 | | (0.3) |
| | | Derivatives, net | Derivatives, net | | $ | 0.3 | | $ | 18.6 | Derivatives, net | $ | 3,333.4 | | $ | 4.2 | | $ | 4,409.8 | | $ | 19.7 |
(1)See Note 3 – Fair Value to the Unaudited Consolidated Financial Statements for additional fair value information on financial instruments.
(2)Net of valuation allowances and including non-performing loans.
(3)Excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings, which have no contractual maturity and are amortized over the life of the related assets.
(4)BalancesAmounts are exclusive of any related discount or unamortized debt issuance costs.
Sensitivity Analysis
Fair Value MSRs, Loans Held for Sale, Loans Held for Investment and Related Derivatives
The following table summarizes the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale that we have elected to carry at fair value as well as any related derivatives at SeptemberJune 30, 2021,2022, given
hypothetical instantaneous parallel shifts in the yield curve. We used SeptemberJune 30, 20212022 market rates to perform the sensitivity analysis. The estimates are based on the interest rate 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 to the change in fair value may not be linear.
| | | Change in Fair Value | | Change in Fair Value |
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| Down 25 bps | | Up 25 bps |
| Down 25 bps | | Up 25 bps |
| Asset value of securitized HECM loans, net of HMBS-related borrowing | Asset value of securitized HECM loans, net of HMBS-related borrowing | $ | 3.4 | | | $ | (3.5) | | Asset value of securitized HECM loans, net of HMBS-related borrowing | $ | 3.9 | | | $ | (4.0) | |
| Loans held for investment - Unsecuritized HECM loans and tails | Loans held for investment - Unsecuritized HECM loans and tails | — | | | — | | Loans held for investment - Unsecuritized HECM loans and tails | — | | | — | |
| Loans held for sale | Loans held for sale | 18.0 | | | (21.7) | | Loans held for sale | 8.6 | | | (10.6) | |
| Derivative instruments | Derivative instruments | 19.9 | | | (18.9) | | Derivative instruments | 2.3 | | | 1.6 | |
| | Total MSRs - Agency and non-Agency (1) | Total MSRs - Agency and non-Agency (1) | (74.5) | | | 75.4 | | Total MSRs - Agency and non-Agency (1) | (34.9) | | | 32.4 | |
| Interest rate lock commitments (2) | Interest rate lock commitments (2) | (1.7) | | | 1.3 | | Interest rate lock commitments (2) | (0.5) | | | 0.7 | |
| | Total, net | Total, net | $ | (34.8) | | | $ | 32.5 | | Total, net | $ | (20.6) | | | $ | 20.1 | |
(1)Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio and on advance funding costs on the non-Agency MSR portfolio carried at fair value.portfolio. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ and MAV financing liabilities, which are recorded in Pledged MSR liability expense.
(2)Forward mortgage loans only.
The increasedecrease in our net sensitivity as of September 30, 2021 as compared tofrom December 31, 20202021 to June 30, 2022 (from approximately $15 million$35 - $39 million) to $33-$35$20 - $21 million for a 25 basis point parallel shift in the yield curve) is primarily due todriven by the growtheffect of our Servicing and Originations businesses, with the significant increase in the size of our Agency MSR portfolio through bulk acquisitions and the increase in our pipeline, asinterest rates on the MSR portfolio (due to convexity), the sale of an MSR portfolio and the change in our hedging strategy objectives and coverage ratio remained broadly similar.instruments in the first six months of 2022.
Borrowings
The majority of the debt used to finance much of our operations is exposed to interest rate fluctuations. We may purchase interest rate swaps and interest rate caps to minimize future interest rate exposure from increases in interest rates, or when required by the financing agreements.
Based on SeptemberJune 30, 20212022 balances, if interest rates were to increase by 1%100 bps on our variable-rate debt and interest earning cash and float balances, we estimate a net positive impact of approximately $19.9$3.9 million resulting from an increase of $36.5$20.8 million in annual interest income and other credits on deposits, and an increase of $16.5$16.8 million in annual interest expense.
Foreign Currency Exchange Rate Risk
Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We have not entered into any foreign currency hedging derivative instruments during the first six months of 2022.
Home Prices
Inactive reverse mortgage loans for which the maximum claim amount has not been met are generally foreclosed upon on behalf of Ginnie Mae with the REO remaining in the related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed upon and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate REO within the FHA program guidelines. As our reverse mortgage portfolio seasons, and the volume of MCA repurchases increases, our exposure to this risk will increase.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision of and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of SeptemberJune 30, 2021.2022.
Based on such evaluation, management concluded that our disclosure controls and procedures as of SeptemberJune 30, 20212022 were (1) designed and functioning effectively to ensure that material information relating to Ocwen, including its consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) operating effectively in that they provided reasonable assurance that information required to be disclosed by Ocwen in the reports that it files or submits under the
Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer or principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting that occurred during the fiscal quarter ended SeptemberJune 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe the most significant risks that management believes affect or could affect us under Part I, Item 1.A. of our Annual Report on Form 10-K for the year ended December 31, 2020.2021. Understanding these risks is important to understanding any statement in such reports and in our subsequent SEC filings (including this Form 10-Q) and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described therein together with all the other information included or incorporated by reference in such Annual Report and in our subsequent SEC filings before you make any decision regarding an investment in our common stock. You should also consider the information set forth under “Forward-Looking Statements.” If any of the risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliates
On May 20, 2022, Ocwen’s Board of Directors authorized a share repurchase program for an aggregate amount of up to $50.0 million of Ocwen’s issued and outstanding shares of common stock. Repurchases may be made through open market purchases. The timing and execution of any share repurchases are subject to market conditions, among other factors, and Ocwen may modify, discontinue or suspend the repurchase program at any time. Any shares repurchased will be retired and canceled. Unless Ocwen amends the share repurchase program or repurchases the full $50.0 million amount by an earlier date, the share repurchase program will continue through November 20, 2022. No assurances can be given as to the amount of shares, if any, that Ocwen may repurchase in any given period.
Information regarding repurchases of our common stock during the second quarter of 2022 is as follows:
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| Period | Total number of shares purchased | | Average price paid per share (1) | | Total number of shares purchased as part of a publicly announced repurchase program | | Approximate dollar value of shares that may yet be purchased under the repurchase program |
| April 1 - April 30 | — | | | $ | — | | | — | | | $ | 50.0 | million |
| May 1 - May 31 | — | | | $ | — | | | — | | | $ | 50.0 | million |
| June 1 - June 30 | 84,087 | | | $ | 26.8742 | | | 84,087 | | | $ | 47.7 | million |
| Total | 84,087 | | | $ | 26.8742 | | | 84,087 | | | |
(1)Average price paid per share does not reflect payment of commissions totaling $2,522 (two thousand five hundred twenty-two dollars).
ITEM 6. EXHIBITS
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| | 4.1 | | The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to the issuance of long-term debt of the Company and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the Company and its subsidiaries. |
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| | 101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20212022 were formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (Loss), (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
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| | 104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2021,2022, formatted in Inline XBRL (Included as Exhibit 101).
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(1)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 10-Q for the period ended September 30, 2020 filed on November 3, 2020.
(2)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on February 25, 2019.
(3)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on May 27, 2022.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Ocwen Financial Corporation |
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| | By: | /s/ June C. CampbellSean B. O’Neil |
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| | | Executive Vice President and Chief Financial Officer
(On behalf of the Registrant and as its principal financial officer) |
Date: November 5, 2021August 4, 2022 | | |