Home Point Capital Inc. - Annual Report: 2022 (Form 10-K)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______________ to ______________
Commission file number 001-39964
Home Point Capital Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 90-1116426 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
2211 Old Earhart Road, Suite 250 Ann Arbor, Michigan | 48105 | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(888) 616-6866
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.0000000072 per share | HMPT | The Nasdaq Stock Market LLC (The Nasdaq Global Select Market) | ||||||||||||
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark 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.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate value of the registrant’s common stock held by non-affiliates was approximately $29.4 million, based on the closing price of the registrant’s common stock on the Nasdaq Global Select Market on that date. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes.
The registrant had outstanding 138,401,090 shares of common stock as of March 3, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
| PART I | Page | ||||
| PART II | |||||
| PART III | |||||
| PART IV | |||||
Cautionary Note on Forward-Looking Statements
This Annual Report on Form 10-K (this “Report”) contains certain “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 are forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs, the industry in which we operate and other similar matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should” and the negative of these terms or other comparable terminology often identify forward-looking statements. Forward-looking statements are not guarantees of future performance, are based upon assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in this Report. Factors, risks, and uncertainties that could cause actual outcomes and results to be materially different from those contemplated include, among others:
•our reliance on our financing arrangements to fund mortgage loans and otherwise operate our business;
•the dependence of our loan origination and servicing revenues on macroeconomic and U.S. residential real estate market conditions;
•the requirement to repurchase mortgage loans or indemnify investors if we breach representations and warranties;
•counterparty risk;
•the requirement to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances;
•risks related to any subservicer;
•competition for mortgage assets that may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns;
•our ability to continue to grow our loan origination business or effectively manage significant increases in our loan production volume;
•difficult conditions or disruptions in the MBS, mortgage, real estate and financial markets;
•competition in the industry in which we operate;
•our ability to acquire loans and sell the resulting MBS in the secondary markets on favorable terms in our production activities;
•our ability to adapt to and implement technological changes;
•the effectiveness of our risk management efforts;
•our ability to detect misconduct and fraud;
•any failure to attract and retain a highly skilled workforce, including our senior executives;
•our ability to obtain, maintain, protect and enforce our intellectual property;
•any cybersecurity risks, cyber incidents and technology failures;
•our vendor relationships;
•our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements;
•any employment litigation and related unfavorable publicity;
•exposure to new risks and increased costs as a result of initiating new business activities or strategies or significantly expanding existing business activities or strategies;
•the impact of changes in political or economic stability or by government policies on our material vendors with operations in India;
•our ability to fully utilize our NOL and other tax carryforwards;
•any challenge by the IRS of the amount, timing and/or use of our NOL carryforwards;
•possible changes in legislation and the effect on our ability to use the tax benefits associated with our NOL carryforwards;
•the impact of other changes in tax laws;
•the impact of interest rate fluctuations;
•risks associated with hedging against interest rate exposure;
•the impact of any prolonged economic slowdown, recession or declining real estate values;
•risks associated with financing our assets with borrowings;
•risks associated with a decrease in value of our collateral;
•the dependence of our operations on access to our financing arrangements, which are mostly uncommitted;
•risks associated with the financial and restrictive covenants included in our financing agreements;
•our ability to raise the debt or equity capital required to finance our assets and maintain and grow our business;
•risks associated with derivative financial instruments;
•our ability to comply with continually changing federal, state and local laws and regulations;
•the impact of revised rules and regulations and enforcement of existing rules and regulations by the CFPB;
•the impact of revised rules and regulations and enforcement of existing rules and regulations by state regulatory agencies;
•our ability to comply with the GSE, FHA, VA and USDA guidelines and changes in these guidelines or GSE and Ginnie Mae guarantees;
•changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as Ginnie Mae, the FHA or the VA, the USDA, or GSEs such as Fannie Mae or Freddie Mac, or such changes that increase the cost of doing business with such entities;
•our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;
•our ability to comply with the regulations applicable to our investment management subsidiary;
•the impact of private legal proceedings;
•risks associated with our acquisition of MSRs;
•the impact of our counterparties terminating our servicing rights under which we conduct servicing activities;
•risks associated with higher risk loans that we service;
•our ability to foreclose on our mortgage assets in a timely manner or at all; and
•the effects of the COVID-19 (as defined herein) pandemic on our business.
Many of the important factors that will determine these results are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Report. Except as otherwise required by law, we do not assume any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated
events. You should refer to the risks and uncertainties listed under the heading “Risk Factors” in Part I, Item 1A. of this Report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (“SEC”), for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.
Website and Social Media Disclosure
We use our website (www.investors.homepoint.com) and our corporate Facebook, LinkedIn, and Twitter accounts as routine channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, incorporated herein by reference or otherwise a part of this Report.
Glossary of Defined Terms
As used in this Report, unless the context otherwise requires:
•“An Agency” or “Agencies” refers to Ginnie Mae, the FHA, the VA, the USDA and/or GSEs.
•“CFPB” refers to the Consumer Financial Protection Bureau.
•“Fannie Mae” refers to the Federal National Mortgage Association.
•“FHA” refers to the Federal Housing Administration.
•“FOA” refers to fallout adjusted.
•“Freddie Mac” refers to the Federal Home Loan Mortgage Corporation.
•“Ginnie Mae” refers to the Government National Mortgage Association.
•“GSE” refers to Government-Sponsored Enterprises, such as Fannie Mae and Freddie Mac.
•“Holdings” refers to Home Point Capital LP, a Delaware limited partnership, the direct parent of Home Point Capital Inc. prior to the consummation of the merger in connection with our initial public offering.
•“HUD” refers to the U.S. Department of Housing and Urban Development.
•“MBS” refers to mortgage-backed securities—a type of asset-backed security that is secured by a group of mortgage loans.
•“MSRs” refers to mortgage servicing rights—the right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
•“Sponsor” or “Stone Point Capital” refers to Stone Point Capital LLC.
•“Trident Stockholders” refers, collectively, to one or more investment entities directly or indirectly managed by Stone Point Capital, including Trident VI, L.P., Trident VI Parallel Fund, L.P., Trident VI DE Parallel Fund, L.P. and Trident VI Professionals Fund, L.P.
•“UPB” refers to unpaid principal balance.
•“USDA” means the U.S. Department of Agriculture.
•“VA” means the U.S. Department of Veterans Affairs.
Unless the context otherwise indicates, any reference in this Report to “Home Point,” “our Company,” “the Company,” “us,” “we” and “our” refers to Home Point Capital Inc.
Part I.
Item 1. Business
Company Overview
We are a leading residential mortgage originator and servicer driven by a mission to create financially healthy, happy homeowners. We do this by delivering scale, efficiency and savings to our partners and customers. Our business model is focused on leveraging a nationwide network of partner relationships to drive sustainable originations. We support our origination operations through a robust operational infrastructure and a highly responsive customer experience. We then leverage our servicing platform to manage the customer experience. We believe that the complementary relationship between our origination and servicing businesses allows us to provide a best-in-class experience to our customers throughout their homeownership lifecycle.
Our primary focus is our Wholesale channel, a business-to-business-to-customer distribution model in which we utilize our relationships with independent mortgage brokerages, which we refer to as our Broker Partners, to reach our end-borrower customers. In this channel, while our Broker Partners establish and maintain the relationship with the end-borrower, we as the lender underwrite the loan in-house and act as the original lender. To emphasize focus on the Wholesale channel, on June 1, 2022, we completed the sale of our Delegated Correspondent channel and subsequently redirected our Direct channel resources to wholesale.
According to Inside Mortgage Finance, we are the third largest wholesale lender by origination volume for the year ended December 31, 2022. We propel the success of our more than 9,000 Broker Partners through a combination of full service, localized sales coverage and an efficient loan fulfillment process supported by our fully integrated technology platform. We differentiate ourselves from our peers focused on the wholesale channel by following a partnership approach towards our Broker Partners, where we seek to mitigate any conflict of interest by allowing the Broker Partners to maintain their customer relationships while we support them with our best-in-class technology platform. Broker Partners, which we define to include brokerage businesses that may include multiple broker employees, represent wholesale and non-delegated correspondent accounts that Home Point is authorized to conduct business with at a given point in time (whether or not we have recently originated mortgages through such broker).
The wholesale channel share of the U.S. residential mortgage market continues to increase. According to Inside Mortgage Finance, our market share in the wholesale channel was 6.6% in 2022 compared to 1.6% in 2017. This growth trend, together with our distinct wholesale strategy, enable highly scalable production volumes, a strong mix of purchase transactions and favorable unit economics, driven by lower fixed costs.
In February 2022, we announced an agreement with ServiceMac, LLC (“ServiceMac”), a wholly owned subsidiary of First American Financial Corporation, pursuant to which ServiceMac will subservice all mortgage loans underlying MSRs we hold. ServiceMac began subservicing loans for us in the second quarter of 2022. While ServiceMac is performing the servicing functions on our behalf, we continue to hold the MSRs. The transition of our servicing operation to ServiceMac enables the redeployment of technology and process resources to support our Wholesale channel, including expanding product offerings and enhancing the partner experience. Strategically retaining the servicing on our originations gives us the opportunity to establish productive relationships with our customers. The opportunity for productive relationships with our customers continues after ServiceMac began subservicing loans for us since customers receive the same high-quality service they are accustomed to and they will continue to see our brand on all communications. Our relationship with ServiceMac allows us to maintain a lower, more variable cost structure and provides greater flexibility when strategically selling certain non-core MSRs.
We have built a flexible technology infrastructure that is highly componentized, which we believe allows us to leverage nimble internal development teams and market leading third-party systems to provide a best-in-class experience for our partners and customers. We believe that our ability to rapidly reconfigure individual solutions using technology in areas such as underwriting, pricing and disclosure preparation reduces the complexity and improves the efficiency of the origination process.
Our Business
Our business model is focused on growing originations by leveraging a network of partner relationships that we support through reliable loan origination infrastructure and a highly responsive customer experience. Our operations are organized into two separate reportable segments: Origination and Servicing.
Origination
We originate mortgages in the Wholesale channel and choose to operate in this channel because we believe that it:
•provides us efficient access to both purchase and refinance transactions throughout market cycles;
•benefits from the premise that in-market advisors will continue to be a cornerstone of the mortgage origination process;
•is highly scalable and flexible; and
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•provides an optimized experience for our customers.
Our primary source of revenue consists of (i) gains on loans, which is the difference between the cost of originating or purchasing the mortgage loans and the price at which we sell such loans to investors, primarily the GSEs and Ginnie Mae, and (ii) gains on fair value of MSRs.
Our originations are comprised of both purchase and refinance originations. While refinancing origination levels in the market vary based on a number of market dynamics, including interest rate levels, inflation, unemployment and the strength of the overall economy, we are focused on maintaining steady purchase origination volumes, which gives us a considerable advantage over many of our competitors as purchase originations tend to be more stable and reduce earnings volatility. In 2021, our purchase origination mix was 31.1%. In 2022, the higher interest rate environment resulted in an increase in our purchase origination mix to 61.3%.
Wholesale Channel
We originate residential mortgages in our Wholesale channel through a nationwide network of more than 9,000 Broker Partners. We are strategically focused on this channel given that the underlying cost structure is more efficient than that of Distributed Retail channel, where the costs and overhead associated with originating loans are the full responsibility of the lender. As a result, we are able to operate with a lower fixed cost than many of our competitors. This highly leverageable cost structure allows for improved financial flexibility in varying interest rate environments.
Our Broker Partners have local and personal relationships with their customers and therefore can provide tailored and thoughtful advice. However, they do not have the underwriting, funding, distributing or servicing capabilities for these loans. We provide these resources, which allow them to operate with scale and compete against larger market participants. This enables our Broker Partners to be nimble and run their business in an entrepreneurial fashion. Our Broker Partners are focused on providing the best possible experience, service, and price to their customers, while we concentrate on maximizing the efficiency of the origination platform leveraged by our partners. While our Broker Partners are responsible for originating the loan, we, as the lender, are responsible for making the loan. As a result, the decision to extend credit to the borrower, and the associated credit risk exposure, is our sole responsibility and not the responsibility of our Broker Partners.
The efficiency of our sales team, combined with our flexible cost structure, has positioned us to further consolidate volume from the smaller and less efficient wholesale lenders that still control nearly 45% of the wholesale market. We plan to do this by increasing the number of independent brokerages that serve as our Broker Partners. We believe that further penetration of the highly fragmented brokerage market will allow us to maintain our industry leading profile.
The strategy we employ in our Wholesale channel is closely tied to our servicing strategy. Strategically retaining the servicing on our originations gives us the opportunity to establish productive relationships with our customers. This provides us the ability to include our Broker Partners in the management of the customer relationship and ultimately the retention of customers in our collective ecosystem. The opportunity for productive relationships with our customers continues since ServiceMac began subservicing loans for us as customers receive the same high-quality service they are accustomed to and they continue to see our brand on all communications. In addition, the transition of our servicing operation to ServiceMac enables the redeployment of technology and process resources to support our Wholesale channel, including expanding product offerings and enhancing the partner experience.
Legacy Correspondent and Direct Channels
In mid-2022, we sold our delegated correspondent channel and redirected our direct channel resources to focus solely on our Wholesale channel.
Correspondent Channel
In our Correspondent channel, we purchased closed and funded mortgages from a trusted network of our Correspondent Partners. Our Correspondent Partners included primarily small- to medium-sized independent mortgage banks, builder affiliates and financial institutions. Our partners underwrote, processed and funded loans, but typically lacked the scale to economically retain servicing. Our financial institution partners preferred to sell to non-bank originators to avoid conflicting customer solicitation. This channel provided a flexible alternative for us to achieve our customer acquisition goals at a low cost.
Direct Channel
In our Direct channel, we originated residential mortgages primarily for existing servicing customers who are seeking new financing options. Our Direct strategy was focused on maximizing the customer retention opportunity in our servicing portfolio, but was differentiated from our competitors in that it was designed to be inclusive of both of our customers’ preferences and our Broker Partners’ in-market presence. For example, if a Broker Partner-initiated customer proactively contacts us about a refinancing, we referred the customer to the applicable Broker Partner that originally established the relationship. This strategy removed the conflict of interest that some competitors have between their direct and wholesale channels. If the customer preferred to use our Direct functionality, or if there is no Broker Partner perhaps because the customer was sourced through a Correspondent Partner, we could still fulfill the customer’s preference and retain the customer relationship.
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Servicing
While we initiate our customer relationships at the time the mortgage is originated, we maintain ongoing connectivity with our nearly 317,000 servicing portfolio customers. Additionally, retaining the MSR provides the Company with opportunities to strategically manage liquidity. Our Servicing segment is authorized to conduct business in all 50 states and D.C.
In February 2022, we announced an agreement with ServiceMac, pursuant to which ServiceMac began to subservice all mortgage loans underlying MSRs we hold in the second quarter of 2022. They perform servicing functions on our behalf, but we continue to hold the MSRs. The transition of our servicing operation to ServiceMac enables the redeployment of technology and process resources to support our Wholesale channel, including expanding product offerings and enhancing the partner experience. Strategically retaining the servicing on our originations gives us the opportunity to establish productive relationships with our customers while opportunistically participating in the dynamic MSR sale market. Productive relationships with our customers continues after ServiceMac began subservicing loans for us since customers receive the same high-quality service they are accustomed to and they continue to see our brand on all communications. Our relationship with ServiceMac allows us to maintain a lower, more variable cost structure and provides greater flexibility when strategically selling certain non-core MSRs.
As of December 31, 2022, we had approximately 317,000 servicing portfolio customers, as compared to 442,000 at the end of 2021. During this same period, our servicing portfolio UPB decreased from $133.9 billion at the end of 2021 to $89.3 billion at the end of 2022.
Technology
Mortgage banking technology is evolving rapidly. Historically, it has been an advantage to develop technology in-house, but in today’s marketplace, there are various alternative technology solutions that provide a competitive advantage through increased flexibility and lower costs. Building and maintaining a monolithic, proprietary loan origination system is not only costly, but highly complex. This makes it increasingly challenging to evolve with emerging technologies. We have developed a multi-prong strategy whereby we (i) partner with best-in-class third-party software providers to meet our core technology needs and (ii) deploy internal resources to build proprietary software in areas where we believe we can create a strategic advantage. We integrate our third-party providers with our proprietarily built software to provide a unified, seamless experience for our partners and customers. We believe that our componentized approach promotes nimbleness and allows us to provide technology solutions faster than our competition, while retaining control in areas that we deem strategically important.
Our servicing platform supports our customers’ home ownership journey. This is done together with third-party providers that offer a variety of products and services to our customers, including insurance, loans and other ancillary home service products. In addition to revenue generation, the successful execution of these offerings is intended to build a stronger relationship between us and our customers with the goal of retaining the customer in our ecosystem.
We believe the combination of customer-centric technology and process execution is key to creating the best overall technology platform. As a result, we have placed a heavy emphasis on process design and have assembled a team of process engineers that possess a unique combination of business acumen and an understanding of how to deploy mortgage technology. This process engineering team is integrated within the operations of our business to ensure our technology solutions are strategically aligned in developing and delivering efficiencies to the business. These efficiencies promote our ability to drive scale and better serve the needs of both our customers and our partners. The dedicated focus of this team enables us to constantly identify and streamline operational areas that can be best served through technological improvement.
U.S. Mortgage Market
The U.S. mortgage market is one of the largest and consistently growing financial markets in the world. As of September 30, 2022, according to the Federal Reserve Bank of New York there was approximately $11.67 trillion of residential mortgage debt outstanding in the United States. Despite continued aggregate growth, the pace of new mortgage originations slowed in 2022 in a rapidly rising interest rate environment from pandemic new mortgage origination highs. According to Fannie Mae’s January 2023 Housing Forecast, total purchase and refinance originations are expected to be $1.6 trillion in 2023, down from $2.3 trillion in originations in 2022. Periods of outsized refinancing opportunities, such as those opportunities experienced in 2020, provided significant upside in the mortgage market. The shifting interest rate environment has emphasized long-term stability through purchase mortgages, which represent $1.3 trillion of the market of the 2023 forecast.
Regulation
We operate in a heavily regulated industry that is highly focused on consumer protection. Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years, initially in response to the financial crisis, and more recently in light of other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the financial services sector. We expect to continue to face regulatory scrutiny as a participant in the mortgage sector.
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Our business is subject to extensive oversight and regulation by federal, state and local governmental authorities, including the CFPB, HUD and various state agencies that license and conduct examinations of our origination, loan servicing, loss mitigation, and collection activities. From time to time, we also receive requests from federal, state and local agencies for records, documents and information relating to the policies, procedures and practices of our origination, loan servicing, loss mitigation and collection activities. The GSEs and Ginnie Mae, and various investors and lenders also conduct periodic reviews and audits of our operations.
The descriptions below summarize certain significant state and federal laws to which we are subject. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions summarized. They do not summarize all possible or proposed changes in current laws or regulations and are not intended to be a substitute for the related statues or regulatory provisions.
Federal, State and Local Laws and Regulations
We must comply with a large number of federal, state and local consumer protection laws and regulations including, among others:
•the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which (1) require certain disclosures to be made to the borrower at application, as to the lender’s good faith estimate of loan origination costs, and at closing with respect to the real estate settlement statement, (2) apply to certain loan servicing practices including escrow accounts, customer complaints, servicing transfers, lender-placed insurance, error resolution and loss mitigation, and (3) prohibit giving or accepting any fee, kickback or a thing of value for the referral of real estate settlement services;
•The Truth In Lending Act (“TILA”), Home Ownership and Equity Protection Act of 1994, and Regulation Z, which regulate mortgage loan origination activities, require certain disclosures be made to borrowers throughout the loan process regarding terms of mortgage financing, provide for a three-day right to rescind some transactions, regulate certain higher-priced and high-cost mortgages, require lenders to make a reasonable and good faith determination that consumers have the ability to repay the loan, mandate home ownership counseling for mortgage applicants, impose restrictions on loan originator compensation, and apply to certain loan servicing practices;
•Regulation N, covering Mortgage Acts and Practices, prohibits certain unfair and deceptive acts and practices related to mortgage advertising;
•certain provisions of the Dodd-Frank Act, including the Consumer Financial Protection Act, which, among other things, prohibit unfair, deceptive or abusive acts or practices;
•the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, which regulate the use and reporting of information related to the credit history of consumers, require disclosures to consumers regarding the use of credit report information in certain credit decisions and require lenders to undertake remedial actions if there is a breach in the lender’s data security;
•the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of age, race and certain other characteristics in the extension of credit and require certain disclosures to applicants for credit;
•the Homeowners Protection Act, which requires certain disclosures and the cancellation or termination of mortgage insurance once certain equity levels are reached;
•the Home Mortgage Disclosure Act and Regulation C, which require reporting of loan origination data, including the number of loan applications taken, approved, denied and withdrawn;
•the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics;
•the Fair Debt Collection Practices Act, which regulates the timing and content of third-party debt collection communications;
•the Gramm-Leach-Bliley Act, which requires initial and periodic communication with consumers on privacy matters and the maintenance of privacy safeguards regarding certain consumer data in our possession;
•the Bank Secrecy Act and related regulations from the Office of Foreign Assets Control, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, or the USA PATRIOT Act, which impose certain due diligence and recordkeeping requirements on lenders to detect and block money laundering that could support terrorist or other illegal activities;
•the Secure and Fair Enforcement for Mortgage Licensing Act (the “SAFE Act”), which imposes state licensing requirements on mortgage loan originators;
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•the Military Lending Act, or MLA, which restricts, among other things, the interest rate and other terms that can be offered to active military personnel and their dependents on most types of consumer credit, requires certain disclosures and prohibits certain terms, such as mandatory arbitration if a dispute arises concerning the consumer credit product;
•the Servicemembers Civil Relief Act, which provides financial protections for eligible service members;
•the Federal Trade Commission Act, the FTC Credit Practices Rules and the FTC Telemarketing Sales Rule, which prohibit unfair or deceptive acts or practices and certain related practices;
•the Telephone Consumer Protection Act, which restricts telephone and text solicitations and communications and the use of automatic telephone equipment;
•the Electronic Signatures in Global and National Commerce Act, or ESIGN, and similar state laws, particularly the Uniform Electronic Transactions Act, or UETA, which require businesses that use electronic records or signatures in consumer transactions and provide required disclosures to consumers electronically, to obtain the consumer’s consent to receive information electronically;
•the Electronic Fund Transfer Act of 1978, or EFTA, and Regulation E, which protect consumers engaging in electronic fund transfers;
•the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 and the FTC’s rules promulgated pursuant to such Act, or the CAN-SPAM Act, which establish requirements for certain “commercial messages” and “transactional or relationship messages” transmitted via email; and
•the Bankruptcy Code and bankruptcy injunctions and stays, which can restrict collection of debts.
In addition to applicable federal laws and regulations governing our operations, our ability to originate and service loans in any particular state is subject to that state’s laws, regulations and licensing requirements, which may differ from the laws, regulations and licensing requirements of other states. State laws often include limits on the fees and interest rates we may charge, disclosure requirements with respect to fees and interest rates and other requirements. Many states have adopted regulations that prohibit various forms of “predatory” lending and place obligations on lenders to substantiate that a customer will derive a tangible benefit from the proposed home financing transaction and/or have the ability to repay the loan. Many of these laws are vague and subject to differing interpretation, which exposes us to additional risks.
We also must comply with federal, state, and local laws related to data privacy and the handling of personally identifiable information and other sensitive, regulated, or non-public data. These include the California Consumer Privacy Act (“CCPA”) and the California Privacy Rights Act which amends and expands on the CCPA (together, the “Amended CCPA”), and we expect other states to enact legislation similar to the Amended CCPA. The Amended CCPA limits how companies can use customer data and impose obligations on companies in their management of such data, and requires us to modify our data processing practices and policies and to incur costs and expenses in an effort to fully comply. Generally speaking, the Amended CCPA provides consumers with certain privacy rights such as the right to request deletion of their data, the right to receive data on record for them, and the right to know what categories of data (generally) are maintained about them. It also mandates disclosures prior to, and at, the point of data collection and increases the privacy and security obligations of entities handling certain personal information of such consumers. The Amended CCPA allows consumers to submit verifiable consumer requests regarding their personal information and requires our business to implement procedures to comply with such requests. The Amended CCPA provides for civil money penalties for violations, as well as a private right of action for certain data breaches that result from a failure to implement reasonable safeguards.
These laws and regulations apply to many facets of our business, including loan origination, loan servicing, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced.
In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) imposed several new compliance obligations on our mortgage servicing activities, including, but not limited to, mandatory forbearance offerings, altered credit reporting obligations, and moratoriums on foreclosure actions and late fee assessments. Many states have taken similar measures to provide mortgage payment and other relief to consumers, which create additional complexity around our mortgage servicing compliance activities. Federal, state and local executive, legislative and regulatory responses to COVID-19 have not been consistent in scope or application. For example, while certain foreclosure moratorium and forbearance programs have expired, other such programs have been extended. The regulatory response to COVID-19 has been characterized by rapid evolution and may continue to evolve in unpredictably ways.
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Our failure to comply with applicable federal, state and local laws, regulations and licensing requirements could lead to, without limitation, any of the following:
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•administrative fines and penalties and litigation;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations resulting in defaults and cross-defaults under our servicing and trade agreements and financing arrangements;
•damage to our reputation;
•inability to obtain new financing and maintain existing financing;
•inability to raise capital; or
•inability to execute on our business strategy.
Supervision and Enforcement
Since its formation, the CFPB has taken a very active role in the mortgage industry. The CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage lenders and servicers, and its rulemaking and regulatory agenda relating to loan servicing and origination continues to evolve. The CFPB also has broad supervisory and enforcement powers with regard to non-depository financial institutions that engage in the origination and servicing of mortgage loans. The CFPB has conducted routine examinations of our business and will conduct future examinations.
As part of its enforcement authority, the CFPB can order, among other things, rescission or reformation of contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust enrichment, the payment of damages or other monetary relief, public notifications regarding violations, remediation of practices, external compliance monitoring and civil money penalties. The CFPB has been active in investigations and enforcement actions and has issued large civil money penalties since its inception to parties the CFPB determines violated the laws and regulations it enforces.
Individual states have also been active in the mortgage industry, as have other regulatory organizations such as the Multistate Mortgage Committee, a multistate coalition of various mortgage banking regulators. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage lenders and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management.
In addition, we receive information requests and other inquiries, both formal and informal in nature, from our federal and state regulators as part of their general regulatory oversight of our servicing and lending businesses.
The CFPB and state regulators have also increasingly focused on the use and adequacy of technology in the mortgage servicing industry. In 2016, the CFPB issued a special edition supervisory report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems to ensure compliance with the CFPB’s mortgage servicing requirements. The New York Department of Financial Services, or the NYDFS, also issued Cybersecurity Requirements for Financial Services Companies, which took effect in 2017, and which required banks, insurance companies, and other financial services institutions regulated by the NYDFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues.
State Licensing, State Attorneys General and Other Matters
Because we are not a depository institution, we must comply with state licensing requirements to conduct our business, and we are licensed to originate loans in all 50 states and the District of Columbia. We also are able to purchase and service loans in all 50 states and the District of Columbia, either because we have the required licenses in such jurisdictions or are exempt or otherwise not required to be licensed to perform such activity in such jurisdictions.
Under the SAFE Act, all states have laws that require mortgage loan originators employed by non-depository institutions to be individually licensed to offer mortgage loan products. These licensing requirements require individual loan originators employed by us to register in a nationwide mortgage licensing system, submit application and background information to state
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regulators for a character and fitness review, submit to a criminal background check, complete a minimum of 20 hours of pre-licensing education, complete an annual minimum of eight hours of continuing education and successfully complete an examination. As a result of each license we maintain, we are subject to regulatory oversight, supervision and enforcement authority in connection with the activities that we conduct pursuant to the license, including to determine our compliance with applicable law.
We also must comply with state licensing requirements to conduct our business, and we incur significant ongoing costs to comply with these licensing requirements. 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. This generally will 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 such as a fine, a directive requiring a certain step to be taken, a prohibition or restriction on certain activities, a suspension of a license or ultimately a revocation of a license. Certain types of regulatory actions could limit our ability to continue to conduct our business in the relevant jurisdictions or result in a breach of representations, warranties and covenants, and potentially cross-defaults in our financing arrangements which could limit or prohibit our access to liquidity to operate our business.
Competition
We compete with third-party businesses in originating forward mortgages, including bank and other non-bank financial services companies focused on one or more of these business lines. Competition in our industry can take many forms, including the variety of loan programs being made available, interest rates and fees charged for a loan, convenience in obtaining a loan, customer service levels, the amount and term of a loan, and marketing and distribution channels. Many of our competitors for forward mortgage originations are commercial banks or savings institutions. These financial institutions typically have access to greater financial resources, have more diverse funding sources with lower funding costs, are less reliant on loan sales or securitizations of mortgage loans into the secondary markets to maintain their liquidity, and may be able to participate in government programs in which we are unable to participate because we are not a state or federally chartered depository institution, all of which places us at a competitive disadvantage. In addition, our competitors seek to compete aggressively on the basis of pricing factors. To the extent that we match our competitors’ lower pricing, we may experience lower gain on sale margins. Fluctuations in interest rates, inflation and general economic conditions may also affect our competitive position. During periods of rising interest rates, competitors that have locked in low borrowing costs may have a competitive advantage. Furthermore, a cyclical decline in the industry’s overall level of originations or decreased demand for loans due to a higher interest rate environment, may lead to increased competition for the remaining loans. Any increase in these competitive pressures could be detrimental to our business.
Intellectual Property
We use a combination of proprietary and third-party intellectual property, including trade secrets, unregistered copyrights, trademarks, service marks, and domain names, and the intellectual property rights in our proprietary software, all of which we believe maintain and enhance our competitive position and protect our products.
Cyclicality and Seasonality
The demand for loan originations is affected by consumer demand for home loans and the market for buying, selling, financing and/or re-financing residential, which in turn, is affected by the national economy, regional trends, property valuations, interest rates, and socio-economic trends and by state and federal regulations and programs which may encourage and accelerate or discourage and slowdown certain real estate trends. Our business is generally subject to seasonal trends with activity generally decreasing during the winter months, especially home purchase loans and related services.
Human Capital Resources
As of December 31, 2022, we employed approximately 830 full-time associates globally. None of our associates are covered by collective bargaining agreements, and we consider our associate relations to be good. Our culture and technology has allowed many of our associates to work remotely, which has allowed us to recruit and hire top managers and executives regardless of geography and to continue our business and operations. In 2022, we announced actions taken to reduce the number of full-time associates in response to the sale of our delegated correspondent channel, the transition to subservicing with ServiceMac, and decreased origination volume.
For additional information, please see the section titled “Human Capital” in the Company’s definitive proxy statement relating to its 2023 Annual Meeting of Stockholders.
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Available Information
Our website address is www.investors.homepoint.com. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. References to our website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document or any other document that we file with or furnish to the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
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Summary Risks
The following is a summary of the principal risks that could adversely affect our business, results of operations and financial condition. If any of these risks actually occurs, our business, results of operations and financial condition may be materially adversely affected.
•our reliance on our financing arrangements to fund mortgage loans and otherwise operate our business;
•the dependence of our loan origination and servicing revenues on macroeconomic and U.S. residential real estate market conditions;
•the requirement to repurchase mortgage loans or indemnify investors if we breach representations and warranties;
•counterparty risk;
•the requirement to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances;
•risks related to any subservicer;
•competition for mortgage assets that may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns;
•our ability to continue to grow our loan origination business or effectively manage significant increases or decreases in our loan production volume;
•our ability to comply with the laws and regulations to which we are subject, whether actual or alleged;
•competition in the industry in which we operate;
•our ability to acquire loans and sell the resulting MBS in the secondary markets on favorable terms in our production activities;
•our ability to adapt to and implement technological changes;
•any failure to attract and retain a highly skilled workforce, including our senior executives;
•any cybersecurity risks, cyber incidents and technology failures;
•our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements;
•the impact of interest rate fluctuations;
•the impact of private legal proceedings;
•risks associated with our acquisition of MSRs;
•our being a “controlled company” within the meaning of Nasdaq rules and, as a result, qualifying for exemptions from certain corporate governance requirements;
•our Sponsor controlling us and its interests conflicting with ours or yours in the future; and
•the effects of the COVID-19 pandemic on our business.
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Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below and the other information set forth in this Report before deciding to invest in us. If any of the following risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of operations in future periods.
Risks Related to Our Business
General Business Risks
Our business relies on our financing arrangements to fund mortgage loans and otherwise operate our business. If one or more of such facilities are terminated other than in the ordinary course, we may be unable to find replacement financing at commercially favorable terms, or at all, which could be detrimental to our business.
We currently fund substantially all of the MSRs and mortgage loans we close through borrowings under our financing arrangements and warehouse lines of credit along with funds generated by our operations. In the ordinary course of our business, we manage the number and size of our mortgage warehouse lines of credit in light of various factors, including origination volumes and broader macroeconomic conditions. As of December 31, 2022, we held mortgage warehouse lines of credit with eight separate financial institutions with a total maximum borrowing capacity of $2.8 billion. Each mortgage funding arrangement is collateralized by the underlying mortgage loans.
Of the nine existing mortgage warehouse lines of credit as of December 31, 2022, five of the facilities are 364-day facilities, one of the facilities renews every two years, and the remaining mortgage warehouse lines of credit are evergreen agreements. As of December 31, 2022, approximately $50 million of borrowing capacity under our mortgage warehouse lines of credit was committed, while the remaining borrowing capacity was uncommitted and can be terminated by the applicable lender at any time. Two of the facilities require that we establish a cash reserve of $6.3 million in the aggregate, which is reflected within Restricted cash on the consolidated balance sheet as of December 31, 2022.
Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We are currently, and may in the future continue to be, dependent upon our lenders to provide the primary mortgage warehouse lines of credit for our loans. We currently believe that we maintain appropriate financing arrangements for our business needs and expect to be able to renew our existing warehouse facilities prior to their expiration. However, there is no guarantee that our current uncommitted facilities will be available for future financing needs, nor that we will be able to secure alternative funding facilities to address unanticipated changes in market conditions or to replace any current facilities that we are unable to renew upon their scheduled expiration. In the event that any of our mortgage warehouse lines of credit is terminated or is not renewed, or if the principal amount that may be drawn under our funding agreements that provide for immediate funding at closing were to significantly decrease, in each case outside of the ordinary course management of our capital resources, we may be unable to find replacement financing on commercially favorable terms, or at all, which could be detrimental to our business.
Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors, including:
•restrictive covenants and borrowing conditions in our existing or future financing arrangements that may limit our ability to raise additional debt;
•a decline in the liquidity in the credit markets;
•prevailing interest rates;
•the financial strength of our lenders;
•the decisions of lenders from whom we borrow to reduce their exposure to mortgage loans; and
•accounting changes that impact the calculations of covenants in our debt agreements.
If we are unable to refinance our existing debt or borrow additional funds due to any of the foregoing or other factors, our ability to maintain or grow our business could be limited.
Our loan origination and servicing revenues are highly dependent on macroeconomic and U.S. residential real estate market conditions.
Our success depends largely on the health of the U.S. residential real estate industry, which is seasonal, cyclical and affected by changes in general economic conditions beyond our control. We also have significant exposure to certain states such as California and are particularly susceptible to adverse economic conditions in those states. Economic factors such as increased interest rates, slow economic growth or recessionary conditions, the pace of home price appreciation or lack thereof, changes in household debt levels and increased unemployment or stagnant or declining wages affect our customers’ income and thus their ability and willingness to make loan payments. National or global events, including, but not limited to, health crises,
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unprovoked attacks on sovereign nations and geopolitical conflicts, affect all such macroeconomic conditions. Weak or a significant deterioration in economic conditions reduces the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of qualified potential borrowers to take out loans. As a result, such economic factors affect loan origination volume, and recent market conditions, such as rapidly rising interest rates, high inflation and home price appreciation due to limited housing supply, have led to a decrease in the affordability index and negatively impacted Origination volume.
Additional macroeconomic factors including, but not limited to, rising government debt levels, the withdrawal or augmentation of government interventions into the financial markets, changing U.S. consumer spending patterns, recession or inflationary pressures, and weak credit markets may create low consumer confidence in the U.S. economy or the U.S. residential real estate industry or result in increased volatility in the United States and worldwide financial markets and economy. Excessive home building or historically high foreclosure rates resulting in an oversupply of housing in a particular area may also increase the amount of losses incurred on defaulted mortgage loans, or may limit our ability to make additional loans in those affected areas. The economic impact of these events could also adversely affect the credit quality of some of our loans and investments and the properties underlying our interests.
Market conditions that lead to a decrease in loan originations result in lower revenue on loans sold into the secondary market. Lower loan origination volumes generally place downward pressure on margins, thus compounding the effect of the deteriorating market conditions. Such events could be detrimental to our business. Moreover, any deterioration in market conditions that leads to an increase in loan delinquencies will result in lower revenue from GSE and Ginnie Mae loans that we service because we ultimately collect servicing fees from them only for performing loans. While increased delinquencies generate higher ancillary revenues, including late fees, these fees are likely unrecoverable when the related loan is liquidated.
Increased delinquencies may also increase the cost of servicing loans. The decreased cash flow from lower servicing fees could decrease the estimated value of our MSRs, resulting in recognition of losses when we write down those values. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts and increases our obligation to advance certain principal, interest, tax and insurance obligations owed by the delinquent mortgage loan borrower. An increase in delinquencies could therefore be detrimental to our business. See the risk factor entitled, “Risks Related to our Mortgage Assets—A significant increase in delinquencies for the loans serviced could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.”
Additionally, origination of loans can be seasonal. Historically, our loan origination has increased activity in the second and third quarters and reduced activity in the first and fourth quarters as home buyers tend to purchase their homes during the spring and summer in order to move to a new home before the start of the school year. As a result, our loan origination revenues vary from quarter to quarter.
Any of the circumstances described above, alone or in combination, may lead to volatility in or disruption of the credit markets at any time and have a detrimental effect on our business.
We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties.
When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser. If a mortgage loan does not comply with the representations and warranties that we made with respect to it at the time of its sale, we could be required to repurchase the loan, replace it with a substitute loan and/or indemnify secondary market purchasers for losses.
In our Direct and Wholesale channels, we underwrite each loan prior to funding and attempt to comply with applicable investor guidelines. However, no assurance can be given that such underwriting will result in all cases with loans that fully comply with such guidelines, and state or federal law.
Prior to the sale of our Correspondent Channel, which we completed in June 2022, we would re-underwrite a percentage of acquired loans to ensure quality underwriting by our Correspondent Partners. However, no assurance can be given that this re-underwriting of a sample population of such loans identified any, or all, underwriting and regulatory compliance issue related to such loans. In the event of a breach of any representations or warranties we make to purchasers, insurers or investors, we believe, based on our experience, that in a majority of cases, for correspondent originated loans acquired using the “delegated underwriting” option, we will have recourse to the Correspondent Partner that sold the mortgage loans to us and breached similar or other representations and warranties. Although we believe we will have the right to seek a recovery of related repurchase losses from that Correspondent Partner, we cannot assure you that this will always be the case. For Correspondent loans where we do the underwriting, referred to as the “non-delegated underwriting” option, our ability to seek a recovery of repurchase and other losses from Correspondent Partners is more limited.
In addition to the customary representations and warranties we make, the documents governing our securitized pools of loans and our contracts with certain purchasers of our whole loans contain additional provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if the borrower fails to make loan payments due to the purchaser on a timely basis in the first few months after we sell the loan. We have been and continue to be subject to repurchase claims from investors for various reasons, and we will
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continue to be subject to such claims in the future. If we are required to indemnify or repurchase loans that we have sold or securitized, or will sell or securitize in the future, and this results in losses that exceed our reserve, such occurrence could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, the repurchased loan typically can only be financed at a steep discount to its repurchase price, if at all, and can generally be sold only at a discount to the unpaid principal balance, which in some cases can be significant. Significant loan repurchase activity without offsetting recourse to a counterparty that we purchased the loan from could materially and adversely affect our business, financial condition, liquidity and results of operations.
We have historically been subject to counterparty risk and may be unable to seek indemnity from, or require our correspondent counterparties or sellers to repurchase mortgage loans if they breach representations and warranties, which could cause us to suffer losses.
When we have purchased mortgage assets, our correspondent counterparty or seller typically makes customary representations and warranties to us about such assets. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches such a representation or warranty. However, there can be no assurance that our mortgage loan purchase agreements contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its obligations under our mortgage loan purchase agreements. Our inability to obtain indemnity or enforce repurchase obligations of counterparties and sellers for a significant number of loans could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances, which could adversely affect our business, financial condition, liquidity and results of operations.
During any period in which a borrower is not making payments on a loan we service, we are required under most of our servicing agreements to advance our own funds to pass through scheduled principal and interest payments to security holders of the MBS or whole loans into which the loans are sold, and pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. In certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. If a mortgage loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or a liquidation occurs. When a relatively young MSR portfolio such as ours ages, it is expected that the percentage of delinquent loans will typically increase and the amount of advances that are required and become outstanding in connection with such loans will increase in the aggregate. This increase in advances could have a material adverse effect on our business, financial condition, liquidity and results of operations.
In response to the COVID-19 pandemic, on March 27, 2020, the CARES Act was signed into law, allowing borrowers affected by the COVID-19 pandemic to request temporary loan forbearance for federally backed mortgage loans. In addition, in February 2021 the federal government announced an additional extension of three to six months depending on loan type, and the federal government announced an additional extension of six months depending on certain criteria in September 2021. Nevertheless, servicers of mortgage loans are contractually bound to advance monthly payments to investors, insurers and taxing authorities regardless of whether the borrower actually makes those payments. While the GSEs and Ginnie Mae issued guidance in April 2020 limiting the number of payments a servicer must advance in the case of a forbearance, we expect that a borrower who has experienced a loss of employment or a reduction of income may not repay the forborne payments at the end of the forbearance period. Additionally, we are prohibited by the CARES Act from collecting certain servicing related fees, such as late fees, during the forbearance plan period. We are further prohibited from initiating foreclosure and/or eviction proceedings under applicable investor and/or state law requirements.
In addition, multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to the COVID-19 pandemic have been issued by states, agencies and regulators. While certain foreclosure moratorium and forbearance programs have expired, other such programs have been extended and remain available. These measures could stay in place for an extended period of time. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties and restrictions on our business. In addition, we could face litigation and reputational damage.
We have risks related to any Subservicer which could have a material adverse effect on our business, liquidity, financial condition and results of operation.
We act as named servicer with respect to MSRs that we retain or acquire or otherwise for loans that we are required to service (including as an issuer of Ginnie Mae securities) and in each such case, we may contract with a third party (the “Subservicer”) for the subservicing of the loans. For example, in February 2022, Home Point Financial Corporation (“Homepoint”), our wholly-owned subsidiary, entered into a subservicing agreement with ServiceMac, LLC (“ServiceMac”), a wholly-owned subsidiary of First American Financial Corporation. ServiceMac currently subservices our agency loan portfolio. We have agreed to indemnify ServiceMac for any losses resulting from their subservicing of the mortgage loans in accordance with the related subservicing agreement (so long as such loss does not result from a breach by ServiceMac under the related
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subservicing agreement). To the extent that we do not have a right to reimburse ourselves for the same amounts under our servicing agreement or if there are insufficient collections in respect of the mortgage loans for such reimbursements, we may face losses in our servicing business. Any subservicing relationship may present a number of risks to us.
Although ServiceMac performs servicing functions on the Company’s behalf, we continue to hold the MSRs. Failure by any Subservicer, including ServiceMac, to meet stipulations of the Fannie Mae and Freddie Mac servicing guidelines, when applicable, including forbearance requirements, can result in the assessment of fines and loss of reimbursement of loan related advances, expenses, interest and servicing fees. The Subservicer has obligations to promptly apply payments received from borrowers, to properly manage and reconcile tax and insurance escrow accounts, and to comply with obligations to pay taxes and insurance in a timely manner for escrowed accounts. If the Subservicer is not vigilant in encouraging borrowers to make their monthly payments or to keep their hazard insurance premiums or property taxes current, the borrowers may be less likely to make these payments, which could result in a higher frequency of default. If the Subservicer takes longer to mitigate losses or liquidate non-performing assets, loss severities may be higher than originally anticipated. If fines or any amounts lost are not recovered from the Subservicer, such events may lead to the eventual realization of a loss by us.
If any Subservicer fails to perform its duties pursuant to its subservicing agreement, our business acting as the named servicer will be required to perform the servicing functions previously performed by such Subservicer or cause another Subservicer to perform such duties, to the extent required pursuant to the servicing agreement. The process of transitioning the functions performed by the Subservicer to a successor subservicer could result in delays in collections and other functions performed by the Subservicer and expose our business to breach of contract and indemnity claims. If any Subservicer experiences financial difficulties, including as a result of a bankruptcy, it may not be able to perform its subservicing duties under the subservicing agreement. There can be no assurance that any Subservicer will remain solvent or that such Subservicer will not file for bankruptcy at any time. Any such financial difficulties, insolvency, or bankruptcy could have a negative impact on our business.
The recovery process against a Subservicer can be prolonged and is subject to our meeting minimum loss deductibles under the indemnification provisions in our agreements with the Subservicer. The time may be extended as the Subservicer has the right to review underlying loss events and our request for indemnification. The amounts ultimately recovered from the Subservicers may differ from our estimated recoveries recorded based on the Subservicer’s interpretation of responsibility for loss, which could lead to our realization of additional losses. We are also subject to counterparty risk for collection of amounts which may be owed to us by a Subservicer.
Any Subservicer may also be required to be licensed under applicable state law, and they are subject to various federal and state laws and regulations, including regulation by the CFPB. Failure of any Subservicer to comply with applicable laws and regulations may expose them to fines, responsibility for refunds to borrowers, loss of licenses needed to conduct their business, and third party litigation, all of which may adversely impact the Subservicer’s ability to perform its responsibilities under the subservicing agreement. Such occurrences may also impact its financial condition and ability to provide indemnification as agreed in the subservicing agreement. In addition, regulators or third parties may take the position that we were responsible for the Subservicer’s actions or failures to act; in that event, we might be exposed to the same risks as the Subservicer.
Competition for mortgage assets may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns and adversely affect our business, financial condition, liquidity and results of operations.
We face substantial competition in originating and acquiring attractive assets, particularly in our loan origination activities. The competition for mortgage loan assets may compress margins and reduce yields, making it difficult for us to acquire assets with attractive risk-adjusted returns. There can be no assurance that we will be able to successfully maintain returns, transition from assets producing lower returns into investments that produce better returns, or that we will not seek investments with greater risk to obtain the same level of returns. Any or all of these factors could cause the profitability of our operations to decline substantially and have a material adverse effect on our business, financial condition, liquidity and results of operations.
In addition, the financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. We may not be able to effectively implement new technology-driven products and services as quickly as competitors or be successful in marketing these products and services to our Broker Partners and consumers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to attract customers and adversely affect our results of operations, financial condition and liquidity.
Our profitability depends, in part, on our ability to continue to acquire our targeted mortgage assets at favorable prices. We compete with mortgage REITs, specialty finance companies, private funds, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, depository institutions, governmental bodies and other entities, many of which focus on acquiring mortgage assets. Many of our competitors also have competitive advantages over us, including size, financial strength, access to capital, cost of funds, federal pre-emption and higher risk tolerance. Competition may result in fewer acquisitions, higher prices, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs.
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We may not be able to continue to grow our loan origination business or effectively manage significant increases in our loan production volume, both of which could negatively affect our reputation and business, financial condition and results of operations.
Our mortgage loan origination business consists of providing purchase money loans to homebuyers and refinancing existing loans. The origination of purchase money mortgage loans is greatly influenced by traditional business customers in the home buying process such as realtors and builders. As a result, our or our partners’ ability to secure relationships with such traditional business customers will influence our ability to grow our loan origination business. Our loan origination business also operates through third-party mortgage professionals who do business with us on a best efforts basis (i.e., they are not contractually obligated to do business with us). Further, our competitors also have relationships with these brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we may not be successful in maintaining our existing relationships or expanding our broker networks. Our business is also subject to overall market factors that can impact our ability to grow our loan production volume. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or slow growth in the level of new home purchase activity can impact our ability to continue to grow our loan production volumes, and we may be forced to accept lower margins in our respective businesses in order to continue to compete and keep our volume of activity consistent with past or projected levels. If we are unable to continue to grow our loan origination business, this could adversely affect our business, financial condition and results of operations.
On the other hand, we may experience material growth in our mortgage loan volume and MSRs. If we do not effectively manage our growth, the quality of our services could suffer. For example, in connection with our increased loan origination volume in recent years, we identified a higher rate of errors in our post-closing loan quality control review of our originations function, and we implemented certain remedial measures to address these errors, including additional training programs for our associates. If these remedial measures are not effective or if these or other errors arise in connection with future growth in our loan volume, the quality of our loans could be impacted, which could in turn negatively affect our reputation and business, financial condition and results of operations.
Difficult conditions or disruptions in the MBS, mortgage, real estate and financial markets and the economy generally may adversely affect our business, financial condition, liquidity and results of operations.
Most of the Agency-eligible mortgage loans that we originate or acquire are delivered to the GSEs and Ginnie Mae to be pooled into an Agency MBS or sold directly to the Agencies through the cash window or other third parties. Any significant disruption or period of illiquidity in the general MBS market would directly affect our liquidity because no existing alternative secondary market would likely be able to accommodate on a timely basis the volume of loans that we typically acquire and sell in any given period. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we acquire into the secondary market in a timely manner or at favorable prices or we may be required to repay a portion of the debt securing these assets, which could impact the availability and cost of financing arrangements and would likely result in a material adverse effect on our business, financial condition and results of operations.
The success of our business strategies and our results of operations are also materially affected by current conditions in the broader mortgage markets, the financial markets and the economy generally. Continuing concerns over factors including inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, geopolitical issues, the availability and cost of credit, the mortgage markets and the real estate markets have contributed to increased volatility and unclear expectations for the economy and markets going forward. The mortgage markets have been and continue to be affected by changes in the lending landscape, defaults, credit losses and significant liquidity concerns. A destabilization of the real estate and mortgage markets or deterioration in these markets may adversely affect the performance and fair value of our assets, reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.
The industry in which we operate is highly competitive, and could become more competitive, which could adversely affect us.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. Non-banks of various sizes and types have become increasingly competitive in the acquisition of newly originated mortgage loans and servicing rights. Many banks and large savings institutions have significantly greater resources or access to capital than we do, as well as a lower cost of funds. Additionally, some of our existing and potential competitors may decide to modify their business models to compete more directly with our wholesale production business. For example, non-bank loan servicers may try to leverage their servicing operations to develop or expand a wholesale and correspondent production business. Since the withdrawal of a number of large participants from the mortgage markets following the financial crisis in 2007, non-bank participants have become more active in these markets. As more non-bank entities enter these markets, or if more of the large commercial banks decide to become aggressive in the mortgage space once again, our production activities may generate lower volumes and/or margins. Accordingly, our inability to compete successfully or a material decrease in profit margins resulting from increased competition could adversely affect our business, financial condition, liquidity and results of operations.
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We depend on our ability to acquire loans and sell the resulting MBS in the secondary markets on favorable terms in our production activities. If our ability to acquire and sell is impaired, this could subject us to increased risk of loss.
In our production activities, we acquire and originate new loans, including non-Agency loans, primarily from our Broker Partners, and sell or securitize those loans to or through the Agencies or other third-party investors. We also may sell the resulting securities into the MBS markets. However, there can be no assurance that we will continue to be successful in operating this business or that we will continue to be able to capitalize on these opportunities on favorable terms or at all. In particular, we have committed, and expect to continue to commit, capital and other resources to this operation. However, we may not be able to continue to source sufficient loan acquisition opportunities to justify the expenditure of such capital and other resources. In the event that we are unable to continue to source sufficient opportunities for this operation, there can be no assurance that we would be able to acquire such assets on favorable terms or at all, or that such loans, if acquired, would be profitable to us. In addition, we may be unable to finance the acquisition of these loans or may be unable to sell the resulting loans or MBS in the secondary mortgage market on favorable terms or at all. We are also subject to the risk that the fair value of the acquired loans may decrease prior to their disposition either due to changes in market conditions, the delinquencies of our mortgage loans or a change in the condition of the underlying mortgage property. The occurrence of any one or more of these risks could adversely impact our business, financial condition, liquidity and results of operations.
The gain recognized from sales in the secondary market represents a significant portion of our revenues and net earnings. Further, we are dependent on the cash generated from such sales to fund our future loan closings and repay borrowings under our mortgage warehouse lines of credit. A decrease in the prices paid to us upon sale of our loans could materially adversely affect our business, financial condition and results of operations. The prices we receive for our loans vary from time to time and may be materially adversely affected by several factors, including, without limitation:
•an increase in the number of similar loans available for sale;
•conditions in the loan securitization market or in the secondary market for loans in general or for our loans in particular, which could make our loans less desirable to potential investors;
•defaults under loans in general;
•loan-level pricing adjustments imposed by Fannie Mae and Freddie Mac, including any adjustments for the purchase of loans in forbearance and refinancing loans;
•the types and volume of loans being originated or sold by us;
•the level and volatility of interest rates; and
•the quality of loans previously sold by us.
The MBS market is also particularly affected by the policies of the U.S. Federal Reserve, which influences interest rates and impacts the size of the loan origination market. In response to the COVID-19 pandemic in 2020, the U.S. Federal Reserve announced programs to increase its purchase of certain MBS products to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Following signals in early 2022 that the Federal Reserve would begin moving away from accommodative monetary policies, in mid-March 2022 the Federal Reserve began increasing interest rates with steady increases continuing throughout the remainder of 2022 and into 2023. Any change to the Federal Reserve’s policies could have a negative impact on the liquidity of MBS markets in the future.
Further, to the extent we become subject to delays in our ability to sell future mortgage loans which we originate, we would need to reduce our origination volume to the amount that we can sell plus any excess capacity under our mortgage warehouse lines of credit. Delays in the sale of mortgage loans also increase our exposure to increases in interest rates, which could adversely affect our profitability on sales of loans.
The success and growth of our production will depend, in part, upon our or any of our Subservicers’ ability to adapt to and implement technological changes.
The production process and our or any of our Subservicers’ servicing platforms are becoming more dependent upon technological advancement and depends, in part, upon our ability to effectively interface with our Broker Partners and other third parties. Maintaining, improving and becoming proficient with new technology may require us, or any of our Subservicers, to make significant capital expenditures. To the extent we or our Subservicers are dependent on any particular technology or technological solution, we may be harmed if such technology or technological solution becomes non-compliant with existing industry standards, fails to meet or exceed the capabilities of our competitors’ equivalent technologies or technological solutions, becomes increasingly expensive to service, retain and update, becomes subject to third-party claims of intellectual property infringement, misappropriation or other violation or malfunctions or functions in a way we did not anticipate that results in loan defects potentially requiring repurchase.
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We also rely on third-party software products and services to operate our business. If we lose our rights to such products or services, or our current software vendors become unable to continue providing services to us on acceptable terms, we may not be able to procure alternatives in a timely and efficient manner and on acceptable terms, or at all.
Additionally, new technologies and technological solutions are continually being released. We need to continue to develop and invest in our technological capabilities to remain competitive and our failure to do so could adversely affect our business, financial condition, liquidity and results of operations.
There is no assurance that we or our Subservicers will be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. Additionally, if we fail to respond to technological developments in a cost-effective manner, or fail to acquire, integrate or interface with third-party technologies effectively, we may experience disruptions in our operations, lose market share or incur substantial costs.
Our risk management efforts may not be effective.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk and other market-related risks, as well as operational, cybersecurity, tax and legal risks related to our business, assets and liabilities. We also are subject to various federal, state, local and foreign laws, regulations and rules that are not industry specific, including health and safety laws, environmental laws, privacy laws and other federal, state, local and foreign laws and other regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified or identify additional risks to which we may become subject in the future. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks including risks related to our hedging transactions and strategy, as well as access to cash reserves, and we may not effectively identify, manage, monitor and mitigate these risks as our business activity changes or increases.
We could be harmed by misconduct or fraud that is difficult to detect.
We are exposed to risks relating to fraud and misconduct by our associates, contractors, custodians, Broker Partners, Subservicers, and other third parties with whom we have relationships. For example, associates could execute unauthorized transactions, use our assets improperly or without authorization, use confidential information for improper purposes or misreport or otherwise try to hide improper activities from us. This type of misconduct can be difficult to detect and if not prevented or detected could result in claims or enforcement actions against us or losses. In addition, such persons or entities may misrepresent facts about a mortgage loan, including the information contained in the loan application, property appraisal, title information and employment and income stated on the loan application. If any of this information was intentionally or negligently misrepresented and such misrepresentation was not detected prior to the acquisition or funding of the loan, the value of the loan could be significantly lower than expected. A mortgage loan subject to a material misrepresentation is typically unsalable or subject to repurchase if it is sold before detection of the misrepresentation. In addition, the persons and entities making a misrepresentation are often difficult to locate and it is often difficult to collect from them any monetary losses we have suffered. Our controls may not be completely effective in detecting this type of activity. Accordingly, such undetected instances of fraud may subject us to regulatory sanctions, litigation and losses, including those under our indemnification arrangements, and may seriously harm our reputation.
Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, an unauthorized use or disclosure of confidential or regulated data and information, and/or damage to our business relationships, all of which could negatively impact our business.
The financial services industry as a whole is characterized by rapidly changing technologies. As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems and the information therein, both internal and those of third-party service providers.
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A cyber incident refers to any adverse event that threatens the confidentiality, integrity or availability of our information technology resources, or those of our third-party providers, that result in the unauthorized access to, or disclosure, use, loss or destruction of, personally identifiable information or other sensitive, non-public, confidential or regulated data and information (including our borrowers’ personal information and transaction data), the misappropriation of assets, or a significant breakdown, invasion, corruption, destruction or interruption of any part of such information technology resources and the data therein. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, computer viruses and disabling devices, employee and contractor error, negligence or malfeasance, failures during the process of upgrading or replacing software and databases, hardware failures, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers. We have faced, and may continue to face, a variety of cyber incidents. Our cybersecurity costs, including cybersecurity insurance, are significant and will likely rise in tandem with the sophistication and frequency of system attacks.
We have undertaken measures intended to protect the safety and security of our information systems and the information systems of our third-party providers and the data therein, including physical and technological security measures, employee training, contractual precautions and business continuity plans, and implementation of policies and procedures designed to help mitigate the risk of system disruptions and failures and the occurrence of cyber incidents. Despite our efforts, there can be no assurance that any such risks will not occur or, if they do occur, that they will be adequately addressed in a timely manner. It is possible that advances in computer capabilities, undetected fraud, inadvertent violations of our policies or procedures or other developments could result in a cyber incident or system disruption or failure. We may not be able to anticipate or implement effective preventive measures against all such risks, especially with respect to cyber incidents, as the methods of attack change frequently or are not recognized until launched, and because cyber incidents can originate from a wide variety of sources, including persons involved with organized crime or associated with external service providers. Those parties may also attempt to fraudulently induce associates, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our Broker Partners or borrowers. These risks have increased in recent years and may increase in the future as we continue to increase our reliance on the internet and use of web-based product offerings and on the use of cybersecurity. In addition, our current work-from-home policy may increase the risk for the unauthorized disclosure or use of personal information or other data.
We may also be held accountable for the actions and inactions of third-party vendors regarding cybersecurity and other consumer-related matters, which may not be covered by indemnification arrangements with our third-party vendors.
Additionally, cyberattacks on local and state government databases and offices, including the rising trend of ransomware attacks, expose us to the risk of losing access to critical data and the ability to provide services to our customers.
In addition, through 2021, we transitioned a substantial portion of our operations to remote working environments and continue to permit many of our associates, including executives, mortgage loan officers and staff, to work remotely. The increase in the number of our associates working from home may increase certain business and procedural control risks. For example, cybersecurity risks have increased following our transition into a substantially work-from-home environment.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, regulatory action or investigation, fines or penalties, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We may be required to expend significant capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. In addition, our remediation efforts may not be successful and we may not have adequate insurance to cover these losses.
We rely on our senior executive team and will require additional key personnel to grow our business, and the loss of key management members or key employees, or an inability to hire key personnel, could harm our business.
Our future success will depend on the efforts and talents of the members of our senior executive team, who have significant experience in the residential mortgage origination and servicing industry, are responsible for our core competencies and would be difficult to replace. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In addition, the loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all.
Changes to our senior executive team may occur from time to time, and their knowledge of our business and industry may be difficult to replace. For example, on February 24, 2023, Mark E. Elbaum submitted his resignation as the Chief Financial Officer of the Company. Mr. Elbaum’s resignation will be effective April 3, 2023. We do not expect his departure to have a material impact on our business or operations. However, future changes to our senior executive team, particularly if they occur on short notice, could have an adverse effect on our business, financial condition and results of operations. If we do not succeed in attracting new members for our senior executive team or retaining and motivating existing members of our senior executive team, our business could be materially and adversely affected.
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The competitive job market creates a challenge and potential risk as we strive to attract and retain a highly skilled workforce.
Competition for our employees, including highly skilled technology and management professionals, loan servicers, debt default specialists, loan officers and underwriters, is extremely intense, reflecting a tight labor market. This can present a risk as we compete for experienced candidates, especially if the competition is able to offer more attractive financial terms of employment. This risk of increased competition extends to our ability to retain our current employees. We also invest significant time and expense in engaging and developing our employees, which also increases their value to other companies that may seek to recruit them. Turnover can result in significant replacement costs and lost productivity. If we are unable to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses, it could materially affect our business, financial condition and results of operations.
We could be adversely affected if we inadequately obtain, maintain, protect and enforce our intellectual property and proprietary rights, and we may encounter disputes from time to time relating to our use of the intellectual property of third parties.
We rely on a combination of strategies to protect our intellectual property and proprietary rights, including the use of trademarks, service marks, domain names, trade secrets and unregistered copyrights, as well as confidentiality procedures and contractual provisions. Nevertheless, these measures may not prevent misappropriation, infringement, reverse engineering or other violation of these rights by third parties. Any intellectual property rights owned by or licensed to us may be challenged, invalidated, held unenforceable or circumvented in litigation or other proceedings, and such intellectual property rights may be lost or no longer provide us meaningful competitive advantages. We cannot guarantee that we will be able to conduct our operations in such a way as to avoid all alleged infringements, misappropriations or other violations of such intellectual property rights. Third parties may raise claims against us alleging an infringement, misappropriation or other violation of their intellectual property or proprietary rights.
Whether it is to defend against such claims or to protect and enforce our intellectual property and proprietary rights, we may be required to spend significant resources including bringing litigation, which could be costly, time consuming and could divert the time and attention of our management team and result in the impairment or loss of portions of our rights, and we may not prevail. Our failure to secure, maintain, protect and enforce our intellectual property and proprietary rights, or defend against claims related to same, could adversely affect our brands and adversely impact our business.
Our vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us with financial, technology and other services to support our mortgage loan servicing and origination businesses. If our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies due to poor economic conditions or other events, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations. Additionally, in April 2012, the CFPB issued Bulletin 2012-03, as amended in 2016 by bulletin 2016-02, which states that supervised banks and non-banks could be held liable for actions of their service providers. As a result, we could be exposed to liability, CFPB enforcement actions or other administrative actions and/or penalties if the vendors with whom we do business violate consumer protection laws.
Our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements, could cause harm to our business and adversely affect our business and financial condition and may negatively impact our reputation.
Maintaining our reputation is critical to attracting and retaining customers, trading and financing counterparties, investors and associates. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business. Reputational risk could negatively affect our financial condition and business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain customers, trading counterparties, investors and associates and adversely affect our business, financial condition, liquidity and results of operations.
Reputational risk from negative public opinion is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Like other consumer-facing companies, we have received some amount of negative comment. These factors could tarnish or otherwise strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading and financing counterparties and associates and adversely affect our business, financial condition, liquidity and results of operations.
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Large-scale natural or man-made disasters may lead to further reputational risk in the servicing area. Our mortgage properties are generally required to be covered by hazard insurance in an amount sufficient to cover repairs to or replacement of the residence. However, when a large scale disaster occurs, the demand for inspectors, appraisers, contractors and building supplies may exceed availability, insurers and mortgage servicers may be overwhelmed with inquiries, mail service and other communications channels may be disrupted, borrowers may suffer loss of employment and unexpected expenses which cause them to default on payments and/or renders them unable to pay deductibles required under the insurance policies, and widespread casualties may also affect the ability of borrowers or others who are needed to effect the process of repair or reconstruction or to execute documents. Loan originations may also be disrupted, as lenders are required to re-inspect properties which may have been affected by the disaster prior to funding. In these situations, borrowers and others in the community may believe that servicers and originators are penalizing them for being the victims of the initial disaster and making it harder for them to recover, potentially causing reputational damage to us.
Moreover, the proliferation of social media websites as well as the personal use of social media by our associates and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our associates interacting with our customers in an unauthorized manner in various social media outlets.
In addition, our ability to attract and retain customers is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters—even if related to seemingly isolated incidents, or even if related to practices not specific to the origination or servicing of loans, such as debt collection—could erode trust and confidence and damage our reputation among existing and potential customers. In turn, this could decrease the demand for our products, increase regulatory scrutiny and detrimentally effect our business, financial condition and results of operations.
Employment litigation and related unfavorable publicity could negatively affect our business.
Team members and former team members may, from time to time, bring lawsuits against us regarding injury, creation of a hostile workplace, discrimination, wage and hour, employee benefits, sexual harassment and other employment issues. In recent years there has been an increase in the number employment-related actions in states with favorable employment laws, such as California, as well as an increase in the number of discrimination and harassment claims against employers generally. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their businesses. If we experience significant incidents involving employment or harassment related claims, we could face substantial out-of-pocket losses and fines if claims are not covered by our liability insurance, as well as negative publicity. In addition, such claims may give rise to litigation, which may be time-consuming, costly and distracting to our management team.
Initiating new business activities or strategies or significantly expanding existing business activities or strategies may expose us to new risks and will increase our cost of doing business.
Initiating new business activities or strategies or significantly expanding existing business activities or strategies may expose us to new or increased financial, regulatory, reputational and other risks. Such innovations are important and necessary ways to grow our businesses and respond to changing circumstances in our industry; however, we cannot be certain that we will be able to manage the associated risks and compliance requirements effectively. Such risks include a lack of experienced management-level personnel, increased administrative burden, increased logistical problems common to large, expansive operations, increased credit and liquidity risk and increased regulatory scrutiny.
Furthermore, our efforts may not succeed and any revenues we earn from any new or expanded business initiative or strategy may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative, strategy or acquisition.
Certain of our material vendors have operations in India that could be adversely affected by changes in political or economic stability or by government policies.
Certain of our material vendors currently have operations located in India, which is subject to relatively higher political and social instability than the United States and may lack the infrastructure to withstand political unrest, natural disasters or global pandemics. The political or regulatory climate in the United States, or elsewhere, also could change so that it would not be lawful or practical for us to use vendors with international operations in the manner in which we currently use them. If we could no longer utilize vendors operating in India or if those vendors were required to transfer some or all of their operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations. In some foreign countries with developing economies, it may be common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”). Any violations of the FCPA or local anti-corruption laws by us, our subsidiaries or our
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local vendors could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
We may not be able to fully utilize our net operating loss, or NOL, and other tax carryforwards.
As of December 31, 2022, we had $443.6 million of NOL carryforwards for federal income tax purposes, a portion of which begin to expire in 2035. Our ability to utilize NOLs and other tax carryforwards to reduce taxable income in future years could be limited due to various factors, including (i) our projected future taxable income, which could be insufficient to recognize the full benefit of such NOL carryforwards prior to their expiration; (ii) limitations imposed as a result of one or more ownership changes under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), (which subject NOLs to an annual limitation on usage); and/or (iii) challenges by the Internal Revenue Service (the “IRS”) that a transaction or transactions were concluded with the principal purpose of evasion or avoidance of federal income tax. As of December 31, 2022, $14.0 million of our NOL carryforwards for federal income tax purposes are subject to limitations under Section 382 of the Code, which we anticipate being able to fully utilize in the normal course.
The IRS could challenge the amount, timing and/or use of our NOL carryforwards.
The amount of our NOL carryforwards has not been audited or otherwise validated by the IRS after the tax year ended December 31, 2016. Among other things, the IRS could challenge the amount, timing and/or our use of our NOLs. Any such challenge, if successful, could significantly limit our ability to utilize a portion or all of our NOL carryforwards. In addition, calculating whether an ownership change has occurred within the meaning of Section 382 is subject to inherent uncertainty, both because of the complexity of applying Section 382 and because of limitations on a publicly traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our utilizable NOL carryforwards could be changed as a result of a successful challenge by the IRS or as a result of new information about the ownership of, and transactions in, our securities.
Possible changes in legislation could negatively affect our ability to use the tax benefits associated with our NOL carryforwards.
The rules relating to U.S. federal income taxation are periodically under review by persons involved in the legislative and administrative rulemaking processes, by the IRS and by the U.S. Department of the Treasury, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes, including increase or decreases in the tax rate. Future revisions in U.S. federal tax laws and interpretations thereof could adversely impact our ability to use some or all of the tax benefits associated with our NOL carryforwards.
Changes in tax laws may adversely affect us.
The Tax Cuts and Jobs Act (the “TCJA”) enacted on December 22, 2017, significantly affected U.S. federal tax law, including by changing how the U.S. imposes tax on certain types of income of corporations and by reducing the U.S. federal corporate income tax rate to 21%. It also imposed new limitations on a number of tax benefits, including deductions for business interest, use of net operating loss carryforwards, taxation of foreign income, and the foreign tax credit, among others.
It also imposed new limitations on deductions for mortgage interest, which may affect the demand for loans which we acquire and service. The CARES Act, enacted on March 27, 2020, in response to the COVID-19 pandemic, further altered U.S. federal tax law, including in respect of certain changes that were made by the TCJA, generally on a temporary basis.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), which, among other things, imposed a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Proposed tax changes that may be enacted in the future could impact our current or future tax structure and effective tax rates. The Biden administration has previously proposed other legislation that would further broaden the tax base and limit tax deductions in certain situations. It is unclear at this time if any of these proposals will be enacted in the future. Proposed tax changes that may be enacted in the future could impact our current or future tax structure and effective tax rates.
There can be no assurance that future tax law changes will not increase the rate of the corporate income tax significantly, impose new limitations on deductions, credits or other tax benefits, or make other changes that may adversely affect our business, cash flows or financial performance. In addition, the IRS has yet to issue guidance on a number of important issues regarding the changes made by the TCJA, the CARES Act, and the Inflation Reduction Act.
The effects of the COVID-19 pandemic could adversely impact our business.
On March 13, 2020, the World Health Organization declared SARS-CoV-2, and the related disease it causes in humans (“COVID-19”) a pandemic. Subsequently, certain variants of COVID-19 have from time-to-time caused surges in the number and/or severity of COVID-19 cases regionally and globally. The impact of such variants cannot be predicted and this time and may depend on numerous factors, including transmissibility of specific variants, vaccine availability and vaccination rates. The long-term impacts of the social, economic and financial disruptions caused by the COVID-19 pandemic and the government
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responses to such disruptions are unknown. See the risk factor entitled, “Market Risks—Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our assets.”
As long as the COVID-19 pandemic, including any existing or new variants, remains a public health threat, global economic conditions may continue to be volatile and uncertainty as to the effects of the COVID-19 pandemic will persist across all industries and geographies. The extent of the impact of the COVID-19 pandemic, or other similar public health crises, on our business (including any adverse impact) will depend on numerous factors that we are not able to accurately predict.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Item 1A. “Risk Factors,” any of which could have a material effect on us.
Market Risks
Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations present a variety of risks to our operations. Our primary interest rate exposures relate to the yield on our assets, their fair values and the financing cost of our debt, as well as to any derivative financial instruments that we utilize for hedging purposes. Increasing interest rates could adversely impact our origination volume because refinancing an existing loan may be less attractive for homeowners and qualifying for a purchase loan may be more difficult for some borrowers. Furthermore, an increase in interest rates could also adversely affect our margins due to increased competition among originators. On the other hand, decreasing interest rates may cause a large number of borrowers to refinance, which could result in the loss of future net servicing revenues with an associated write-down of the related MSRs. In addition, significant savings in interest rate movement may impact our gains and losses from interest rate hedging arrangements and result in our need to change our hedging strategy. Any such scenario with respect to increasing or decreasing interest rates could have a material adverse effect on our business, results of operations and financial condition.
Changes in the level of interest rates also may affect our ability to acquire assets (including the purchase or origination of mortgage loans), the value of our assets (including our pipeline of mortgage loan commitments and our portfolio of MSRs) and any related hedging instruments, the value of newly originated or purchased loans, and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates and may impact our ability to refinance or modify loans and/or to sell real estate owned, or REO, assets.
Borrowings under some of our financing agreements are at variable rates of interest, which also expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable-rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. We currently have entered into, and in the future we may continue to enter into, interest rate swaps or interest rate swap futures that involve the exchange of floating for fixed-rate interest payments to reduce interest rate volatility. However, we may not maintain interest rate swaps or interest rate swap futures with respect to all of our variable-rate indebtedness, and any such swaps may not fully mitigate our interest rate risk, may prove disadvantageous, or may create additional risks.
In addition, our business is materially affected by the monetary policies of the U.S. government and its agencies. We are particularly affected by the policies of the U.S. Federal Reserve, which influence interest rates and impact the size of the loan origination market. In 2017, the U.S. Federal Reserve ended its quantitative easing program and started its balance sheet reduction plan. The U.S. Federal Reserve’s balance sheet consists of U.S. Treasuries and MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. To shrink its balance sheet prior to the COVID-19 pandemic, the U.S. Federal Reserve had slowed the pace of MBS purchases to a point at which natural runoff exceeded new purchases, resulting in a net reduction. In response to the COVID-19 pandemic, the Federal Reserve implemented policies to support the financial markets, including through increased purchases of certain MBS products and decreased interest rates. Following signals in early 2022 that the Federal Reserve would begin moving away from accommodative monetary policies, in mid-March 2022 the Federal Reserve began increasing interest rates with steady increases continuing throughout the remainder of 2022 and into 2023. The results of these actions have been, and are expected to continue to be, upward pressure on mortgage rates and reduced liquidity of MBS. However, the full effect and duration of this policy change and future policy changes by the U.S. Federal Reserve are unknown at this time and could have a material adverse effect on our business, results of operations and financial condition.
Hedging against interest rate exposure may materially and adversely affect our business, financial condition, liquidity and results of operations.
We pursue hedging strategies to reduce our exposure to changes in interest rates. However, while we enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in poorer overall performance than if we had not engaged in any such hedging transactions, in addition to directly affecting the percentage of loan applications
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in the underwriting process that ultimately close. Interest rate hedging may fail to protect or could adversely affect us because, among other things, it may not fully eliminate interest rate risk, it could expose us to counterparty and default and cross-default risk that may result in greater losses or the loss of unrealized profits, and it will create additional expense. Generally, hedging activity requires the investment of capital and the amount of capital required often varies as interest rates and asset valuations change. Thus, hedging activity, while intended to limit losses, may materially and adversely affect our business, financial condition, liquidity and results of operations.
A prolonged economic slowdown, recession or declining real estate values could materially and adversely affect us.
Our business and earnings are sensitive to general business and economic conditions in the U.S. A downturn in economic conditions resulting in adverse changes in interest rates, inflation, the debt capital markets, unemployment rates, consumer and commercial bankruptcy filings, the general strength of national and local economies and other factors that negatively impact household incomes could decrease demand for our mortgage loan products as a result of a lower volume of housing purchases and reduced refinancings of mortgages and could lead to higher mortgage defaults and lower prices for our loans upon sale.
In addition, a weakening economy, high unemployment and declining real estate values may increase the likelihood that borrowers will become delinquent and ultimately default on their debt service obligations. Our cost to service increases when borrowers become delinquent. In the event of a default, we may incur additional costs, the size of which depends on a number of factors, including, but not limited to, the instruction of the loan investor, location and condition of the underlying property, the terms of the guarantee or insurance on the loan, the level of interest rates and the time it takes to liquidate the property.
We finance our assets with borrowings, which may materially and adversely affect the income derived from our assets.
We currently leverage and, to the extent available, we intend to continue to leverage our assets through borrowings, the level of which may vary based on the particular characteristics of our asset portfolio and on market conditions. We have financed certain of our assets through repurchase agreements, pursuant to which we sell mortgage loans to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the assets to the lender is less than our cost to acquire the assets as well as the fair value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the difference in asset value sold back to us reduced further by interest accrued on the financing (assuming there was no change in the fair value of the assets). Additionally, if the market value of the loans pledged or sold by us under a repurchase agreement to a counterparty lender declines, the lender may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. We may not have the funds available to do so, and we may be required to liquidate assets at a disadvantageous time to avoid a default, which could cause us to incur further losses and limit our ability to leverage our assets. If we are unable to satisfy a margin call, our counterparty may accelerate repayment of our indebtedness, increase interest rates, liquidate the collateral (which may result in significant losses to it) or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection. A rapidly rising interest rate environment may increase the likelihood of additional margin calls that could adversely impact our liquidity.
The value of our collateral may decrease, which could lead to our lenders initiating margin calls and requiring us to post additional collateral or repay a portion of our outstanding borrowings.
We originate or acquire certain assets, including MSRs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs under secured financing arrangements. Our MSRs are pledged to secure borrowings under a loan and security agreement. Our Fannie Mae, Freddie Mac, and Ginnie Mae MSRs are financed on a $1.0 billion line of credit with a three year revolving period ending on May 4, 2024, followed by a one year amortization period which ends on May 20, 2025. Similar to our mortgage warehouse lines of credit, the cash that we receive under this MSR facility is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Our secured financing arrangements pursuant to which we finance MSRs are further subject to the terms of an acknowledgement agreement with the related GSE and Ginnie Mae, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable GSE or Ginnie Mae and subject to financial covenants similar to our financing arrangements. Accordingly, the exercise by any GSE or Ginnie Mae of its rights under the applicable acknowledgment agreement, including at the direction of the secured parties and whether or not we are in breach of our financing arrangement, could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.
We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our asset portfolio’s cash flow.
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Our operations are dependent on access to our financing arrangements, which are mostly uncommitted. If the lenders under these financing facilities terminate, or modify the terms of, these facilities, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We depend on short-term debt financing in the form of secured borrowings under various financing arrangements with financial institutions. These facilities are primarily uncommitted, which means that any request we make to borrow funds under these facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. We may not be able to obtain additional financing under our financing arrangements when necessary, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and exposing us to, among other things, liquidity risks which could adversely affect our profitability and operations.
Our financing agreements contain financial and restrictive covenants that could adversely affect our financial condition and our ability to operate our businesses.
The lenders under our financing agreements require us and/or our subsidiaries to comply with various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position and maintain collateral having a market value sufficient to support the related borrowings. From time to time, as a result of market conditions or otherwise, we may need to seek amendments or waivers to our financing arrangements to address an anticipated inability to satisfy one or more of these financial covenants. For example, we have entered into amendments to certain warehouse lines that contain profitability covenants to the extent necessary to allow for a net loss under such covenants for specified reporting periods. If we are unable to meet these financial covenants and lenders are unwilling to waive their application, our financial condition could deteriorate rapidly and could also result in a default or cross-defaults under our financing arrangements.
Our existing financing agreements also impose other financial and non-financial covenants and restrictions on us that impact our flexibility to determine our operating policies by limiting our ability to, among other things: incur certain types of indebtedness; grant liens; engage in consolidations and mergers and asset sales; make restricted payments and investments; and enter into transactions with affiliates. In our financing agreements, we agree to certain covenants and restrictions and we make representations about the assets sold or pledged under these agreements. We also agree to certain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of financial and other covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades, bankruptcy or insolvency proceedings, legal judgments against us, loss of licenses, loss of Agency, FHA, VA and/or USDA approvals and other events of default and remedies customary for these types of agreements. If we default on our obligations under our financing arrangements, fail to comply with certain covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, repurchase the assets, and/or cease entering into any other financing arrangements with us, which could also result in defaults or cross-defaults in our financing arrangements.
Because our financing agreements typically contain cross-default provisions, a default that occurs under any one agreement could allow the lenders under our other agreements to also declare a default, thereby exposing us to a variety of lender remedies, such as those described above, and potential losses arising therefrom. In addition, defaults and cross-defaults under our financing arrangements could trigger a cross-defaults under our trading agreements, which could have a negative impact on our ability to enter into hedging transactions. Any losses that we incur on our financing agreements could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We may not be able to raise the debt or equity capital required to finance our assets and maintain or grow our businesses.
Our businesses require continued access to debt and equity capital that may or may not be available on favorable terms, at the desired times or at all. In addition, we own certain assets, including MSRs, for which financing has historically been difficult to obtain. Our inability to continue to maintain debt financing for MSRs could require us to seek equity capital that may be more costly or unavailable to us.
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks and risk thresholds and tolerances, any of which may materially and negatively impact their willingness to extend credit to us specifically or mortgage lenders and servicers generally. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital.
Our access to any debt or equity capital on favorable terms or at all is uncertain. Our inability to raise such capital or obtain such debt or equity financing on favorable terms or at all could materially and adversely impact our business, financial condition, liquidity and results of operations.
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We utilize derivative financial instruments, which could subject us to risk of loss.
We enter into a variety of hedging arrangements such as derivative contracts, to hedge the fair value of the MSR portfolio and minimize market rate risk although we cannot assure you that these hedging arrangements will protect the value of our MSR assets. We utilize derivative financial instruments for hedging purposes, which may include swap futures, options, “to be announced” contracts and futures. However, the prices of derivative financial instruments, including futures and options, are highly volatile. As a result, the cost of utilizing derivatives may reduce our income and liquidity, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions.
The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations.
Regulatory Risks
We operate in a highly regulated industry with continually changing federal, state and local laws and regulations.
The mortgage industry is highly regulated, and we are required to comply with a wide array of federal, state and local laws and regulations that restrict, among other things, the manner in which we conduct our loan production and servicing businesses, including the fees that we may charge and the collection, use, retention, protection, disclosure and other processing of personal information. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. Both the scope of the laws and regulations and the intensity of the supervision to which our business is subject have increased over time in response to the financial crisis, as well as other factors, such as technological and market changes.
The laws and regulations and judicial and administrative decisions relating to mortgage loans and consumer protection to which we are subject include, for example, those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, unfair, deceptive and abusive acts and practices, federal and state advertising requirements, high-cost loans and predatory lending, compliance with net worth and financial statement delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, ability-to-repay and qualified mortgages, licensing of loan originators and other personnel, loan originator compensation, secured transactions, property valuations, insurance, servicing transfers, payment processing, escrow, communications with consumers, loss mitigation, debt collection, prompt payment crediting, periodic statements, foreclosure, bankruptcies, repossession and claims-handling procedures, disclosures related to and cancellation of private mortgage insurance, flood insurance, the reporting of loan application and origination data, and other trade practices. For a more detailed description of the regulations to which we are subject, see “Item 1. Business—Regulation.”
We also must comply with federal, state and local laws related to data privacy and the handling of personally identifiable information (“PII”) and other sensitive, regulated or non-public data. These include the California Consumer Privacy Act (the “CCPA”) and the California Privacy Rights Act which amends and expands the CCPA (together, the “Amended CCPA”) and we expect other states to enact legislation similar to the Amended CCPA, which limit how companies can use customer data and impose obligations on companies in their management of such data, and require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. The Amended CCPA, among other things, requires certain disclosures to California consumers and affords such consumers new abilities to opt out of certain sales of personal information, in addition to limiting our ability to use their information. The Amended CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result from a failure to implement reasonable safeguards. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The service providers we use, including outside counsel retained to process foreclosures and bankruptcies, must also comply with some of these legal requirements. Changes to laws, regulations or regulatory policies or their interpretation or implementation and the continued heightening of regulatory requirements could affect us in substantial and unpredictable ways.
The influx of new laws, regulations, and other directives adopted by federal, state and local governments in response to the COVID-19 pandemic exemplifies the ever-changing and increasingly complex regulatory landscape in which we operate. While some regulatory reactions to COVID-19 relaxed certain compliance obligations, the forbearance requirements imposed on mortgage servicers in the CARES Act added new regulatory responsibilities. The GSEs and the Federal Housing Finance Agency (the “FHFA”), Ginnie Mae, HUD, state and local governments, various investors and others have also issued guidance relating to COVID-19. Future regulatory scrutiny and enforcement resulting from COVID-19 is not yet fully known.
Our failure to comply with applicable federal, state and local consumer protection and data privacy laws could lead to:
•loss of our licenses and approvals to engage in our servicing and lending/loan purchasing businesses;
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•damage to our reputation in the industry;
•governmental investigations and enforcement actions;
•administrative fines and penalties and litigation;
•civil and criminal liability, including class action lawsuits;
•diminished ability to sell loans that we originate or purchase, requirements to sell such loans at a discount compared to other loans or repurchase or address indemnification claims from purchasers of such loans, including the GSEs and Ginnie Mae;
•inability to raise capital; and
•inability to execute on our business strategy, including our growth plans.
Furthermore, situations involving a potential violation of law or regulation, even if limited in scope, may give rise to numerous and overlapping investigations and proceedings, either by multiple federal and state agencies and officials in the United States. In addition, our failure, or the failure of our Broker Partners to comply with these laws and regulations may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, rescission of mortgages and return of interest payments, permanent forgiveness of debt, delays in the foreclosure process, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations, which could affect our investor approval status and our ability to sell or service loans. Our failure to adequately supervise vendors and service providers may lead to significant liabilities, inclusive of assignee liabilities, as a result of the errors and omissions of those vendors and service providers.
As regulatory guidance and enforcement and the views of the CFPB, state attorneys general, the GSEs and Ginnie Mae and other market participants evolve, we may need to modify further our loan origination processes and systems in order to adjust to evolution in the regulatory landscape and successfully operate our lending business. In such circumstances, if we are unable to make the necessary adjustments, our business and operations could be adversely affected.
Our failure to comply with the laws and regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, and also trigger defaults under our financing arrangements, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
We may be subject to liability for potential violations of anti-predatory lending laws, which could adversely impact our results of operations, financial condition and business.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending and servicing practices. The Home Ownership and Equity Protection Act of 1994 (“HOEPA”) prohibits inclusion of certain provisions in residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a residential loan, for example, does not meet the test even if the related originator reasonably believed that the test was satisfied. The VA has also adopted rules to protect veterans from predatory lending in connection with certain home loans.
Failure of residential loan originators or servicers to comply with these laws, to the extent any of their residential loans are or become part of our mortgage-related assets, could subject us, as a servicer or, in the case of acquired loans, as an assignee or purchaser, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers, assignees and purchasers of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If our loans are found to have been originated in violation of predatory or abusive lending laws, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses.
The CFPB is active in its monitoring of the residential mortgage origination and servicing sectors. New or revised rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB could result in increased compliance costs, enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.
The CFPB has oversight of non-depository mortgage lending and servicing institutions and is empowered with broad supervision, rulemaking and examination authority to enforce laws involving consumer financial products and services and to ensure, among other things, that consumers receive clear and accurate disclosures regarding financial products and are protected from hidden fees and unfair, deceptive or abusive acts or practices. The CFPB has adopted a number of regulations under long-standing consumer financial protection laws and the Dodd-Frank Act, including rules regarding truth in lending, assessments of
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a borrower’s ability to repay, home mortgage loan disclosure, home mortgage loan origination, fair credit reporting, fair debt collection practices, foreclosure protections and mortgage servicing rules, including provisions regarding loss mitigation, prompt crediting of borrowers’ accounts for payments received, delinquency and early intervention, prompt investigation of complaints by borrowers, periodic statement requirements, lender-placed insurance, requests for information and successors-in-interest to borrowers. The CFPB also periodically issues guidance documents, such as bulletins, setting forth informal guidance regarding compliance with these and other laws under its jurisdiction, and issues public enforcement actions, which provide additional guidance on its interpretation of these legal requirements.
The CFPB also has enforcement authority and can order, among other things, rescission or reformation of contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust enrichment, the payment of damages or other monetary relief, public notifications regarding violations, limits on activities or functions, remediation of practices, external compliance monitoring and civil money penalties. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review vendors’ policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations. Through enforcement actions and guidance, the CFPB is also applying scrutiny to compensation payments to third-party providers for marketing services and may issue guidance that narrows the range of acceptable payments to third-party providers as part of marketing services agreements, lead generation agreements and other third-party marketer relationships.
In addition to its supervision and examination authority, the CFPB is authorized to conduct investigations to determine whether any person is engaging in, or has engaged in, conduct that violates federal consumer financial protection laws, and to initiate enforcement actions for such violations, regardless of its direct supervisory authority. Investigations may be conducted jointly with other regulators. The CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws, require remediation of practices and pursue administrative proceedings or litigation for violations of applicable federal consumer financial laws. The CFPB also has the authority to obtain cease and desist orders, orders for restitution or rescission of contracts and other kinds of affirmative relief and monetary penalties.
December 2020, the CFPB issued revised Qualified Mortgage (“QM”) rules that replaced Appendix Q and the strict 43% debt-to-income ratio (“DTI”) underwriting threshold with a price-based QM loan definition. The revised QM rules also terminated the QM Patch, under which certain loans eligible for sale to Fannie Mae and Freddie Mac do not have to be underwritten to Appendix Q or satisfy the capped 43% DTI requirement. The rule was to take effect on March 1, 2021, but compliance would not be mandatory until July 1, 2021. However, on April 27, 2021, the CFPB published a final rule delaying the mandatory compliance date of the revised QM rule from July 1, 2021, to October 1, 2022, which gave lenders the option of originating QM rules under either the legacy QM rules or the revised QM rules between March 1, 2021 and October 1, 2022. This “optionality” was partially negated by the GSEs’ (that is, Fannie Mae and Freddie Mac) April 2021 pronouncements in which they announced that they, in effect will adhere to the mandatory effective date of the revised QM rules as originally promulgated by the CFPB in December 2020. We cannot predict what other actions the CFPB will take and how it might affect us as well as other mortgage lenders.
Consistent with its active monitoring of residential mortgage origination and servicing, the CFPB may impose new regulations under existing statutes or revise its existing regulations to more stringently limit our business activities. In addition, uncertainty regarding changes in leadership or authority levels within the CFPB and changes in supervisory and enforcement priorities, including potentially more stringent enforcement actions, could result in heightened regulation and oversight of our business activities, materially and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our business activities. Our failure to comply with the laws and regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, and also trigger defaults under our financing arrangements, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The state regulatory agencies continue to be active in their supervision of the loan origination and servicing sectors and the results of these examinations may be detrimental to our business. New or revised rules and regulations and more stringent enforcement of existing rules and regulations by state regulatory agencies could result in increased compliance costs, enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.
We are also supervised by regulatory agencies under state law. State attorneys general, state licensing regulators, and state and local consumer protection offices have authority to investigate consumer complaints and to commence investigations and other formal and informal proceedings regarding our operations and activities. In addition, the GSEs and the FHFA, Ginnie Mae, the FTC, HUD, various investors, non-agency securitization trustees and others subject us to periodic reviews and audits.
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State regulatory agencies have been and continue to be active in their supervision of loan origination and servicing companies, including us. If a state regulatory agency imposes new rules or revises its rules or otherwise engages in more stringent supervisory and enforcement activities with respect to existing or new rules, we could be subject to enforcement actions, fines or penalties, as well as reputational harm as a result of these actions. We also may face increased compliance costs as a direct result of new or revised rules or in response to any such stringent enforcement or supervisory activities. A determination of our failure to comply with applicable law could lead to enforcement action, administrative fines and penalties, or other administrative action.
Failure to comply with the GSEs, FHA, VA and USDA guidelines and changes in these guidelines or GSE and Ginnie Mae guarantees could adversely affect our business.
Loan servicers and originators are required to follow specific guidelines and eligibility standards that impact the way GSE and U.S. government agency loans are serviced and originated, including guidelines and standards with respect to:
•underwriting standards and credit standards for mortgage loans;
•our staffing levels and other servicing practices;
•the servicing and ancillary fees that we may charge;
•our modification standards and procedures;
•the amount of reimbursable and non-reimbursable advances that we may make; and
•the types of loan products that are eligible for sale or securitization.
These guidelines provide the GSEs and Ginnie Mae and other government agencies with the ability to provide monetary incentives for loan servicers that perform well and to assess penalties for those that do not. In addition, these guidelines directly limit the types of loan products that we may offer in general and the mortgage loans that we may underwrite for specific borrowers to the extent that we those products to be supported by the GSEs and Ginnie Mae and other government agencies. As a result, failure to comply with these guidelines could adversely impact our ability to benefit from GSE and other government agency support and could therefore impact our business.
At the direction of the FHFA, Fannie Mae and Freddie Mac have aligned their guidelines for servicing delinquent mortgages, which could result in monetary incentives for servicers that perform well and to assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. We generally cannot negotiate these terms with the Agencies and they are subject to change at any time without our specific consent. A significant change in these guidelines, that decreases the fees we charge or requires us to expend additional resources to provide mortgage services, could decrease our revenues or increase our costs.
In addition, changes in the nature or extent of the guarantees provided by Fannie Mae, Freddie Mac, Ginnie Mae, the USDA or the VA, or the insurance provided by the FHA, or coverage provided by private mortgage insurers, could also have broad adverse market implications. Any future increases in guarantee fees or changes to their structure or increases in the premiums we are required to pay to the FHA or private mortgage insurers for insurance or to the VA or the USDA for guarantees could increase mortgage origination costs and insurance premiums for our customers. These industry changes could negatively affect demand for our mortgage services and consequently our origination volume, which could be detrimental to our business. We cannot predict whether the impact of any proposals to move Fannie Mae and Freddie Mac out of conservatorship would require them to increase their fees. For further discussion, see “—We are highly dependent on the GSEs and Ginnie Mae and the FHFA, as the conservator of the GSEs, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial condition and results of operations.”
We are highly dependent on the GSEs and Ginnie Mae and the FHFA, as the conservator of the GSEs, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial condition and results of operations.
Our ability to generate revenues through mortgage loan sales depends to a significant degree on programs administered by the GSEs and Ginnie Mae and others that facilitate the issuance of MBS in the secondary market. The GSEs, Ginnie Mae and FHFA play a critical role in the mortgage industry and we have significant business relationships with them. Presently, almost all of the newly originated conventional conforming loans that we acquire from mortgage lenders through our correspondent production activities qualify under existing standards for inclusion in mortgage securities backed by the GSEs and Ginnie Mae or for purchase by a GSE directly through its cash window. We also derive other material financial benefits from these relationships, including the assumption of credit risk by the GSEs and Ginnie Mae on loans included in such mortgage securities in exchange for our payment of guarantee fees, our retention of such credit risk through structured transactions that lower our guarantee fees, and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures to the Agencies and other third-party purchasers.
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As a result of our dependence on the GSEs and Ginnie Mae, any adverse change in our relationship with them could materially and adversely affect our business, financial condition, liquidity and results of operations.
There is significant uncertainty regarding the future of the GSEs and Ginnie Mae, including with respect to how long they will continue to be in existence, the extent of their roles in the market and what forms they will have, and whether they will be government agencies, government-sponsored agencies or private for-profit entities. Since they have been placed into conservatorship, many legislative and administrative plans for GSE reform have been put forth, but all have been met with resistance from various constituencies. At this point, it remains unclear whether any of these legislative or regulatory reforms will be enacted or implemented. Any changes in laws and regulations affecting the relationship between the GSEs and Ginnie Mae and the U.S. federal government could adversely affect our business and prospects. Although the U.S. Treasury has committed capital to the GSEs and Ginnie Mae, these actions may not be adequate for their needs. If the GSEs and Ginnie Mae are adversely affected by events such as ratings downgrades, inability to obtain necessary government funding, lack of success in resolving repurchase demands to lenders, foreclosure problems and delays and problems with mortgage insurers, they could suffer losses and fail to honor their guarantees and other obligations. Any discontinuation of, or significant reduction in, the operation of the GSEs and Ginnie Mae or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or underwriting criteria could materially and adversely affect our business, liquidity, financial condition and results of operations. The roles of the GSEs and Ginnie Mae could be significantly restructured, reduced or eliminated and the nature of the guarantees could be considerably limited relative to historical measurements. Elimination of the traditional roles of the GSEs and Ginnie, or any changes to the nature or extent of the guarantees provided by the GSEs and Ginnie Mae or the fees, terms and guidelines that govern our selling and servicing relationships with them, such as increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase demands and/or the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other sellers/servicers, could also materially and adversely affect our business, including our ability to sell and securitize loans that we acquire through our correspondent production activities or our Direct channel activities, and the performance, liquidity and market value of our assets. Moreover, any changes to the nature of the GSEs and Ginnie Mae or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity and results of operations.
We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to maintain those Agency approvals or state licenses or that changes in Agency guidelines will not materially and adversely affect our business, financial condition and results of operations.
We are subject to state mortgage lending, purchase and sale, loan servicing or debt collection licensing and regulatory requirements. Our failure to obtain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our Direct channel activities or loan purchase and sale or servicing activities, result in litigation, or civil and other monetary penalties, or criminal penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity and results of operations.
We are required to hold Agency approvals in order to sell mortgage loans to a particular Agency and/or service such mortgage loans on their behalf. Our failure to satisfy the various requirements necessary to maintain such Agency approvals over time would also substantially restrict our business activities and could adversely impact our results of operations and financial condition including defaults under our financing agreements.
We are also required to follow specific guidelines that impact the way that we originate and service Agency loans. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which could also adversely affect our business, financial condition and results of operations.
In addition, we are subject to periodic examinations by federal and state regulators, our lenders and the Agencies, which can result in increases in our administrative costs, the requirement to pay substantial penalties due to compliance errors or the loss of our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.
In addition, because we are not a state or federally chartered depository institution, we do not benefit from exemptions from state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all states in which we operate and the District of Columbia, and regulatory changes may increase our costs through stricter licensing laws, disclosure laws or increased fees or may impose conditions to licensing that we or our personnel are unable to meet.
In most states in which we operate, a regulatory agency or agencies regulate and enforce laws relating to mortgage servicers and mortgage originators. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary income we are entitled to collect from borrowers or otherwise. This could make our business cost-prohibitive in the affected state or states and could materially affect our business, financial condition and results of operations.
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If we are unable to comply with TRID rules, our business and operations could be materially and adversely affected.
The CFPB’s TILA-RESPA Integrated Disclosure (“TRID”) rules impose requirements on consumer facing disclosure rules and impose certain waiting periods to allow consumers time to shop for and consider the loan terms after receiving the required disclosures. If we fail to comply with the TRID rules, we may be unable to sell loans that we originate or purchase, or we may be required to sell such loans at a discount compared to other loans. We could also be subject to repurchase or indemnification claims from purchasers of such loans, including the GSEs and Ginnie Mae.
The conduct of mortgage brokers with whom we produce our wholesale mortgage loans could subject us to lawsuits, regulatory action, fines or penalties.
The failure to comply with any applicable laws, regulations and rules by the mortgage lenders from whom loans were acquired through our wholesale production activities may subject us to lawsuits, regulatory actions, fines or penalties. We have in place a due diligence program designed to assess areas of risk with respect to these acquired loans, including, without limitation, compliance with underwriting guidelines and applicable law. However, we may not detect every violation of law by these mortgage lenders. Further, to the extent any other third-party originators with whom we do business fail to comply with applicable law, and subsequently any of their mortgage loans become part of our assets, or prior servicers from whom we acquire MSR fail to comply with applicable law, it could subject us, as an assignee or purchaser of the related mortgage loans or MSR, respectively, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, serviced or owned by us or a third party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses.
The independent third-party mortgage brokers through whom we produce wholesale mortgage loans have parallel and separate legal obligations to which they are subject. These independent mortgage brokers are not considered our employees and are treated as independent third parties. While the applicable laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, federal and state agencies increasingly have sought to impose such liability. The U.S. Department of Justice, through its use of a disparate impact theory under the Fair Housing Act, is actively holding home loan lenders responsible for the pricing practices of brokers, alleging that the lender is directly responsible for the total fees and charges paid by the borrower even if the lender neither dictated what the broker could charge nor kept the money for its own account. In addition, under the TRID rule, we may be held responsible for improper disclosures made to customers by brokers. We may be subject to claims for fines or other penalties based upon the conduct of the independent home loan brokers with which we do business.
Mortgage loan modification and refinance programs, future legislative action and other actions and changes may materially and adversely affect the value of, and the returns on, the assets in which we invest.
The U.S. government, primarily through the Agencies, has established loan modification and refinance programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. We can provide no assurance that we will be eligible to use any government programs or, if eligible, that we will be able to utilize them successfully. These programs, future U.S. federal, state or local legislative or regulatory actions that result in the modification of outstanding mortgage loans, as well as changes in the requirements necessary to qualify for modifications or refinancing mortgage loans with the GSEs or Ginnie Mae, may adversely affect the value of, and the returns on MSRs, residential mortgage loans, residential MBS, real estate-related securities and various other asset classes in which we invest, all of which could require us to repurchase loans, generally, and specifically from Ginnie Mae and the GSEs, which may result in a material adverse effect on our business and liquidity.
Private legal proceedings alleging failures to comply with applicable laws or regulatory requirements, and related costs, could adversely affect our financial condition and results of operations.
We are subject to various pending private legal proceedings challenging, among other things, whether certain of our loan origination and servicing practices and other aspects of our business comply with applicable laws and regulatory requirements. The outcome of any legal matter is never certain. 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. Please see “Item 8 – Note 13 - Commitments and Contingencies.”
With respect to legal actions for impending or expected foreclosures, we may incur costs if we are required to, or if we elect to, execute or re-file documents or take other actions in our capacity as a servicer. We may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower or a class of borrowers. In addition, if a court rules that the lien of a homeowners association takes priority over the lien we service, we may incur legal liabilities and costs to defend such actions. If a court dismisses or overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability in our capacity as seller, servicer or otherwise to the loan owner, a borrower, title insurer or the purchaser of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans or loans that we sell to the GSEs and Ginnie Mae or other third parties. A significant increase in litigation costs and losses occurring from lawsuits could trigger a default or cross-defaults under our
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financing arrangements, which could have a material adverse effect on our liquidity, business, financial condition and results of operations.
Residential mortgage foreclosure proceedings in certain states have been delayed due to lack of judicial resources and legislation.
Several states have enacted Homeowner’s Bill of Rights legislation to establish mandatory loss mitigation practices for homeowners which cause delays in foreclosure proceedings. It is possible that additional states could enact similar laws in the future. Delays in foreclosure proceedings could require us to delay the recovery of advances, which could materially affect our business, results of operations and liquidity and increase our need for capital.
When a mortgage loan we service is in foreclosure, we are generally required to continue to advance delinquent principal and interest to the securitization trust and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved. Regulatory actions that lengthen the foreclosure process will increase the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred during the foreclosure process.
Increased regulatory scrutiny and new laws and procedures could cause us to adopt additional compliance measures and incur additional compliance costs in connection with our foreclosure processes. We may incur legal and other costs responding to regulatory inquiries or any allegation that we improperly foreclosed on a borrower. We could also suffer reputational damage and could be fined or otherwise penalized if we are found to have breached regulatory requirements.
We may incur increased costs and related losses if a customer challenges the validity of a foreclosure action, if a court overturns a foreclosure or if a foreclosure subjects us to environmental liabilities.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. In addition, if certain documents required for a foreclosure action are missing or defective or if a court overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer or the purchaser of the property sold in foreclosure or could be obligated to cure the defect or repurchase the loan. We may also incur litigation costs, timeline delays and other protective advance expenses if the validity of a foreclosure action is challenged by a customer. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. A significant increase in such costs and liabilities could adversely affect our liquidity and our inability to be reimbursed for advances could adversely affect our business, financial condition and results of operations.
Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting claims that the practices of lenders and loan servicers result in a disparate impact on protected classes.
Anti-discrimination statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, sex, religion and national origin. The Fair Housing Act also expressly prohibits discrimination with respect to the purchase of mortgage loans. Various federal regulatory agencies and departments, including the U.S. Department of Justice and CFPB, take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionate negative affect on a protected class of individuals).
These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims. The U.S. Supreme Court recently confirmed that the “disparate impact” theory applies to cases brought under the FHA, while emphasizing that a causal relationship must be shown between a specific policy of the defendant and a discriminatory result that is not justified by a legitimate objective of the defendant. Although it is still unclear whether the theory applies under the Equal Credit Opportunity Act, regulatory agencies and private plaintiffs can be expected to continue to apply it to both the Fair Housing Act and the Equal Credit Opportunity Act in the context of home loan lending and servicing. To the extent that the “disparate impact” theory continues to apply, we may be faced with significant administrative burdens in attempting to comply and potential liability for failures to comply.
Furthermore, many industry observers believe that the “ability to repay” rule issued by the CFPB, discussed above may have the unintended consequence of having a disparate impact on protected classes. Specifically, it is possible that lenders that make only qualified mortgages may be exposed to discrimination claims under a disparate impact theory.
In addition to reputational harm, violations of the Equal Credit Opportunity Act and the Fair Housing Act can result in actual damages, punitive damages, injunctive or equitable relief, attorneys’ fees and civil money penalties.
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Risks Related to Our Mortgage Assets
Our acquisition of MSRs exposes us to significant risks.
MSRs arise from contractual agreements between us and the investors (or their agents) in mortgage securities and mortgage loans that we service on their behalf. We generally create MSRs in connection with our sale of mortgage loans to the Agencies or others where we assume the obligation to service such loans on their behalf. We may also purchase MSRs from third-party sellers. All MSR capitalizations are recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced mortgage loans. The ultimate realization of future cash flows from the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Accordingly, there may be material uncertainty about the fair value of any MSRs we acquire or hold.
Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the value of MSRs on, among other things, our projection of the cash flows from the related mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from MSRs, and we could ultimately receive substantially less than what we estimated when initially capitalizing such assets.
Moreover, delinquency rates may also have an effect on the valuation of any MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners for performing loans. Our expectation of delinquencies is also a consideration in projecting our cash flows. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. Increased delinquencies also typically translate into increased defaults and liquidations, and as an MSR owner we are also responsible for certain expenses and losses associated with the loans we service, particularly on loans sold to Ginnie Mae. A reduction in the fair value of the MSR or an increase in defaults and liquidations would adversely impact our business, financial condition, liquidity and results of operations.
Changes in interest rates are a key driver of the performance of MSRs. Historically, in periods of rising interest rates, the fair value of the MSRs generally increases as prepayments decrease, and therefore the estimated life of the MSRs and related expected cash flows increase. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore the estimated life of the MSRs, and related cash flows, decrease.
Until recently, there has been a long-term trend of falling interest rates, with intermittent periods of rate increases. More recently, there was a rising interest rate environment for the majority of 2018, 2021, and 2022 and a falling interest rate environment in 2019 and 2020.
In addition, we may pursue various hedging strategies to seek to further reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to fully hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity and results of operations would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change.
Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. Our failure to comply with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our counterparties may terminate our servicing rights under which we conduct servicing activities.
The majority of the mortgage loans we service are serviced on behalf of the GSEs and Ginnie Mae. These entities establish the base service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards.
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As is standard in the industry, under the terms of our master servicing agreements with the GSEs and Ginnie Mae, the GSEs and Ginnie Mae have the right to terminate us as servicer of the loans we service on their behalf at any time and also have the right to cause us to sell the MSRs to a third party. In addition, failure to comply with servicing standards could result in termination of our agreements with the GSEs or Ginnie Mae with little or no notice and without any compensation. If any of Fannie Mae, Freddie Mac or Ginnie Mae were to terminate us as a servicer, or increase our costs related to such servicing by way of additional fees, fines or penalties, such changes could have a material adverse effect on the revenue we derive from servicing activity, as well as the value of the related MSRs. These agreements, and other servicing agreements under which we service mortgage loans for non-GSE loan purchasers, also require that we service in accordance with GSE servicing guidelines and contain financial covenants. If we were to have our servicing rights terminated on a material portion of our servicing portfolio, this could adversely affect our business.
A significant increase in delinquencies for the loans serviced could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.
An increase in delinquencies will result in lower revenue for loans we service for the GSEs and Ginnie Mae because we only collect servicing fees from the GSEs and Ginnie Mae from payments made on the mortgage loans. Additionally, while increased delinquencies generate higher ancillary revenues, including late fees, these fees may not be collected until the related loan reinstates or in the event that the related loan is liquidated. In addition, an increase in delinquencies may result in certain other advances being made on behalf of delinquent loans, which may not be entirely reversible and would decrease the interest income we receive on cash held in collection and other accounts to the extent permitted under applicable requirements.
We base the price we pay for MSRs on, among other things, our projections of the cash flows from the related mortgage loans. Our expectation of delinquencies is an assumption underlying those cash flow projections. If delinquencies were significantly greater than expected, the estimated fair value of our MSRs could be diminished. If the estimated fair value of MSRs is reduced, we may not be able to satisfy minimum net worth covenants and borrowing conditions in our debt agreements and we could suffer a loss, which could trigger a default and cross-defaults under our other financing arrangements and trading agreements (impacting our ability to enter into hedging transactions) and the possible loss of our eligibility to sell loans to the Agencies or issue an Agency MBS, all of which would likely have a material adverse effect on our business, financial condition and results of operations.
We are also subject to risks of borrower defaults and bankruptcies in cases where we might be required to repurchase loans sold with recourse or under representations and warranties. A borrower filing for bankruptcy during foreclosure would have the effect of staying the foreclosure and thereby delaying the foreclosure process, which may potentially result in a reduction or discharge of a borrower’s mortgage debt. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. For example, foreclosure may create a negative public perception of the related mortgaged property, resulting in a diminution of its value. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss. If these risks materialize, they could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event of a default under any mortgage loan we have not sold, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and of the mortgage loan.
Our inability to promptly foreclose upon defaulted mortgage loans could increase our cost of doing business and/or diminish our expected cash flows.
Our ability to promptly foreclose upon defaulted mortgage loans and liquidate the underlying real property plays a critical role in our valuation of the assets which we acquire and our expected cash flows on such assets. There are a variety of factors that may inhibit our ability to foreclose upon a mortgage loan and liquidate the real property within the time frames we model as part of our valuation process or within the statutes of limitation under applicable state law. These factors include, without limitation: extended foreclosure timelines in states that require judicial foreclosure, including states where we hold high concentrations of mortgage loans, significant collateral documentation deficiencies, federal, state or local laws that are borrower friendly, including legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and that serve to delay the foreclosure process and programs that may require specific procedures to be followed to explore the refinancing of a mortgage loan prior to the commencement of a foreclosure proceeding and declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the judicial and administrative systems.
A decline in the fair value of the real estate that we acquire, or that underlies the mortgage loans we own or service, may result in reduced risk-adjusted returns or losses.
A substantial portion of our assets are measured at fair value. The fair value of the real estate that we own or that underlies mortgage loans that we own or service is subject to market conditions and requires the use of assumptions and complex analyses. Changes in the real estate market may adversely affect the fair value of the collateral and thereby lower the cash to be received from its liquidation. Depending on the investor and/or insurer or guarantor, we may suffer financial losses that increase
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when we or they receive less cash upon liquidation of the collateral for defaulted loans that we service. The same would apply to loans that we own. In addition, adverse changes in the real estate market increase the probability of default of the loans we own or service.
We may be adversely affected by concentration risks of various kinds that apply to our mortgage or MSR assets at any given time, as well as from unfavorable changes in the related geographic regions containing the properties that secure such assets.
Our mortgage and MSR assets are not subject to any geographic, diversification or concentration limitations except that we will be concentrated in mortgage-related assets. Accordingly, our mortgage and MSR assets may be concentrated by geography, investor, originator, insurer, loan program, property type and/or borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing adverse developments. We may be disproportionately affected by general risks such as natural disasters, including major hurricanes, tornadoes, wildfires, floods, earthquakes and severe or inclement weather should such developments occur in or near the markets in California or the Gulf Coast region in which such properties are located. For example, as of December 31, 2022, approximately 20.4% of our mortgage and MSR assets had underlying properties in California. In addition, adverse conditions in the areas where the properties securing or otherwise underlying our mortgage and MSR assets are located (including business layoffs or downsizing, industry slowdowns, changing demographics, natural disasters and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of those assets. A material decline in the demand for real estate in these areas, regardless of the underlying cause, may materially and adversely affect us. Concentration or a lack of diversification can increase the correlation of non-performance and foreclosure risks among subsets of our mortgage and MSR assets, which could have a material adverse effect on our business, financial condition and results of operations.
Many of our mortgage assets may be illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
Our MSRs, securities and mortgage loans that we acquire may be or become illiquid. It may also be difficult or impossible to obtain or validate third-party pricing on the assets that we purchase. Illiquid investments typically experience greater price volatility, as a ready market does not exist, or may cease to exist, and such investments can be more difficult to value. Contractual restrictions on transfer or the illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, which could impair our ability to satisfy margin calls or access capital for other purposes when needed. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the recorded value, or may not be able to obtain any liquidation proceeds at all, thus exposing us to a material or total loss.
Fair values of our MSRs are estimates and the realization of reduced values from our recorded estimates may materially and adversely affect our financial results and credit availability.
The fair values of our MSRs are not readily determinable and the fair value at which our MSRs are recorded may differ from the values we ultimately realize. Ultimate realization of the fair value of our MSRs depends to a great extent on economic and other conditions that change during the time period over which it is held and are beyond our control. Further, fair value is only an estimate based on good faith judgment of the price at which an asset can be sold since transacted prices of MSRs can only be determined by negotiation between a willing buyer and seller. In certain cases, our estimation of the fair value of our MSRs includes inputs provided by third-party dealers and pricing services, and valuations of certain securities or other assets in which we invest are often difficult to obtain and are subject to judgments that may vary among market participants. Changes in the estimated fair values of those assets are directly charged or credited to earnings for the period. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset was recorded. Accordingly, in either event, our financial condition could be materially and adversely affected by our determinations regarding the fair value of our MSRs, and such valuations may fluctuate over short periods of time.
We utilize analytical models and data in connection with the valuation of our assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.
We rely heavily on models and data to value our assets, including analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by third parties. Models and data are also used in connection with our potential acquisition of assets and the hedging of those acquisitions. Models are inherently imperfect predictors of actual results because they are based on historical data available to us and our assumptions about factors such as future mortgage loan demand, default rates, severity rates, home price trends and other factors that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience.
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In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, we may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.
We rely on internal models to manage risk and to make business decisions. Our business could be adversely affected if those models fail to produce reliable and/or valid results.
We make significant use of business and financial models in connection with our proprietary technology to measure and monitor our risk exposures and to manage our business. For example, we use models to measure and monitor our exposures to interest rate, credit and other market risks. The information provided by these models is used in making business decisions relating to strategies, initiatives, transactions, pricing and products. If these models are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected.
We build these models using historical data and our assumptions about factors such as future mortgage loan demand, default rates, home price trends and other factors that may overstate or understate future experience. Our assumptions may be inaccurate and our models may not be as predictive as expected for many reasons, including the fact that they often involve matters that are inherently beyond our control and difficult to predict, such as macroeconomic conditions, and that they often involve complex interactions between a number of variables and factors.
Our models could produce unreliable results for a variety of reasons, including, but not limited to, the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models, or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience, as was the case from 2008 to 2010 or during the COVID-19 pandemic.
We continue to monitor the markets and make necessary adjustments to our models and apply appropriate management judgment in the interpretation and adjustment of the results produced by our models. As a result of the time and resources, including technical and staffing resources, that are required to perform these processes effectively, it may not be possible to replace existing models quickly enough to ensure that they will always properly account for the impacts of recent information and actions.
We depend on the accuracy and completeness of information from and about borrowers, mortgage loans and the properties securing them, and any misrepresented information could adversely affect our business, financial condition and results of operations.
In connection with our activities, we may rely on information furnished by or on behalf of borrowers and/or our business counterparties, including Broker Partners. We also may rely on representations of borrowers and business counterparties as to the accuracy and completeness of that information, and upon the information and work product produced by appraisers, credit repositories, depository institutions and others, as well as the output of automated underwriting systems created by the GSEs and Ginnie Mae and others. If any of this information or work product is intentionally or negligently misrepresented in connection with a mortgage loan and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our associates, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions, or from our business counterparties. Any such misrepresented information could materially and adversely affect our business, financial condition and results of operations.
Fraudulent emails have been sent, and may in the future be sent, on behalf of the Company which introduce malware, including spyware, through malicious links in order to redirect funds to the fraudster’s account. Such incidents could adversely affect our reputation, business, financial condition and results of operation.
The technology and other controls and processes we have created to help us identify misrepresented information in our mortgage loan production operations were designed to obtain reasonable, not absolute, assurance that such information is identified and addressed appropriately. Accordingly, such controls may not have detected, and may fail in the future to detect, all misrepresented information in our mortgage loan production operations. In the future, we may experience financial losses and reputational damage as a result of mortgage loan fraud.
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General Risk Factors
We are a “controlled company” within the meaning of the rules of Nasdaq and the rules of the SEC and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements.
As of December 31, 2022, our Sponsor beneficially owned approximately 92.3% of the voting power of our common stock. As a result, we are a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that:
•a majority of our board of directors consist of “independent directors” as defined under the rules of Nasdaq;
•our director nominees be selected, or recommended for our board of directors’ selection by a nominating/governance committee comprised solely of independent directors; and
•the compensation of our executive officers be determined, or recommended to our board of directors for determination, by a compensation committee comprised solely of independent directors.
We have and intend to continue to utilize these exemptions. As a result, we do not have a majority of independent directors and our Compensation Committee and Nominating and Corporate Governance Committee do not consist entirely of independent directors. Accordingly, stockholders of the Company do not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
Our Sponsor controls us and their interests may conflict with yours in the future.
As of December 31, 2022, our Sponsor beneficially owned approximately 92.3% of the voting power of our common stock. As a result, our Sponsor is able to control the election and removal of our directors and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our amended and restated certificate of incorporation or amended and restated bylaws and other significant corporate transactions for so long as our Sponsor and its affiliates retain significant ownership of us. Our Sponsor and its affiliates may also direct us to make significant changes to our business operations and strategy, including with respect to, among other things, new product and service offerings, team member headcount levels and initiatives to reduce costs and expenses. This concentration of our ownership may delay or deter possible changes in control of the Company, which may reduce the value of an investment in our common stock. So long as our Sponsor continues to own a significant amount of our voting power, even if such amount is less than 50%, our Sponsor will continue to be able to strongly influence or effectively control our decisions and, so long as our Sponsor and its affiliates collectively own at least 5% of all outstanding shares of our stock entitled to vote generally in the election of directors, our Sponsor will be able to appoint individuals to our board of directors under the stockholders’ agreement that we entered into in connection with the initial public offering on February 2, 2021 (the “IPO”). The interests of our Sponsor may not coincide with the interests of other holders of our common stock.
In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation provides that our Sponsor, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates do not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor and its affiliates also may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you.
In addition, our Sponsor and its affiliates are able to determine the outcome of all matters requiring stockholder approval and are able to cause or prevent a change of control of the Company or a change in the composition of our board of directors and could preclude any acquisition of the Company. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of the Company and ultimately might affect the market price of our common stock.
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We have incurred, and will continue to incur, significantly increased costs and we became subject to additional regulations and requirements as a result of becoming a public company, and our management is, and will continue to be, required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.
As a public company, we have incurred, and will continue to incur, significant legal, regulatory, finance, accounting, investor relations, insurance and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and the Dodd-Frank Act and related rules implemented by the SEC and Nasdaq. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements, diverting the attention of management away from revenue-producing activities. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
While we are no longer an “emerging growth company,” we are a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to “smaller reporting companies” will make our common stock less attractive to investors.
Because our gross revenue exceeded $1.07 billion in fiscal year 2020, we ceased to be an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act as of December 31, 2020. However, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. As such, we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies,” including, among other things, providing only two years of audited financial statements, we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, and we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We will remain a “smaller reporting company” until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of the prior second fiscal quarter, or (2) our annual revenues exceed $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the prior second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.
We cannot predict if investors may find our common stock less attractive if we rely on the exemptions and relief granted to “smaller reporting companies.” If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.
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Failure to comply with requirements to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.
As a public company, we have significant requirements for enhanced financial reporting and internal controls. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot assure you that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we continue to grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations.
In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report. Our testing, or the subsequent testing (if required) by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements. As a smaller reporting company, our independent registered public accounting firm is not required to conduct, and has not conducted, an audit of our internal control over financial reporting. It is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified material weaknesses and deficiencies that we have not identified. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in a default and cross-defaults under our financing arrangements.
We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.
Our stock price may change significantly, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. You may not be able to resell your shares at or above your purchase price due to a number of factors such as those listed in “—Risks Related to Our Business” and the following:
•results of operations that vary from the expectations of securities analysts and investors;
•results of operations that vary from those of our competitors;
•changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
•changes in economic conditions for companies in our industry;
•changes in market valuations of, or earnings and other announcements by, companies in our industry;
•declines in the market prices of stocks generally, particularly those of companies in our industry;
•additions or departures of key management personnel;
•strategic actions by us or our competitors;
•announcements by us, our competitors, our suppliers of significant contracts, price reductions, new products or technologies, acquisitions, dispositions, joint marketing relationships, joint ventures, other strategic relationships or capital commitments;
•changes in preference of our customers and our market share;
•changes in general economic or market conditions or trends in our industry or the economy as a whole;
•changes in business or regulatory conditions;
•future sales of our common stock or other securities;
•investor perceptions of or the investment opportunity associated with our common stock relative to other investment alternatives;
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•changes in the way we are perceived in the marketplace, including due to negative publicity or campaigns on social media to boycott certain of our products, our business or our industry;
•the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
•changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;
•announcements relating to litigation or governmental investigations;
•guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
•the development and sustainability of an active trading market for our common stock;
•exchange rate fluctuations;
•tax developments;
•changes in accounting principles; and
•other events or factors, including those resulting from informational technology system failures and disruptions, epidemics, pandemics, natural disasters, war, acts of terrorism, civil unrest or responses to these events.
Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation against various issuers. For example, in June 2021, we and certain of our directors and officers were named as defendants in a putative class action alleging various securities law violations. We may be the target of this type of litigation in the future as well. Any such litigation could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation, which may adversely affect the market price of our common stock.
You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.
As of December 31, 2022, we had 861,601,293 shares of common stock authorized but unissued. Our amended and restated certificate of incorporation authorizes us to issue these shares of common stock, options and other equity awards relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. As of December 31, 2022, we have reserved 7,584,217 shares for issuance under the 2021 Incentive Plan; substitute options granted in connection with the IPO are not counted against the share reserve under the 2021 Incentive Plan. Any common stock that we issue, including under the 2021 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership currently held by our stockholders. In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.
Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue 250 million shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to holders of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities or securities convertible into equity securities, existing stockholders
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will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, you bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
As a holding company, we depend on the ability of our subsidiaries to transfer funds to us to meet our obligations, including to pay dividends.
We are a holding company for all of our operations and are a legal entity separate from our subsidiaries. Dividends and other distributions from our subsidiaries are the principal sources of funds available to us to pay corporate operating expenses, to pay stockholder dividends, to repurchase stock and to meet our other obligations. The inability to receive dividends from our subsidiaries could have a material adverse effect on our business, financial condition, liquidity or results of operations.
Our subsidiaries have no obligation to pay amounts due on any of our liabilities or to make funds available to us for such payments. The ability of our subsidiaries to pay dividends or other distributions to us in the future will depend, among other things, on their earnings, tax considerations and covenants contained in any financing or other agreements. In addition, such payments may be limited as a result of claims against our subsidiaries by their creditors, including suppliers, vendors, lessors and employees.
If the ability of our subsidiaries to pay dividends or make other distributions or payments to us is materially restricted by cash needs, bankruptcy or insolvency, or is limited due to operating results or other factors, we may be required to raise cash through the incurrence of debt, the issuance of equity or the sale of assets. However, there is no assurance that we would be able to raise sufficient cash by these means. This could materially and adversely affect our ability to pay our obligations or pay dividends, which could have an adverse effect on the trading price of our common stock.
We may not pay cash dividends in the future.
We have, from time to time, declared cash dividends in respect of our common stock. Our Board reassesses the payment of cash dividends on a quarterly basis, and determinations as to whether to declare and pay cash dividends, if any, depend on a variety of factors, including general macroeconomic, business and financial market conditions; applicable laws; our financial condition, results of operations, contractual restrictions, capital requirements, and business prospects; and other factors the Board may deem relevant at the time. Accordingly, we make no assurance that we will pay dividends in the future for any particular quarter or at all. To the extent that the Board determines to declare cash dividends for any particular quarter, we make no assurance that such dividends will be consistent with dividends paid in any prior period.
Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price for our common stock to decline.
The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, including sales by our existing stockholders, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of December 31, 2022, we had a total of 138,398,707 shares of our common stock outstanding. Of the outstanding shares, 7,509,299 shares are freely tradable without restriction or further registration under the Securities Act, except for any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, including our directors, executive officers and other affiliates (including our Sponsor ).
The remaining outstanding 130,889,408 shares of common stock held by certain of our existing stockholders, including our Sponsor and certain of our directors and executive officers, representing approximately 94.6% of the total outstanding shares of our common stock as of December 31, 2022, are “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144.
Pursuant to a registration rights agreement, our Sponsor has the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act. See “Item 13. Certain Relationships and Related Party Transactions.” By exercising its registration rights and selling a large number of shares, our Sponsor could cause the prevailing market price of our common stock to decline. Certain of our existing stockholders may have “piggyback” registration rights with respect to future registered offerings of our common stock. As of December 31, 2022, the shares covered by registration rights represent approximately 92.3% of our total common stock outstanding. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement.
On January 29, 2021, we filed a registration statement on Form S-8 under the Securities Act to register an aggregate of 22,344,275 shares of common stock subject to outstanding stock options and subject to issuance under the 2021 Incentive Plan
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and Employee Stock Purchase Plan. Shares registered under the registration statement on Form S-8 are eligible for sale in the open market.
If our existing stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
•a classified board of directors, as a result of which our board of directors is divided into three classes, with each class serving for staggered three-year terms;
•the ability of our board of directors to issue one or more series of preferred stock;
•advance notice requirements for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
•certain limitations on convening special stockholder meetings;
•the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% of the shares of common stock entitled to vote generally in the election of directors if our Sponsor and its affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors; and
•that certain provisions may be amended only by the affirmative vote of at least 66 2/3% of shares of common stock entitled to vote generally in the election of directors if our Sponsor and its affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors.
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders and the federal district courts will be the exclusive forum for Securities Act claims, which could limit our stockholders’ ability to bring a suit in a different judicial forum than they may otherwise choose for disputes with us or our directors, officers, team members or stockholders.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of our company to the Company or our stockholders, creditors or other constituents, (iii) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, which already provides that such claims must be bought exclusively in the federal courts. Our amended and restated certificate of incorporation also provides that, unless we consent in writing to the selection of an alternative forum, the U.S. federal district courts will be the exclusive forum for the resolution of any actions or proceedings asserting claims arising under the Securities Act. While the Delaware Supreme Court has upheld the validity of similar provisions under the DGCL, there is uncertainty as to whether a court in another state would enforce such a forum selection provision. Our exclusive forum provision does not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other team members or stockholders. Alternatively, if a court were to find the choice of forum
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provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial conditions.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We operated through a network of 7 leased corporate offices located throughout the United States, totaling approximately 210,000 square feet as of December 31, 2022. Our headquarters and principal executive offices are located at 2211 Old Earhart Road, Suite 250, Ann Arbor, Michigan 48105. At this location, we lease office space totaling approximately 30,000 square feet. The lease for this location expires on June 30, 2029.
We believe that our facilities are in good operating condition and are sufficient for our current needs. Any additional space needed to support future needs and growth will be available on commercially reasonable terms.
Item 3. Legal and Regulatory Proceedings
As an organization that, among other things, provides consumer residential mortgage lending and servicing as well as related services and engages in online marketing and advertising, we operate within highly regulated industries on a federal, state and local level. We are routinely subject to various examinations and legal and administrative proceedings in the normal and ordinary course of business. This can include, on occasion, investigations, subpoenas, enforcement actions involving the CFPB or FTC, state regulatory agencies and attorney generals. In the ordinary course of business, we are, from time to time, a party to civil litigation matters, including class actions. None of these matters have had, nor are pending matters expected to have, a material impact on our assets, business, operations or prospects.
Item 4. Mine Safety Disclosures
Not applicable.
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Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock has been listed and traded on Nasdaq under the symbol “HMPT” since January 29, 2021.
Holders of Record
As of March 3, 2023, there were approximately 12 shareholders of record of our common stock. This does not include the significant number of beneficial owners whose stock is in nominee or “street name” accounts through brokers, banks or other nominees.
Dividend Policy
Beginning with the conclusion of the second fiscal quarter of 2021, we began to pay cash dividends on a quarterly basis. Our board of directors (the “Board”) determined not to declare a dividend on our common stock for the second, third, and fourth quarters of 2022. The Board’s determination reflects our desire to maintain a strong liquidity position to support operations in the current macroeconomic environment, including rising interest rates and inflationary pressure, and the potential impact on our results of operations and financial condition.
The Board intends to reassess the payment of cash dividends on a quarterly basis. Future determinations to declare and pay cash dividends, if any, will be made at the discretion of the Board and will depend on a variety of factors, including general macroeconomic, business and financial market conditions; applicable laws; our financial condition, results of operations, contractual restrictions, capital requirements, and business prospects; and other factors the Board may deem relevant at the time.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
On February 24, 2022, we announced a stock repurchase program whereby we could repurchase up to a total of $8.0 million of our issued and outstanding stock from time to time until the program’s expiration on December 31, 2022 on the open market or in privately negotiated transactions. Repurchases under the stock repurchase program may also be made from time to time pursuant to one or more plans adopted under Rule 10b5-1 of the Exchange Act. The program did not require us to repurchase any specific number of shares. Shares repurchased under the program were subsequently retired.
Recent Sales of Unregistered Equity Securities
None.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report. The following discussion includes forward-looking statements that reflect our plans, estimates and assumptions and involves numerous risks and uncertainties, including, but not limited to, those described in the “Item 1A. Risk Factors” section of this Report. Refer to “Cautionary Note on Forward-Looking Statements.” Future results could differ significantly from the historical results presented in this section.
Overview
We are a leading residential mortgage originator and servicer driven by a mission to create financially healthy, happy homeowners. We do this by delivering scale, efficiency and savings to our partners and customers. Our business model is focused on leveraging a nationwide network of partner relationships to drive sustainable originations. We support our origination operations through a robust operational infrastructure and a highly responsive customer experience. We then leverage our servicing platform to manage the customer experience. We believe that the complementary relationship between our origination and servicing businesses allows us to provide a best-in-class experience to our customers throughout their homeownership lifecycle.
Our primary focus is our Wholesale channel, which is a business-to-business-to-customer distribution model in which we utilize our relationships with 9,259 partnering independent mortgage brokers (“Broker Partners”) to reach our end-borrower customers. We had 1,658 active broker partners as of December 31, 2022. Through our Wholesale channel, we propel the success of our Broker Partners through a combination of full service, localized sales coverage and an efficient loan fulfillment process supported by our fully integrated technology platform. On June 1, 2022, the Company completed the previously announced sale of the Correspondent channel, through which we purchased closed and funded mortgages from a trusted network of correspondent sellers (“Correspondent Partners”). For additional information refer to Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC. In our Direct channel, we originate residential mortgages primarily for existing servicing customers who are seeking new financing options.
While we initiate our customer relationships at the time the mortgage is originated, we maintain ongoing connectivity with our approximately 315 thousand servicing customers. In February 2022, we announced an agreement with ServiceMac, pursuant to which ServiceMac subservices all mortgage loans underlying Mortgage servicing rights (“MSRs”) we hold. ServiceMac began subservicing newly originated agency loans for us in the second quarter of 2022. The Company completed transitioning to ServiceMac the balance of the agency portfolio and all of the Government National Mortgage Association (“Ginnie Mae”) portfolio in the third quarter of 2022. ServiceMac performs subservicing functions on the Company’s behalf, but we continue to hold the MSRs. We believe that our relationship with ServiceMac allows us to maintain a leaner cost structure with a greater variable component and provides greater flexibility when strategically selling certain non-core MSRs. The number of our servicing portfolio customers was 315,478 and 425,989, while the servicing portfolio unpaid principal balance (“UPB”) was $88.7 billion and $128.4 billion as of December 31, 2022 and 2021, respectively.
In the environment of rapidly rising interest rates and increased competition, we are strategically managing our business by managing our liquidity, reducing expenses, and concentrating our efforts on margins over volume.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Summary
We generated $255.6 million of total revenue, net for the year ended December 31, 2022 compared to $961.5 million of total revenue, net for the year ended December 31, 2021. We had $163.5 million of net loss for the year ended December 31, 2022 compared to $166.3 million of net income for the year ended December 31, 2021. We generated $195.2 million of Adjusted revenue for the year ended December 31, 2022 compared to $746.2 million for the year ended December 31, 2021. We had $189.6 million of Adjusted net loss for the year ended December 31, 2022 compared to $0.4 million Adjusted net loss for the year ended December 31, 2021. Refer to “Non-GAAP Financial Measures” for further information regarding our use of Adjusted revenue and Adjusted net income, including limitations related to such non-GAAP measures and a reconciliation of such measures to net income, the nearest comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
We originated $27.7 billion of mortgage loans for the year ended December 31, 2022 compared to $96.2 billion for the year ended December 31, 2021, representing a decrease of $68.5 billion or 71.2%. Our MSR Servicing Portfolio was $88.7 billion as of December 31, 2022 compared to $128.4 billion as of December 31, 2021. Year-over-year decreases were due to rising interest rates, increased competition in the industry, and MSR sales. Our gain on sale margins decreased 47 basis points for the year ended December 31, 2022 compared to the year ended December 31, 2021. Additionally, according to the Mortgage Bankers Association Mortgage Finance Forecast, average 30-year mortgage rates increased by approximately 340 basis points from December 31, 2021 to December 31, 2022. An increase of this nature generally results in our Origination volume declining as refinance opportunities decrease, which also increases competition, resulting in lower gain on sale margins.
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However, when rates increase, we experience lower prepayment speeds and a subsequent upward adjustment to the fair value of our MSRs for the loans that still exist in our portfolio.
Segments
Our operations are organized into two separate reportable segments: Origination and Servicing.
In our Origination segment, we source loans through two distinct production channels: Direct and Wholesale. As discussed in Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC, on June 1, 2022, the Company completed the sale of its Correspondent channel.
The Direct channel provides the Company’s existing servicing customers with various financing options. At the same time, it supports the servicing assets in the ecosystem by retaining existing servicing customers who may otherwise refinance their existing mortgage loans with a competitor. The Wholesale channel consists of mortgages originated through a nationwide network of 9,259 Broker Partners. Prior to its sale, the Correspondent channel consisted of closed and funded mortgages that we purchased from a trusted network of Correspondent Partners. Once a loan is locked, it becomes channel agnostic. The channels in our Origination segment function in unison through the following activities: hedging, funding, and production. Our Origination segment has contribution loss of $106.9 million and contribution margin of $237.1 million for the years ended December 31, 2022 and 2021, respectively.
Our Servicing segment consists of servicing loans that were produced in our Originations segment where the Company retained the servicing rights. In February 2022, the Company entered into an agreement with ServiceMac, pursuant to which ServiceMac subservices all mortgage loans underlying the Company’s MSRs. We also strategically buy and sell MSRs. Our Servicing segment generated Contribution margins of $121.8 million and $185.8 million for the years ended December 31, 2022 and 2021, respectively.
We believe that maintaining both an Origination segment and a Servicing segment provides us with a more balanced business model in both rising and declining interest rate environments, as compared to other industry participants that predominantly focus on either origination or servicing, instead of both.
Key Factors Affecting Results of Operations for Periods Presented
Residential Real Estate Market Conditions
Our Origination volume is impacted significantly by broader residential real estate market conditions and the general economy. Housing affordability, availability and general economic conditions influence the demand for our products. Housing affordability and availability are impacted by mortgage interest rates, availability of funds to finance purchases, availability of alternative investment products, and the relative relationship of supply and demand. General economic conditions are impacted by unemployment rates, changes in real wages, inflation, consumer confidence, seasonality, and the overall economic environment. Recent market conditions, such as rapidly rising interest rates, high inflation, and home price appreciation due to limited housing supply, have led to a decrease in the affordability index and negatively impacted Origination volume.
Changes in Interest Rates
Origination volume is impacted by changes in interest rates. Decreasing interest rates tend to increase the volume of purchase loan origination and refinancing whereas increasing interest rates tend to decrease the volume of purchase loan origination and refinancing.
Changes in interest rates impact the value of interest rate lock commitments (“IRLCs”) and loans held for sale (“MLHS”). IRLCs represent an agreement to extend credit to a customer whereby the interest rate is set prior to the loan funding. These commitments bind us to fund the loan at a specified rate. When loans are funded, they are classified as held for sale until they are sold. During the origination and sale process, the value of IRLC and MLHS inventory fluctuates with changes in interest rates; for example, if we enter into IRLC at low interest rates followed by an increase in interest rates in the market, the value of our IRLC will decrease.
The fair value of MSRs is also driven primarily by interest rates, which impact the likelihood of loan prepayments. In periods of rising interest rates, the fair value of the MSRs generally increases as prepayments decrease, and therefore the estimated life of the MSRs and related expected cash flows increase. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore the estimated life of the MSRs, and related cash flows, decrease.
To mitigate the interest rate risk impact, we employ economic hedging strategies through forward delivery commitments on mortgage-backed securities or whole loans and options on forward contracts.
Early 2021 had a falling interest rate environment. In the second half of 2021, interest rates started to rise at a rapid pace, which continued into 2022. The rapid rise in interest rates has adversely impacted our Origination volumes.
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Key Performance Indicators
We review several operating metrics, including the following key performance indicators to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and they may be used by investors to help analyze the health of our business.
Our origination metrics enable us to monitor our ability to generate revenue and expand our market share across different channels. In addition, they help us track origination quality and compare our performance against the nationwide originations market and our competitors. Other key performance indicators include the number of Broker Partners and, prior to the sale of our Correspondent channel, number of Correspondent Partners, which enable us to monitor key inputs of our business model. As noted above, in June, 2022 the Company completed the previously announced sale of the Correspondent channel. For additional information refer to Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC. Our servicing metrics enable us to monitor the size of our customer base, the characteristics and value of our MSR Servicing Portfolio, and help drive retention efforts.
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Origination Segment KPIs
The following presents key performance indicators for our business:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Origination Volume by Channel | |||||||||||
| Wholesale | $ | 22,393,275 | $ | 69,450,704 | |||||||
| Correspondent | 4,529,238 | 21,872,389 | |||||||||
| Direct | 757,771 | 4,880,301 | |||||||||
| Origination volume | $ | 27,680,284 | $ | 96,203,394 | |||||||
| Fallout Adjusted (“FOA”) Lock Volume by Channel | |||||||||||
| Wholesale | $ | 22,132,356 | $ | 61,021,701 | |||||||
| Correspondent | 3,879,896 | 18,827,684 | |||||||||
| Direct | 592,908 | 3,295,243 | |||||||||
| FOA Lock Volume | $ | 26,605,160 | $ | 83,144,628 | |||||||
| Gain on sale margin by Channel | |||||||||||
| Wholesale | $ | 139,704 | $ | 557,946 | |||||||
| Correspondent | 5,452 | 47,155 | |||||||||
| Direct | 15,271 | 100,846 | |||||||||
| Gain on sale margin attributable to channels | 160,427 | 705,947 | |||||||||
Other (loss) gain on sale(a) | (45,807) | 44,633 | |||||||||
Total gain on sale margin(b) | $ | 114,620 | $ | 750,580 | |||||||
| Gain on sale margin by Channel (bps) | |||||||||||
| Wholesale | 63 | 91 | |||||||||
| Correspondent | 14 | 25 | |||||||||
| Direct | 258 | 306 | |||||||||
Gain on sale margin attributable to channels | 60 | 85 | |||||||||
Other (loss) gain on sale(a) | (17) | 5 | |||||||||
Total gain on sale margin(b) | 43 | 90 | |||||||||
| Origination Volume by Purpose | |||||||||||
| Purchase | 61.3 | % | 31.1 | % | |||||||
| Refinance | 38.7 | % | 68.9 | % | |||||||
| Market Share | |||||||||||
Overall share of origination market(c) | 1.3 | % | 2.1 | % | |||||||
Share of wholesale channel(d) | 6.6 | % | 9.8 | % | |||||||
| Third Party Partners | |||||||||||
Number of Broker Partners(e) | 9,259 | 8,012 | |||||||||
Number of Correspondent Partners(f) | N/A | 676 | |||||||||
(a) Includes loan fee income, interest income (expense), net, realized and unrealized gains (losses) on locks and mortgage loans held for sale, net hedging results, the provision for the representation and warranty reserve and differences between modeled and actual pull-through.
(b) Gain on sale margin calculated as gain on sale divided by Fallout Adjusted Lock volume. Gain on sale includes gain on loans, net, loan fee income, and interest income (expense), net for the Origination segment.
(c) Overall share of origination market share data for December 31, 2022 is obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics.
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(d) Share of wholesale channel for December 31, 2022 is obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics.
(e) Number of Broker Partners with whom the Company sources loans.
(f) Number of Correspondent Partners from whom the Company purchased loans prior to the completion of the previously announced sale of the Correspondent channel.
Servicing Segment KPIs
The following presents key performance indicators for our business:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Mortgage Servicing | |||||||||||
MSR Servicing Portfolio - UPB (a) | $ | 88,668,633 | $ | 128,359,574 | |||||||
MSR Servicing Portfolio - Units (b) | 315,478 | 425,989 | |||||||||
60 days or more delinquent (c) | 0.9 | % | 0.7 | % | |||||||
| MSR Portfolio | |||||||||||
MSR Multiple (d) | 6.0 | 4.6 | |||||||||
Weighted Average Note Rate (e) | 3.35 | % | 2.96 | % | |||||||
(a) The unpaid principal balance of loans we service on behalf of Ginnie Mae, Fannie Mae, Freddie Mae and others, at period end.
(b) Number of loans in our capitalized servicing portfolio at period end.
(c) Total balances of outstanding loan principals for which installment payments are at least 60 days past due as a percentage of the outstanding loan principal as of a specified date.
(d) Calculated as the MSR fair market value as of a specified date divided by the related UPB divided by the weighted average service fee.
(e) Weighted average interest rate of our MSR portfolio at period end.
Non-GAAP Financial Measures
We believe that certain non-GAAP financial measures presented in this Report, including Adjusted revenue and Adjusted net income provide useful information to investors and others in understanding and evaluating our operating results. These measures are not financial measures calculated in accordance with U.S. GAAP and should not be considered as a substitute for net income, or any other operating performance measure calculated in accordance with U.S. GAAP and may not be comparable to a similarly titled measure reported by other companies.
We believe that the presentation of Adjusted revenue and Adjusted net income provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted revenue and Adjusted net income provide indicators of performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period, and management relies on these measures for planning and forecasting of future periods. The Company measures the performance of the segments primarily on a contribution margin basis. Additionally, these measures allow management to compare our results with those of other companies that have different financing and capital structures. However, other companies may define Adjusted revenue and Adjusted net income differently, and as a result, our measures of Adjusted revenue and Adjusted net income may not be directly comparable to those of other companies.
Adjusted revenue. We define Adjusted revenue as Total revenue, net exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs hedge, and adjusted for Income from equity method investment.
Adjusted net income. We define Adjusted net (loss) income as Net (loss) income exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs economic hedging results.
The non-GAAP information presented below should be read in conjunction with the Company’s consolidated financial statements and the related notes.
The following presents a reconciliation of Adjusted revenue and Adjusted net loss to the nearest U.S. GAAP financial measures of Total revenue, net and Net (loss) income, as applicable:
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Reconciliation of Total Revenue, Net to Adjusted Revenue
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Total revenue, net | $ | 255,647 | $ | 961,516 | |||||||
| (Loss) income from equity method investment | (26,278) | 15,373 | |||||||||
Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | (34,132) | (230,727) | |||||||||
| Adjusted revenue | $ | 195,237 | $ | 746,162 | |||||||
Reconciliation of Total Net (Loss) Income to Adjusted Net Loss
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Net (loss) income | $ | (163,454) | $ | 166,272 | |||||||
Change in fair value of MSR (due to inputs and assumptions), net of hedge(a) | (34,132) | (230,727) | |||||||||
Income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge(b) | 7,988 | 64,059 | |||||||||
| Adjusted net loss | $ | (189,598) | $ | (396) | |||||||
(a) MSR fair value changes due to valuation inputs and assumptions are measured using a static discounted cash flow model that includes assumptions such as prepayment speeds, delinquencies, discount rates, and effects of changes in market interest rates. Refer to Note 4 - Mortgage Servicing Rights to our consolidated financial statements included elsewhere in this Report. We exclude changes in fair value of MSRs (due to inputs and assumptions), net of hedge from Adjusted revenue and Adjusted net loss as they add volatility and we believe that they are not indicative of the Company’s operating performance or results of operations. This adjustment does not include changes in fair value of MSRs due to realization of cash flows. Realization of cash flows occurs when cash is collected as customers make scheduled payments, partial prepayments of principal, or pay their mortgage in full. The adjustment includes the gain (loss) on MSR sales since it is not indicative of the Company’s results of operations.
(b) The income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge is calculated as the MSR valuation change, net of hedge multiplied by the quotient of Income tax benefit (expense) divided by (Loss) income before income tax.
Description of Certain Components of our Results of Operations
Components of Revenue
Gain on loans, net includes the realized and unrealized gains and losses on mortgage loans, as well as the changes in fair value of all loan-related derivatives, including but not limited to, forward mortgage-backed securities sales commitments, IRLCs, freestanding loan-related derivative instruments and the representation and warranty reserve.
Loan fee income consists of fee income earned on all loan originations, including amounts earned related to application and underwriting fees. Fees associated with the origination and acquisition of mortgage loans are recognized when earned, which is the date the loan is originated or acquired.
Interest income (expense), net consists of interest income recognized on MLHS for the period from loan funding to sale, which is typically less than 30 days. Loans are placed on non-accrual status and the related accrued interests is reserved when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received for loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. Interest income (expense), net is presented net of interest expense related to our loan funding warehouse and other facilities as well as expenses related to amortization of capitalized debt expense, original issue discount, gains or losses upon extinguishment of debt, and commitment fees paid on certain debt agreements.
Loan servicing fees consist of fees received from loan servicing. Loan servicing involves the servicing of residential mortgage loans on behalf of an investor. Total loan servicing fees include servicing and other ancillary servicing revenue earned for servicing mortgage loans owned by investors. Servicing fees received for servicing mortgage loans owned by investors are based on a stipulated percentage of the outstanding monthly principal balance on such loans, or the difference between the weighted-average yield received on the mortgage loans and the amount paid to the investor, less guaranty fees and interest on curtailments (reduction of principal balance). Loan servicing fees are receivable only out of interest collected from mortgagors and are recorded as income when earned, which is generally upon collection. Late charges and other miscellaneous fees collected from mortgagors are also recorded as income when collected.
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Change in fair value of mortgage servicing rights. MSRs represent the fair value assigned to contracts that obligate us to service the mortgage loans on behalf of the owners of the mortgage loans in exchange for service fees and the right to collect certain ancillary income from the borrower. We recognize MSRs at our estimate of the fair value of the contract to service loans. Changes in the fair value of MSRs are recognized as current period income as a component of Change in fair value of MSRs. To hedge against interest rate exposure on these assets, we enter into various derivative instruments, which may include but are not limited to swaps and forward loan purchase commitments. Changes in the value of derivatives designed to protect against MSR value fluctuations, or MSR hedging gains and losses, are also included as a component of Change in fair value of MSRs. This account also includes gains and losses from the sale of MSRs.
Other income consists of income that is dissimilar in nature to revenues the Company earns from its ongoing central operations. Other income includes gain from the sale of certain assets.
Components of Operating Expenses
Compensation and benefits expense includes all salaries, commissions, bonuses and benefit-related expenses for our associates.
Loan expense primarily includes loan origination costs, loan processing costs, and fees related to loan funding. Certain passthrough fees such as flood certification, credit report, and appraisal fees, among others, are presented net within Loan expense.
Loan servicing expense primarily includes subservicing fees, non-performing servicing expenses, and general servicing expenses, such as printing expenses, recording fees, and title search fees.
Production technology includes origination and servicing system technology expenses.
General and administrative primarily includes occupancy and equipment, marketing and advertising costs, travel and entertainment, legal reserves, and professional services, such as audit and consulting fees.
Depreciation includes depreciation of Property and equipment.
Other expenses primarily consist of insurance, dues and subscriptions, and other employee-related expenses such as recruitment fees and training expenses.
Equity-Based Compensation
Equity-based compensation consists of equity awards and is measured and expensed accordingly under ASC 718, Compensation—Stock Compensation.
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Results of Operations – Years Ended December 31, 2022 and 2021
Consolidated Results of Operations
The following presents certain consolidated financial data:
| Years Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Gain on loans, net | $ | 47,105 | $ | 585,762 | $ | (538,657) | (92.0) | % | |||||||||||||||
| Loan fee income | 46,029 | 150,921 | (104,892) | (69.5) | % | ||||||||||||||||||
| Interest income | 91,417 | 136,477 | (45,060) | (33.0) | % | ||||||||||||||||||
| Interest expense | (112,281) | (169,390) | 57,109 | (33.7) | % | ||||||||||||||||||
| Interest expense, net | (20,864) | (32,913) | 12,049 | (36.6) | % | ||||||||||||||||||
| Loan servicing fees | 265,275 | 331,382 | (66,107) | (19.9) | % | ||||||||||||||||||
| Change in fair value of mortgage servicing rights | (97,689) | (76,831) | (20,858) | 27.1 | % | ||||||||||||||||||
| Other income | 15,791 | 3,195 | 12,596 | 394.2 | % | ||||||||||||||||||
| Total revenue, net | 255,647 | 961,516 | (705,869) | (73.4) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | 256,856 | 494,227 | (237,371) | (48.0) | % | ||||||||||||||||||
| Loan expense | 21,865 | 63,912 | (42,047) | (65.8) | % | ||||||||||||||||||
| Loan servicing expense | 35,382 | 27,373 | 8,009 | 29.3 | % | ||||||||||||||||||
| Production technology | 16,153 | 31,866 | (15,713) | (49.3) | % | ||||||||||||||||||
| General and administrative | 60,317 | 95,476 | (35,159) | (36.8) | % | ||||||||||||||||||
| Depreciation | 10,700 | 10,127 | 573 | 5.7 | % | ||||||||||||||||||
| Impairment of goodwill | 10,789 | — | 10,789 | N/A | |||||||||||||||||||
| Other expenses | 22,675 | 29,638 | (6,963) | (23.5) | % | ||||||||||||||||||
| Total expenses | 434,737 | 752,619 | (317,882) | (42.2) | % | ||||||||||||||||||
| (Loss) income before income tax | (179,090) | 208,897 | (387,987) | (185.7) | % | ||||||||||||||||||
| Income tax benefit (expense) | 41,914 | (57,998) | 99,912 | (172.3) | % | ||||||||||||||||||
| (Loss) income from equity method investment | (26,278) | 15,373 | (41,651) | (270.9) | % | ||||||||||||||||||
| Net (loss) income | $ | (163,454) | $ | 166,272 | $ | (329,726) | (198.3) | % | |||||||||||||||
Consolidated results are further analyzed in our segment disclosure below.
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Origination Segment
The following presents certain financial data for the Origination segment:
| Years Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Gain on loans, net | $ | 47,105 | $ | 585,762 | $ | (538,657) | (92.0) | % | |||||||||||||||
| Loan fee income | 46,029 | 150,921 | (104,892) | (69.5) | % | ||||||||||||||||||
| Loan servicing fees | — | 8 | (8) | (100.0) | % | ||||||||||||||||||
| Interest income | 79,245 | 133,551 | (54,306) | (40.7) | % | ||||||||||||||||||
| Interest expense | (57,870) | (119,654) | 61,784 | (51.6) | % | ||||||||||||||||||
| Interest income, net | 21,375 | 13,897 | 7,478 | 53.8 | % | ||||||||||||||||||
| Other income | 111 | — | 111 | N/A | |||||||||||||||||||
| Total origination revenue, net | 114,620 | 750,588 | (635,968) | (84.7) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | 157,373 | 373,127 | (215,754) | (57.8) | % | ||||||||||||||||||
| Loan expense | 21,865 | 62,809 | (40,944) | (65.2) | % | ||||||||||||||||||
| Loan servicing expense | — | 32 | (32) | (100.0) | % | ||||||||||||||||||
| Production technology | 14,153 | 29,895 | (15,742) | (52.7) | % | ||||||||||||||||||
| General and administrative | 23,906 | 39,640 | (15,734) | (39.7) | % | ||||||||||||||||||
| Other expenses | 4,207 | 8,030 | (3,823) | (47.6) | % | ||||||||||||||||||
| Total origination expenses | 221,504 | 513,533 | (292,029) | (56.9) | % | ||||||||||||||||||
| Origination net (loss) income | $ | (106,884) | $ | 237,055 | $ | (343,939) | (145.1) | % | |||||||||||||||
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Origination Revenue, Net
Gains on loans, net
The following presents components of Gain on loans, net:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| FOA Lock Volume by Channel | |||||||||||
| Wholesale | $ | 22,132,356 | $ | 61,021,701 | |||||||
| Correspondent | 3,879,896 | 18,827,684 | |||||||||
| Direct | 592,908 | 3,295,243 | |||||||||
| FOA Lock Volume | $ | 26,605,160 | $ | 83,144,628 | |||||||
| Gain on sale margin by Channel | |||||||||||
| Wholesale | $ | 139,704 | $ | 557,946 | |||||||
| Correspondent | 5,452 | 47,155 | |||||||||
| Direct | 15,271 | 100,846 | |||||||||
| Gain on sale margin attributable to channels | 160,427 | 705,947 | |||||||||
Other (loss) gain on sale(a) | (45,807) | 44,633 | |||||||||
Total gain on sale margin(b) | $ | 114,620 | $ | 750,580 | |||||||
| Gain on sale margin by Channel (bps) | |||||||||||
| Wholesale | 63 | 91 | |||||||||
| Correspondent | 14 | 25 | |||||||||
| Direct | 258 | 306 | |||||||||
Gain on sale margin attributable to channels | 60 | 85 | |||||||||
Other (loss) gain on sale(a) | (17) | 5 | |||||||||
Total gain on sale margin(b) | 43 | 90 | |||||||||
(a) Includes loan fee income, interest income (expense), net, realized and unrealized gains (losses) on locks and MLHS, net hedging results, the provision for the representation and warranty reserve, and differences between modeled and actual pull-through.
(b) Gain on sale margin calculated as gain on sale divided by FOA Lock volume. Gain on sale includes gain on loans, net, loan fee income, and interest income (expense), net for the Origination segment.
The following presents details of the characteristics of our mortgage loan production:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Origination volume | $ | 27,680,284 | $ | 96,203,394 | |||||||
| Originated MSR UPB | $ | 30,802,034 | $ | 92,052,349 | |||||||
Gain on sale margin (%) (a) | 0.43 | % | 0.90 | % | |||||||
Retained servicing (UPB) (%) (b) | 97.8 | % | 96.8 | % | |||||||
(a) Includes loan fee income, interest income (expense), net, realized and unrealized gains (losses) on locks and MLHS, net hedging results, the provision for the representation and warranty reserve and differences between modeled and actual pull-through.
(b) Represents the percentage of our loan sales UPBs for which we retained the underlying servicing UPB during the period.
Gain on loans, net decreased by $538.7 million, or 92.0% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily due to a reduction in origination volume, a decrease of $636.0 million, or 84.7% in gain on sale margin, as well as $56.9 million increase in provision for representation and warranty reserve.
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We experienced a decrease in FOA lock volume and Origination volume across all of our origination channels primarily due to rising interest rates. Additionally, we saw a significant decrease in gain on sale margins due to the competitive environment during the year ended December 31, 2022 compared to the prior year. As mortgage interest rates rise, the origination market contracts, primarily due to a decline in refinance volume, which generally leads to increased competition and lower gain on sale margins. Our origination market share decreased from 2.1% to 1.3%, and our share of the wholesale channel decreased from 9.8% to 6.6% compared to the prior year.
Loan fee income
Loan fee income decreased by $104.9 million, or 69.5% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was consistent with the decrease in Origination volume.
Interest income, net
Interest income, net increased by $7.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in interest income, net was driven by $54.3 million decrease in interest income and $61.8 million decrease in interest expense. Interest income decreased due to lower MLHS balance partially offset by the impact of the rising interest rates. Interest expense decreased as a result of a decrease in warehouse borrowing and related fees due to the decrease in Origination volume. The Company continues to strategically rightsize its warehouse lines of credit to minimize associated costs and more efficiently operate in the environment of rising interest rates and increased competition.
Expenses
Total expenses decreased by $292.0 million, or 56.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by decreases in compensation and benefits expense, loan expense, production technology expense, and general and administrative expenses.
Compensation and benefits expense decreased by $215.8 million, or 57.8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by a decrease of $119.6 million in salary and benefits and $96.2 million decrease in variable compensation due to headcount reductions detailed in Note 18 - Restructuring, decrease in Origination volume, and the sale of the Correspondent channel detailed in Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC. Compensation and benefits expense was 0.6% and 0.4% of Origination volume for the years ended December 31, 2022 and 2021, respectively.
Loan expense decreased by $40.9 million, or 65.2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was consistent with the decrease in Origination volume.
Production technology expense decreased by $15.7 million, or 52.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by lower variable expenses associated with the Company’s origination systems as a result of the decline in Origination volume, combined with the investment the Company made in improving and upgrading the Company’s origination technologies in 2021.
General and administrative expense decreased $15.7 million, or 39.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by decrease in outsourced loan review services due to the decline in origination volume, as well as lower expenses as a result of cost-saving initiatives implemented in the second half of 2021 and continuing during 2022.
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Servicing Segment
The following table sets forth certain servicing segment financial data for the periods indicated:
| Years Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Loan servicing fees | $ | 265,275 | $ | 331,374 | $ | (66,099) | (19.9) | % | |||||||||||||||
| Change in fair value of mortgage servicing rights | (97,689) | (76,831) | (20,858) | 27.1 | % | ||||||||||||||||||
| Interest income | 12,172 | 2,926 | 9,246 | 316.0 | % | ||||||||||||||||||
| Interest expense | — | (995) | 995 | (100.0) | % | ||||||||||||||||||
| Interest income, net | 12,172 | 1,931 | 10,241 | 530.3 | % | ||||||||||||||||||
| Other income | — | 227 | (227) | (100.0) | % | ||||||||||||||||||
| Total servicing revenue, net | 179,758 | 256,701 | (76,943) | (30.0) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | 16,356 | 30,481 | (14,125) | (46.3) | % | ||||||||||||||||||
| Loan expense | — | 1,104 | (1,104) | (100.0) | % | ||||||||||||||||||
| Loan servicing expense | 35,382 | 27,340 | 8,042 | 29.4 | % | ||||||||||||||||||
| Production technology | 2,000 | 1,971 | 29 | 1.5 | % | ||||||||||||||||||
| General and administrative | 4,139 | 9,417 | (5,278) | (56.0) | % | ||||||||||||||||||
| Other expenses | 116 | 564 | (448) | (79.4) | % | ||||||||||||||||||
| Total servicing expenses | 57,993 | 70,877 | (12,884) | (18.2) | % | ||||||||||||||||||
| Servicing net income | $ | 121,765 | $ | 185,824 | $ | (64,059) | (34.5) | % | |||||||||||||||
Servicing Revenue, Net
Loan servicing fees
The following presents certain characteristics of our mortgage loan servicing portfolio:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| MSR Servicing Portfolio (UPB) | $ | 88,668,633 | $ | 128,359,574 | |||||||
| Average MSR Servicing Portfolio (UPB) | $ | 108,514,104 | $ | 108,318,412 | |||||||
| MSR Servicing Portfolio (Loan Count) | 315,478 | 425,989 | |||||||||
| MSRs Fair Value Multiple (x) | 6.0 | 4.6 | |||||||||
| Delinquency Rates (%) | 1.6 | % | 0.7 | % | |||||||
| Weighted average credit score | 748 | 757 | |||||||||
| Weighted average servicing fee, net (bps) | 27 | 26 | |||||||||
Loan servicing fees decreased by $66.1 million, or 19.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by $20.0 million lower ancillary servicing income due to lower loan modification fees earned on GNMA loans and gains in 2021 as a result of the Company selling 77% of its GNMA MSR portfolio during the fourth quarter of 2021 and approximately 40% of its MSR servicing portfolio in 2022.
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Change in fair value of MSRs
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Realization of cash flows | $ | (131,821) | $ | (307,558) | |||||||
| Valuation inputs and assumptions | 358,782 | 227,401 | |||||||||
| Economic hedging results | (242,487) | (33,699) | |||||||||
| (Loss) gain on MSR sales | (82,163) | 37,025 | |||||||||
| Change in fair value of MSRs | $ | (97,689) | $ | (76,831) | |||||||
Change in fair value of MSRs presented losses for both years ended December 31, 2022 and 2021. Fair value losses increased by $20.9 million, or 27.1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The change was primarily driven by the $82.2 million loss on MSR sales, which was partially offset by changes in valuation inputs and assumptions net of hedge, that were favorably affected by an increase in interest rates during the period, as well as decrease in loss from realization of cash flows resulting from a decrease in prepayments due to higher interest rates and higher scheduled payments collected on loans in our MSR portfolio.
Expenses
Total expenses decreased by $12.9 million, or 18.2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by decreases in compensation and benefits expense and general and administrative expenses, partially offset by the increases in loan servicing expense.
Compensation and benefits expense decreased by $14.1 million, or 46.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by the salary expense decreases due to employee headcount reductions and efficiencies gained from the transition of subservicing to ServiceMac.
Loan servicing expense increased by $8.0 million, or 29.4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to $16.3 million increase in subservicing fee due to outsourcing of the servicing to ServiceMac, partially offset by $6.1 million decrease in recording fees and other reductions in loan servicing expense due to the sale of MSRs and other efficiencies gained from the subservicing to ServiceMac.
General and administrative expense decreased $5.3 million, or 56.0%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by a decrease in professional services and consulting fees resulting from the Company’s cost savings initiatives.
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Corporate Segment
The following presents corporate financial data:
| Years Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Interest expense | $ | (54,411) | $ | (48,741) | $ | (5,670) | 11.6 | % | |||||||||||||||
| Interest expense, net | (54,411) | (48,741) | (5,670) | 11.6 | % | ||||||||||||||||||
| Other (expense) income | (10,598) | 18,341 | (28,939) | (157.8) | % | ||||||||||||||||||
| Total corporate revenue, net | (65,009) | (30,400) | (34,609) | 113.8 | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | 83,127 | 90,619 | (7,492) | (8.3) | % | ||||||||||||||||||
| General and administrative | 32,272 | 46,419 | (14,147) | (30.5) | % | ||||||||||||||||||
| Depreciation and amortization | 10,700 | 10,127 | 573 | 5.7 | % | ||||||||||||||||||
| Impairment of goodwill | 10,789 | — | 10,789 | N/A | |||||||||||||||||||
| Other expenses | 18,352 | 21,044 | (2,692) | (12.8) | % | ||||||||||||||||||
| Total corporate expenses | 155,240 | 168,209 | (12,969) | (7.7) | % | ||||||||||||||||||
| Corporate net loss | $ | (220,249) | $ | (198,609) | $ | (21,640) | 10.9 | % | |||||||||||||||
Total Corporate Revenue
Interest expense, net increased by $5.7 million, or 11.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in expense was driven by an increase in corporate debt interest due to issuance of the Senior Notes in January 2021.
Other expense increased by $28.9 million for the year ended December 31, 2022 compared to the Other income for the year ended December 31, 2021. The increase in Other expense was primarily driven by $41.7 million increase in loss from our equity method investment, which included an impairment charge of $8.8 million detailed in Note 21 - Shareholders’ Equity and Equity Method Investment, partially offset by $9.3 million debt extinguishment gain related to the repurchase and retirement of $50.0 million of outstanding Senior Notes (as defined below) during the year ended December 31, 2022.
Expenses
Total expenses decreased by $13.0 million, or 7.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by changes in compensation and benefits, impairment of goodwill, general and administrative, and other expenses.
Compensation and benefits expense decreased by $7.5 million, or 8.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by $11.5 million lower salary expense and $9.4 million lower variable compensation for the year ended December 31, 2022, partially offset by $15.6 million increase in severance expense due to headcount reduction detailed in Note 18 - Restructuring resulting from the decrease in Origination volume.
Impairment of goodwill charge of $10.8 million was recorded for the year ended December 31, 2022 as discussed in Note 6 - Goodwill.
General and administrative expenses decreased by $14.1 million, or 30.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by a decrease in professional services fees of $12.5 million for the year ended December 31, 2022, as a result of higher costs in 2021 associated with the Company’s IPO.
Other expenses decreased by $2.7 million, or 12.8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily driven by $3.4 million decrease in employee related expenses due to the reduction in employee headcount and $1.7 million reduction in other expenses due to the Company’s cost saving initiatives. These decreases were partially offset by $2.4 million loss related to asset disposal and $0.4 million loss from the sale of the Correspondent channel.
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Income Tax Benefit (Expense)
Income tax benefit (expense) is recognized for the entire company rather than on a segment basis. Income tax benefit increased by $99.9 million for the year ended December 31, 2022 compared to the income tax expense for the year ended December 31, 2021. The change is primarily due to the change in (loss) income before income tax. Our overall effective tax rate of 23.4% and 27.8% for the years ended December 31, 2022 and 2021, respectively, differed from the U.S. statutory rate of 21.0% primarily due to the impact of state incomes taxes, the equity investment, sale of its equity interests in HPAM and its wholly owned subsidiary HPMAC detailed in Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC, goodwill impairment, limitations on the tax deductibility of officers’ compensation applicable to a public entity in both periods, equity-based compensation, and non-deductible transaction costs in 2021 associated with the Company’s IPO.
Liquidity and Capital Resources
Sources and Uses of Cash
Historically, our primary sources of liquidity have included:
•Borrowings, including under our warehouse funding facilities and other secured and unsecured financing facilities.
•Cash flow from our operations, including:
•Sale of mortgage loans held for sale,
•Loan origination fees,
•Servicing fee income,
•Interest income on loans held for sale,
•Proceeds from sale of mortgage servicing rights, and
•Cash and marketable securities on hand.
Historically, our primary uses of funds have included:
•Origination of loans,
•Payment of interest expense,
•Repayment of debt,
•Payment of operating expenses, and
•Changes in margin requirements for derivative contracts.
We are also subject to contingencies which may have a significant impact on the use of our cash.
Summary of Certain Indebtedness
To originate and aggregate loans for sale into the secondary market, we use our own working capital and borrow on a short-term basis primarily through committed and uncommitted mortgage warehouse lines of credit that we have established with different large global and regional banks and financial institutions. Our loan funding facilities are primarily in the form of master repurchase agreements and participation agreements. New loan originations that are financed under these facilities are generally financed at approximately 95% to 100% of the principal balance of the loan (although certain types of loans are financed at lower percentages of the principal balance of the loan).
At the time of either the funding or purchase, mortgage loans are pledged as collateral for borrowings on mortgage warehouse lines of credit. In most cases, loans will remain on one of the warehouse lines of credit facilities for only a short time, generally less than one month, until the loans are pooled and sold. During the time the loans are held for sale, we earn interest income from the borrower on the underlying mortgage loan. This income is partially offset by the interest and fees we have to pay under the mortgage warehouse lines of credit.
When we sell a pool of loans in the secondary market, the proceeds received from the sale of the loans are used to pay back the amounts we owe on the mortgage warehouse lines of credit. We rely on the cash generated from the sale of loans to fund future loans and repay borrowings under our mortgage warehouse lines of credit. Delays or failures to sell loans in the secondary market could have an adverse effect on our liquidity position.
We held mortgage warehouse lines of credit arrangements with eight separate financial institutions with a total maximum borrowing capacity of $2.8 billion and an unused borrowing capacity of $2.3 billion as of December 31, 2022, approximately
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$106.0 million of which is available and undrawn. Refer to Note 10 - Warehouse Lines of Credit of our consolidated financial statements.
In light of the recent decline in the Origination volumes, the Company continues to strategically rightsize its warehouse lines of credit in order to minimize associated costs and more efficiently operate in the environment of rising interest rates and increased competition.
We maintained a servicing advance financing facility, MSR financing facility and an operating line of credit with total combined unused borrowing capacity of $459.2 million as of December 31, 2022. Refer to Note 11 – Term Debt and Other Borrowings, net of our consolidated financial statements.
The amount owed and outstanding on our loan funding facilities fluctuates significantly based on our Origination volume and the amount of time it takes us to sell the loans we originate.
Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit generally will result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement relative to the available financing and offsetting hedges. Upon notice from the applicable lender, we generally will be required to satisfy the margin call on the day of such notice or the following business day.
The warehouse facilities and other lines of credit require maintenance of certain operating and financial covenants, and the availability of funds under these facilities is subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining a certain minimum tangible net worth, minimum liquidity, minimum profitability levels, and ratio of indebtedness to tangible net worth, among others. A breach of these covenants can result in an event of default under these facilities following which the lenders would be able to pursue certain remedies against us. In addition, each of these facilities includes cross-default or cross-acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility.
In January 2021, the Company issued $550.0 million aggregate principal amount of its Senior Notes (the “Senior Notes”) in a private placement transaction. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than HPAM and HPMAC. The Senior Notes bear interest at a rate of 5.0% per annum, payable semi-annually in arrears. The Senior Notes will mature on February 1, 2026.
The Indenture governing the Senior Notes (the “Indenture”) contains covenants and restrictions that, among other things and subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries to (i) incur certain additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets. The Indenture governing the Senior Notes does not include any financial maintenance covenants. Refer to Note 11 – Term Debt and Other Borrowings, net of our consolidated financial statements.
The Company was in compliance with all covenants under the indenture and our warehouse facilities and other lines of credit as of December 31, 2022.
The Company may, at any time and from time to time, seek to retire or purchase the Company’s outstanding Senior Notes through cash purchases in the form of open-market purchases, privately negotiated transactions, or otherwise. Such repurchases, if any, will be upon such terms and at such prices as the Company may determine, and will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. The Company repurchased and retired $50.0 million of outstanding Senior Notes during the second quarter of 2022.
Summary of Mortgage Loan Participation Agreement
In November 2021, we entered into a Mortgage Loan Participation Sale Agreement (the “Gestation Agreement”) with JPMorgan Chase Bank, National Association, as purchaser (the “Gestation Purchaser”). Subject to compliance with the terms and conditions of the Gestation Agreement, including the affirmative and negative covenants contained therein, the Gestation Agreement permits the Gestation Purchaser to purchase from us from time to time during the term of the Gestation Agreement participation certificates evidencing a 100% undivided beneficial ownership interest in designated pools of fully amortizing first lien residential mortgage loans that are intended to ultimately be included in mortgage-backed securities (“MBS”) issued or guaranteed, as applicable, by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Ginnie Mae.
The aggregate purchase price of participation certificates owned by the Gestation Purchaser at any given time for which the Gestation Purchaser has not been paid the purchase price for the related MBS by the applicable takeout investor as specified in the applicable takeout commitment cannot exceed $400 million, which was reduced from $1.5 billion during the third quarter of 2022. On January 31, 2023, HPF terminated the Gestation Agreement. For additional information, refer to Note 27 – Subsequent Events.
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The Gestation Agreement and certain ancillary agreements thereto contain various financial and non-financial covenants, including financial covenants relating to the maintenance of tangible net worth, liquidity, and a ratio of total indebtedness to tangible net worth. The Company was in compliance with these covenants as of December 31, 2022.
Repurchase Obligation Relief
Certain of the Company’s loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. Historically, the Company received relief of certain repurchase obligations on loans sold to the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) by taking advantage of their repurchase alternative program. This program provided the Company with the ability, in certain instances, to pay a fee to FNMA or FHLMC, in lieu of being obligated to repurchase the loan. During September and October 2022, FNMA and FHMC notified the Company that they will not provide repurchase obligation relief through the repurchase alternative program beginning in the fourth quarter of 2022 until further notice.
Cash Flows
The following presents the summary of the Company’s cash flows:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Net cash provided by (used for) operating activities | $ | 3,654,503 | $ | (2,356,148) | |||||||
| Net cash provided by investing activities | 771,766 | 208,601 | |||||||||
| Net cash (used for) provided by financing activities | (4,525,467) | 2,158,444 | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (99,198) | 10,897 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 108,592 | $ | 207,790 | |||||||
Our Cash and cash equivalents and restricted cash decreased by $99.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Operating Activities
Our Cash flows from operating activities are primarily influenced by changes in the levels of our inventory of MLHS as shown below:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from: | (dollars in thousands) | ||||||||||
| Mortgage loans held for sale | $ | 3,654,789 | $ | (2,347,241) | |||||||
| Gain on loans, net | (47,105) | (585,762) | |||||||||
| Decrease in fair value of derivative assets, net | 36,148 | 215,550 | |||||||||
| Decrease in fair value of mortgage loans held for sale | 138,530 | 41,824 | |||||||||
| Other operating sources | 10,671 | 361,305 | |||||||||
| Net cash provided by (used for) operating activities | $ | 3,654,503 | $ | (2,356,148) | |||||||
Cash provided by operating activities increased by $6.0 billion for the year ended December 31, 2022 compared to the cash used for operating activities for the year ended December 31, 2021. The increase provided by operating activities is primarily driven by decrease in the level of inventory of loans held for sale as a result of a decrease in Origination volume for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was partially offset by the change in fair value of derivative assets of $179.4 million primarily due to interest rate lock commitment (“IRLC”) revenue and margin call assets.
Investing Activities
Cash provided by investing activities increased by $563.2 million primarily due to proceeds from sale of MSRs of $757.3 million for the year ended December 31, 2022 compared to $262.0 million for the year ended December 31, 2021.
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Financing Activities
Our Cash flows from financing activities are primarily influenced by changes in warehouse borrowings as shown below:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from: | (dollars in thousands) | ||||||||||
| Warehouse borrowings, net | $ | (4,222,177) | $ | 1,713,242 | |||||||
Distributions to parent, net1 | — | (294,897) | |||||||||
| Other financing sources | (303,290) | 740,099 | |||||||||
| Net cash (used for) provided by financing activities | $ | (4,525,467) | 2,158,444 | ||||||||
(1) distributions to Home Point Capital LP, our direct parent prior to the merger consummated in connection with the IPO.
Cash used for financing activities increased for the year ended December 31, 2022 compared to the cash provided by financing activities for the year ended December 31, 2021. The increase in use was primarily driven by decrease in proceeds, net of payments, on warehouse borrowings due to a decrease in Origination volume. As noted above, the Company continues to strategically rightsize its warehouse lines of credit in order to minimize associated costs and more efficiently operate in the environment of rising interest rates and increased competition.
Contractual Obligations and Other Commitments
Cash Requirements from Contractual and Other Obligations
As of December 31, 2022, our material cash requirements from known contractual and other obligations include interest and principal payments under the Senior Notes, payments under the MSR financing facility (the “MSR Facility”), and payments under our warehouse facilities. Annual cash payments for interest under the Senior Notes totaled approximately $25.6 million for the year ended December 31, 2022 and $500.0 million of the outstanding Senior Notes’ principal is due in 2026. Annual cash payments for interest under the MSR Facility totaled approximately $25.1 million for the year ended December 31, 2022 and approximately $300.0 million outstanding under the MSR Facility matures in 2024 and $150.0 million matures in 2025. Approximately $0.5 billion of outstanding borrowings under the warehouse facilities mature in 2023, which are typically repaid using the proceeds from the sale of mortgage loans to investors, usually within 30 days. We do not have material commitments for capital expenditures as of December 31, 2022 given the nature of our business.
The sources of funds needed to satisfy these cash requirements include cash flows from operations and financing activities, including cash flows from sales of MSRs, sale of loans into the secondary market, loan origination fees, servicing fee income, and interest income on mortgage loans. Refer to “Note 10 - Warehouse Lines of Credit,” “Note 11 – Term Debt and Other Borrowings, net,” and “Note 13 - Commitments and Contingencies” of the notes to our consolidated financial statements for further discussion of contractual obligations, commercial commitments, and other contingencies, including legal contingencies.
Dividend Payments and Suspension of Dividend
During the year ended December 31, 2022, the Company paid quarterly cash dividends of approximately $11.1 million to its common stockholders, representing $0.04 per share of common stock for the fourth quarter of 2021 and first quarter of 2022.
Our board of directors (the “Board”) has determined not to declare a dividend on our common stock for the second, third, and fourth quarters of 2022. The Board’s determination reflects our desire to maintain a strong liquidity position to support operations in the current macroeconomic environment, including rising interest rates and inflationary pressure, and the potential impact on our results of operations and financial condition.
The Board intends to reassess the payment of cash dividends on a quarterly basis. Future determinations to declare and pay cash dividends, if any, will be made at the discretion of the Board and will depend on a variety of factors, including general macroeconomic, business and financial market conditions; applicable laws; our financial condition, results of operations, contractual restrictions, capital requirements, and business prospects; and other factors the Board may deem relevant at the time.
Repurchase and Indemnification Obligations
In the ordinary course of business, we are exposed to liability with respect to certain representations and warranties that we make to the investors who purchase the loans that we originate. Under certain circumstances, we may be required to repurchase mortgage loans, or indemnify the purchaser of such loans for losses incurred, if there has been a breach of these representations and warranties, or in the case of early payment defaults. In addition, in the event of an early payment default, we are contractually obligated to refund certain premiums paid to us by the investors who purchased the related loan.
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Interest Rate Lock Commitments, Loan Sale and Forward Commitments
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit to borrowers at either fixed or floating interest rates. IRLCs are binding agreements to lend to a borrower at a specified interest rate within a specified period of time as long as there is no violation of conditions established in the contract. Forward commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. As many of the commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition, we have forward commitments to sell MBS at specified future dates and interest rates.
The following presents a summary of the notional amounts of commitments:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Interest rate lock commitments—fixed rate | $ | 596,633 | $ | 5,979,475 | |||||||
| Interest rate lock commitments—variable rate | 2,337 | 89,288 | |||||||||
| Forward commitments to sell mortgage-backed securities | 819,900 | 7,819,802 | |||||||||
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. We have identified certain accounting estimates as being critical because they require us to make difficult, subjective or complex judgments about matters that are uncertain. We believe that the judgment, estimates, and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, actual results could differ, and the use of other assumptions or estimates could result in material differences in our results of operations or financial condition. Our critical accounting policies and estimates are discussed below and relate to fair value measurements, particularly those determined to be Level 2 and Level 3. Refer to “Note 16 - Fair Value Measurements” to our consolidated financial statements.
Mortgage loans held for sale. We have elected to record MLHS at fair value. The majority of our MLHS at fair value are saleable into the secondary mortgage markets, and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of our MLHS consist of loans repurchased from the Government-Sponsored Enterprises (“GSEs”) and Ginnie Mae that have subsequently been deemed to be non-saleable to GSEs and Ginnie Mae when certain representations and warranties are breached. These repurchased loans are considered Level 3 at collateral value less estimated costs to sell the properties.
Changes in economic or other relevant conditions could cause our assumptions with respect to market prices of securities backed by similar mortgage loans to be different than our estimates. Increases in the market yields of similar mortgage loans result in a lower Mortgage loans held for sale at fair value.
Derivative financial instruments. Our derivative financial instruments are accounted for as free-standing derivatives and are included in the consolidated balance sheets at fair value. These derivative financial instruments include, but are not limited to, forward MBS sales and purchase commitments, IRLCs, and other derivative instruments used to economically hedge fluctuations in MSRs’ fair value.
Interest rate lock commitments The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The Company estimates the fair value of forward sales commitments based on quoted MBS prices. The weighted average pull-through rate for IRLCs was 77.5% and 86.1% for the years ended December 31, 2022 and 2021, respectively. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.
Mortgage Servicing Rights. We have elected to record MSRs at fair value. MSRs are recognized as a component of Gain on loans, net when loans are sold, and the associated servicing rights are retained. Subsequent changes in fair value of MSRs due to the collection and realization of cash flows and changes in model inputs and assumptions are recognized in current period earnings and included as a separate line item in the consolidated statements of operations.
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We use a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value.
Changes in economic and other relevant conditions could cause our assumptions, such as with respect to the prepayment speeds, to be different than our estimates. The key assumptions used to estimate the fair value of MSRs are prepayment speeds and the discount rate. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster, which causes accelerated MSR amortization. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. Refer to “Note 4 - Mortgage Servicing Rights” to our consolidated financial statements.
Forward sales and purchase commitments. The Company treats forward mortgage-backed securities purchase and sale commitments that have not settled as derivatives and recognizes them at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized and new originations and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. The Company estimates the fair value of forward commitments based on quoted MBS prices.
MSR derivatives: interest rate swap and Treasury futures purchase contracts. These derivatives represent a combination of derivatives used to offset possible adverse changes in the fair value of MSRs and include options on swap contracts, interest rate swap contracts, and other instruments. Fair value is determined by using quoted prices for similar instruments.
Representation and warranty reserves Loans sold to investors which we believe met investor and agency guidelines at the time of sale may be subject to repurchase in the event of default by the borrower or subsequent discovery that guidelines were not satisfied. The Company establishes a reserve for the probable lifetime loss based on borrower performance, repurchase demand behavior, and historical loan defect experience. This reserve considers both the estimate of expected losses on loans sold during the current accounting period as well as adjustments to the Company’s previous estimate of expected losses on loans sold.
New Accounting Pronouncements Not Yet Effective
Refer to “Note 2 - Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements for a discussion of recent accounting developments and the expected effect on the Company.
Item 7A. Qualitative and Quantitative Disclosure About Market Risk
As a smaller reporting company, we are not required to provide information for this item.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
| Page | |||||
Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Philadelphia, PA, PCAOB ID#243) | |||||
63
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Home Point Capital Inc. & Subsidiaries
Ann Arbor, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Home Point Capital, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Fair Value of Mortgage Servicing Rights
As described in Notes 2, 4 and 16 to the Company's consolidated financial statements, the Company’s balance of mortgage servicing rights (“MSRs”) was $1.40 billion as of December 31, 2022. The Company has elected to account for MSRs at fair value and determines the fair value by estimating the fair value of the future servicing cash flows associated with the mortgage loans being serviced. Prepayment speeds and discount rates are both significant unobservable assumptions that are key to the valuation of MSRs. The fair value of MSRs is classified as Level 3 in the valuation hierarchy.
We identified the valuation of MSRs as a critical audit matter because of (i) the significant judgments made by management in determining the prepayment speeds and discount rates assumptions, and (ii) the high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of these significant unobservable valuation assumptions, including specialized skill and knowledge needed.
The primary procedures we performed to address this critical audit matter include:
–Testing the relevance and reliability of loan level data used in determining the MSR valuation by verifying the completeness and accuracy of the data.
–Evaluating the reasonableness of management’s MSR valuation methodology and the design of the valuation model used to estimate the fair value of MSRs with the assistance of personnel with specialized skill and knowledge.
–Assessing the reasonableness of the prepayment speed and discount rate assumptions used by management in valuing the MSRs, by (i) comparing the assumptions used by the Company with those used by peer institutions and (ii)
64
comparing the assumptions used by the Company to independent market information with the assistance of personnel with specialized skill and knowledge.
–Evaluating the Company’s MSR fair value by (i) comparing it with an independently determined estimate of fair value, and (ii) comparing it to values implied by observable transactions with the assistance of personnel with specialized skill and knowledge.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2017.
Philadelphia, Pennsylvania
March 9, 2023
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HOME POINT CAPITAL INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Assets: | |||||||||||
| Cash and cash equivalents | $ | 97,248 | $ | 170,987 | |||||||
| Restricted cash | 11,344 | 36,803 | |||||||||
| Cash and cash equivalents and Restricted cash | 108,592 | 207,790 | |||||||||
| Mortgage loans held for sale (at fair value) | 642,993 | 5,107,161 | |||||||||
| Mortgage servicing rights (at fair value) | 1,402,542 | 1,525,103 | |||||||||
| Property and equipment, net | 11,660 | 21,892 | |||||||||
| Accounts receivable, net | 124,691 | 129,092 | |||||||||
| Derivative assets | 25,611 | 84,385 | |||||||||
| Goodwill | — | 10,789 | |||||||||
| Government National Mortgage Association loans eligible for repurchase | 85,937 | 65,237 | |||||||||
| Assets held for sale | — | 63,664 | |||||||||
| Other assets | 36,166 | 43,228 | |||||||||
| Total assets | $ | 2,438,192 | $ | 7,258,341 | |||||||
| Liabilities and Shareholders’ Equity: | |||||||||||
| Liabilities: | |||||||||||
| Warehouse lines of credit | $ | 496,481 | $ | 4,718,658 | |||||||
| Term debt and other borrowings, net | 942,083 | 1,226,524 | |||||||||
| Accounts payable and accrued expenses | 64,349 | 138,193 | |||||||||
| Government National Mortgage Association loans eligible for repurchase | 85,937 | 65,237 | |||||||||
| Deferred tax liabilities | 183,860 | 229,752 | |||||||||
| Derivative liabilities | 4,110 | 26,736 | |||||||||
| Other liabilities | 57,836 | 76,588 | |||||||||
| Total liabilities | 1,834,656 | 6,481,688 | |||||||||
Note 13 - Commitments and Contingencies | |||||||||||
| Shareholders’ Equity: | |||||||||||
Preferred stock (250,000,000 authorized shares, none issued and outstanding, $0.0000000072 par value per share) | — | — | |||||||||
Common stock (1,000,000,000 authorized shares, 138,398,707 and 139,326,953 shares issued and outstanding; par value $0.0000000072 per share) | — | — | |||||||||
| Additional paid-in capital | 513,710 | 523,811 | |||||||||
| Retained earnings | 89,826 | 252,842 | |||||||||
| Total shareholders' equity | 603,536 | 776,653 | |||||||||
| Total liabilities and shareholders' equity | $ | 2,438,192 | $ | 7,258,341 | |||||||
See accompanying notes to the consolidated financial statements.
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HOME POINT CAPITAL INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Gain on loans, net | $ | 47,105 | $ | 585,762 | |||||||
| Loan fee income | 46,029 | 150,921 | |||||||||
| Interest income | 91,417 | 136,477 | |||||||||
| Interest expense | (112,281) | (169,390) | |||||||||
| Interest expense, net | (20,864) | (32,913) | |||||||||
| Loan servicing fees | 265,275 | 331,382 | |||||||||
| Change in fair value of mortgage servicing rights | (97,689) | (76,831) | |||||||||
| Other income | 15,791 | 3,195 | |||||||||
| Total revenue, net | 255,647 | 961,516 | |||||||||
| Expenses: | |||||||||||
| Compensation and benefits | 256,856 | 494,227 | |||||||||
| Loan expense | 21,865 | 63,912 | |||||||||
| Loan servicing expense | 35,382 | 27,373 | |||||||||
| Production technology | 16,153 | 31,866 | |||||||||
| General and administrative | 60,317 | 95,476 | |||||||||
| Depreciation | 10,700 | 10,127 | |||||||||
| Impairment of goodwill | 10,789 | — | |||||||||
| Other expenses | 22,675 | 29,638 | |||||||||
| Total expenses | 434,737 | 752,619 | |||||||||
| (Loss) income before income tax | (179,090) | 208,897 | |||||||||
| Income tax benefit (expense) | 41,914 | (57,998) | |||||||||
| (Loss) income from equity method investment | (26,278) | 15,373 | |||||||||
| Net (loss) income | $ | (163,454) | $ | 166,272 | |||||||
| (Loss) earnings per share: | |||||||||||
| Basic | $ | (1.18) | $ | 1.19 | |||||||
| Diluted | $ | (1.18) | $ | 1.19 | |||||||
See accompanying notes to the consolidated financial statements.
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HOME POINT CAPITAL INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(dollars in thousands)
| Common Stock | Additional Paid in Capital | Treasury Stock | Retained Earnings | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | 138,860,103 | $ | — | $ | 519,510 | $ | — | $ | 407,964 | $ | 927,474 | ||||||||||||||||||||||||
| Contributed capital | — | — | — | — | 192 | 192 | |||||||||||||||||||||||||||||
| Distributions to parent | — | — | — | — | (295,089) | (295,089) | |||||||||||||||||||||||||||||
| Dividends to shareholders | — | — | — | — | (26,497) | (26,497) | |||||||||||||||||||||||||||||
| Employee stock purchases (option exercise) | 466,850 | — | (2,636) | — | — | (2,636) | |||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 6,937 | — | — | 6,937 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 166,272 | 166,272 | |||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | 139,326,953 | $ | — | $ | 523,811 | $ | — | $ | 252,842 | $ | 776,653 | ||||||||||||||||||||||||
| Stock repurchase | — | — | — | (3,774) | (3,774) | ||||||||||||||||||||||||||||||
| Retirement of treasury stock | (1,179,796) | — | (15,338) | 3,774 | 11,564 | — | |||||||||||||||||||||||||||||
| Dividends to shareholders | — | — | — | — | (11,126) | (11,126) | |||||||||||||||||||||||||||||
| Employee stock purchases (option exercise) | 126,772 | — | 60 | — | — | 60 | |||||||||||||||||||||||||||||
| Equity-based compensation (restricted stock units vesting) | 124,778 | — | 5,177 | — | — | 5,177 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (163,454) | (163,454) | |||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 138,398,707 | $ | — | $ | 513,710 | $ | — | $ | 89,826 | $ | 603,536 | ||||||||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
69
HOME POINT CAPITAL INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(dollars in thousands)
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net (loss) income | $ | (163,454) | $ | 166,272 | |||||||
| Adjustments to reconcile net (loss) income to cash used in operating activities: | |||||||||||
| Depreciation | 10,700 | 10,127 | |||||||||
| Amortization of debt issuance costs | 4,009 | 3,271 | |||||||||
| Impairment of goodwill | 10,789 | — | |||||||||
| Impairment of equity method investment | 8,795 | — | |||||||||
| Gain on loans, net | (47,105) | (585,762) | |||||||||
| Provision for representation and warranty reserve, net of charge offs | 2,028 | 6,497 | |||||||||
| Equity-based compensation expense | 5,177 | 6,937 | |||||||||
| Deferred income tax (benefit) expense | (45,165) | 55,751 | |||||||||
| Loss (income) from equity method investment | 17,483 | (15,373) | |||||||||
| Gain from sale of subsidiary | (2,750) | — | |||||||||
| Originations and purchases of mortgage loans held for sale | (28,622,069) | (100,217,789) | |||||||||
| Proceeds from sale and payments of mortgage loans held for sale | 32,276,858 | 97,870,548 | |||||||||
| Loss (gain) on sale of mortgage servicing rights | 82,163 | (37,025) | |||||||||
| Decrease in fair value of mortgage servicing rights | 15,526 | 113,856 | |||||||||
| Decrease in fair value of mortgage loans held for sale | 138,530 | 41,824 | |||||||||
| Decrease in fair value of derivative assets, net | 36,148 | 215,550 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Decrease in accounts receivable, net | 20,266 | 51,958 | |||||||||
| Decrease (increase) in other assets | 6,824 | (18,259) | |||||||||
| Decrease in accounts payable and accrued expenses | (78,742) | (29,856) | |||||||||
| (Decrease) increase in other liabilities | (21,508) | 5,325 | |||||||||
| Net cash provided by (used for) operating activities | 3,654,503 | (2,356,148) | |||||||||
See accompanying notes to the consolidated financial statements.
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HOME POINT CAPITAL INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(dollars in thousands)
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Investing activities: | |||||||||||
| Purchases of property and equipment | (555) | (10,309) | |||||||||
| Purchases of mortgage servicing rights | (24,738) | (43,056) | |||||||||
| Proceeds from sale of mortgage servicing rights | 757,253 | 261,966 | |||||||||
| Equity method investment | (1,500) | — | |||||||||
| Proceeds from sale of equity method investments | 38,886 | — | |||||||||
| Proceeds from sale of subsidiary | 2,420 | — | |||||||||
| Net cash provided by investing activities | 771,766 | 208,601 | |||||||||
| Financing activities: | |||||||||||
| Proceeds from warehouse borrowings | 30,503,338 | 104,148,375 | |||||||||
| Payments on warehouse borrowings | (34,725,515) | (102,435,133) | |||||||||
| Proceeds from term debt borrowings | 595,000 | 1,483,400 | |||||||||
| Payments on term debt borrowings | (880,000) | (660,000) | |||||||||
| Proceeds from other borrowings | 70,000 | 111,000 | |||||||||
| Payments on other borrowings | (73,250) | (151,000) | |||||||||
| Payments of debt issuance costs | (200) | (14,168) | |||||||||
| Employee stock purchases (option exercise) | 60 | (2,636) | |||||||||
| Common stock repurchases | (3,774) | — | |||||||||
| Contributed capital from parent | — | 192 | |||||||||
| Dividends to shareholders | (11,126) | (26,497) | |||||||||
| Distributions to parent | — | (295,089) | |||||||||
| Net cash (used for) provided by financing activities | (4,525,467) | 2,158,444 | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (99,198) | 10,897 | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 207,790 | 196,893 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 108,592 | $ | 207,790 | |||||||
| Supplemental disclosure: | |||||||||||
| Cash paid for interest | $ | 114,211 | $ | 141,819 | |||||||
| Cash refunded for income taxes | $ | (2,774) | $ | (41,043) | |||||||
See accompanying notes to the consolidated financial statements.
71
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 1 - Organization and Operations
Nature of Business
Home Point Capital Inc., a Delaware corporation (“HPC”, or the “Company”), through its subsidiaries, is a residential mortgage originator and servicer with a business model focused on growing originations by leveraging a network of partner relationships and its servicing operation. The Company’s business operations are organized into the following two segments: (1) Origination and (2) Servicing. Home Point Financial Corporation (“HPF”), a New Jersey corporation and a wholly owned subsidiary of the Company, originates, sells, and services residential real estate mortgage loans throughout the U.S. and owns certain servicing assets. Home Point Corporation Insurance Agency LLC (“HPCIA”), a Michigan limited liability company, is a wholly owned subsidiary of the Company that brokers home owner insurance policies.
On December 2, 2022, HPC completed the previously announced sale of its equity interests in Home Point Asset Management LLC (“HPAM”), and its wholly owned subsidiary, Home Point Mortgage Acceptance Corporation (“HPMAC”). Prior to the sale, HPAM was a wholly owned subsidiary of the Company and managed certain servicing assets. HPMAC, an Alabama Corporation, serviced residential real estate mortgage loans.
HPF is an approved seller and servicer of one-to-four family first mortgages by the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and is an approved issuer by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) (collectively, the “Agencies”), and as such, HPF must meet certain Agency eligibility requirements.
Note 2 - Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial statements of HPC and all its wholly owned subsidiaries, including HPF and HPCIA.
All intercompany balances and transactions have been eliminated in consolidation. As noted above, in December 2022 HPC completed the sale of HPAM and HPMAC. The results of operations for HPAM and HPMAC through the date of sale are included in the consolidated financial statements.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires HPC to make estimates and assumptions about future events that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.
Examples of reported amounts that rely on significant estimates include mortgage loans held for sale (“MLHS”), mortgage servicing rights (“MSRs”), servicing advances reserve, derivative assets, derivative liabilities, reserves for mortgage repurchases and indemnifications, and deferred tax valuation allowance considerations. Significant estimates are also used in determining the recoverability and fair value of property and equipment and goodwill.
Initial Public Offering
On February 2, 2021, the Company completed its initial public offering (“IPO”) in which the Company’s stockholders sold 7,250,000 shares of its common stock at a public offering price of $13 per share. In conjunction with the IPO, the Company’s board of directors (the “Board”) also approved a reorganization of the Company through merging Home Point Capital LP (“HPLP”) with and into the Company, with the Company as the surviving entity. Prior to the reorganization in connection with the IPO, HPLP was the direct parent of the Company (the “Parent”). As a secondary offering, there were no proceeds to the Company from the sale of the shares being sold by the selling stockholders and all related expenses for the IPO were recorded in General and administrative expenses. Upon the completion of the IPO, investment entities directly or indirectly managed by Stone Point Capital LLC, which are referred to as the Trident Stockholders, beneficially owned approximately 92% of the voting power of the Company’s common stock.
Summary of Significant Accounting Policies
Cash and cash equivalents are comprised of cash and other highly liquid investments with a maturity of three months or less. Cash equivalents are stated at cost, which approximates market value. The Company maintains its deposits in financial
72
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
institutions that are guaranteed by various programs offered by the Federal Deposit Insurance Corporation (“FDIC”). The Company monitors its positions with, and the credit quality of, the financial institutions with which it does business. The Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk.
Restricted cash is comprised of borrower escrow funds and cash reserves required by the Company’s warehouse lenders.
Mortgage loans held for sale are accounted for using the fair value option. Therefore, mortgage loans originated and intended for sale in the secondary market are reflected at fair value. Changes in the fair value are recognized in current period earnings in Gain on loans, net, within the consolidated statements of operations. Refer to “Note 3 - Mortgage Loans Held for Sale.”
Mortgage servicing rights are recognized when loans are sold and the associated servicing rights are retained. The Company maintains one class of MSR asset and has elected the fair value option. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of MSRs include, but are not limited to, discount rates and prepayment speeds. Other assumptions such as delinquencies, and cost to service are also considered. The assumptions used in the valuation model are validated on a periodic basis. The Company obtains valuations from an independent third party on a quarterly basis and records an adjustment based on this third-party valuation. Changes in the fair value are recognized in Change in fair value of mortgage servicing rights, net on the Company's consolidated statements of operations. Purchased MSRs are recorded at the fair value at the date of purchase.
Property and equipment, net include furniture, equipment, leasehold improvements, and work-in-process, which are stated at cost, net of accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets for financial reporting, which range from to seven years for furniture, computers and office equipment, and the shorter of the related lease term or useful life for leasehold improvements.
Servicing advances represent advances paid by the Company on behalf of customers to fund delinquent balances for principal, interest, property taxes, insurance premiums, and other out-of-pocket costs. Advances are made in accordance with the servicing agreements and are recoverable upon collection of future borrower payments or foreclosure of the underlying loans. The Company is exposed to losses only to the extent that the respective servicing guidelines are not followed or in the event there is a shortfall in liquidation proceeds and records a reserve against the advances when it is probable that the servicing advance will be uncollectible. The adequacy of the reserve is evaluated so that the reserve represents management’s estimate of current expected losses and is maintained at a level that management considers adequate based upon continuing assessments of collectability, current trends, and historical loss experience. The reserve for uncollectible servicing advances is recorded in Accounts receivable, net in the consolidated balance sheets and the change in the reserve is recorded in Loan servicing expense in the consolidated statements of operations. In certain circumstances, the Company may be required to remit funds on a non-recoverable basis, which are expensed as incurred. Refer to “Note 9 – Accounts Receivable, net.”
Derivative financial instruments are recorded at fair value as either Derivative assets or in Derivative liabilities on the consolidated balance sheets on a gross basis. The Company has accounted for its derivative instruments as non-designated hedge instruments and uses the derivative instruments to economically manage risk. The Company’s derivative instruments include, but are not limited to, forward mortgage-backed securities (“MBS”) sales commitments, interest rate lock commitments (“IRLCs”), and other derivative instruments used to economically hedge fluctuations in MSRs’ fair value. The impact of the Company’s Derivative assets and liabilities is reported in Change in fair value of derivative assets, net on the consolidated statements of cash flows. The Company records derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty. Refer to “Note 5 - Derivative Financial Instruments.”
Forward mortgage-backed securities sale commitments that have not settled are considered derivative financial instruments and are recognized at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized, new originations, and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments. Gain or loss on derivatives is recorded in Gain on loans, net in the consolidated statements of operations.
Interest rate lock commitments represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan.
73
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. Change in fair value of IRLC derivatives is recorded in Gain on loans, net in the consolidated statements of operations. Forward MBS sale commitments or whole loan sale commitments and options on forward contracts are used to manage the interest rate and price risk. These derivatives are not designated as hedging instruments.
Mortgage servicing rights hedges are accounted for at fair value. MSRs are subject to substantial interest rate risk as the mortgage notes underlying the servicing rights permit the borrowers to prepay the loans. Therefore, the value of MSRs generally tend to diminish in periods of declining interest rates, as prepayments increase and increase in periods of rising interest rates, as prepayments decrease. Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, and product characteristics.
The Company manages the impact that the volatility associated with changes in fair value of its MSRs has on its earnings with a variety of derivative instruments. The amount and composition of derivatives used to economically hedge the value of MSRs will depend on the Company's exposure to loss of value on the MSRs, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. This serves as a business hedge of the MSRs, providing a benefit when increased borrower refinancing activity results in higher production volumes, which would partially offset declines in the value of the MSRs thereby reducing the need to use derivatives. The benefit of this business hedge depends on the decline in interest rates required to create an incentive for borrowers to refinance their mortgage loans and lower their interest rates; however, this benefit may not be realized under certain circumstances regardless of the change in interest rates. The change in fair value of MSR hedges is recorded in Change in fair value of mortgage servicing rights in the consolidated statements of operations.
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired net of liabilities assumed. Goodwill is not amortized but rather subject to an annual impairment test at the reporting unit level. Management performs its annual goodwill impairment test on October 1, or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. The Company performed an interim impairment test during the third quarter ended September 30, 2022, which resulted in a write off of the Goodwill balance. For additional information refer to Note 6 - Goodwill.
GNMA loans eligible for repurchase are certain loans transferred to GNMA and included in GNMA MBS for which the Company has the right, but not the obligation, to repurchase the loan from the MBS, including loans delinquent more than 90 days. Once the Company has the unilateral right to repurchase the delinquent loan, the Company has effectively regained control over the loan and must re-recognize the loan on the consolidated balance sheets and establish a corresponding finance liability regardless of the Company’s intention to repurchase the loan. GNMA loans eligible for repurchase are presented at their outstanding unpaid principal balance.
Equity method investments are business entities, which the Company does not have control of, but has the ability to exercise significant influence over operating and financial policies and are accounted for using the equity method. The Company evaluates its equity method investment for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other-than-temporary, an impairment loss is recorded. The Company recognizes investments in equity method investment initially at cost and are adjusted for the Company’s share of earnings or losses, contributions or distributions. The Company held an equity method investment in Longbridge Financial, LLC (“Longbridge”), which was sold on October 3, 2022. For additional information refer to Note 21 - Shareholders’ Equity and Equity Method Investment.
Representation and warranty reserves are maintained to account for expected losses related to loans the Company may be required to repurchase or the indemnity payments the Company may have to make to purchasers. The Company originates and sells residential mortgage loans in the secondary market. When the Company sells mortgage loans, it makes customary representations and warranties to the purchasers about various characteristics of each loan, such as the ownership of the loan, the validity of the lien securing the loan, the nature and extent of underwriting standards applied, and the types of documentation being provided. These representations and warranties are generally enforceable over the life of the loan. If a defect in the origination process is identified, the Company may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, the Company has no liability to the purchaser for losses it may incur on such loans.
The representation and warranty reserve reflects management's best estimate of probable lifetime loss based on borrower performance, repurchase demand behavior, and historical loan defect experience. The reserve considers both the estimate of expected losses on loans sold during the current accounting period as well as adjustments to the Company's previous estimate of
74
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
expected losses on loans sold. Management monitors the adequacy of the overall reserve and adjusts the level of reserve, as necessary, after consideration of other qualitative factors.
At the time a loan is sold, the representation and warranty reserve is recorded as a decrease in Gain on loans, net, on the consolidated statements of operations and recorded in Other liabilities on the Company's consolidated balance sheets. Changes to the reserve are recorded as an increase or decrease to Gain on loans, net, on the consolidated statements of operations.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Gains and losses stemming from transfers reported as sales, if any, are included in Gain on loans, net within the Company’s consolidated statements of operations. In instances where a transfer of financial assets does not qualify for sale accounting, the assets remain on the Company’s consolidated balance sheets and continue to be reported and accounted for as if the transfer had not occurred.
Gain on loans, net includes the realized and unrealized gains and losses on mortgage loans, as well as the changes in fair value of all loan-related derivatives, including but not limited to, forward MBS sales commitments, IRLCs, freestanding loan-related derivative instruments and the representation and warranty reserve.
Loan fee income consists of fee income earned on all loan originations, including amounts earned related to application and underwriting fees. Fees associated with the origination and acquisition of mortgage loans are recognized when earned, which is on the date the loan is originated or acquired.
Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically less than 30 days. Loans are placed on non-accrual status and the related accrued interests is reserved when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received for loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible.
Prior to entering into a subservicing agreement with ServiceMac, the Company had a fiduciary responsibility for servicing accounts related to customer escrow funds and custodial funds. The Company receives certain benefits from these deposits, as allowable under federal and state laws and regulations, or as agreed to under certain subservicing agreements. Interest income is recorded as earned and included in the consolidated statements of operations within Interest income.
Loan servicing fees involve the servicing of residential mortgage loans on behalf of an investor. Total Loan servicing fees include servicing and other ancillary servicing revenue earned for servicing mortgage loans owned by investors. Servicing fees received for servicing mortgage loans owned by investors are based on a stipulated percentage of the outstanding monthly principal balance of such loans, or the difference between the weighted-average yield received on the mortgage loans and the amount paid to the investor, less guaranty fees and interest on curtailments (reduction of principal balance). Loan servicing fees are receivable only out of interest collected from mortgagors and are recorded as income when earned, which is generally upon collection. Late charges and other miscellaneous fees collected from mortgagors are also recorded as income when collected.
Other income consists of income that is dissimilar in nature to revenues the Company earns from its ongoing central operations.
Equity-based compensation consists of stock options, restricted stock units, and performance stock units. Expense is recognized at the fair value of equity awards on the date of grant within Compensation and benefits expense in the Company’s consolidated statements of operations on a straight-line basis over the requisite service period. Estimates of future forfeitures are made at the grant date and revised, if necessary, in later periods if subsequent information indicates actual forfeitures will differ from those estimates. Refer to “Note 19 - Equity-based Compensation”.
Debt issuance costs are recorded for the Company’s warehouse lines of credit and other debt. Debt issuance costs are amortized on a straight-line basis, which approximates the effective interest method, during the revolving period of the warehouse facilities or during the total term of the term debt agreement. Amortization of debt issuance costs is recorded in the consolidated statements of operations within Interest expense.
Income taxes are accounted for under the asset and liability method. Deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences, using the tax rates expected to be in effect when the temporary differences reverse. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are also recognized for tax attributes such as net operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
75
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognized tax benefits from uncertain income tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authority based on the technical merits of the position. An uncertain income tax position that meets the “more likely than not” recognition threshold is then measured to determine the amount of the benefit to recognize.
Recently Adopted Accounting Standards
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, eliminates particular exceptions related to the method for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This amendment is effective for annual periods beginning after December 15, 2021. The Company adopted ASU 2019-12 as of January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, subject to meeting certain criteria, provides optional expedients and exceptions related to applying U.S. GAAP to certain contract modifications and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another rate that is expected to be discontinued. This guidance was effective upon issuance and allows application to contract changes as early as January 1, 2020. Subsequently, in 2021, the FASB issued ASU 2021-01, Reference Rate Reform, to further clarify and expand certain aspects of Topic 848. The Company adopted ASU 2020-04 and ASU 2021-01 in September 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
As of December 31, 2022, there have been no new accounting pronouncements recently issued but not yet adopted that are reasonably likely to have a material impact on the Company’s consolidated financial statements.
Note 3 - Mortgage Loans Held for Sale
The Company sells its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. The following presents MLHS at fair value, by type:
| December 31, 2022 | |||||||||||||||||
Unpaid Principal | Fair Value Adjustment | Total Fair Value | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Conventional(a) | $ | 425,160 | $ | (31,639) | $ | 393,521 | |||||||||||
Government(b) | 254,800 | (5,664) | 249,136 | ||||||||||||||
Reverse(c) | 355 | (19) | 336 | ||||||||||||||
| Total | $ | 680,315 | $ | (37,322) | $ | 642,993 | |||||||||||
| December 31, 2021 | |||||||||||||||||
Unpaid Principal | Fair Value Adjustment | Total Fair Value | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Conventional(a) | $ | 4,206,099 | $ | 79,389 | $ | 4,285,488 | |||||||||||
Government(b) | 799,579 | 21,902 | 821,481 | ||||||||||||||
Reverse(c) | 275 | (83) | 192 | ||||||||||||||
| Total | $ | 5,005,953 | $ | 101,208 | $ | 5,107,161 | |||||||||||
(a) Conventional includes mortgage loans meeting the eligibility requirements to be sold to FNMA or FHLMC.
(b) Government includes mortgage loans meeting the eligibility requirements to be sold to GNMA (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agricultural mortgage loans).
(c) Reverse mortgages presented in MLHS on the consolidated balance sheets as a result of a repurchase
76
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
MLHS on nonaccrual status had $21.8 million and $26.1 million of unpaid principal balances and $16.7 million and $21.6 million estimated fair value as of December 31, 2022 and 2021, respectively.
The Company had $0.6 billion in unpaid principal balance pledged to secure its mortgage warehouse line of credit as of December 31, 2022.
The following presents a reconciliation of the changes in MLHS to the amounts presented on the consolidated statements of cash flows:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Fair value at beginning of period | $ | 5,107,161 | $ | 3,301,694 | |||||||
Mortgage loans originated and purchased(a) | 28,622,069 | 100,217,789 | |||||||||
Proceeds from sales and payments received(a) | (32,276,858) | (97,870,548) | |||||||||
| Change in fair value | (138,530) | (41,824) | |||||||||
Loss on sale(a) | (670,849) | (499,950) | |||||||||
| Fair value at end of period | $ | 642,993 | $ | 5,107,161 | |||||||
(a) This line as presented on the consolidated statements of cash flows excludes originated mortgage servicing rights and MSR hedging.
Note 4 - Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold.
MSRs give the Company the contractual right to receive service fees and other remuneration in exchange for performing loan servicing functions on behalf of investors in mortgage loans and securities. Upon sale of a mortgage loan for which the Company retains the underlying servicing, an MSR asset is capitalized, which represents the current fair value of the future net cash flows that are expected to be realized for performing servicing activities.
The following presents an analysis of the changes in capitalized MSRs:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Balance at beginning of period | $ | 1,525,103 | $ | 748,457 | |||||||
| MSRs originated | 475,469 | 1,052,012 | |||||||||
| MSRs purchased | 24,738 | 43,056 | |||||||||
| MSRs sold | (849,729) | (238,265) | |||||||||
| Changes in valuation model inputs | 358,782 | 227,401 | |||||||||
| Change due to cash payoffs and principal amortization | (131,821) | (307,558) | |||||||||
| Balance at end of period | $ | 1,402,542 | $ | 1,525,103 | |||||||
77
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents the Company’s total capitalized mortgage servicing portfolio (based on the unpaid principal balance (“UPB”) of the underlying mortgage loans):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Ginnie Mae | $ | 4,357,853 | $ | 5,602,582 | |||||||
| Fannie Mae | 47,198,689 | 70,174,987 | |||||||||
| Freddie Mac | 37,082,471 | 52,547,588 | |||||||||
| Other | 29,620 | 34,417 | |||||||||
| Total | $ | 88,668,633 | $ | 128,359,574 | |||||||
The following presents the key weighted average assumptions used in determining the fair value of the Company’s MSRs:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Discount rate | 11.23 | % | 8.68 | % | |||||||
| Weighted average prepayment speeds | 5.44 | % | 8.30 | % | |||||||
The key assumptions used to estimate the fair value of the MSRs are discount rate and the Conditional Prepayment Rate (“CPR” or “prepayment speeds”). An increase in prepayment speeds generally has an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase. A decrease in prepayment speeds generally has a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.
The following presents the impact on the fair value of the Company’s MSR portfolio when applying the following hypothetical data points:
| Discount Rate | Prepayment Speeds | ||||||||||||||||||||||
| 100 BPS Adverse Change | 200 BPS Adverse Change | 10% Adverse Change | 20% Adverse Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| December 31, 2022 | $ | (66,658) | $ | (127,263) | $ | (36,353) | $ | (70,814) | |||||||||||||||
| December 31, 2021 | $ | (66,885) | $ | (128,172) | $ | (56,278) | $ | (108,621) | |||||||||||||||
The following presents information related to loans serviced:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Total unpaid principal balance | $ | 89,280,085 | $ | 133,889,085 | |||||||
| Loans 30-89 days delinquent | 824,348 | 656,012 | |||||||||
| Loans delinquent 90 or more days or in foreclosure | 555,293 | 777,650 | |||||||||
78
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents components of Loan servicing fees as reported in the Company’s consolidated statements of operations:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Contractual servicing fees | $ | 266,050 | $ | 312,181 | |||||||
| Late fees | 2,394 | 5,070 | |||||||||
| Other | (3,169) | 14,131 | |||||||||
| Total | $ | 265,275 | $ | 331,382 | |||||||
The Company held for its customers $5.1 million and $19.9 million of escrow funds recorded in Other liabilities in the consolidated balance sheets as of December 31, 2022 and 2021, respectively.
The Company reported $82.2 million loss and a $37.0 million gain on MSR sales in the Change in fair value of mortgage servicing rights in the consolidated statement of operations for the year ended December 31, 2022 and 2021, respectively. The Company reclassified $37.0 million gain on MSR sales from Other income to the Change in fair value of mortgage servicing rights on the consolidated statement of operations for the year ended December 31, 2021.
The following presents the components of Change in fair value of MSRs:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| $ | (131,821) | $ | (307,558) | ||||||||
| 358,782 | 227,401 | ||||||||||
| Economic hedging results | (242,487) | (33,699) | |||||||||
| (Loss) gain on MSR sales | (82,163) | 37,025 | |||||||||
| Change in fair value of MSRs | $ | (97,689) | $ | (76,831) | |||||||
Note 5 - Derivative Financial Instruments
The following presents the outstanding notional amounts and fair values of derivative instruments not designated as hedging instruments:
| December 31, 2022 | |||||||||||||||||
| Notional Value | Derivative Asset | Derivative Liability | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Forward sale contracts | $ | 819,900 | $ | 6,107 | $ | 1,200 | |||||||||||
| Interest rate lock commitments | 598,970 | 2,231 | 2,504 | ||||||||||||||
| Forward purchase contracts | 61,300 | — | 400 | ||||||||||||||
| Treasury futures purchase contracts | 897,500 | — | — | ||||||||||||||
| Margin | 17,273 | 6 | |||||||||||||||
| Total | $ | 25,611 | $ | 4,110 | |||||||||||||
79
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| December 31, 2021 | |||||||||||||||||
Notional Value | Derivative Asset | Derivative Liability | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Forward sale contracts | $ | 7,819,802 | $ | 6,969 | $ | 8,242 | |||||||||||
| Interest rate lock commitments | 6,068,763 | 29,887 | 2,843 | ||||||||||||||
| Forward purchase contracts | 1,521,000 | 3,031 | 281 | ||||||||||||||
| Interest rate swap futures contracts | 1,540,000 | 111 | 5,662 | ||||||||||||||
| Treasury futures purchase contracts | 4,720,000 | — | — | ||||||||||||||
| Margin | 44,387 | 9,708 | |||||||||||||||
| Total | $ | 84,385 | $ | 26,736 | |||||||||||||
The following presents the recorded gain/(loss) on derivative financial instruments:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Forward sale contracts | $ | 5,956 | $ | 58,530 | |||||||
| Interest rate lock commitments | (26,880) | (235,988) | |||||||||
| Forward purchase contracts | (2,926) | (1,669) | |||||||||
| Interest rate swap and Treasury futures purchase contracts | (196,453) | (20,632) | |||||||||
Counterparty agreements for forward commitments contain master netting agreements. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. The Company incurred no credit losses due to nonperformance of any of its counterparties for the years ended December 31, 2022 and 2021.
The following presents a summary of derivative assets and liabilities and related netting amounts:
| December 31, 2022 | |||||||||||||||||||||||
Gross Amounts Not Offset in the Statement of Financial Position(1) | |||||||||||||||||||||||
| Gross Amount of Assets (Liabilities) Recognized | Financial Instruments | Cash Collateral | Net Amount | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Derivatives subject to master netting agreements: | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Forward sale contracts | $ | 6,107 | $ | (1,062) | $ | (3,790) | $ | 1,255 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Forward sale contracts | (1,200) | 1,062 | 138 | — | |||||||||||||||||||
| Forward purchase contracts | (400) | — | 400 | — | |||||||||||||||||||
| Derivatives not subject to master netting agreements: | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Interest rate lock commitments | 2,231 | — | — | 2,231 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate lock commitments | (2,504) | — | — | (2,504) | |||||||||||||||||||
| Total derivatives | |||||||||||||||||||||||
| Assets | $ | 8,338 | $ | (1,062) | $ | (3,790) | $ | 3,486 | |||||||||||||||
| Liabilities | $ | (4,104) | $ | 1,062 | $ | 538 | $ | (2,504) | |||||||||||||||
80
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| December 31, 2021 | ||||||||||||||||||||||||||
Gross Amounts Not Offset in the Statement of Financial Position(1) | ||||||||||||||||||||||||||
| Gross Amount of Assets (Liabilities) Recognized | Financial Instruments | Cash Collateral | Net Amount | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||
| Derivatives subject to master netting agreements: | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Forward sales contracts | $ | 6,969 | $ | (4,886) | $ | (1,272) | $ | 811 | ||||||||||||||||||
| Forward purchase contracts | 3,031 | (258) | (2,627) | 146 | ||||||||||||||||||||||
| Interest rate swap futures contracts | 111 | (111) | — | — | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Forward sale contracts | (8,242) | 4,886 | 1,252 | (2,104) | ||||||||||||||||||||||
| Forward purchase contracts | (281) | 258 | — | (23) | ||||||||||||||||||||||
| Interest rate swap futures contracts | (5,662) | 111 | 5,551 | — | ||||||||||||||||||||||
| Derivatives not subject to master netting agreements: | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Interest rate lock commitments | 29,887 | — | — | 29,887 | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate lock commitments | (2,843) | — | — | (2,843) | ||||||||||||||||||||||
| Total derivatives | ||||||||||||||||||||||||||
| Assets | $ | 39,998 | $ | (5,255) | $ | (3,899) | $ | 30,844 | ||||||||||||||||||
| Liabilities | $ | (17,028) | $ | 5,255 | $ | 6,803 | $ | (4,970) | ||||||||||||||||||
(1) Amounts disclosed for collateral received from or posted to the same counterparty includes cash up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received from or posted to the same counterparty may exceed the amounts presented. The amounts of collateral received from or posted to counterparty are presented as margin and included as a component of either Derivative assets or Other liabilities in the Balance Sheet.
For information on the determination of fair value, refer to Note 16 - Fair Value Measurements.
Note 6 - Goodwill
The Company performs its annual goodwill impairment analysis as of October 1 or more frequently if events and circumstances indicate that goodwill may be impaired. The Company compares the fair value of each reporting unit with its carrying amount, including goodwill. If the quantitative assessment indicates that the reporting unit’s carrying amount exceeds its fair value, the Company recognizes an impairment charge up to this amount but not to exceed the total carrying value of the reporting unit’s goodwill.
The Company performed an interim impairment test during the third quarter ended September 30, 2022, due to the impact of rising interest rates on the mortgage industry and the Company’s recent stock performance. The Company used the market-based valuation approach to determine fair value of its reporting units and compare against the carrying value of the reporting units, and the fair value was measured using inputs classified as Level 3 in the fair value hierarchy. Based upon the results of this evaluation, the Company recorded $10.8 million goodwill impairment charges in Corporate Impairment of goodwill, driven predominantly by a significant decline in our market capitalization. The Company wrote off the $7.0 million and $3.8 million goodwill asset for the Origination and Servicing segments, respectively, and has no remaining goodwill balance as of December 31, 2022.
81
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 7 - Other Assets And Other Liabilities
The following presents the principal categories of Other assets:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Prepaid expenses and other | $ | 15,215 | $ | 23,418 | |||||||
| Right of use lease asset | 8,269 | 12,039 | |||||||||
| Foreclosure and real estate owned | 12,682 | 7,771 | |||||||||
| Total | $ | 36,166 | $ | 43,228 | |||||||
The Company reclassified $14.4 million Servicing sale receivable from Other assets to Accounts receivable, net on the consolidated balance sheet as of December 31, 2021, to conform to the current period presentation.
The following presents the principal categories of Other liabilities:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Escrow liability | $ | 5,088 | $ | 19,920 | |||||||
| Repurchase reserves | 26,605 | 24,577 | |||||||||
| Right of use lease liabilities, net | 10,600 | 15,562 | |||||||||
| Unclaimed property | 14,811 | 15,641 | |||||||||
| Other | 732 | 888 | |||||||||
| Total | $ | 57,836 | $ | 76,588 | |||||||
Note 8 - Property and Equipment, net
The following presents the principal categories of Property and equipment, net:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Computer and telephone | $ | 18,569 | $ | 31,187 | |||||||
| Office furniture and equipment | 2,281 | 3,027 | |||||||||
| Leasehold improvements | 5,464 | 5,537 | |||||||||
| Work-in-process for internal use software | 1,772 | 421 | |||||||||
| Gross property and equipment | 28,086 | 40,172 | |||||||||
| Less accumulated depreciation | (16,426) | (18,280) | |||||||||
| Total | $ | 11,660 | $ | 21,892 | |||||||
Depreciation expense of $10.7 million and $10.1 million was recognized within Depreciation and amortization expense in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively.
82
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 9 – Accounts Receivable, net
The following presents principal categories of Accounts receivable, net:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Servicing receivable-general | $ | 14,943 | $ | 359 | |||||||
| Pair off receivable | 619 | 3,738 | |||||||||
| Servicing sale receivable | 29,503 | 14,364 | |||||||||
| Servicing advance receivable | 77,257 | 71,884 | |||||||||
| Servicing advance reserve | (3,355) | (4,207) | |||||||||
| Agency receivable | 595 | 20,184 | |||||||||
| Income tax receivable | 1,902 | 11,181 | |||||||||
| Warehouse receivable | — | 1,934 | |||||||||
| Interest on servicing deposits | 302 | 464 | |||||||||
| Other | 2,925 | 9,191 | |||||||||
| Total | $ | 124,691 | $ | 129,092 | |||||||
As part of managing the Company’s servicing advances, servicing advance reserve is recognized with management’s estimate of current expected losses and maintained at a level that management considers adequate based upon continuing assessments of collectability, historical loss experience, current trends, and reasonable and supportable forecasts.
The following presents changes to the servicing advance reserve:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Servicing advance reserve at beginning of period | $ | (4,207) | $ | (8,380) | |||||||
| Additions | (2,620) | (1,975) | |||||||||
| Charge-offs | 3,472 | 6,148 | |||||||||
| Servicing advance reserve at end of period | $ | (3,355) | $ | (4,207) | |||||||
Note 10 - Warehouse Lines of Credit
The Company maintains mortgage warehouse lines of credit arrangements with various financial institutions, primarily to fund the origination of mortgage loans. The Company held mortgage funding arrangements with eight and eleven separate financial institutions with a total maximum borrowing capacity of $2.8 billion and $7.5 billion as of December 31, 2022 and 2021, respectively. These funding arrangements are primarily uncommitted. The Company had $2.3 billion and $2.8 billion of unused capacity under its warehouse lines of credit as of December 31, 2022 and 2021, respectively.
The following presents the amounts outstanding and maturity dates under the Company’s various mortgage funding arrangements:
83
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Maturity Date | December 31, 2022 | ||||||||||
| (dollars in thousands) | |||||||||||
$450 million Warehouse Facility(a) | August 2023 | $ | 149,513 | ||||||||
$200 million Warehouse Facility(b) | September 2023 | 41,309 | |||||||||
$200 million Warehouse Facility(c) | September 2023 | 32,011 | |||||||||
$200 million Warehouse Facility(d) | March 2023 | 45,284 | |||||||||
$50 million Warehouse Facility(e) | March 2023 | 41,928 | |||||||||
$1,200 million Warehouse Facility(f) | May 2024 | 113,136 | |||||||||
$88.5 million Warehouse Facility | Evergreen | 8,050 | |||||||||
$400 million Warehouse Facility(g) | Evergreen | 65,250 | |||||||||
| Gestation Warehouse Facility | Evergreen | — | |||||||||
| Total | $ | 496,481 | |||||||||
(a) Subsequent to December 31, 2021, the maturity of this Warehouse Facility has been extended from September 2022 to August 2023.
(b) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $500 million to $200 million. The maturity of this Warehouse Facility has been extended from September 2022 to September 2023.
(c) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $500 million to $200 million. The maturity of this Warehouse Facility has been extended from September 2022 to September 2023.
(d) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $500 million to $200 million. The maturity of this Warehouse Facility has been extended from March 2022 to March 2023. In February 2023, the maturity was extended to April 2023. Refer to Note 27 – Subsequent Events
(e) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $500 million to $250 million as of June 30, 2022 and $50 million as of September 30, 2022.
(f) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $1,500 million to $1,200 million. The maturity of this Warehouse Facility has been extended from May 2023 to May 2024.
(g) Subsequent to December 31, 2021, the capacity of this Warehouse Facility has been reduced from $550 million to $400 million.
| Maturity Date(h) | Balance at December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
$1,200 million Warehouse Facility(i) | February 2022 | $ | 604,421 | ||||||||
$500 million Warehouse Facility(j) | March 2022 | 335,509 | |||||||||
$500 million Warehouse Facility | March 2022 | 381,087 | |||||||||
$1,000 million Warehouse Facility(k) | August 2022 | 716,802 | |||||||||
$450 million Warehouse Facility | September 2022 | 277,060 | |||||||||
$500 million Warehouse Facility | September 2022 | 339,521 | |||||||||
$500 million Warehouse Facility | September 2022 | 375,381 | |||||||||
$500 million Warehouse Facility | March 2023 | 309,898 | |||||||||
$1,500 million Warehouse Facility | May 2023 | 731,132 | |||||||||
$88.5 million Warehouse Facility | Evergreen | 11,409 | |||||||||
$550 million Warehouse Facility | Evergreen | 363,959 | |||||||||
| Gestation Warehouse Facility | Evergreen | 179,360 | |||||||||
Early Funding(l) | 93,119 | ||||||||||
| Total | $ | 4,718,658 | |||||||||
(h) Maturity Dates in this table are as of December 31, 2021. The Maturity Dates as of December 31, 2022 are reflected in the table above.
(i) The warehouse facility was terminated on October 7, 2022.
(j) The warehouse facility was terminated on September 23, 2022.
(k) The warehouse facility expired in August 2022.
84
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(l) In addition to warehouse facilities, the Company is an approved lender for early funding facilities with Fannie Mae through its As Soon As Pooled (“ASAP”) program and Freddie Mac through its Early Funding (“EF”) program. From time to time, the Company enters into agreements to deliver certified pools of mortgage loans and receive funding in exchange for such pools. All mortgage loans delivered under these programs must adhere to a set of eligibility criteria. Early funding programs with Fannie Mae and Freddie Mac do not have stated expiration dates or maximum capacities.
The Company’s warehouse facilities’ variable interest rates are calculated using an index rate generally tied to a Secured Overnight Financing Rate (“SOFR”); plus applicable interest rate margins, with varying interest rate floors. The weighted average interest rate for the Company’s warehouse facilities was 2.91% and 2.36% for the years ended December 31, 2022 and 2021, respectively. The Company’s borrowings are secured by MLHS at fair value.
The Company’s warehouse facilities require the maintenance of certain financial covenants relating to net worth, profitability, liquidity, and ratio of indebtedness to net worth among others. The Company’s warehouse lines that contain profitability covenants were amended to allow for a net loss for the three months ended December 31, 2022. The Company was in compliance with all warehouse facility covenants as of December 31, 2022.
Note 11 – Term Debt and Other Borrowings, net
The following presents the Company’s term debt and other borrowings, net:
| December 31, | |||||||||||||||||||||||
| Maturity Date | Collateral | 2022 | 2021 | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
$1.0 billion MSR Facility | May 2025 | MSRs | $ | 450,000 | $ | 685,000 | |||||||||||||||||
$550 million Senior Notes(a) | February 2026 | Unsecured | 500,000 | 550,000 | |||||||||||||||||||
$85 million Servicing Advance Facility(b), (c) | May 2023 | Servicing advances | — | 3,250 | |||||||||||||||||||
$35 million Operating Line of Credit(c) | May 2023 | Mortgage loans | 1,000 | 1,000 | |||||||||||||||||||
| Gross | 951,000 | 1,239,250 | |||||||||||||||||||||
| Debt issuance costs | (8,917) | (12,726) | |||||||||||||||||||||
| Total | $ | 942,083 | $ | 1,226,524 | |||||||||||||||||||
(a) The Company repurchased and retired $50 million of outstanding Senior Notes during the year ended December 31, 2022.
(b) Effective June 9, 2022, the capacity of the Servicing Advance Facility was reduced from $90 million to $85 million.
(c) Subsequent to December 31, 2021, the maturity was extended from May 2022 to May 2023.
The Company maintains a $1.0 billion MSR financing facility (the “MSR Facility”). On April 29, 2022, the Company entered into an amendment to the MSR facility that, among other things, reduced the committed capacity from $650.0 million to $500 million. The amendment also replaced the LIBOR based interest rate with SOFR, plus the applicable interest rate margin, with advance rates generally ranging from 62.5% to 72.5% of the fair value of the underlying MSRs. The MSR Facility is collateralized by the Company’s FNMA, FHLMC, and GNMA MSRs. The MSR Facility has a three-year revolving period ending on May 4, 2024 followed by a one-year period during which the balance drawn must be repaid and no further amounts may be drawn down, which ends on May 20, 2025. The MSR Facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. The Company was in compliance with all covenants under the MSR Facility as of December 31, 2022.
In January 2021, the Company issued $550.0 million aggregate principal amount of its 5.0% Senior Notes due 2026 (the “Senior Notes”) in a private placement transaction. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than HPAM and HPMAC. The Senior Notes bear interest at a rate of 5.0% per annum, payable semi-annually in arrears. The Senior Notes will mature on February 1, 2026. The company repurchased and retired $50.0 million of outstanding Senior Notes during the second quarter of 2022.
The Indenture governing the Senior Notes contains covenants and restrictions that, among other things and subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries to (i) incur additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease or otherwise dispose of all or substantially all of their assets.
85
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The Senior Notes had a carrying value of $500 million and $550 million and an estimated fair value of $343 million and $506 million as of December 31, 2022 and 2021, respectively. The valuation of the Senior Notes was determined based on observable trading information considered Level 2 inputs under the fair value hierarchy. For the Company’s other long-term secured borrowings not recorded at fair value, the carrying value approximated fair value due to the variable interest rate on the borrowings and the repricing of collateral.
The Company has a $85.0 million servicing advance facility, which is collateralized by all of the Company’s servicing advances. The facility carries an interest rate of Term SOFR plus a margin and an advance rate ranging from 85.0-95.0%. The servicing advance facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. The Company was in compliance with all covenants under the servicing advance facility as of December 31, 2022.
The Company also has a $35.0 million operating line, with an interest rate based on the Prime Rate.
The Company had total available capacity of $391.8 million and $67.4 million for its MSR Facility and servicing advance facility, respectively as of December 31, 2022. The Company has no available capacity for its operating line of credit as of December 31, 2022,
The following presents the Company’s debt maturity schedule for the operating line of credit, MSR Facility and the Senior Notes:
| (dollars in thousands) | ||||||||
| 2023 | $ | 1,000 | ||||||
| 2024 | 300,000 | |||||||
| 2025 | 150,000 | |||||||
| 2026 | 500,000 | |||||||
| 2027 and thereafter | — | |||||||
| Total | $ | 951,000 | ||||||
Note 12 - Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company also considers whether its service arrangements include the right to control the use of the asset. The initial measurement of the Right-of-use (“ROU”) asset and liability is based on the present value of future lease payments over the lease term at lease commencement date. To determine the present value of lease payments, the Company uses its incremental borrowing rate based on the estimated rate of interest for a fully collateralized fully amortizing borrowing over a similar term of the lease payments at commencement date, since the leases generally do not have a readily determinable implicit discount rates. The Company applies judgement in assessing factors such as Company-specific credit risk, lease term, nature and quality of the underlying collateral, and the economic environment in determining the lease-specific borrowing rate.
The Company leases office space and equipment under non-cancelable operating leases expiring through 2029, some of which include options to extend for up to , by way of two five-year terms, and some of which include options to terminate the leases within one year. However, the Company is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not considered in the lease term or in the determination of the ROU asset and liability balances. The Company’s lease population does not contain any material restrictive covenants. Operating lease costs amounted to $4.5 million and $6.8 million for the years ended December 31, 2022 and 2021, respectively. Operating lease costs are recorded on a straight-line basis over the lease term in General and administrative expense in the consolidated statements of operations. Short-term lease costs were insignificant as of December 31, 2022 and 2021. The Company recorded $1.0 million and $1.5 million sublease income in Other income in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively.
The Company has leases with variable payments, most commonly in the form of Common Area Maintenance (“CAM”) and tax charges which are based on actual costs incurred. These variable payments were excluded from the determination of the ROU asset and lease liability balances since they are not fixed or in-substance fixed payments. Variable payments are expensed as incurred.
86
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents supplemental cash flow information related to leases:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Cash paid for amounts included in measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 5,790 | $ | 6,521 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | — | $ | 881 | |||||||
The following presents supplemental balance sheet information related to leases:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Operating leases: | |||||||||||
| $ | 8,269 | $ | 12,039 | ||||||||
| $ | 10,600 | $ | 15,562 | ||||||||
| Weighted average remaining lease term in years: | 3.95 | 4.21 | |||||||||
| Weighted average discount rate: | 5.22 | % | 5.08 | % | |||||||
Operating lease ROU assets are recorded within Other assets in the consolidated balance sheet. The operating lease ROU liabilities are recorded within Other liabilities in the consolidated balance sheet.
The following presents maturities of lease liabilities:
| (dollars in thousands) | |||||
| 2023 | $ | 3,515 | |||
| 2024 | 3,294 | ||||
| 2025 | 2,146 | ||||
| 2026 | 781 | ||||
| 2027 | 804 | ||||
| Thereafter | 1,251 | ||||
| Total lease payments | 11,791 | ||||
| Less: imputed interest | (1,191) | ||||
| Total | $ | 10,600 | |||
Note 13 - Commitments and Contingencies
Commitments to Extend Credit
The Company’s IRLCs expose the Company to market risk if interest rates change and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the customer does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans were $0.6 billion and $6.1 billion as of December 31, 2022 and 2021, respectively.
Litigation
The Company is subject to various legal proceedings arising out of the ordinary course of business. There were no current or pending claims against the Company which are expected to have a material impact on the Company's consolidated balance sheets, statements of operations, or cash flows.
Regulatory Contingencies
87
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those made as part of regulatory oversight of the Company’s mortgage origination, servicing, and financing activities. Such audits and examinations could result in additional actions, penalties, or fines by state or federal governmental bodies, regulators, or the courts with respect to the Company’s mortgage origination, servicing, and financing activities, which may be applicable generally to the mortgage industry or to the Company in particular. The Company did not pay any material penalties or fines during the years ended December 31, 2022 or 2021 and is not currently required to pay any such penalties or fines.
Note 14 - Regulatory Net Worth Requirements
The Company is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development (“HUD”), which govern non-supervised, direct endorsement mortgagees. The Company is also subject to regulatory capital requirements administered by Ginnie Mae, Fannie Mae, and Freddie Mac, which govern issuers of Ginnie Mae, Fannie Mae, and Freddie Mac securities. Additionally, the Company is required to maintain minimum net worth requirements for many of the states in which it sells and services loans. Each state has its own minimum net worth requirement; these range from $0 to $1,000, depending on the state.
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could (i) remove the Company’s ability to sell and service loans to, or on behalf of, the Agencies and (ii) have a direct material effect on the Company’s consolidated financial statements. In accordance with the regulatory capital guidelines, the Company must meet specific quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Further, changes in regulatory and accounting standards, as well as the impact of future events on the Company’s results, may significantly affect the Company’s net worth adequacy.
The Company is subject to the following minimum net worth, minimum capital ratio, and minimum liquidity requirements established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 25 basis points of outstanding UPB for total loans serviced.
•Adjusted/Tangible Net Worth, as defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 35 basis points of the issuer’s total single-family effective outstanding obligations.
•Adjusted/Tangible Net Worth, as defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
Minimum Capital Ratio
For Fannie Mae, Freddie Mac and Ginnie Mae, the Company is also required to maintain a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6.0%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
•3.5 basis points of total Agency servicing.
•Incremental 200 basis points of total nonperforming Agency servicing, measured as 90 plus day delinquencies, in excess of 6.0% of the total Agency servicing UPB.
•Allowable assets for liquidity may include: cash and cash equivalents (unrestricted); available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of Government-Sponsored Enterprises (“GSEs”), US Treasury Obligations); and unused/available portion of committed servicing advance lines.
88
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The minimum liquidity requirement for Ginnie Mae is defined as follows:
•Maintain liquid assets equal to the greater of $1.0 million or 10 basis points of the Company’s outstanding single-family MBS.
The most restrictive of the requirements require the Company to maintain a minimum adjusted net worth balance of $225.7 million and $326.3 million as of December 31, 2022 and 2021, respectively.
The Company is in compliance with all minimum requirements to which it was subject as of December 31, 2022.
Note 15 - Representation and Warranty Reserve
The majority of the Company’s loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. Historically, the Company received relief of certain repurchase obligations on loans sold to FNMA or FHLMC by taking advantage of their repurchase alternative program. This program provided the Company with the ability, in certain instances, to pay a fee to FNMA or FHLMC, in lieu of being obligated to repurchase the loan. During September and October 2022, FNMA and FHMC notified the Company that they will not provide repurchase obligation relief through the repurchase alternative program beginning in the fourth quarter of 2022 until further notice.
The Company has included considerations that it may receive relief of certain representations and warranty obligations on loans sold to FNMA or FHLMC on or after January 1, 2013 if FNMA or FHLMC satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to FNMA or FHLMC, respectively. The current UPB of loans sold by the Company represents the maximum potential exposure to repurchases related to representations and warranties. Reserve levels are a function of expected losses based on historical experience and loan volume. While the amount of repurchases is uncertain, the Company considers the liability to be appropriate.
The following presents the activity of the outstanding repurchase reserve:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Repurchase reserve, at beginning of period | $ | 24,577 | $ | 18,080 | |||||||
| Additions | 52,799 | 12,147 | |||||||||
| Charge-offs | (50,771) | (5,650) | |||||||||
| Repurchase reserves, at end of period | $ | 26,605 | $ | 24,577 | |||||||
Note 16 - Fair Value Measurements
The Company uses fair value measurements to record certain assets and liabilities at fair value on a recurring basis, such as MSRs, derivatives, MLHS and Early buyout loans (“EBOs”). The Company has elected fair value accounting for MLHS and MSRs to more closely align the Company’s accounting with its interest rate risk strategies without having to apply the operational complexities of hedge accounting.
89
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
| Level Input: | Input Definition: | |||||||
| Level 1 | Unadjusted, quoted prices in active markets for identical assets or liabilities. | |||||||
| Level 2 | Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others. | |||||||
| Level 3 | Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity), unobservable inputs may be used. Unobservable inputs reflect the Company's own assumptions about the factors that market participants would use in pricing the asset or liability and are based on the best information available in the circumstances. | |||||||
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the financial statements.
Fair Value of Certain Assets and Liabilities
The following describes the methods used in estimating the fair values of certain assets and liabilities:
Mortgage loans held for sale. The majority of the Company's MLHS at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of the Company's MLHS consist of loans repurchased from the GSEs that have subsequently been deemed to be non-saleable to GSEs and Ginnie Mae when certain representations and warranties are breached. These loans, however, are saleable to other entities and are classified on the consolidated balance sheets as Mortgage loans held for sale. These repurchased loans are considered Level 3 and are valued based on recent sales prices of similar loans.
Interest rate lock commitments. The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the IRLC. The average pull-through rate for IRLCs was 77.5% and 86.1% as of December 31, 2022 and 2021, respectively. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.
Forward sales and purchase commitments. The Company treats forward mortgage-backed securities purchase and sale commitments that have not settled as derivatives and recognizes them at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized and new originations and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. The Company estimates the fair value of forward commitments based on quoted MBS prices. These derivatives are classified as Level 2.
Interest rate swap futures contracts. The Company uses options on swap contracts to offset changes in the fair value of MSRs. The Company estimates the fair value of these MSR-related derivatives using quoted prices for similar instruments. These derivatives are classified as Level 2.
Treasury futures purchase contracts. The Company uses Treasury futures contracts to offset changes in the fair value of MSRs. The Company estimates fair value of these MSR-related derivatives using quoted market prices. These derivatives are classified as Level 1.
90
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Mortgage servicing rights. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The Company obtains valuations from an independent third party on a quarterly basis to support the reasonableness of the fair value estimate. Key assumptions used in measuring the fair value of MSRs include, but are not limited to, discount rates and prepayment speeds. Other assumptions such as delinquencies, and cost to service are also considered resulting in a Level 3 classification.
The following presents the major categories of assets and liabilities measured at fair value on a recurring basis:
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Mortgage loans held for sale | $ | — | $ | 629,108 | $ | 13,885 | $ | 642,993 | |||||||||||||||
| Interest rate lock commitments | — | — | 2,231 | 2,231 | |||||||||||||||||||
| Forward sale contracts | — | 6,107 | — | 6,107 | |||||||||||||||||||
| Mortgage servicing rights | — | — | 1,402,542 | 1,402,542 | |||||||||||||||||||
| Total | $ | — | $ | 635,215 | $ | 1,418,658 | $ | 2,053,873 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate lock commitments | $ | — | $ | — | $ | 2,504 | $ | 2,504 | |||||||||||||||
| Forward sale contracts | — | 1,200 | — | 1,200 | |||||||||||||||||||
| Forward purchase contracts | — | 400 | — | 400 | |||||||||||||||||||
| Total | $ | — | $ | 1,600 | $ | 2,504 | $ | 4,104 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Mortgage loans held for sale | $ | — | $ | 5,086,943 | $ | 20,218 | $ | 5,107,161 | |||||||||||||||
| Interest rate lock commitments | — | — | 29,887 | 29,887 | |||||||||||||||||||
| Forward sales contracts | — | 6,969 | — | 6,969 | |||||||||||||||||||
| Forward purchase contracts | — | 3,031 | — | 3,031 | |||||||||||||||||||
| Interest rate swap futures contracts | — | 111 | — | 111 | |||||||||||||||||||
| Mortgage servicing rights | — | — | 1,525,103 | 1,525,103 | |||||||||||||||||||
| Total | $ | — | $ | 5,097,054 | $ | 1,575,208 | $ | 6,672,262 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate lock commitments | $ | — | $ | — | $ | 2,843 | $ | 2,843 | |||||||||||||||
| Forward sales contracts | — | 8,242 | — | 8,242 | |||||||||||||||||||
| Forward purchase contracts | — | 281 | — | 281 | |||||||||||||||||||
| Interest rate swap futures contracts | — | 5,662 | — | 5,662 | |||||||||||||||||||
| Total | $ | — | $ | 14,185 | $ | 2,843 | $ | 17,028 | |||||||||||||||
91
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents a reconciliation of Level 3 assets measured at fair value on a recurring basis:
| Year Ended December 31, 2022 | |||||||||||||||||||||||
| MSRs | IRLC-Asset | MLHS | IRLC-Liability | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Balance at beginning of period | $ | 1,525,103 | $ | 29,887 | $ | 20,218 | $ | 2,843 | |||||||||||||||
| Purchases, sales, issuances, contributions, and settlements | (349,522) | — | (5,621) | — | |||||||||||||||||||
| Change in fair value | 226,961 | (27,656) | 468 | (339) | |||||||||||||||||||
Transfers out(a) | — | — | (1,180) | — | |||||||||||||||||||
| Balance at end of period | $ | 1,402,542 | $ | 2,231 | $ | 13,885 | $ | 2,504 | |||||||||||||||
| Year Ended December 31, 2021 | |||||||||||||||||||||||
| MSRs | IRLC-Asset | MLHS | IRLC-Liability | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Balance at beginning of period | $ | 748,457 | $ | 257,785 | $ | 44,374 | $ | — | |||||||||||||||
| Purchases, sales, issuances, contributions, and settlements | 856,802 | — | (26,353) | 2,843 | |||||||||||||||||||
| Change in fair value | (80,156) | (227,898) | (633) | — | |||||||||||||||||||
Transfers in(a) | — | — | 2,830 | — | |||||||||||||||||||
| Balance at end of period | $ | 1,525,103 | $ | 29,887 | $ | 20,218 | $ | 2,843 | |||||||||||||||
(a) Transfers in (out) represents transfers between Levels 2 and 3, and reclassifications to Real estate owned (“REO”), foreclosure or claims.
The following presents the fair value and UPB of MLHS that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for MLHS as the Company believes fair value best reflects its expected future economic performance:
| Fair Value | Principal Amount Due Upon Maturity | Difference(a) | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| December 31, 2022 | $ | 642,993 | $ | 680,315 | $ | (37,322) | |||||||||||
| December 31, 2021 | $ | 5,107,161 | $ | 5,005,069 | $ | 102,092 | |||||||||||
(a) Represents the amount of (losses) gains related to changes in fair value of items accounted for using the fair value option included in Gain on loans, net within the consolidated statements of operations.
To evaluate Goodwill, the Company determined fair value of its reporting units using inputs classified as Level 3 in the fair value hierarchy, refer to Note 6 - Goodwill. The Company had no other significant assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021, respectively.
The following is a summary of the key unobservable inputs used in the valuation of the Level 3 assets:
| Year Ended December 31, 2022 | |||||||||||||||||
| Assets: | Key Input | Range | Weighted Average | ||||||||||||||
| Mortgage servicing rights | Discount rate | 9.6% - 14.0% | 11.2% | ||||||||||||||
| Prepayment speeds | 4.6% - 8.2% | 5.4% | |||||||||||||||
| Interest rate lock commitments | Pull-through rate | 21.0% - 100% | 77.5% | ||||||||||||||
| Mortgage loans held for sale | Investor pricing | 65.0% - 103.6% | 93.3% | ||||||||||||||
92
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Year Ended December 31, 2021 | |||||||||||||||||
| Asset | Key Input | Range | Weighted Average | ||||||||||||||
| Mortgage servicing rights | Discount rate | 8.6% - 12.2% | 8.7% | ||||||||||||||
| Prepayment speeds | 6.9% - 11.6% | 8.3% | |||||||||||||||
| Interest rate lock commitments | Pull-through rate | 49.8% - 100.0% | 86.1% | ||||||||||||||
| Mortgage loans held for sale | Investor pricing | 70.0% - 104.1% | 91.3% | ||||||||||||||
Fair Value of Other Financial Instruments
All financial instruments were either recorded at fair value or the carrying value approximated fair value as of December 31, 2022. For financial instruments that were not recorded at fair value, such as cash and cash equivalents, restricted cash, servicing advances, warehouse and operating lines of credit, and accounts payable, their carrying values approximated fair value due to the short-term nature of such instruments.
Note 17 - Retirement Benefit Plans
The Company maintains a 401(k) profit sharing plans covering substantially all employees. Employees may contribute amounts subject to certain IRS and plan limitations. The Company may make discretionary matching contributions, subject to certain limitations. Matching contribution made by the Company totaled $2.5 million and $3.7 million for the years ended December 31, 2022 and 2021, respectively.
Note 18 - Restructuring
Given the current market factors and industry trends, including the rapidly rising interest rates and increased competition in the industry, the Company took restructuring actions to enhance liquidity and align the Company’s cost structure with the decrease in the Origination volume.
In August 2022, the Board approved the restructuring actions, which resulted in $14.2 million expense for cash severance and related benefits, retention, and termination costs in Compensation and benefits in the consolidated statements of operations for the year ended December 31, 2022.
The restructuring actions also included charges related to the write-down and write-off of office equipment totaling $2.3 million in Other expenses in the consolidated statement of operations for the year ended December 31, 2022.
The activities associated with the current restructuring actions are complete as of December 31, 2022.
The following is a summary of the Company’s restructuring reserve:
| Severance and Employee-Related Costs | Office Equipment | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Balance as of January 1, 2022 | $ | — | $ | — | $ | — | |||||||||||
| Restructuring charges | 14,182 | 2,302 | 16,484 | ||||||||||||||
| Payments | (14,182) | — | (14,182) | ||||||||||||||
| Non-cash impairment of office equipment | — | (2,302) | (2,302) | ||||||||||||||
| Balance as of December 31, 2022 | $ | — | $ | — | $ | — | |||||||||||
93
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 19 - Equity-based Compensation
In January, 2021, the Company’s Board approved the adoption of the Company’s 2021 Incentive Plan (“2021 Plan”) and designated 6.9 million shares of the Company’s authorized common stock available for equity-based awards thereunder. The 2021 Plan allows for the assumption and substitution of outstanding options to purchase common units of HPLP granted under HPLP 2015 Option Plan (the “2015 Option Plan”), which was in place prior to the Company’s IPO. The expiration date of the 2021 Plan is the tenth (10th) anniversary of the effective date of the 2021 Plan, which is January 21, 2031. The 2021 Plan contains both time-vesting service criteria, and performance based vesting terms, which are based on the achievement of specified performance criteria outlined in the underlying award agreement.
Prior to the consummation of the merger in connection with the IPO, the 2015 Option Plan governed awards of stock options to key persons conducting business for HPLP and its direct and indirect subsidiaries, including the Company. The 2015 Option Plan allowed awards in the form of options that are exercisable into common units of HPLP. In connection with the IPO, all outstanding options under the 2015 Option Plan were canceled and “substitute options” were granted under the 2021 Plan. The exercise price and number of shares of common stock of the substitute options result in the same (subject to rounding) intrinsic value as the outstanding options granted under the 2015 Option Plan.
Restricted Stock Units
Restricted stock units (“RSUs”) are awards that represent the potential to receive shares of the Company’s common stock at the end of the applicable vesting period, subject to the terms and conditions of the 2021 Plan and the applicable award documents. RSUs awarded under the 2021 Plan are fair valued based upon the fair market value of the Company’s common stock on the grant date. Any person who holds RSUs has no ownership interest in the shares of the Company’s common stock to which such RSUs relate until and unless shares of common stock are delivered to the holder. The RSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following presents the summary of the Company’s RSU activity:
| Year ended December 31, 2022 | |||||||||||
| Units | Weighted-Average Grant Date Fair Value | ||||||||||
| Outstanding at beginning of period | 367,991 | $ | 10.18 | ||||||||
| Granted | 233,550 | 3.85 | |||||||||
| Vested | (209,093) | 10.75 | |||||||||
| Outstanding at end of period | 392,448 | $ | 6.12 | ||||||||
The RSUs granted to the Company’s management team will vest in equal annual installments over a three-year period subject to the participants’ continued employment with the Company. The RSUs granted to the non-management members of the Company’s Board who are not affiliated with Stone Point Capital LLC vest at the next annual meeting of stockholders following the grant date. The Company recognized $1.5 million of compensation expense related to RSUs within Compensation and benefits expense on the consolidated statements of operations for both years ended December 31, 2022 and 2021.
Performance Stock Units
Performance stock units (“PSUs”) are fair valued on the date of grant and expensed over the service period using a straight-line method as the awards cliff vest at the end of a three-year performance period. The Company also estimates the number of shares expected to vest, which is based on management’s determination of the probable outcome of the Performance Condition (as defined below), which requires considerable judgment. The Company records a cumulative adjustment in periods in which the Company’s estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the Performance Condition. The PSUs will become earned based on the level of achievement of the Company’s average return on equity over a three-year performance period (the “Performance Condition”). The number of earned PSUs can range from 0% to 150% of the number of PSUs granted, depending on continued service with the Company and the extent to which the Performance Condition has been achieved at the end of the performance period. The PSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following presents the summary of the Company’s PSU activity:
94
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Year ended December 31, 2022 | |||||||||||
| Units | Weighted-Average Grant Date Fair Value | ||||||||||
| Outstanding at beginning of period | 238,347 | $ | 9.44 | ||||||||
| Granted | 131,924 | 3.79 | |||||||||
| Outstanding at end of period | 370,271 | $ | 7.43 | ||||||||
The Company did not recognize any compensation expense related to PSUs for the years ended December 31, 2022 and 2021.
Stock Option Awards
The Company recognizes compensation expense associated with the stock option grants using the straight-line method over the requisite service period. The Company recognized $3.7 million and $5.4 million of compensation expense related to stock options within Compensation and benefits expense in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively. The unrecognized compensation expense related to outstanding and unvested stock options was $42.1 million as of December 31, 2022, which is expected to vest and get recognized over a weighted-average period of 5.2 years. The number of options vested and exercisable was 2,367,280 and the weighted-average exercise price of the options exercisable was $3.77 as of December 31, 2022.
The following presents the summary of the Company’s stock option activity under the 2021 Plan:
| Year ended December 31, 2022 | |||||||||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Life (Years) | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at beginning of period | 11,751,031 | $ | 4.45 | 6.87 | $ | 8.38 | |||||||||||||||||
| Granted | 337,043 | 1.81 | 4.09 | 9.79 | |||||||||||||||||||
| Exercised | (294,068) | 1.86 | 1.52 | 9.77 | |||||||||||||||||||
| Forfeited | (661,130) | 1.85 | 0.14 | 9.73 | |||||||||||||||||||
| Expired | (198,983) | 1.79 | 1.00 | 9.76 | |||||||||||||||||||
| Outstanding at end of period | 10,933,893 | $ | 4.64 | 4.70 | $ | 8.27 | |||||||||||||||||
The following presents the summary of the Company’s non-vested activity under the 2021 Plan :
| Year ended December 31, 2022 | |||||||||||
Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Non-vested at beginning of period | 9,627,033 | $ | 8.19 | ||||||||
| Granted | 337,043 | 9.79 | |||||||||
| Vested | (243,282) | 9.20 | |||||||||
| Exercised | (294,068) | 9.77 | |||||||||
| Forfeited | (661,130) | 9.73 | |||||||||
| Expired | (198,983) | 9.76 | |||||||||
| Non-vested at end of period | 8,566,613 | $ | 8.12 | ||||||||
95
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents assumptions used in the Black-Scholes option valuation model to determine the weighted-average fair value per stock option granted:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Expected life (in years) | 8.3 | 8.2 | |||||||||
| Risk-free interest rate | 0-3.0% | 0.6%-3.0% | |||||||||
| Expected volatility | 24.9% | 24.9% | |||||||||
| Dividend yield | — | — | |||||||||
The expected life of each stock option is estimated based on its vesting and contractual terms. The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was based on an analysis of the historical volatilities of peer companies, adjusted for certain characteristics specific to the Company. The Company applied an estimated forfeiture rate of 0-10.4% both as of December 31, 2022 and 2021.
Note 20 - Earnings Per Share
(Loss) earnings per share (“EPS”) is calculated and presented in the consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is calculated by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if the Company’s dilutive outstanding stock options and stock awards were issued and exercised.
The following presents the calculation of the basic and diluted (loss) earnings per share:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands, except per share amounts ) | |||||||||||
| Net (loss) income | $ | (163,454) | $ | 166,272 | |||||||
| Numerator: | |||||||||||
| Net (loss) income attributable to common shareholders | $ | (163,454) | $ | 166,272 | |||||||
| Net (loss) income attributable to Home Point - diluted | $ | (163,454) | $ | 166,272 | |||||||
| Denominator (in thousands): | |||||||||||
| Weighted average shares of common stock outstanding - basic | 138,638 | 139,198 | |||||||||
| Dilutive effect of common stock equivalents | — | 798 | |||||||||
| Weighted average shares of common stock outstanding - diluted | 138,638 | 139,996 | |||||||||
| (Loss) earnings per share of common stock outstanding - basic | $ | (1.18) | $ | 1.19 | |||||||
| (Loss) earnings per share of common stock outstanding - diluted | $ | (1.18) | $ | 1.19 | |||||||
As a result of the net loss from continuing operations for the year ended December 31, 2022, the effect of certain dilutive securities was excluded from the computation of weighted average diluted shares outstanding, as inclusion would have resulted in antidilution.
96
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 21 - Shareholders’ Equity and Equity Method Investment
Common Stock Repurchases
On February 24, 2022, the Company’s Board approved the repurchase of shares of the Company’s common stock, par value $0.0000000072 per share (the “Common Stock”), in an aggregate amount not to exceed $8.0 million, from time to time through and including December 31, 2022 pursuant to one or more plans adopted under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Stock Repurchase Program”). The Company repurchased 1,179,796 shares of Common Stock at an aggregate price of $3.8 million, including commissions and fees, through market purchase transactions under the Stock Repurchase Program during the year ended December 31, 2022. Shares repurchased under the program have been subsequently retired.
Equity Method Investment
The Company held an equity method investment in Longbridge through a 49.6% voting ownership interest, which was the only equity method investment held by the Company. The $63.7 million net investment was classified as held for sale as of December 31, 2021 and was adjusted for HPC’s 2022 share of Longbridge’s earnings or losses, contributions and distributions, and impairment.
The Company entered into a definitive agreement in February of 2022 to sell its investment in Longbridge. An impairment charge of $8.8 million was recognized for the held for sale balance of equity method investment in Loss from equity method investment in the consolidated statement of operations for the year ended December 31, 2022. On October 3, 2022, the Company completed the previously announced sale for a purchase price of approximately $38.9 million in cash.
Note 22 - Income Taxes
The following presents the components of Income tax benefit (expense):
| Year Ended December 31, 2022 | |||||||||||||||||
| Federal | State | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Current | $ | (1,551) | $ | (1,700) | $ | (3,251) | |||||||||||
| Deferred | 39,386 | 5,779 | 45,165 | ||||||||||||||
| Total income tax benefit | $ | 37,835 | $ | 4,079 | $ | 41,914 | |||||||||||
| Year Ended December 31, 2021 | |||||||||||||||||
| Federal | State | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Current | $ | 64 | $ | (2,311) | $ | (2,247) | |||||||||||
| Deferred | (43,039) | (12,712) | (55,751) | ||||||||||||||
| Total income tax expense | $ | (42,975) | $ | (15,023) | $ | (57,998) | |||||||||||
The following presents a reconciliation of the Income tax benefit (expense) recorded on the Company’s consolidated statements of operations to the expected statutory federal corporate income tax rates:
97
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Loss (income) before income taxes | $ | (179,090) | $ | 208,897 | |||||||
| Statutory federal income tax (benefit) expense (21%) | (37,609) | 43,868 | |||||||||
| State income tax expense, net of federal tax | (6,914) | 10,116 | |||||||||
| Impact of equity investments | (5,518) | 3,679 | |||||||||
| Impact of tax rate change | 3,199 | (494) | |||||||||
| HPMAC investment write Off | 2,318 | — | |||||||||
| Impairment of goodwill | 1,879 | — | |||||||||
| Change in valuation allowance | — | 1,812 | |||||||||
| Other | 731 | (983) | |||||||||
| Total income tax (benefit) expense | $ | (41,914) | $ | 57,998 | |||||||
| Effective tax rate | 23.4 | % | 27.8 | % | |||||||
The following presents the components of the Company’s net deferred tax assets (liabilities):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Deferred tax asset | |||||||||||
| Federal NOL carryforward | $ | 93,151 | $ | 101,800 | |||||||
| State NOL carryforward | 23,603 | 23,825 | |||||||||
| Rep. & Warranty | 6,715 | 6,120 | |||||||||
| ROU lease deferred asset | 2,775 | 4,000 | |||||||||
| Other | 6,249 | 13,281 | |||||||||
| Total deferred tax asset | $ | 132,493 | $ | 149,026 | |||||||
| Deferred tax liability | |||||||||||
| MSR | (308,158) | (348,417) | |||||||||
| Derivatives | — | (6,734) | |||||||||
| Investment in Longbridge | — | (11,546) | |||||||||
| ROU lease deferred liability | (2,803) | (3,900) | |||||||||
| Other | (3,052) | (5,785) | |||||||||
| Total deferred tax liability | $ | (314,013) | $ | (376,382) | |||||||
| Valuation Allowance | (2,340) | (2,396) | |||||||||
| Net deferred tax liability | $ | (183,860) | $ | (229,752) | |||||||
The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on all available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company’s analysis focuses on identifying significant, objective evidence that it will more likely than not be able to realize its deferred tax assets in the future. The Company considers both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence on a jurisdiction-by-jurisdiction basis.
98
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The Company established a valuation allowance of $2.3 million and $2.4 million related to state net operating losses (“NOLs”) as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company’s deferred tax asset includes gross federal and state NOL carryforwards of $443.6 million and $436.6 million, respectively. Certain of these carryforwards expire in 2035 through 2037. The NOLs generated after 2017 carryforward indefinitely and are subject to a limit of 80% of taxable income in taxable years beginning after December 31, 2020. Certain of the Company’s NOLs are subject to limitation under IRC §382, limiting the Company’s ability to utilize the full NOL in any given period.
Unrecognized tax benefits are recognized related to tax positions included in (i) previously filed income tax returns and (ii) financial results expected to be included in income tax returns to be filed for periods through the date of the consolidated financial statements. The Company recognizes tax benefits from uncertain income tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authority based on the technical merits of the position. An uncertain income tax position that meets the “more likely than not” recognition threshold is then measured to determine the amount of the benefit to recognize. The Company has $0.8 million and $0.7 million uncertain tax positions as of December 31, 2022 and 2021, respectively. The liability is for unrecognized tax benefits related to state income tax matters excluding interest and penalties.
The following presents a reconciliation of the beginning and ending amounts of uncertain tax positions:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Balance at beginning of period | $ | 743 | $ | — | |||||||
| Increases related to positions taken during prior years | — | 743 | |||||||||
| Increases related to positions taken during the current year | 92 | — | |||||||||
| Decreases related to positions settled with tax authorities | — | — | |||||||||
| Decreases due to a lapse of applicable statute of limitations | — | — | |||||||||
| Balance at end of period | $ | 835 | $ | 743 | |||||||
Total amount of unrecognized tax benefit that would affect the effective tax rate if recognized was $0.5 million and $0.4 million as of December 31, 2022 and 2021, respectively. Less than $20 thousand for interest and penalties was accrued on the liability for unrecognized tax benefits for the year ended December 31, 2022, which, in accordance with company policy, are a part of interest and penalty expense.
The Company's tax years that generally remain subject to examination by the IRS and various state and local jurisdictions are 2019-2021.
On August 16, 2022, Inflation Reduction Act (“IRA”) of 2022 was signed into law, which, among other things, imposed a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The Company is still analyzing the impact of IRA, but do not expect it to be material to the financial statements .
Note 23 – Segments
Management has organized the Company into two reportable segments based primarily on its services as follows: (1) Origination and (2) Servicing. Each reportable segment has discrete financial information evaluated regularly by the chief operating decision maker (“CODM”) in monitoring performance, allocating capital, and making strategic and operational decisions that align with the Company and its internal operations.
99
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Origination
In the Origination segment, the Company originates residential real estate mortgage loans in the U.S. through the consumer direct third party originations, and prior to its sale, which was completed on June 1, 2022, the correspondent channel. The Company’s origination channels offer a variety of loan programs that support the financial needs of the borrowers. In each of the channels, the Company’s primary source of revenue is the difference between the cost of originating or purchasing the loan and the price at which the loan is sold to investors as well as the fair value of originated MSRs and hedging gains and losses. Loan origination fees and interest income earned on loans held for sale or securitization are also included in the revenue for this segment.
Servicing
In the Servicing segment, the Company generates revenue through contractual fees earned by performing daily administrative and management activities for mortgage loans. These activities include collecting loan payments, remitting payments to investors, sending monthly statements, managing escrow accounts, servicing delinquent loan work-outs, and managing and disposing of foreclosed properties. In February 2022, the Company entered into an agreement with ServiceMac, LLC (“ServiceMac”), a wholly owned subsidiary of First American Financial Corporation, pursuant to which ServiceMac subservices all mortgage loans underlying the Company’s MSRs. These services include maintaining borrower contact, facilitating borrower advances, generating borrower statements, collecting and processing payments of interest and principal, and facilitating loss-mitigation strategies in an attempt to keep defaulted borrowers in their homes. ServiceMac began subservicing loans for the Company in the second quarter of 2022.
Other Information About the Company’s Segments
The Company's CODM evaluates performance, makes operating decisions, and allocates resources based on the Company's contribution margin. Contribution margin is the Company’s measure of profitability for its two reportable segments. Contribution margin is defined as revenue from Gain on loans, net, Loan fee income, Loan servicing fees, Change in fair value of MSRs, Interest income, and Other income (which includes Income from equity method investment) adjusted for the change in fair value attributable to valuation assumptions of MSRs and less directly attributable expenses. Directly attributable expenses include salaries, commissions and associate benefits, general and administrative expenses, and other expenses, such as servicing and origination costs. Direct operating expenses driven by the activities of the segments are included in the respective segments.
The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting. Additionally, the Company does not enter into transactions between its reportable segments.
The Company also reports an “All Other” category that includes unallocated corporate expenses, such as IT, finance, and human resources. These operations are neither significant individually or in aggregate and therefore do not constitute a reportable segment.
The following presents the key operating data for the Company’s business segments:
| Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Origination | Servicing | Segments Total | All Other | Total | Reconciliation Item(a) | Total Consolidated | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||
| Gain on loans, net | $ | 47,105 | $ | — | $ | 47,105 | $ | — | $ | 47,105 | — | $ | 47,105 | ||||||||||||||||||||||||||||
| Loan fee income | 46,029 | — | 46,029 | — | 46,029 | — | 46,029 | ||||||||||||||||||||||||||||||||||
| Loan servicing fees | — | 265,275 | 265,275 | — | 265,275 | — | 265,275 | ||||||||||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | (97,689) | (97,689) | — | (97,689) | — | (97,689) | ||||||||||||||||||||||||||||||||||
| Interest income (expense), net | 21,375 | 12,172 | 33,547 | (54,411) | (20,864) | — | (20,864) | ||||||||||||||||||||||||||||||||||
| Other income (expense) | 111 | — | 111 | (10,598) | (10,487) | 26,278 | 15,791 | ||||||||||||||||||||||||||||||||||
| Total | $ | 114,620 | $ | 179,758 | $ | 294,378 | $ | (65,009) | $ | 229,369 | $ | 26,278 | $ | 255,647 | |||||||||||||||||||||||||||
| Contribution (loss) margin | $ | (106,884) | $ | 121,765 | $ | 14,881 | $ | (220,249) | $ | (205,368) | |||||||||||||||||||||||||||||||
100
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Origination | Servicing | Segments Total | All Other | Total | Reconciliation Item(a) | Total Consolidated | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||
| Gain on loans, net | $ | 585,762 | $ | — | $ | 585,762 | $ | — | $ | 585,762 | $ | — | $ | 585,762 | |||||||||||||||||||||||||||
| Loan fee income | 150,921 | — | 150,921 | — | 150,921 | — | 150,921 | ||||||||||||||||||||||||||||||||||
| Loan servicing fees | 8 | 331,374 | 331,382 | — | 331,382 | — | 331,382 | ||||||||||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | (76,831) | (76,831) | — | (76,831) | — | (76,831) | ||||||||||||||||||||||||||||||||||
| Interest income (expense), net | 13,897 | 1,931 | 15,828 | (48,741) | (32,913) | — | (32,913) | ||||||||||||||||||||||||||||||||||
| Other income | — | 227 | 227 | 18,341 | 18,568 | (15,373) | 3,195 | ||||||||||||||||||||||||||||||||||
| Total | $ | 750,588 | $ | 256,701 | $ | 1,007,289 | $ | (30,400) | $ | 976,889 | $ | (15,373) | $ | 961,516 | |||||||||||||||||||||||||||
| Contribution margin | $ | 237,055 | $ | 185,824 | $ | 422,879 | $ | (198,609) | $ | 224,270 | |||||||||||||||||||||||||||||||
(a) The Company includes the results from its equity method investment in the All Other. Therefore, the loss (income) is removed to reconcile to Total revenue, net on the consolidated statements of operations.
The following presents a reconciliation of contribution (loss) margin to consolidated U.S. GAAP (Loss) income before income tax:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| (Loss) income before income tax | $ | (179,090) | $ | 208,897 | |||||||
| (Loss) income from equity method investment | (26,278) | 15,373 | |||||||||
| Contribution (loss) margin | $ | (205,368) | $ | 224,270 | |||||||
Note 24 – Concentrations of Risk
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to credit risk, consist of cash and cash equivalents, derivatives, and mortgage loans held for sale.
Credit risk is reduced by the Company’s underwriting standards, monitoring pledged collateral, and other in-house monitoring procedures performed by management. The Company’s credit exposure for amounts due from investors is minimized through its policy to sell mortgage loans only to highly reputable and financially sound financial institutions.
101
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Concentrations
The Company originated or purchased loans in 50 states and the District of Columbia, with significant activity (approximately 5% or greater of total originations) in the following states:
Percentage of Origination | |||||
| 2022 | |||||
| State: | |||||
| California | 26.5 | % | |||
| Texas | 7.5 | % | |||
| Florida | 7.1 | % | |||
| 2021 | |||||
| State: | |||||
| California | 31.8 | % | |||
| Florida | 7.4 | % | |||
| New Jersey | 5.4 | % | |||
The total unpaid principal balance of the servicing portfolio, including MLHS, was approximately $89.3 billion and $133.9 billion as of December 31, 2022 and 2021, respectively. The unpaid principal balance of loans originated by the Company and sold with servicing retained was $26.8 billion and $92.2 billion for the year-end December 31, 2022 and 2021, respectively.
ServiceMac subservices all mortgage loans underlying the Company’s MSRs in 50 states and the District of Columbia, with significant activity (approximately 5% or greater of total servicing) in the following states:
Percentage of Servicing Unpaid Principal Balance | |||||
| 2022 | |||||
| State: | |||||
| California | 20.4 | % | |||
| Texas | 8.3 | % | |||
| Florida | 6.3 | % | |||
| 2021 | |||||
| State: | |||||
| California | 29.1 | % | |||
| Florida | 5.6 | % | |||
| Texas | 7.4 | % | |||
Significant Customers
Residential mortgage loans are sold through one of the following methods: (i) sales to or pursuant to programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae, or (ii) sales to private investors. 97.8% and 97.0% of mortgage loans sales were to the Agencies for the years ended December 31, 2022 and 2021, respectively.
102
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents newly originated loans that the Company sold to investors or transferred into GNMA securitization pools:
| Years Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (dollars in thousands) | Percentage | (dollars in thousands) | Percentage | ||||||||||||||||||||
| GNMA | $ | 7,095,893 | 22.3 | % | $ | 13,089,283 | 13.9 | % | |||||||||||||||
| FNMA | 11,632,784 | 36.5 | % | 42,721,394 | 45.3 | % | |||||||||||||||||
| FHLMC | 11,858,369 | 37.2 | % | 35,824,414 | 38.0 | % | |||||||||||||||||
| Other | 1,300,224 | 4.1 | % | 2,667,113 | 2.8 | % | |||||||||||||||||
| $ | 31,887,270 | 100 | % | $ | 94,302,204 | 100 | % | ||||||||||||||||
103
HOME POINT CAPITAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 25 – Related Parties
The Company entered into transactions and agreements to purchase various services and products from certain affiliates of our sponsor, Stone Point Capital LLC. The services include valuation of MSRs, insurance brokerage services, loan review, and tax payment services for certain loan originations.
The following presents principal categories of the related party transactions recorded in the consolidated statements of operations.
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Loan expense | $ | 9,134 | $ | 14,590 | |||||||
| Loan servicing expense | 1,911 | 1,014 | |||||||||
| General and administrative | 9,450 | 5,268 | |||||||||
Other expenses(a) | 5,793 | 9,630 | |||||||||
| Other | 208 | 10 | |||||||||
| Total | $ | 26,496 | $ | 30,512 | |||||||
(a) Includes amounts paid to related party insurance brokers which are passthrough to third party carriers.
Note 26 – Sale of The Correspondent Channel and Home Point Asset Management LLC
On June 1, 2022 (the “Closing Date”), HPF completed the previously announced sale of certain assets of HPF’s delegated Correspondent channel to Planet Home Lending, LLC (“Planet”). The sale of the correspondent channel reduces the Company’s expenses and enables reallocation of resources to our Wholesale channel.
The purchase price for such assets was $2.5 million in cash, plus an earnout payment based on certain of Planet’s correspondent origination volume during the two-year period commencing on the Closing Date. The Company records the earnout payment when the consideration is determined to be realizable. The sale resulted in a $0.4 million loss in Other expenses in the consolidated statements of operations. The loss was more than offset by earnout income of $0.9 million for the year ended December 31, 2022.
On December 2, 2022, HPC completed the previously announced sale of its equity interests in HPAM and its wholly owned subsidiary HPMAC. Prior to the sale, HPAM was a wholly owned subsidiary of the Company and managed certain servicing assets. HPMAC serviced residential real estate mortgage loans.
The purchase price for this transaction was $3.2 million in cash. The sale resulted in a $2.8 million gain in in the consolidated statements of operations.
Note 27 – Subsequent Events
On January 31, 2023, HPF terminated the Mortgage Loan Participation Sale Agreement (the “Gestation Agreement”), dated as of November, 2021, between HPF, as seller and JPMorgan Chase Bank, National Association, as purchaser (“Purchaser”). The Gestation Agreement permitted the Purchaser to purchase from HPF from time to time during the term of the Gestation Agreement participation certificates evidencing a 100% undivided beneficial ownership interest in designated pools of fully amortizing first lien residential mortgage loans that were intended to ultimately be included in residential MBS (the “Agency MBS”) issued or guaranteed, as applicable, by Fannie Mae, Freddie Mac, and Ginnie Mae. The aggregate purchase price of participation certificates owned by Purchaser at any given time for which Purchaser had not been paid the purchase price for the related Agency MBS by the applicable takeout investor as specified in the applicable takeout commitment could not exceed $400 million. The parties mutually agreed to terminate the JPM Gestation Agreement prior to its scheduled maturity date of September 29, 2023. HPF did not incur any early termination penalties.
On March 3, 2023, The Company extended the maturity date of its $200 million warehouse facility with Bank of Montreal from March 6, 2023 to April 20, 2023.
104
Item 9. Changes in and Disagreements with Accountants
None.
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of December 31, 2022.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 using the criteria set forth in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As a “smaller reporting company,” management’s report is not subject to attestation by our registered public accounting firm.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
105
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 will appear in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will appear in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will appear in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Party Transactions
The information required by Item 13 will appear in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 will appear in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
106
Part IV
Item 15. Exhibit and Financial Statement Schedules.
(a) The following documents are filed as a part of this Report:
(1)Financial Statements — See Part II, Item 8. “Financial Statements and Supplementary Data” of this Report.
(2)Financial Statement Schedules — None.
(3)Exhibits — The following is a list of exhibits filed as part of this Report.
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 10.1+ | ||||||||
| 10.1.1+ | ||||||||
10.1.2 | ||||||||
10.1.3 | ||||||||
10.1.4+ | ||||||||
10.1.5 | ||||||||
10.1.6 | ||||||||
10.1.7 | ||||||||
10.1.8 | ||||||||
| 10.1.9 | ||||||||
107
| Exhibit Number | Description | |||||||
| 10.1.10++ | ||||||||
| 10.1.11+ | ||||||||
| 10.1.12+ | ||||||||
| 10.2+ | ||||||||
| 10.2.1+ | ||||||||
| 10.2.2+ | ||||||||
| 10.2.3+ | ||||||||
| 10.2.4+ | ||||||||
| 10.2.5+ | ||||||||
| 10.3++ | ||||||||
| 10.4*+† | ||||||||
| 10.5+ | ||||||||
| 10.6+ | ||||||||
| 10.6.1+ | ||||||||
| 10.6.2+ | ||||||||
| 10.6.3+ | ||||||||
| 10.6.4+ | ||||||||
| 10.6.5 | ||||||||
| 10.6.6 | ||||||||
108
| Exhibit Number | Description | |||||||
| 10.6.7+ | ||||||||
| 10.6.8+ | ||||||||
| 10.6.9+ | ||||||||
| 10.6.10 | ||||||||
| 10.6.11+ | ||||||||
| 10.6.12+ | ||||||||
| 10.6.13+ | ||||||||
| 10.6.14+ | ||||||||
| 10.6.15+ | ||||||||
| 10.6.16 | ||||||||
| 10.6.17 | ||||||||
| 10.6.18 | ||||||||
| 10.6.19+ | ||||||||
| 10.6.20+ | ||||||||
| 10.7+ | ||||||||
| 10.7.1 | ||||||||
| 10.8+ | ||||||||
| 10.9*+† | ||||||||
109
| Exhibit Number | Description | |||||||
| 10.10+ | ||||||||
| 10.10.1+ | ||||||||
| 10.10.2+ | ||||||||
| 10.10.3+ | ||||||||
| 10.11 | ||||||||
| 10.12† | ||||||||
| 10.13† | ||||||||
| 10.14† | ||||||||
| 10.15† | ||||||||
| 10.16† | ||||||||
| 10.17† | ||||||||
| 10.18+ | ||||||||
| 10.18.1+ | ||||||||
| 10.18.2*+ | ||||||||
| 10.19+† | ||||||||
| 10.20+† | ||||||||
| 10.21† | ||||||||
| 10.22† | ||||||||
10.23+ | ||||||||
110
| Exhibit Number | Description | |||||||
10.23.1+ | ||||||||
10.23.2 | ||||||||
10.23.3+ | ||||||||
10.24 | ||||||||
10.25† | ||||||||
10.26† | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
*Filed herewith.
†Compensatory arrangements for director(s) and/or executive officer(s).
+ Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the Securities and Exchange Commission upon its request.
The agreements and other documents filed as exhibits to this Report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Item 16. Form 10-K Summary
None.
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HOME POINT CAPITAL INC. | |||||||||||
| Dated: March 9, 2023 | By: | /s/ William A. Newman | |||||||||
| Name: | William A. Newman | ||||||||||
| Title: | President and Chief Executive Officer | ||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
/s/ William A. Newman | President, Chief Executive Officer and Director | March 9, 2023 | ||||||||||||
William A. Newman | (Principal Executive Officer) | |||||||||||||
/s/ Mark E. Elbaum | Chief Financial Officer | March 9, 2023 | ||||||||||||
Mark E. Elbaum | (Principal Financial Officer and Principal Accounting Officer) | |||||||||||||
/s/ Andrew J. Bon Salle | Chairperson of the Board of Directors | March 9, 2023 | ||||||||||||
Andrew J. Bon Salle | ||||||||||||||
/s/ Laurie S. Goodman | Director | March 9, 2023 | ||||||||||||
Laurie S. Goodman | ||||||||||||||
| /s/ Agha S. Khan | Director | March 9, 2023 | ||||||||||||
Agha S. Khan | ||||||||||||||
/s/ Stephen A. Levey | Director | March 9, 2023 | ||||||||||||
Stephen A. Levey | ||||||||||||||
/s/ Timothy R. Morse | Director | March 9, 2023 | ||||||||||||
Timothy R. Morse | ||||||||||||||
/s/ Eric L. Rosenzweig | Director | March 9, 2023 | ||||||||||||
Eric L. Rosenzweig | ||||||||||||||
/s/ Joanna E. Zabriskie | Director | March 9, 2023 | ||||||||||||
Joanna E. Zabriskie | ||||||||||||||
112