HOME POINT CAPITAL INC. The following discussion and analysis supplements our management's discussion and analysis for the year endedDecember 31, 2021 as contained in our 2021 Annual Report, and presumes that readers have read or have access to such discussion and analysis. The following discussion and analysis should also be read together with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Report. This discussion contains forward-looking statements that reflect our plans and strategy for our business, and involve risks and uncertainties. You should review the "Risk Factors" section of our 2021 Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read "Cautionary Note on Forward-Looking Statements" in this Report .
Data as of and for the three and six months ended
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 origination growth. 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 8,744 partnering independent mortgage brokerages ("Broker
Partners ") to reach our end-borrower customers. In the second quarter of 2022,
we had 3,573 active broker partners. 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 670
correspondent sellers ("Correspondent Partners "). For additional information
refer to Note 19 - Sale of The Correspondent Channel. 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 320 thousand
servicing customers, with the ultimate objective of securing them as a Customer
for Life. In February 2022 , we announced an agreement with ServiceMac, pursuant
to which ServiceMac will subservice all mortgage loans underlying MSRs we hold.
ServiceMac began subservicing newly originated agency loans for us in the second
quarter of 2022. The balance of the agency portfolio and all of the Ginnie Mae
portfolio will transition to ServiceMac in the third quarter of 2022. ServiceMac
will perform servicing functions on the Company's behalf, but we will continue
to hold the MSRs. We expect that our relationship with ServiceMac will allow us
to maintain a leaner cost structure with a greater variable component and will
provide greater flexibility when strategically selling certain non-core MSRs.
The number of our servicing portfolio customers was 320 thousand and 426
thousand, while the unpaid principal balance ("UPB") was $92.2 billion and
$133.9 billion as of June 30, 2022 and December 31, 2021 , respectively.
According to Inside Mortgage Finance, we are the third largest wholesale lender
by origination volume for the year ended
Three Months Ended
We generated$70.0 million of total revenue, net for the three months endedJune 30, 2022 compared to$84.4 million of total revenue, net for the three months endedJune 30, 2021 . We had$44.4 million of net loss for the three months endedJune 30, 2022 compared to$73.2 million of net loss for the three months endedJune 30, 2021 . We generated$57.4 million of Adjusted revenue for the three months endedJune 30, 2022 compared to$126.8 million for the three months endedJune 30, 2021 . We had$46.9 million of Adjusted net loss for the three months endedJune 30, 2022 compared to$51.0 million Adjusted net loss for the three months endedJune 30, 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 withU.S. GAAP. 28
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We originated$9.3 billion of mortgage loans for the three months endedJune 30, 2022 compared to$25.5 billion for the three months endedJune 30, 2021 , representing a decrease of$16.2 billion or 63.5%. Our MSR Servicing Portfolio was$90.5 billion as ofJune 30, 2022 compared to$124.3 billion as ofJune 30, 2021 . Year-over-year decreases were due to rising interest rates and increased competition in the industry. Our gain on sale margins decreased 16 basis points for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Additionally, according to the Mortgage Bankers Association Mortgage Finance Forecast, average 30-year mortgage rates increased by approximately 210 basis points fromJune 30, 2021 toJune 30, 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. 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.
Six Months Ended
We generated$228.2 million of total revenue, net for the six months endedJune 30, 2022 compared to$506.3 million of total revenue, net for the six months endedJune 30, 2021 . We had$32.6 million of net loss for the six months endedJune 30, 2022 compared to$75.8 million of net income for the six months endedJune 30, 2021 . We generated$144.1 million of Adjusted revenue for the six months endedJune 30, 2022 compared to$450.9 million for the six months endedJune 30, 2021 . We had$77.8 million of Adjusted net loss for the six months endedJune 30, 2022 compared to$23.4 million Adjusted net income for the six months endedJune 30, 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 withU.S. GAAP. We originated$21.8 billion of mortgage loans for the six months endedJune 30, 2022 compared to$54.9 billion for the six months endedJune 30, 2021 , representing a decrease of$33.1 billion or 60.2%. As noted above, our MSR Servicing Portfolio was$90.5 billion as ofJune 30, 2022 compared to$124.3 billion as ofJune 30, 2021 . Year-over-year decreases were due to rising interest rates and increased competition in the industry. Our gain on sale margins also decreased 50 basis points for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Additionally, as noted above, average 30-year mortgage rates increased by approximately 210 basis points fromJune 30, 2021 toJune 30, 2022 . As noted above, an increase of this nature generally results in lower Origination volume and lower gain on sale margins. However, the higher rates result in an upward adjustment to the fair value of our MSRs for the loans that still exist in our portfolio.
Segments
Our operations are organized into two separate reportable segments: Origination and Servicing.
In our Origination segment, we source loans through three distinct production channels: Direct, Wholesale and Correspondent. The Direct channel provides the Company's existing servicing customers with various financing options. At the same time, it supports the servicing assets in the ecosystem by retaining existing servicing customers who may otherwise refinance their existing mortgage loans with a competitor. The Wholesale channel consists of mortgages originated through a nationwide network of 8,744Broker Partners . The Correspondent channel consists of closed and funded mortgages that we purchase from a trusted network ofCorrespondent Partners . Once a loan is locked, it becomes channel agnostic. As discussed in Note 19 - Sale of The Correspondent Channel above, onJune 1, 2022 , the Company completed the previously announced sale of the Correspondent channel. The channels in our Origination segment function in unison through the following activities: hedging, funding, and production. Our Origination segment generated contribution margin of$(29.9) million and$(38.2) million for the three and six months endedJune 30, 2022 , respectively and$(20.9) million and$166.4 million for the three and six months endedJune 30, 2021 , respectively. Our Servicing segment consists of servicing loans that were produced in our Originations segment where the Company retained the servicing rights. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio in compliance with state and federal regulations. We also strategically buy and sell MSRs. Our Servicing segment generated Contribution margins of$20.0 million and$103.3 million for the three and six months endedJune 30, 2022 , respectively and$(39.6) million and$25.2 million for the three and six months endedJune 30, 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. 29
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Key Factors Affecting Results of Operations for Periods Presented
Residential Real Estate Market Conditions
Our Origination volume is impacted 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 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. These trends are partially offset by the effects of strong employment market with continuing wage growth.
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 and loans held for sale. Interest rate lock commitments 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 interest rate lock commitments and loans held for sale inventory fluctuates with changes in interest rates; for example, if we enter into interest rate lock commitments at low interest rates followed by an increase in interest rates in the market, the value of our interest rate lock commitment 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. Early 2021 had a falling interest rate environment. In the second half of 2021, interest rates started to rise, which continued into the first half of 2022. Because origination volumes tend to increase in declining interest rate environments and decrease in increasing rate environments, we believe that our two principal sources of revenue, mortgage origination and mortgage loan servicing, create a natural hedge against changes in the interest rate environment. Additionally, to mitigate the interest rate risk impact, we employ economic hedging strategies. Our economic hedging strategies allow us to protect our investment and help us manage our liquidity through forward delivery commitments on mortgage-backed securities or whole loans and options on forward contracts. 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 ofBroker Partners , prior to the sale of our Correspondent channel, number ofCorrespondent Partners , which enable us to monitor key inputs of our business model. As noted above, onJune 1, 2022 , the Company completed the previously announced sale of the Correspondent channel. For additional information refer to Note 19 - Sale of The Correspondent Channel. 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. 30
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Origination Segment KPIs
The following presents key performance indicators for our business:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Origination Volume by Channel
Wholesale $ 7,382,358 $ 18,380,041 $ 16,700,059 $ 38,048,305
Correspondent 1,731,820 5,695,078 4,465,121 13,938,458
Direct 177,689 1,390,698 681,760 2,904,985
Origination volume $ 9,291,867 $
25,465,817
Fallout Adjusted ("FOA") Lock Volume by
Channel
Wholesale $ 7,483,278 $ 15,566,192 $ 17,046,986 $ 31,706,115
Correspondent 1,269,053 3,962,583 3,879,896 10,635,642
Direct 125,874 835,980 540,444 1,575,776
FOA Lock Volume $ 8,878,205 $ 20,364,755 $ 21,467,326 $ 43,917,533
Gain on sale margin by Channel
Wholesale $ 47,654 $ 114,486 $ 110,240 $ 359,536
Correspondent 2,002 9,270 5,452 31,432
Direct 3,214 26,322 13,911 53,080
Gain on sale margin attributable to channels 52,870 150,078 129,603 444,048
Other (loss) gain on sale(a) (15,685) (32,869) (19,653) 19,791
Total gain on sale margin(b) $ 37,185 $
117,209
Gain on sale margin by Channel (bps)
Wholesale 64 74 65 113
Correspondent 16 23 14 29
Direct 256 315 257 334
Gain on sale margin attributable to channels 60 74 60 101
Other (loss) gain on sale(a) (18) (16) (9) -
Total gain on sale margin(b) 42 58 51 101
Origination Volume by Purpose
Purchase 71.3 % 35.2 % 55.9 % 20.4 %
Refinance 28.7 % 64.8 % 44.1 % 79.6 %
June 30,
2022 2021Market Share Overall share of origination market(c) 1.7 % 2.2 % Share of wholesale channel(d)
8.3 % 10.2 %
Third Party Partners
Number of Broker Partners(e) 8,744 6,738
Number of Correspondent Partners(f) 670 642
(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.
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(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, interest income (expense), net, and loan servicing fees (expense) for the Origination segment. (c) Overall share of origination market share data forJune 30, 2022 is as ofMarch 31, 2022 obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics. The data as ofJune 30, 2022 is not yet available from Inside Mortgage Finance as of the date of this filing. (d) Share of wholesale channel forJune 30, 2022 is as ofMarch 31, 2022 obtained from Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics. The data as ofJune 30, 2022 is not yet available from Inside Mortgage Finance as of the date of this filing.
(e) Number of
(f) Number ofCorrespondent Partners from whom the Company purchased loans prior to the completion of the previously announced sale of the Correspondent channel onJune 1, 2022 . Servicing Segment KPIs
The following presents key performance indicators for our business:
June 30,
2022 2021
(dollars in thousands)
Mortgage Servicing
MSR Servicing Portfolio - UPB(a) $ 90,516,421 $ 124,258,935
MSR Servicing Portfolio - Units(b) 320,215
449,029
60 days or more delinquent(c) 0.9 % 1.6 % MSR Portfolio MSR multiple(d) 5.83 3.69 Weighted Average Note Rate (e) 3.18 %
3.09 %
(a) The unpaid principal balance of loans we service on behalf of
(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 withU.S. GAAP and should not be considered as a substitute for net income, or any other operating performance measure calculated in accordance withU.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 net revenue 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 income as Net 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.
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The following presents a reconciliation of Adjusted revenue and Adjusted net (loss) income to the nearestU.S. GAAP financial measures of Total revenue, net and Net (loss) income, as applicable:
Reconciliation of Adjusted Revenue to Total Revenue, Net
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Total revenue, net $ 70,008 $ 84,372 $ 228,179 $ 506,344
(Loss) income from equity method investment (9,144) 13,198 (14,416) 17,361
Change in fair value of MSR (due to inputs
and assumptions), net of hedge(a) (3,502) 29,181 (69,635) (72,837)
Adjusted revenue $ 57,362 $ 126,751 $ 144,128 $ 450,868 Reconciliation of Adjusted Net (Loss) Income to Total Net (Loss) Income
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Net (loss) income $ (44,417) $
(73,213)
(3,502) 29,181 (69,635) (72,837)
Income tax effect of change in fair value of
MSR (due to inputs and assumptions), net of
hedge(b) 1,001 (6,988) 24,424 20,523
Adjusted net (loss) income $ (46,918) $
(51,020)
(a)MSR fair value changes due to valuation inputs and assumptions are measured using a stochastic 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 condensed 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 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 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 expense (benefit) divided by Income (loss) before income tax.
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