MR. COOPER GROUP INC.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2020 . The
following discussion contains, in addition to the historical information,
forward-looking statements that include risks, assumptions and uncertainties
that could cause actual results to differ materially from those anticipated by
such statements.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.
Overview
We are a leading servicer and originator of residential mortgage loans. Our
purpose is to keep the dream of homeownership alive, and we do this as a
servicer by helping mortgage borrowers manage what is typically their largest
financial asset, and by helping our investors maximize the returns from their
portfolios of residential mortgages. We have a track record of significant
growth, having expanded our servicing portfolio from $10 billion in 2009 to $668
billion as of September 30, 2021 . We believe this track record reflects our
strong operating capabilities, which include a proprietary low-cost servicing
platform, strong loss mitigation skills, a commitment to compliance, a
customer-centric culture, a demonstrated ability to retain customers, growing
origination capabilities, and significant investment in technology.
Our strategy is to position the Company for sustainable long-term growth, drive
improved efficiency and profitability, and generate a return on tangible equity
of 12% or higher. Key strategic priorities include the following:
•Strengthen our balance sheet by building capital and liquidity, and managing
interest rate and other forms of risk;
•Improve efficiency by driving continuous improvement in unit costs for
Servicing and Originations segments, as well as by taking corporate actions to
eliminate costs throughout the organization;
•Grow our servicing portfolio to $1 trillion in UPB and grow our customer base
by acquiring new customers and retaining existing customers;
•Achieve a refinance recapture rate of 60%;
•Delight our customers and keep Mr. Cooper a great place for our team members to
work;
•Reinvent the customer experience by acting as the customer's advocate and by
harnessing technology to deliver user-friendly digital solutions;
•Sustain the talent of our people and the culture of our organization; and
•Maintain strong relationships with agencies, investors, regulators, and other
counterparties and a strong reputation for compliance and customer service.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to eighteen months for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio. As ofOctober 17, 2021 , approximately 2.4% of our customers were on a forbearance plan, down from a peak of 7.2% inJuly 2020 . More customers are now exiting forbearance than are entering. We include loans in forbearance related to the CARES Act, whereby no payments have been received from borrowers for greater than 90 days, in loans subject to repurchase rights fromGinnie Mae in other assets and payables and other liabilities on a gross basis. The balance was$2,486 as ofSeptember 30, 2021 . See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A. 34 -------------------------------------------------------------------------------- Table of Contents Anticipated Trends In the third quarter of 2021, our forward MSR portfolio continued to grow due to strong execution across all channels, primarily correspondent, direct-to-consumer, and acquisitions. We expect to see continued portfolio growth in the remainder of 2021 as the bulk market is starting to present us with more sizable opportunities. We closed on$21.6 billion in acquisitions this quarter, and anticipate closing on$32 billion in acquisitions subsequent to the third quarter of 2021. We have continued to benefit from early-buyout gains in 2021, which have driven strong operating income for our servicing segment, as we helped customers exit forbearance. We expect another quarter of solid early-buyout revenues in the fourth quarter of 2021, although down from third quarter of 2021, after which revenues will begin to taper off because we will be nearing the end of the inventory as loans in forbearance status continue to decrease. Based on the current interest rate environment, we expect prepayment speeds and amortization to remain elevated in the fourth quarter of 2021. OnJuly 1, 2021 , we entered into a definitive agreement for the sale of our reverse servicing portfolio, operating under the Champion Mortgage brand. The sale is expected to close in the fourth quarter of 2021. Refer to Note 2, Discontinued Operations, for further details. Our Originations segment continued to generate strong funded volumes from both the correspondent and direct-to-consumer channels in the third quarter of 2021 despite competitive pricing pressure. Additionally, our pull through adjusted lock volume grew by 9%, as we took advantage of the drop in mortgage rates during the quarter. We expect the originations profit margins to compress quarter-over-quarter in the fourth quarter of 2021 as a result of continued pricing pressure. In addition, we completed the sale of the Field Services business inOctober 2021 . The sale of the Field Services business and the reverse servicing portfolio allow us to focus on our core business. Xome's revenue has been, and is expected to continue to be, negatively impacted, as the REO exchange continues to be idle while the foreclosure moratoriums remain in effect. We expect the foreclosure moratoriums to expire at the end of the year and the resumption of foreclosure sales in 2022. Results of Operations Table 1. Consolidated Operations Three Months Ended September 30, 2021 2020 Change Revenues - operational $ 709$ 879 $ (170) Revenues - mark-to-market 151 (16) 167 Total revenues 860 863 (3) Total expenses 402 455 (53) Total other expenses, net 44 162 (118) Income from continuing operations before income tax expense 414 246 168 Less: Income tax expense 104 59 45 Net income from continuing operations 310 187 123 Less: Net earnings attributable to non-controlling interests - 5 (5) Net income from continuing operations attributable to Mr. Cooper $ 310$ 182 $ 128 During the three months endedSeptember 30, 2021 , income from continuing operations before income tax expense increased to$414 from$246 in 2020. The increase was driven by a decrease in total other expenses, net and total expenses. Total other expenses, net decreased primarily due to the$53 loss in 2020 on redemption of the 2023 unsecured senior notes and increase in interest income related to higher pandemic related buyouts in 2021, whereas, the decrease in total expenses was related to the sale of Xome's Title and Valuations businesses in 2021. See further discussions in Note 1, Nature of Business and Basis of Presentation, in the Notes to the Condensed Consolidated Financial Statements and the Segment Results section of the MD&A. The effective tax rate for continuing operations during the three months endedSeptember 30, 2021 was 25.0% as compared to 23.9% in 2020. The change in effective tax rate for continuing operations is primarily attributable to state income taxes and nondeductible executive compensation expenses during the three months endedSeptember 30, 2021 as compared to 2020. 35 -------------------------------------------------------------------------------- Table of Contents Table 1.1 Consolidated Operations Nine Months Ended September 30, 2021 2020 Change Revenues - operational $ 2,317$ 2,363 $ (46) Revenues - mark-to-market 376 (618) 994 Total revenues 2,693 1,745 948 Total expenses 1,281 1,277 4 Total other income (expenses), net 294 (330) 624 Income from continuing operations before income tax expense 1,706 138 1,568 Less: Income tax expense 410 33 377 Net income from continuing operations 1,296 105 1,191 Less: Net earnings attributable to non-controlling interests - 2 (2) Net income from continuing operations attributable to Mr. Cooper $ 1,296
During the nine months endedSeptember 30, 2021 , income from continuing operations before income tax expense increased to$1,706 from$138 in 2020. The change was primarily driven by a favorable MTM adjustments in 2021 compared to negative MTM adjustments in 2020 due to the interest rate environment. The change was also attributable to the completion of the sale of Xome's Title and Valuations businesses in 2021, which resulted in a$494 gain recorded in total other income (expenses), net. See further discussions in Note 1, Nature of Business and Basis of Presentation, in the Notes to the Condensed Consolidated Financial Statements and Segment Results section of the MD&A. In addition, total other income (expenses), net in 2020 included the$53 loss on redemption of the 2023 unsecured senior notes. The effective tax rate for continuing operations during the nine months endedSeptember 30, 2021 was 24.0% as compared to 23.8% in 2020. The increase in effective tax rate for continuing operations is primarily attributable to the completion of the Title Transaction and excess tax benefit from stock-based compensation expenses during the nine months endedSeptember 30, 2021 as compared to 2020. Segment Results
Our operations are conducted through two segments: Servicing and Originations.
•The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO. •The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent channel, which purchases or originates loans from mortgage bankers.
Refer to Note 16, Segment Information, in the Notes to the Condensed Consolidated Financial Statements for a summary of segment results.
Servicing Segment
The Servicing segment's strategy is to generate income by growing the portfolio
and maximizing the servicing margin. We believe several competitive strengths
have been critical to our long-term growth as a servicer, including our low-cost
platform, our skill in mitigating losses for investors, our commitment to strong
customer service and regulatory compliance, our history of successfully boarding
new loans, and the ability to retain existing customers by offering attractive
refinance options. We believe that our operational capabilities are reflected in
our strong servicer ratings.
36
--------------------------------------------------------------------------------
Table of Contents
Table 2. Servicer Ratings
Fitch(1) Moody's(2) S&P(3)
Rating date May 2021 February 2021 December 2020
Residential RPS2 SQ2- Above Average
Master Servicer RMS2+ SQ2 Above Average
Special Servicer RSS2 SQ2- Above Average
Subprime Servicer RPS2 SQ2- Above Average
(1)Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency) (2)Moody's Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability) (3)S&P Rating Scale of Strong to Weak
The following tables set forth the results of operations for the Servicing segment: Table 3. Servicing Segment Results of Operations
Three Months Ended September 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 402 25 $ 268 19 $ 134 6
Amortization, net of accretion (202) (12) (129) (9) (73) (3)
Mark-to-market 151 9 (16) (1) 167 10
Total revenues 351 22 123 9 228 13
Expenses
Salaries, wages and benefits 69 4 66 5 3 (1)
General and administrative
Servicing support fees 19 1 26 2 (7) (1)
Corporate and other general and
administrative expenses 28 2 31 2 (3) -
Foreclosure and other
liquidation related (recoveries)
expenses, net 1 - (6) - 7 -
Depreciation and amortization 11 1 6 - 5 1
Total general and administrative
expenses 59 4 57 4 2 -
Total expenses 128 8 123 9 5 (1)
Other income (expense)
Other interest income 39 2 1 - 38 2
Interest income 39 2 1 - 38 2
Advance interest expense (4) - (7) (1) 3 1
Other interest expense (61) (4) (61) (4) - -
Interest expense (65) (4) (68) (5) 3 1
Total other expenses, net (26) (2) (67) (5) 41 3
Income (loss) from continuing
operations before income tax
expense (benefit) $ 197 12 $ (67) (5) $ 264 17
Weighted average cost - advance
facilities 2.7 % 3.0 % (0.3) %
Weighted average cost - excess
spread financing 9.0 % 9.0 % - %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
37--------------------------------------------------------------------------------
Table of Contents
Table 3.1 Servicing - Revenues
Three Months Ended September 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Forward MSR Operational Revenue
Base servicing fees $ 230 14 $ 231 16 $ (1) (2)
Modification fees(2) 6 - 3 - 3 -
Late payment fees(2) 15 1 15 1 - -
Other ancillary revenues(2) 155 10 52 4 103 6
Total forward MSR operational
revenue 406 25 301 21 105 4
Base subservicing fees and other
subservicing revenue(2) 61 4 71 5 (10) (1)
Total servicing fee revenue 467 29 372 26 95 3
MSR financing liability costs (6) - (8) - 2 -
Excess spread payments and
portfolio runoff (59) (4) (96) (7) 37 3
Total operational revenue 402 25 268 19 134 6
Amortization, Net of Accretion
Forward MSR amortization (261) (16) (225) (16) (36) -
Excess spread accretion 59 4 96 7 (37) (3)
Total amortization, net of
accretion (202) (12) (129) (9) (73) (3)
Mark-to-Market Adjustments
MSR MTM 155 10 (52) (3) 207 13
MTM Adjustments(3) (13) (1) 2 - (15) (1)
Excess spread / financing MTM 9 - 34 2 (25) (2)
Total MTM adjustments 151 9 (16) (1) 167 10
Total revenues - Servicing $ 351 22 $ 123 9 $ 228 13
(1)Calculated basis points ("bps") are as follows: Annualized dollar
amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations
are separately presented as other subservicing revenues.
(3)MTM Adjustments includes the impact of negative modeled cash flows which have
been transferred to reserves on advances and other receivables. The negative
modeled cash flows relate to advances and other receivables associated with
inactive and liquidated loans that are no longer part of the MSR portfolio. The
impact of negative modeled cash flows was $8 and $7 during the three months
ended September 30, 2021 and 2020, respectively. In addition, MTM Adjustments
included a negative $8 impact from MSR hedging activities during the three
months ended September 30, 2021 .
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Forward - Other ancillary revenue increased during the three months ended
Forward MSR amortization increased during the three months endedSeptember 30, 2021 as compared to 2020, primarily due to higher runoff values in 2021 due to favorable discount rates.
MTM adjustments increased during the three months ended
Subservicing - There were no material changes for Subservicing fees during the
three months ended
Servicing Segment Expenses There were no material changes for total expenses during the three months endedSeptember 30, 2021 as compared to 2020. 38 -------------------------------------------------------------------------------- Table of Contents Servicing Segment Other Income (Expenses), net Total other expenses, net decreased during the three months endedSeptember 30, 2021 as compared to 2020, primarily due to an increase in other interest income due to higher pandemic related buyouts.
Table 4. Servicing Segment Results of Operations
Nine Months Ended September 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 1,215 26 $ 862 19 $ 353 7
Amortization, net of accretion (567) (12) (362) (8) (205) (4)
Mark-to-market 376 7 (618) (14) 994 21
Total revenues 1,024 21 (118) (3) 1,142 24
Expenses
Salaries, wages and benefits 205 4 205 5 - (1)
General and administrative
Servicing support fees 62 1 71 2 (9) (1)
Corporate and other general and
administrative expenses 88 2 93 2 (5) -
Foreclosure and other
liquidation related (recoveries)
expenses, net (19) - (29) (1) 10 1
Depreciation and amortization 23 - 14 - 9 -
Total general and administrative
expenses 154 3 149 3 5 -
Total expenses 359 7 354 8 5 (1)
Other income (expense)
Other interest income 87 2 44 1 43 1
Interest income 87 2 44 1 43 1
Advance interest expense (14) - (20) - 6 -
Other interest expense (187) (4) (175) (4) (12) -
Interest expense (201) (4) (195) (4) (6) -
Total other expenses, net (114) (2) (151) (3) 37 1
Income (loss) from continuing
operations before income tax
expense (benefit) $ 551 12 $ (623) (14) $ 1,174 26
Weighted average cost - advance
facilities 2.9 % 3.0 % (0.1) %
Weighted average cost - excess
spread financing 9.0 % 9.0 % - %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
39
--------------------------------------------------------------------------------
Table of Contents
Table 4.1 Servicing - Revenues
Nine Months Ended September 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Forward MSR Operational Revenue
Base servicing fees $ 677 14 $ 720 17 $ (43) (3)
Modification fees(2) 19 - 8 - 11 -
Incentive fees(2) 1 - 9 - (8) -
Late payment fees(2) 44 1 54 1 (10) -
Other ancillary revenues(2) 507 11 134 3 373 8
Total forward MSR operational
revenue 1,248 26 925 21 323 5
Base subservicing fees and other
subservicing revenue(2) 191 4 205 4 (14) -
Total servicing fee revenue 1,439 30 1,130 25 309 5
MSR financing liability costs (19) - (25) (1) 6 1
Excess spread payments and
portfolio runoff (205) (4) (243) (5) 38 1
Total operational revenue 1,215 26 862 19 353 7
Amortization, Net of Accretion
Forward MSR amortization (772) (16) (605) (13) (167) (3)
Excess spread accretion 205 4 243 5 (38) (1)
Total amortization, net of
accretion (567) (12) (362) (8) (205) (4)
Mark-to-Market Adjustments
MSR MTM 476 10 (727) (17) 1,203 27
MTM Adjustments(3) (107) (3) (14) - (93) (3)
Excess spread / financing MTM 7 - 123 3 (116) (3)
Total MTM adjustments 376 7 (618) (14) 994 21
Total revenues - Servicing $ 1,024 21 $ (118) (3) $ 1,142 24
(1)Calculated basis points ("bps") are as follows: Annualized dollar
amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations
are separately presented as other subservicing revenues.
(3)MTM Adjustments includes the impact of negative modeled cash flows which have
been transferred to reserves on advances and other receivables. The negative
modeled cash flows relate to advances and other receivables associated with
inactive and liquidated loans that are no longer part of the MSR portfolio. The
impact of negative modeled cash flows was $28 and $20 during the nine months
ended September 30, 2021 and 2020, respectively. In addition, MTM Adjustments
included a negative $82 impact from MSR hedging activities during the nine
months ended September 30, 2021 .
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Forward - Base servicing fee revenue decreased during the nine months ended
September 30, 2021 as compared to 2020 primarily due to an increase in loan
modifications and a shift in portfolio mix from GNMA to FNMA and FHLMC in 2021,
which generate lower servicing fees. Other ancillary revenues increased
primarily due to the $421 gain on sale associated with loans bought out of GNMA
securitization, modified and redelivered following GNMA guidelines.
Forward MSR amortization increased during the nine months ended September 30,
2021 as compared to 2020, primarily due to higher prepayments driven by the low
interest rate environment.
Total MTM adjustments increased during the nine months ended September 30, 2021
compared to 2020, primarily due to favorable impact from changes in interest
rates. MTM adjustments increased during the nine months ended September 30, 2021
compared to 2020 primarily due to the growth of loan-related derivative
activities.
Subservicing - There were no material changes for Subservicing fees during the
nine months ended
40
--------------------------------------------------------------------------------
Table of Contents
Servicing Segment Expenses
There were no material changes for total expenses during the nine months ended
September 30, 2021 as compared to 2020.
Servicing Segment Other Income (Expenses), net
Total other expenses, net decreased during the nine months ended September 30,
2021 as compared to 2020, primarily due to an increase in other interest income
due to higher pandemic related buyouts.
Table 5. Servicing Portfolio - Unpaid Principal Balances
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Average UPB
Forward MSRs
351,211 293,014 347,598 301,752
Total average UPB $ 653,266 $ 570,721 $ 639,105 $ 591,951
September 30, 2021 September 30, 2020
Carrying Carrying
UPB Amount bps UPB Amount bps
Forward MSRs
Agency $ 266,588 $ 3,329 125 $ 220,139 $ 2,234 101
Non-agency 36,503 337 92 46,528 429 92
Total forward MSRs 303,091 3,666 121 266,667 2,663 100
Subservicing and other(1)
Agency 347,806 N/A 285,704 N/A
Non-agency 17,479 N/A 15,151 N/A
Total subservicing and other 365,285 N/A 300,855 N/A
Total ending balance $ 668,376 $ 3,666 $ 567,522 $ 2,663
September 30, September 30,
Forward MSRs UPB Encumbrance 2021 2020
Forward MSRs - unencumbered $ 167,993 $ 85,937
Forward MSRs - encumbered(2) 135,098 180,730
Total Forward MSRs UPB $ 303,091 $ 266,667
(1)Subservicing and other includes (i) loans we service for others, (ii)
residential mortgage loans originated but have yet to be sold, and (iii) agency
REO balances for which we own the mortgage servicing rights.
(2)The encumbered forward MSRs consist of residential mortgage loans included
within our excess spread financing transactions and MSR financing liability.
41
--------------------------------------------------------------------------------
Table of Contents
The following tables provide a rollforward of our forward MSR and subservicing
and other portfolio UPB:
Table 6. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward
Three Months Ended September 30, 2021 Three Months Ended September 30, 2020
Subservicing and Subservicing and
Forward MSR Other Total Forward MSR Other Total
Balance - beginning of
period $ 287,455 $ 366,862 $ 654,317 $ 277,975 $ 296,792 $ 574,767
Additions:
Originations 18,821 1,175 19,996 14,517 1,232 15,749
Acquisitions / Increase in
subservicing(1) 18,308 28,395 46,703 (2,660) 38,082 35,422
Deductions:
Dispositions (14) (1,119) (1,133) (23) (3,046) (3,069)
Principal reductions and
other (2,974) (3,384) (6,358) (2,683) (2,659) (5,342)
Voluntary reductions(2) (18,338) (26,620) (44,958) (20,215) (29,506) (49,721) Involuntary reductions(3) (87) (24) (111) (177) (40) (217) Net changes in loans serviced by others (80) - (80) (67) - (67) Balance - end of period$ 303,091 $ 365,285 $ 668,376 $ 266,667 $ 300,855 $ 567,522
(1)Includes transfers to/from Subservicing and Other. (2)Voluntary reductions are related to loan payoffs by customers. (3)Involuntary reductions refer to loan chargeoffs.
During the three months ended
Table 6.1 Forward Servicing and Subservicing and Other Portfolio UPB Rollforward
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Subservicing and Subservicing and
Forward MSR Other Total Forward MSR Other Total
Balance - beginning of
period $ 271,189 $ 336,513 $ 607,702 $ 296,782 $ 323,983 $ 620,765
Additions:
Originations 63,351 4,053 67,404 35,630 2,918 38,548
Acquisitions / Increase in
subservicing(1) 35,369 131,355 166,724 (4,967) 78,342 73,375
Deductions:
Dispositions (82) (7,064) (7,146) (94) (23,156) (23,250)
Principal reductions and
other (8,364) (10,242) (18,606) (8,109) (7,792) (15,901)
Voluntary reductions(2) (57,801) (89,237) (147,038) (51,514) (73,291) (124,805) Involuntary reductions(3) (343) (93) (436) (815) (149) (964) Net changes in loans serviced by others (228) - (228) (246) - (246) Balance - end of period$ 303,091 $ 365,285 $ 668,376 $ 266,667 $ 300,855 $ 567,522
(1)Includes transfers to/from Subservicing and Other. (2)Voluntary reductions are related to loan payoffs by customers. (3)Involuntary reductions refer to loan chargeoffs.
42
--------------------------------------------------------------------------------
Table of Contents
During the nine months ended September 30, 2021 , our forward MSR UPB increased
primarily due to originations volumes and acquisitions, partially offset by
voluntary reductions in the low interest rate environment. During the nine
months ended September 30, 2021 , our subservicing and other portfolio UPB
increased primarily driven by acquisitions, partially offset by voluntary
reductions in the low interest rate environment.
The table below summarizes the overall performance of the forward servicing and
subservicing portfolio:
Table 7. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1)
September 30, September 30,
2021 2020
Loan count(2) 3,488,384 3,283,769
Average loan amount(3) $ 191,602 $ 172,828
Average coupon - agency(4) 3.7 % 4.3 %
Average coupon - non-agency(4) 4.4 % 4.6 %
60+ delinquent (% of loans)(5) 4.0 % 5.9 %
90+ delinquent (% of loans)(5) 3.7 % 5.1 %
120+ delinquent (% of loans)(5) 3.5 % 4.3 %
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Total prepayment speed (12-month
constant prepayment rate) 24.6 % 30.1 % 27.1 % 25.0 %
(1)Characteristics and key performance metrics of our servicing portfolio
exclude UPB and loan counts acquired but not yet boarded and currently serviced
by others.
(2)As of September 30, 2021 and 2020, loan count includes 84,939 and 199,118
loans in forbearance related to the CARES Act, respectively.
(3)Average loan amount is presented in whole dollar amounts.
(4)The weighted average coupon amounts presented in the table above are only
reflective of our owned forward MSR portfolio that is reported at fair value.
(5)Loan delinquency is based on the current contractual due date of the loan. In
the case of a completed loan modification, delinquency is based on the modified
due date of the loan. Loan delinquency includes loans in forbearance.
Delinquency is an assumption in determining the mark-to-market adjustment and is
a key indicator of MSR portfolio performance. Delinquent loans contribute to
lower MSR values due to higher costs to service and increased carrying costs of
advances. Delinquency rates have begun to decrease as the COVID-19 pandemic's
effect on the macroeconomic environment declines.
Table 8. Forward Loan Modifications and Workout Units
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Modifications(1) 14,540 3,242 11,298 47,720 12,286 35,434
Workouts(2) 14,041 20,483 (6,442) 50,418 25,849 24,569
Total modifications and workout
units 28,581 23,725 4,856 98,138 38,135 60,003
(1)Modifications adjust the terms of the loan.
(2)Workouts are other loss mitigation options which do not adjust the terms of
the loan. Workouts exclude loans which did not miss a contractual payment during
forbearance related to the CARES Act.
Modifications consist of agency programs, including forbearance options under
the CARES Act, designed to help borrowers manage financial stress and remain in
their homes by providing them with new loan terms, which often include reduced
interest rates. Workouts consist of other loss mitigation options designed to
assist borrowers and keep them in their homes.
43
--------------------------------------------------------------------------------
Table of Contents
Total modifications during the three and nine months ended September 30, 2021
increased compared to 2020 primarily due to an increase in modifications related
to loans impacted by the COVID-19 pandemic which successfully exited their
forbearance plans. Total workouts during the three months ended September 30,
2021 decreased compared to 2020 primarily due to a decrease in customers who
were exiting forbearance plans, as there were fewer customers in forbearance.
During the nine months ended September 30, 2021 , total workouts increased when
compared to 2020 primarily due to the peak forbearance season related to the
COVID- 19 pandemic being in July 2020 .
Servicing Portfolio and Related Liabilities
The following table sets forth the activities of forward MSRs: Table 9. Forward MSRs - Fair Value Rollforward
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Fair value - beginning of period $ 3,307 $ 2,757 $ 2,703 $ 3,496 Additions:
Servicing retained from mortgage loans sold 236 163 790 412 Purchases of servicing rights 220 6 438 30 Dispositions: Sales and cancellation of servicing assets (1) - (13) - Changes in fair value: Due to changes in valuation inputs or assumptions used in the valuation model (MSR fair value MTM): Agency 150 (49) 108 (679) Non-agency 5 (3) 368 (48) Changes in valuation due to amortization: Scheduled principal payments (33) (23) (82) (70) Prepayments Voluntary prepayments Agency (212) (182) (625) (455) Non-agency (15) (17) (62) (73) Involuntary prepayments Agency (1) (2) (3) (7) Non-agency - - - - Other changes: Disposition of negative MSRs and other(1) 10 13 44 57 Fair value - end of period $ 3,666$ 2,663 $ 3,666$ 2,663
(1)Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.
See Note 3, Mortgage Servicing Rights and Related Liabilities and Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of forward MSRs as ofSeptember 30, 2021 andDecember 31, 2020 . 44 -------------------------------------------------------------------------------- Table of Contents Excess Spread Financing
As further disclosed in Note 3, Mortgage Servicing Rights and Related Liabilities, in the Notes to the Condensed Consolidated Financial Statements, we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs and the purchase of loans. We do not currently utilize these transactions as a primary source of financing due to the availability of lower cost sources of funding. Excess spread financings are recorded at fair value, and the impact of fair value adjustments varies primarily due to (i) prepayment speeds (ii) recapture rates and (iii) discount rates. See Note 3, Mortgage Servicing Rights and Related Liabilities and Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as ofSeptember 30, 2021 andDecember 31, 2020 .
The following table sets forth the change in the excess spread financing: Table 10. Excess Spread Financing - Rollforward
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Fair value - beginning of period $ 867
$ 934$ 1,311 Additions: New financings - - - 24 Deductions: Settlements and repayments (37) (49) (118) (159) Changes in fair value: Agency (12) (31) (3) (134) Non-agency 4 - 9 2 Fair value - end of period $ 822$ 1,044 $ 822$ 1,044 45
--------------------------------------------------------------------------------
Table of Contents Originations Segment The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Our Originations segment is one way that we help underserved consumers access the financial markets. In the nine months endedSeptember 30, 2021 , our total originations included loans for 34,374 customers with low FICOs (<660), 51,163 customers with income below theU.S. median household income, 28,621 first-time homebuyers, and 18,754 veterans. During this time period, we originated a total of 58,538Ginnie Mae loans, which are designed for first-time homebuyers and low- and moderate-income borrowers, comprising$14 billion in total proceeds. Once these loans are originated, these underserved borrowers become our servicing customers.
The Originations segment includes two channels:
•Our direct-to-consumer ("DTC") lending channel relies on our call centers,
website and mobile apps, specially trained teams of licensed mortgage
originators, predictive analytics and modeling utilizing proprietary data from
our servicing portfolio to reach our existing customers who may benefit from a
new mortgage. Depending on borrower eligibility, we will refinance existing
loans into conventional, government or non-agency products. Through lead
campaigns and direct marketing, the direct-to-consumer channel seeks to convert
leads into loans in a cost-efficient manner.
•Our correspondent lending channel acquires newly originated residential
mortgage loans that have been underwritten to investor guidelines. This includes
both conventional and government-insured loans that qualify for inclusion in
securitizations that are guaranteed by the GSEs. Our correspondent lending
channel enables us to replenish servicing portfolio run-off typically at a
better rate of return than traditional bulk or flow acquisitions.
46
--------------------------------------------------------------------------------
Table of Contents
The following tables set forth the results of operations for the Originations
segment:
Table 11. Originations Segment Results of Operations
Three Months Ended September 30,
2021 2020 Change
Revenues
Service related, net $ 44 $ 27 $ 17
Net gain on mortgage loans held for sale
Net gain on loans originated and sold 213 449 (236)
Capitalized servicing rights 221 162 59
Provision for repurchase reserves, net of release (4) (6) 2
Total net gain on mortgage loans held for sale 430 605 (175)
Total revenues 474 632 (158)
Expenses
Salaries, wages and benefits 147 140 7
General and administrative
Loan origination expenses 25 20 5
Corporate and other general administrative
expenses 15 16 (1)
Marketing and professional service fees 13 14 (1)
Depreciation and amortization 8 5 3
Total general and administrative 61 55 6
Total expenses 208 195 13
Other income (expenses)
Interest income 27 16 11
Interest expense (22) (15) (7)
Total other income, net 5 1 4
Income from continuing operations before income
tax expense $ 271
Weighted average note rate - mortgage loans held
for sale 3.0 % 3.1 % (0.1) %
Weighted average cost of funds (excluding
facility fees) 1.9 % 2.5 % (0.6) %
47
--------------------------------------------------------------------------------
Table of Contents
Table 11.1 Originations - Key Metrics
Three Months Ended September 30,
2021 2020 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 9,419 $ 10,414 $ (995)
Other locked pull through adjusted volume(1) 10,654 9,380 1,274
Total pull through adjusted lock volume $ 20,073 $ 19,794 $ 279
Funded volume $ 19,938 $ 15,598 $ 4,340
Volume of loans sold $ 21,463 $ 15,206 $ 6,257
Recapture percentage(2) 29.9 % 24.9 % 5.0 %
Refinance recapture percentage(3) 40.3 % 31.2 % 9.1 %
Purchase as a percentage of funded volume 30.9 % 16.4 % 14.5 %
Value of capitalized servicing on retained
settlements 138 bps 133 bps 5 bps
Originations Margin
Revenue $ 474 $ 632 $ (158)
Pull through adjusted lock volume $ 20,073 $ 19,794 $ 279
Revenue as a percentage of pull through
adjusted lock volume(4) 2.36 % 3.19 % (0.83) %
Expenses(5) $ 203 $ 194 $ 9
Funded volume $ 19,938 $ 15,598 $ 4,340
Expenses as a percentage of funded volume(6) 1.02 % 1.24 % (0.22) %
Originations Margin 1.34 % 1.95 % (0.61) %
(1)Pull through adjusted volume represents the expected funding from locks taken
during the period.
(2)Recapture percentage includes new loan originations for both purchase and
refinance transactions where borrower retention and/or property retention occurs
as a result of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(3)Refinance recapture percentage includes new loan originations for refinance
transactions where borrower retention and property retention occurs as a result
of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(4)Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(5)Expenses include total expenses and total other income (expenses), net.
(6)Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income from continuing operations before income tax expense decreased for the
three months ended September 30, 2021 as compared to 2020 primarily due to a
decrease in total revenues driven by a decrease in net gain on loans originated
and sold and unfavorable mark-to-market on locks and commitments revenues. The
Originations Margin for the three months ended September 30, 2021 decreased as
compared to 2020 primarily due to a lower revenue ratio as a percentage of pull
through adjusted lock volume driven by lower margins from a shift in channel mix
from DTC to higher correspondent channel mix. Correspondent channel mix for the
three months ended September 30, 2021 was 53% compared to 47% in 2020.
48
--------------------------------------------------------------------------------
Table of Contents
Originations Segment Revenues
Total revenues decreased during the three months ended September 30, 2021
compared to 2020 primarily driven by a decrease in net gain on loans originated
and sold as a result of a decrease in gain on loans originated and sold and
unfavorable mark-to-market on locks and commitments revenue, partially offset by
higher value of capitalized servicing on retained settlements. There were no
material changes for repurchase reserves.
Originations Segment Expenses
Total expenses during the three months ended September 30, 2021 increased when
compared to 2020 primarily due to growth in origination volumes. The origination
volume growth contributed to the increase in salaries, wages and benefits, due
to increased compensation and headcount related costs. Despite the increase in
expenses, our expenses as a percentage of funded volume decreased during the
three months ended September 30, 2021 when compared to 2020, demonstrating an
improvement in cost efficiencies and scale.
Originations Segment Other Income (Expenses), Net
Interest income relates primarily to mortgage loans held for sale. Interest
expense is associated with the warehouse facilities utilized to finance newly
originated loans. There were no material changes in total other income, net,
during the three months ended September 30, 2021 as compare to 2020.
Table 12. Originations Segment Results of Operations
Nine Months Ended September 30,
2021 2020 Change
Revenues
Service related, net $ 132 $ 68 $ 64
Net gain on mortgage loans held for sale
Net gain on loans originated and sold 642 1,085 (443)
Capitalized servicing rights 741 404 337
Provision for repurchase reserves, net of release (16) (14) (2)
Total net gain on mortgage loans held for sale 1,367 1,475 (108)
Total revenues 1,499 1,543 (44)
Expenses
Salaries, wages and benefits 478 377 101 General and administrative Loan origination expenses 78 52 26 Corporate and other general administrative expenses 52 50 2 Marketing and professional service fees 39 37 2 Depreciation and amortization 18 12 6 Total general and administrative 187 151 36 Total expenses 665 528 137 Other income (expenses) Interest income 76 69 7 Interest expense (70) (55) (15) Total other income, net 6 14 (8) Income from continuing operations before income tax expense $ 840
Weighted average note rate - mortgage loans held
for sale 3.0 % 3.4 % (0.4) %
Weighted average cost of funds (excluding
facility fees) 2.0 % 2.7 % (0.7) %
49
--------------------------------------------------------------------------------
Table of Contents
Table 12.1 Originations - Key Metrics
Nine Months Ended September 30,
2021 2020 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 28,375 $ 27,432 $ 943
Other locked pull through adjusted volume(1) 33,323 17,433 15,890
Total pull through adjusted lock volume $ 61,698 $ 44,865 $ 16,833
Funded volume $ 67,298 $ 38,686 $ 28,612
Volume of loans sold $ 72,724 $ 39,633 $ 33,091
Recapture percentage(2) 31.1 % 26.5 % 4.6 %
Refinance recapture percentage(3) 39.2 % 32.4 % 6.8 %
Purchase as a percentage of funded volume 21.7 % 17.8 % 3.9 %
Value of capitalized servicing on retained
settlements 131 bps 134 bps (3) bps
Originations Margin
Revenue $ 1,499 $ 1,543 $ (44)
Pull through adjusted lock volume $ 61,698 $ 44,865 $ 16,833
Revenue as a percentage of pull through
adjusted lock volume(4) 2.43 % 3.44 % (1.01) %
Expenses(5) $ 659 $ 514 $ 145
Funded volume $ 67,298 $ 38,686 $ 28,612
Expenses as a percentage of funded volume(6) 0.98 % 1.33 % (0.35) %
Originations Margin 1.45 % 2.11 % (0.66) %
(1) Pull through adjusted volume represents the expected funding from locks
taken during the period.
(2) Recapture percentage includes new loan originations for both purchase and
refinance transactions where borrower retention and/or property retention occurs
as a result of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(3) Refinance recapture percentage includes new loan originations for refinance
transactions where borrower retention and property retention occurs as a result
of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(4) Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(5) Expenses include total expenses and total other income (expenses), net.
(6) Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income from continuing operations before income tax expense decreased for the
nine months ended September 30, 2021 as compared to 2020 primarily due to an
increase in total expenses driven by higher salaries, wages and benefits and
loan originations expenses as a result of higher origination volume due to the
low interest rate environment and funding out the pipeline. The Originations
Margin for 2021 decreased as compared to 2020 primarily due to a lower revenue
ratio as a percentage of pull through adjusted lock volume driven by lower
margins from a shift in channel mix from DTC to higher correspondent channel
mix. Correspondent channel mix for the nine months ended September 30, 2021 was
54% compared to 39% in 2020
Originations Segment Revenues
Total revenues decreased during the nine months ended September 30, 2021
compared to 2020 primarily driven by decrease in net gain on loans originated
and sold in connection with unfavorable mark-to-market on locks and commitments
revenue, partially offset by favorable mark-to-market loans related derivatives
revenue. There were no material changes for repurchase reserves.
50
--------------------------------------------------------------------------------
Table of Contents
Originations Segment Expenses
Total expenses during the nine months ended September 30, 2021 increased when
compared to 2020 primarily due to growth in origination volumes. The origination
volume growth contributed to the increase in salaries, wages and benefits, due
to increased compensation and headcount related costs. Despite the increase in
expenses, our expenses as a percentage of funded volume decreased during the
nine months ended September 30, 2021 when compared to 2020, demonstrating an
improvement in cost efficiencies and scale.
Originations Segment Other Income (Expenses), Net
Total other income, net, decreased during the nine months ended September 30,
2021 compared to 2020 primarily driven by an increase in interest expense due to
originations volume growth, partially off by an increase in interest income in
connection with higher originations volume.
Corporate/Other
Corporate/Other represents unallocated overhead expenses, including the costs of
executive management and other corporate functions that are not directly
attributable to our operating segments, and interest expense on our unsecured
senior notes. In the third quarter of 2021, we began presenting the Xome
financial results under Corporate/Other. See Note 16, Segment Information, for
further details on change in reportable segments. Previously, Xome financial
results were reported under Xome segment, which ceased to be a reportable
segment in the third quarter of 2021. Xome operates an exchange which
facilitates the sale of foreclosed properties. On June 30, 2021 and August 31
2021 , we completed the sale of Xome's Title and Valuations business,
respectively. In addition, during the third quarter of 2021, the Company entered
into a definitive agreement to sell its Xome Field Services business. For more
information, see Note 1, Nature of Business and Basis of Presentation in the
Notes to the Condensed Consolidated Financial Statements.
The following table set forth the selected financial results for Corporate/Other: Table 13. Corporate/Other Selected Financial Results
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Corporate/Other - Operations
Total revenues $ 35 $ 108 $ (73) $ 170 $ 320 $ (150)
Total expenses 66 137 (71) 257 395 (138)
Interest expense 31 45 (14) 92 144 (52)
Other income (expense), net 8 (51) 59 494 (50) 544
Key Metrics
Average exchange properties under
management 14,907 15,067 (160) 14,438 16,761 (2,323)
Total revenues and total expenses decreased during the three and nine months
ended September 30, 2021 as compared to 2020 primarily due to sale of Xome's
Title and Valuations businesses in 2021.
Interest expense decreased in the three and nine months ended September 30, 2021
as compared to 2020 primarily due to repayment and redemption in 2020 of the
unsecured senior notes due 2021, 2022, 2023 and 2026 and the issuance in 2020 of
the unsecured senior notes due 2027, 2028 and 2030 at lower interest rates.
The change in other income (expense), net, in the three months ended September
30, 2021 as compared to 2020 was primarily due to the $53 loss on redemption of
the 2023 unsecured senior notes in 2020. The change in total other income
(expense), net, during the nine months ended September 30, 2021 is primarily a
result of the gain of $487 that was recorded in the second quarter of 2021 upon
the completion of the sale of Xome's Title business.
51
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
We measure liquidity by unrestricted cash and availability of borrowings on our
MSR facilities and other facilities. We held cash and cash equivalents on hand
of $731 as of September 30, 2021 compared to $695 as of December 31, 2020 .
During the three months ended September 30, 2021 , we bought back 11.1 million
shares of our outstanding common stocks as part of our stock repurchase program.
Additionally, during the three months ended September 30, 2021 , we repurchased
and retired all of our outstanding preferred stock. We have sufficient borrowing
capacity to support our operations. As of September 30, 2021 , total available
borrowing capacity was $17,530 , of which $9,213 was unused.
The economic impact of the COVID-19 pandemic could continue to result in an
increase in servicing advances and liquidity demands related to the utilization
of forbearance programs offered by the CARES Act. Forbearance rates have
declined since the peak during the second of quarter of 2020. As of
September 30, 2021 , our total advance facility capacity was $1,740 , of which
$1,201 remained unused. For more information on our advance facilities, see Note
9, Indebtedness in the Notes to the Condensed Consolidated Financial Statements.
Sources and Uses of Cash Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (iii) payments received in connection with the sale of excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing
advances; (ii) originations of loans; (iii) payment of interest expenses; (iv)
payment of operating expenses; (v) repayment of borrowings and repurchases or
redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs;
and (vii) payment of our technology expenses.
We believe that our cash flows from operating activities, as well as capacity
through existing facilities, provide adequate resources to fund our anticipated
ongoing cash requirements. We rely on these facilities to fund operating
activities. As the facilities mature, we anticipate renewal of these facilities
will be achieved. Future debt maturities will be funded with cash and cash
equivalents, cash flow from operating activities and, if necessary, future
access to capital markets. We continue to optimize the use of balance sheet cash
to avoid unnecessary interest carrying costs.
In addition, derivative instruments are used as part of the overall strategy to
manage exposure to market risks primarily associated with fluctuations in
interest rates related to originations. See Note 8, Derivative Financial
Instruments, in the Notes to the Condensed Consolidated Financial Statements in
Item 1, Financial Statements and Supplementary Data, which is incorporated
herein for a summary of our derivative transactions.
In the normal course of business, we enter into various types of on- and
off-balance sheet transactions with special purpose entities ("SPEs") determined
to be variable interest entities ("VIEs"), which primarily consist of
securitization trusts established for a limited purpose. Generally, these SPEs
are formed for the purpose of securitization transactions in which we transfer
assets to an SPE, which then issues to investors various forms of debt
obligations supported by those assets. In these securitization transactions, we
typically receive cash and/or other interests in the SPE as proceeds for the
transferred assets. See Note 10, Securitizations and Financings, in the Notes to
the Condensed Consolidated Financial Statements in Item 1, Financial Statements
and Supplementary Data, which is incorporated herein for a summary of our
transactions with VIEs and unconsolidated balances, and details of their impact
on our condensed consolidated financial statements.
Cash Flows
The table below presents cash flows information:
Table 14. Cash Flows
Nine Months Ended September 30,
2021 2020 Change
Net cash attributable to:
Operating activities $ (770) $ 1,878 $ (2,648)
Investing activities 1,011 (38) 1,049
Financing activities (240) (1,277) 1,037
Net increase in cash, cash equivalents, and
restricted cash $ 1 $ 563 $ (562)
52-------------------------------------------------------------------------------- Table of Contents Operating activities Our operating activities used cash of$770 during the nine months endedSeptember 30, 2021 compared to cash generated of$1,878 in 2020. The change in cash attributable to operating activities was primarily related to continuing operations, driven by$1,089 in the cash used for originations net sale activities in 2021 compared to$1,164 of cash generated in 2020, as a result of an increase in repurchases of forward loan assets out ofGinnie Mae securitizations, and a decrease of$1,036 driven by fair values changes in MSRs. In addition, we recorded a total gain of$494 from the sale of the Xome Title and Valuations businesses in 2021. Investing activities Our investing activities generated cash of$1,011 during the nine months endedSeptember 30, 2021 compared to cash used of$38 in 2020. The change in cash attributable to investing activities was primarily related to discontinued operations, driven by$1,030 of proceeds from sale of the reverse servicing portfolio. Additionally, investing activities from continuing operations included$432 of proceeds from sale of the Xome Title and Valuation businesses, net of cash divested, in 2021, offset by an increase of$392 in cash used for the purchase of forward mortgage servicing rights. Financing activities Our financing activities used cash of$240 during the nine months endedSeptember 30, 2021 compared to cash used of$1,277 in 2020. The decrease in cash used for financing activities was primarily related to continuing operations, driven by an increase of$1,964 in cash generated from advance and warehouse facilities due to net increased borrowing of$1,950 from advance and warehouse facilities compared to net repayment of$14 in 2020. Additionally, in 2020,$1,686 of cash was used in the redemption and repayment of the 2021, 2022, 2023 and 2026 unsecured senior notes, partially offset by$1,450 related to the issuance of the 2027, 2028 and 2030 unsecured senior notes. There were no such activities in 2021. Capital Resources Capital Structure and Debt We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions. Financial Covenants Our credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements. These covenants are measured at our operating subsidiary,Nationstar Mortgage LLC . As ofSeptember 30, 2021 , we were in compliance with our required financial covenants. Seller/Servicer Financial Requirements We are also subject to net worth, liquidity and capital ratio requirements established by theFederal Housing Finance Agency ("FHFA") for Fannie Mae and Freddie Mac Seller/Servicers, andGinnie Mae for single family issuers, as summarized below. These requirements apply to our operating subsidiary,Nationstar Mortgage, LLC . MinimumNet Worth ?FHFA - a net worth base of$2.5 plus 25 basis points of outstanding UPB for total loans serviced. ?Ginnie Mae - a net worth equal to the sum of (i) base of$2.5 plus 35 basis points of the issuer's total single-family effective outstanding obligations, and (ii) base of$5 plus 1% of the total effective outstanding HMBS obligations. Minimum Liquidity •FHFA - 3.5 basis points of total Agency Mortgage Servicing UPB plus incremental 200 basis points of total nonperforming Agency, measured at 90+ delinquencies, servicing in excess of 6% total Agency servicing UPB. •Ginnie Mae - the greater of$1 or 10 basis points of our outstanding single-family MBS and at least 20% of our net worth requirement for Home Equity Conversion Mortgage ("HECM") mortgage-backed securities ("HMBS"). Minimum Capital Ratio ?FHFA andGinnie Mae - a ratio of TangibleNet Worth to Total Assets (excluding HMBS securitizations) greater than 6%. 53
--------------------------------------------------------------------------------
Table of Contents
Secured Debt to Gross Tangible Asset Ratio •Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
As of
Since we have aGinnie Mae single-family servicing portfolio that exceeds$75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. We are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents. In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 14, Capital Requirements, in the Notes to the Condensed Consolidated Financial Statements for additional information. Table 15. Debt September 30, 2021 December 31, 2020 Advance facilities principal amount $ 539 $
669
Warehouse facilities principal amount 7,375
5,330
MSR facilities principal amount 305
270
Unsecured senior notes principal amount 2,100 2,100 Advance Facilities As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As ofSeptember 30, 2021 , we had a total borrowing capacity of$1,740 , of which we could borrow an additional$1,201 . Warehouse and MSR Facilities Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. As ofSeptember 30, 2021 , we had a total borrowing capacity of$15,790 for warehouse and MSR facilities, of which we could borrow an additional$8,012 . Unsecured Senior Notes In 2020, we completed offerings of unsecured senior notes with maturity dates ranging from 2027 to 2030. We pay interest semi-annually to the holders of these notes at interest rates ranging from 5.125% to 6.000%. For more information regarding our indebtedness, see Note 9, Indebtedness, in the Notes to the Condensed Consolidated Financial Statements. Contractual Obligations As ofSeptember 30, 2021 , no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 except for the following:
In the second quarter of 2021, we entered into an agreement, under which we
committed a total of
54
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Various elements of our accounting policies, by their nature, are inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. In particular, we have identified the following policies that, due
to the judgment, estimates and assumptions inherent in those policies, are
critical to an understanding of our condensed consolidated financial statements.
These policies relate to fair value measurements, particularly those determined
to be Level 3 as discussed in Note 13, Fair Value Measurements, in the Notes to
the Condensed Consolidated Financial Statements, goodwill, and valuation and
realization of deferred tax assets. We believe that the judgment, estimates and
assumptions used in the preparation of our condensed consolidated financial
statements are appropriate given the factual circumstances at the time. However,
given the sensitivity of these critical accounting policies on our condensed
consolidated financial statements, the use of other judgments, estimates and
assumptions could result in material differences in our results of operations or
financial condition. Fair value measurements considered to be Level 3
representing estimated values based on significant unobservable inputs primarily
include (i) the valuation of MSRs, (ii) the valuation of excess spread
financing, and (iii) the valuation of IRLCs. For further information on our
critical accounting policies and estimates, please refer to the Company's Annual
Reports on Form 10-K for the year ended December 31, 2020 . There have been no
material changes to our critical accounting policies and estimates since
December 31, 2020 .
Other Matters
Recent Accounting Developments
Below lists recently issued accounting pronouncements applicable to us but not yet adopted.
Accounting Standards Update 2020-04 and 2021-01, collectively implemented as
Accounting Standards Codification Topic 848 ("ASC 848"), Reference Rate Reform
provide temporary optional expedients and exceptions for applying generally
accepted accounting principles to contract modifications, hedge accounting and
other transactions affected by the transitioning away from reference rates that
are expected to be discontinued, such as interbank offered rates and LIBOR. If
LIBOR ceases to exist or if the methods of calculating LIBOR change from current
methods for any reasons, interest rates on our floating rate loans, obligation
derivatives, and other financial instruments tied to LIBOR rates, may be
affected and need renegotiation with its lenders. In January 2021 , ASU 2021-01
was issued to clarify that all derivatives instruments affected by changes to
the interests rates used for discounting, margining alignment due to reference
rate reform are in scope of ASC 848. ASU 2020-04 and ASU 2021-01 are effective
March 2020 and January 2021 , respectively, through December 31, 2022 . The
guidance in ASU 2020-04 and ASU 2021-01 is optional and may be elected over time
as reference rate reform activities occur. We are currently assessing the impact
of ASU 2020-04 and ASU 2021-01 on our consolidated financial statements.
55--------------------------------------------------------------------------------
Table of Contents
GLOSSARY OF TERMSThis Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans. Agency. Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; theFederal Housing Administration , theDepartment of Veterans Affairs , theUS Department of Agriculture andGinnie Mae (and collectively, the "Agencies") Agency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA,USDA or guaranteed by theVA or sold into Ginnie Mae. Asset-Backed Securities ("ABS"). A financial security whose income payments and value is derived from and collateralized (or "backed") by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis. Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, theVA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs. Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs ("VA"). TheVA is a cabinet-level department of theU.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA. Direct-to-consumer originations ("DTC"). A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a
base servicing fee and the servicer and co-investment partner share the excess
servicing fees. This co-investment strategy reduces the required upfront capital
from the servicer when purchasing or investing in MSRs.
Federal National Mortgage Association ("Fannie Mae" or "FNMA"). FNMA was
federally chartered by the U.S. Congress in 1938 to support liquidity,
stability, and affordability in the secondary mortgage market, where existing
mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans
from lenders and resells them as mortgage-backed securities in the secondary
mortgage market.
Federal Housing Administration ("FHA"). The FHA is a U.S. federal government
agency within the Department of Housing and Urban Development (HUD). It provides
mortgage insurance on loans made by FHA-approved lenders in compliance with FHA
guidelines throughout the United States .
56
--------------------------------------------------------------------------------
Table of Contents
Federal Housing Finance Agency ("FHFA"). A U.S. federal government agency that
is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator
of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"). Freddie Mac
was chartered by Congress in 1970 to stabilize the nation's residential mortgage
markets and expand opportunities for homeownership and affordable rental
housing. Freddie Mac participates in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities for investment and by issuing
guaranteed mortgage-related securities.
Forbearance. An agreement between the mortgage servicer or lender and borrower
for a temporary postponement of mortgage payments. It is a form of repayment
relief granted by the lender or creditor in lieu of forcing a property into
foreclosure.
Government National Mortgage Association ("Ginnie Mae" or "GNMA"). GNMA is a
self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae
guarantees the timely payment of principal and interest on MBS backed by
federally insured or guaranteed loans - mainly loans insured by the FHA or
guaranteed by the VA . Ginnie Mae securities are the only MBS to carry the full
faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise ("GSE"). Certain entities established by the
U.S. Congress to provide liquidity, stability and affordability in residential
housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan
Banks.
Home Equity Conversion Mortgage ("HECM"). Reverse mortgage loans issued by FHA.
HECMs provide seniors aged 62 and older with a loan secured by their home which
can be taken as a lump sum, line of credit, or scheduled payments. HECM loan
balances grow over the loan term through borrower draws of scheduled payments or
line of credit draws as well as through the accrual of interest and FHA mortgage
insurance premiums. In accordance with FHA guidelines, HECMs are designed to
repay through foreclosure and subsequent liquidation of loan collateral after
the loan becomes due and payable. Shortfalls experienced by the servicer of the
HECM through the foreclosure and liquidation process can be claimed to FHA in
accordance with applicable guidelines.
HECM mortgage-backed securities ("HMBS"). A type of asset-backed security that is secured by a group of HECM loans.
Interest Rate Lock Commitments ("IRLC"). Agreements under which the interest
rate and the maximum amount of the mortgage loan are set prior to funding the
mortgage loan.
Loan Modification. Temporary or permanent modifications to loan terms with the
borrower, including the interest rate, amortization period and term of the
borrower's original mortgage loan. Loan modifications are usually made to loans
that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio ("LTV"). The unpaid principal balance of a mortgage loan as
a percentage of the total appraised or market value of the property that secures
the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds
the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage Servicing Right ("MSRs"). The right and obligation to service a loan or
pool of loans and to receive a servicing fee as well as certain ancillary
income. MSRs may be bought and sold, resulting in the transfer of loan servicing
obligations. MSRs are designated as such when the benefits of servicing the
loans are expected to adequately compensate the servicer for performing the
servicing.
MSR Facility. A line of credit backed by mortgage servicing rights that is used
for financing purposes. In certain cases, these lines may be a sub-limit of
another warehouse facility or alternatively exist on a stand-alone basis. These
facilities allow for same or next day draws at the request of the borrower.
57
--------------------------------------------------------------------------------
Table of Contents
Mortgage Servicing Liability ("MSL"). The right and obligation to service a
loan or pool of loans and to receive a servicing fee as well as certain
ancillary income. MSLs may be bought and sold, resulting in the transfer of loan
servicing obligations. MSLs are designated as such when the benefits of
servicing the loans are not expected to adequately compensate the servicer for
performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics. Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned ("REO"). Property acquired by the servicer on behalf of the
owner of a mortgage loan or pool of mortgage loans, usually through foreclosure
or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a
third-party real estate management firm is responsible for selling the REO. Net
proceeds of the sale are returned to the owner of the related loan or loans. In
most cases, the sale of REO does not generate enough to pay off the balance of
the loan underlying the REO, causing a loss to the owner of the related mortgage
loan.
Recapture. Voluntarily prepaid loans that are expected to be refinanced by the related servicer.
Refinancing. The process of working with existing borrowers to refinance their
mortgage loans. By refinancing loans for borrowers we currently service, we
retain the servicing rights, thereby extending the longevity of the servicing
cash flows.
Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity
Conversion Mortgage, enables seniors to borrow against the value of their home,
and no payment of principal or interest is required until the death of the
borrower or the sale of the home. These loans are designed to go through the
foreclosure and claim process to recover loan balance.
Servicing. The performance of contractually specified administrative functions
with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer
typically include, among other things, collecting monthly payments, maintaining
escrow accounts, providing periodic monthly statements to the borrower and
monthly reports to the loan owners or their agents, managing insurance,
monitoring delinquencies, executing foreclosures (as necessary), and remitting
fees to guarantors, trustees and service providers. A servicer is generally
compensated with a specific fee outlined in the contract established prior to
the commencement of the servicing activities.
58
--------------------------------------------------------------------------------
Table of Contents
Servicing Advances. In the course of servicing loans, servicers are required to
make advances that are reimbursable from collections on the related mortgage
loan or pool of loans. There are typically three types of servicing advances:
P&I Advances, T&I Advances and Corporate Advances.
(i) P&I Advances cover scheduled payments of principal and interest that have
not been timely paid by borrowers. P&I Advances serve to facilitate the cash
flows paid to holders of securities issued by the residential MBS trust. The
servicer is not the insurer or guarantor of the MBS and thus has the right to
cease the advancing of P&I, when the servicer deems the next advance
nonrecoverable.
(ii) T&I Advances pay specified expenses associated with the preservation of a
mortgaged property or the liquidation of defaulted mortgage loans, including but
not limited to property taxes, insurance premiums or other property-related
expenses that have not been timely paid by borrowers in order for the lien
holder to maintain its interest in the property.
(iii) Corporate Advances pay costs, fees and expenses incurred in foreclosing
upon, preserving defaulted loans and selling REO, including attorneys' and other
professional fees and expenses incurred in connection with foreclosure and
liquidation or other legal proceedings arising in the course of servicing the
defaulted mortgage loans.
Servicing Advances are reimbursed to the servicer if and when the borrower makes
a payment on the underlying mortgage loan at the time the loan is modified or
upon liquidation of the underlying mortgage loan but are primarily the
responsibility of the investor/owner of the loan. The types of servicing
advances that a servicer must make are set forth in its servicing agreement with
the owner of the mortgage loan or pool of mortgage loans. In some instances, a
servicer is allowed to cease Servicing Advances, if those advances will not be
recoverable from the property securing the loan.
Subservicing. Subservicing is the process of outsourcing the duties of the
primary servicer to a third-party servicer. The third-party servicer performs
the servicing responsibilities for a fee and is typically not responsible for
making servicing advances, which are subsequently reimbursed by the primary
servicer. The primary servicer is contractually liable to the owner of the loans
for the activities of the subservicer.
Unpaid Principal Balance ("UPB"). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
Warehouse Facility. A type of line of credit facility used to temporarily
finance mortgage loan originations to be sold in the secondary market. Pursuant
to a warehouse facility, a loan originator typically agrees to transfer to a
counterparty certain mortgage loans against the transfer of funds by the
counterpart, with a simultaneous agreement by the counterpart to transfer the
loans back to the originator at a date certain, or on demand, against the
transfer of funds from the originator.
59--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
