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, 2021 . 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 $804
billion as of June 30, 2022 . We believe this track record reflects our strong
operating capabilities, which include a 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 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 digital solutions that are personalized and
friction-less;
•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
We 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 extended to borrowers in our private label mortgage servicing portfolio. As ofJune 30, 2022 , approximately 1.0% of our customers were on a forbearance plan, down from a peak of 7.2% inJuly 2020 . 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 decreased to$1,241 as ofJune 30, 2022 from$1,301 as ofDecember 31, 2021 . Anticipated Trends In the second quarter of 2022, our servicing portfolio grew to$804 billion and we made progress towards our$1 trillion UPB goal. We expect to see continued portfolio growth in 2022, at a measured pace, through acquisitions or execution of additional subservicing contracts for the remainder of the year. In addition, we continue to expect the Servicing segment to benefit from rising interest rates, including decreased amortization, lower prepayment speeds and increased interest income. In the second quarter, our Originations segment met our strategic target of 60% refinance recapture and expect continued strong performance from refinance recapture through the end of the year. 31 -------------------------------------------------------------------------------- Table of Contents In 2022, the inflation rate has continued to increase. Inflationary pressures may limit a borrower's disposable income, which can decrease customers' ability to enter into mortgage transactions. Inflationary pressures, along with supply chain disruptions, may also increase our operating costs. However, historically changes in interest rates have a greater impact on our financial results than changes in inflation. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or extent as the inflation rate. Results of Operations Table 1. Consolidated Operations Three Months Ended June 30, 2022 2021 Change Revenues - operational(1) $ 399$ 714 $ (315) Revenues - mark-to-market 200 (140) 340 Total revenues 599 574 25 Total expenses 328 425 (97) Total other (expenses) income, net (66) 418 (484) Income from continuing operations before income tax expense 205 567 (362) Less: Income tax expense 54 140 (86) Net income from continuing operations $ 151 $
427
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
During the three months endedJune 30, 2022 , income from continuing operations before income tax expense decreased to$205 from$567 in 2021. The decrease was primarily driven by the change in total other (expenses) income, net, partially offset by lower total expenses. The change in total other (expenses) income, net was primarily due to completion of the sale of our Title business, which resulted in a$487 gain in 2021. The decrease in total expenses was primarily driven by lower salaries, wages and benefits in our Originations segment due to lower headcount in both the direct-to-consumer and correspondent channels as a result of right sizing the organization consistent with lower origination volumes. See further discussions in the Segment Results section of the MD&A. The effective tax rate for continuing operations during the three months endedJune 30, 2022 was 26.0% as compared to 24.8% in 2021. The change in effective tax rate is primarily attributable to the impact of quarterly discrete tax items relative to income before taxes for the respective period, including the excess tax benefit from stock-based compensation and prior period tax credits. 32 -------------------------------------------------------------------------------- Table of Contents Table 1.1 Consolidated Operations Six Months Ended June 30, 2022 2021 Change Revenues - operational(1) $ 898$ 1,608 $ (710) Revenues - mark-to-market 753 225 528 Total revenues 1,651 1,833 (182) Total expenses 666 879 (213) Total other income, net 86 338 (252) Income from continuing operations before income tax expense 1,071 1,292 (221) Less: Income tax expense 262 306 (44) Net income from continuing operations $ 809 $
986
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
During the six months endedJune 30, 2022 , income from continuing operations before income tax expense decreased to$1,071 from$1,292 in 2021. The decrease was primarily driven by a decrease in total other income (expenses), net and total revenues, partially offset by lower total expenses. Total other income (expenses), net decreased primarily due to a$223 gain recorded in the first quarter of 2022 upon completion of the Sagent Transaction compared to a$487 gain recorded in the second quarter of 2021 upon completion of the sale of our Title business. See further discussions in Note 2, Dispositions, in the Notes to the Condensed Consolidated Financial Statements. Total revenues decreased primarily due to a decrease in revenues from our Originations segment due to lower origination volumes, partially offset by an increase in favorable mark-to-market adjustments from our Servicing segment, both primarily driven by higher mortgage rates in 2022. The decrease in total expenses was primarily driven by lower salaries, wages and benefits in our Originations segment due to lower headcount as we right sized the organization in both the direct-to-consumer and correspondent channels as a result of lower origination volumes. See further discussions in the Segment Results section of the MD&A. The effective tax rate for continuing operations during the six months endedJune 30, 2022 was 24.4% as compared to 23.7% in 2021. The change in effective tax rate is primarily attributable to the impact of quarterly discrete tax items relative to income before taxes for the respective period, including the excess tax benefit from stock-based compensation and prior period tax credits. 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.
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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 that creates operating leverage, 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.
Table 2. Servicer Ratings
Fitch(1) Moody's(2) S&P(3)
Rating date May 2021 April 2022 June 2022
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
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Table of Contents The following tables set forth the results of operations for the Servicing segment:
Table 3. Servicing Segment Results of Operations
Three Months Ended June 30,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 394 20 $ 443 27 $ (49) (7)
Amortization, net of accretion (199) (10) (198) (12) (1) 2
Mark-to-market 200 10 (140) (9) 340 19
Total revenues 395 20 105 6 290 14
Expenses
Salaries, wages and benefits 84 4 70 4 14 -
General and administrative
Servicing support fees 24 1 22 1 2 -
Corporate and other general and
administrative expenses 32 2 30 2 2 -
Foreclosure and other
liquidation related recoveries,
net (2) - (8) - 6 -
Depreciation and amortization 5 - 7 - (2) -
Total general and administrative
expenses 59 3 51 3 8 -
Total expenses 143 7 121 7 22 -
Other income (expense)
Other interest income 35 2 25 2 10 -
Advance interest expense (8) (1) (8) - - (1)
Other interest expense (53) (3) (57) (4) 4 1
Interest expense (61) (4) (65) (4) 4 -
Total other expenses, net (26) (2) (40) (2) 14 -
Income (loss) before income tax
expense (benefit) $ 226 11 $ (56) (3) $ 282 14
Weighted average cost - advance
facilities 3.1 % 3.4 % (0.3) %
Weighted average cost - excess
spread financing 8.7 % 9.0 % (0.3) %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
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Table 3.1 Servicing - Revenues
Three Months Ended June 30,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
MSR Operational Revenue
Base servicing fees $ 324 16 $ 223 14 $ 101 2
Modification fees(2) 4 - 7 - (3) -
Incentive fees(2) - - - - - -
Late payment fees(2) 15 1 14 1 1 -
Other ancillary revenues(2) 15 1 210 13 (195) (12)
Total MSR operational revenue 358 18 454 28 (96) (10)
Base subservicing fees and other
subservicing revenue(2) 68 3 65 4 3 (1)
Total servicing fee revenue 426 21 519 32 (93) (11)
MSR financing liability costs (5) - (6) (1) 1 1
Excess spread payments and
portfolio runoff (27) (1) (70) (4) 43 3
Total operational revenue 394 20 443 27 (49) (7)
Amortization, Net of Accretion
MSR amortization (226) (11) (268) (16) 42 5
Excess spread accretion 27 1 70 4 (43) (3)
Total amortization, net of
accretion (199) (10) (198) (12) (1) 2
Mark-to-Market Adjustments
MSR MTM 326 16 (200) (13) 526 29
MTM Adjustments(3) (94) (4) 31 2 (125) (6)
Excess spread / financing MTM (32) (2) 29 2 (61) (4)
Total MTM adjustments 200 10 (140) (9) 340 19
Total revenues - Servicing $ 395 20 $ 105 6 $ 290 14
(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 $6 and $8 during the three months
ended June 30, 2022 and 2021, respectively. In addition, MTM Adjustments
included a negative $89 and positive $39 impact from MSR hedging activities
during the three months ended June 30, 2022 and 2021, respectively.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing - Operational revenue decreased during the three months ended June 30,
2022 as compared to 2021 primarily due to a decrease in other ancillary revenue
from early-buyout revenues associated with loans bought out of GNMA
securitization, modified and redelivered following GNMA guidelines primarily
driven by a decrease in mortgage loans remaining in forbearance program in 2022.
The decrease was partially offset by an increase in base servicing fees
primarily due to a larger servicing UPB portfolio in 2022.
MSR amortization decreased during the three months ended June 30, 2022 as
compared to 2021, primarily due to lower prepayments driven by higher mortgage
rates in 2022, partially offset by a higher average MSR UPB and higher average
MSR fair value.
The change in MSR MTM and excess spread and financing MTM during the three
months ended June 30, 2022 compared to 2021, was primarily due to an increase in
mortgage rates in 2022 compared to 2021, which impacted prepayment speeds and
increased the fair value of the MSR.
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Subservicing - There were no material changes for Subservicing fees during the
three months ended June 30, 2022 as compared to 2021.
Servicing Segment Expenses
Total expenses increased during the three months ended June 30, 2022 as compared
to 2021, primarily driven by an increase in salaries, wages and benefits
resulting from higher headcount-related costs due to growth of our servicing
portfolio.
Servicing Segment Other Income (Expenses), net
Total other expenses, net decreased during the three months ended June 30, 2022
as compared to 2021, primarily due to higher other interest income driven by
higher interest income earned on custodial balances due to higher interest
rates.
Table 4. Servicing Segment Results of Operations
Six Months Ended June 30,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 759 20 $ 813 26 $ (54) (6)
Amortization, net of accretion (401) (11) (365) (12) (36) 1
Mark-to-market 753 20 225 7 528 13
Total revenues 1,111 29 673 21 438 8
Expenses
Salaries, wages and benefits 159 5 136 4 23 1
General and administrative
Servicing support fees 35 1 43 1 (8) -
Corporate and other general and
administrative expenses 58 1 60 2 (2) (1)
Foreclosure and other liquidation
related expenses (recoveries), net 4 - (20) - 24 -
Depreciation and amortization 10 - 12 - (2) -
Total general and administrative
expenses 107 2 95 3 12 (1)
Total expenses 266 7 231 7 35 -
Other income (expense)
Other interest income 54 1 48 1 6 -
Advance interest expense (14) - (18) - 4 -
Other interest expense (101) (3) (118) (4) 17 1
Interest expense (115) (3) (136) (4) 21 1
Total other expenses, net (61) (2) (88) (3) 27 1
Income before income tax expense $ 784 20 $ 354 11 $ 430 9
Weighted average cost - advance
facilities 2.8 % 3.2 % (0.4) %
Weighted average cost - excess
spread financing 8.9 % 9.0 % (0.1) %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
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Table 4.1 Servicing - Revenues
Six Months Ended June 30,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
MSR Operational Revenue
Base servicing fees $ 596 16 $ 447 14 $ 149 2
Modification fees(2) 9 - 13 1 (4) (1)
Incentive fees(2) - - 1 - (1) -
Late payment fees(2) 30 1 29 1 1 -
Other ancillary revenues(2) 57 1 352 11 (295) (10)
Total MSR operational revenue 692 18 842 27 (150) (9)
Base subservicing fees and other
subservicing revenue(2) 137 3 130 4 7 (1)
Total servicing fee revenue 829 21 972 31 (143) (10)
MSR financing liability costs (10) - (13) (1) 3 1
Excess spread payments and
portfolio runoff (60) (1) (146) (4) 86 3
Total operational revenue 759 20 813 26 (54) (6)
Amortization, Net of Accretion
MSR amortization (461) (12) (511) (16) 50 4
Excess spread accretion 60 1 146 4 (86) (3)
Total amortization, net of
accretion (401) (11) (365) (12) (36) 1
Mark-to-Market Adjustments
MSR MTM 1,124 29 321 10 803 19
MTM Adjustments(3) (240) (6) (94) (3) (146) (3)
Excess spread / financing MTM (131) (3) (2) - (129) (3)
Total MTM adjustments 753 20 225 7 528 13
Total revenues - Servicing $ 1,111 29 $ 673 21 $ 438 8
(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. In addition, other
subservicing revenue for the six months ended June 30, 2022 includes revenue
related to an interim subserviced portfolio that transferred on April 1, 2022 .
See further discussions in Note 2, Dispositions, in the Notes to the Condensed
Consolidated Financial Statements.
(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 $12 and $20 during the six months
ended June 30, 2022 and 2021, respectively. In addition, MTM Adjustments
included a negative $229 and $74 impact from MSR hedging activities during the
six months ended June 30, 2022 and 2021, respectively.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing - Operational revenue decreased during the six months ended June 30,
2022 as compared to 2021 primarily due to a decrease in other ancillary revenue
from early-buyout revenues associated with loans bought out of GNMA
securitization, modified and redelivered following GNMA guidelines primarily
driven by a decrease in mortgage loans remaining in forbearance program in 2022,
partially offset by an increase in base servicing fees primarily due to a larger
servicing UPB portfolio in 2022.
MSR amortization decreased during the six months ended June 30, 2022 as compared
to 2021, primarily due to lower prepayments driven by higher mortgage rates in
2022, partially offset by a higher average MSR UPB and higher average MSR fair
value.
The change in MSR MTM and excess spread and financing MTM during the six months
ended June 30, 2022 compared to 2021, was primarily due to an increase in
mortgage rates in 2022 compared to 2021, which impacted prepayment speeds and
increased the fair value of the MSR.
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Subservicing - There were no material changes for Subservicing fees during the
six months ended
Servicing Segment Expenses Total expenses increased during the six months endedJune 30, 2022 as compared to 2021, primarily driven by a change in foreclosure and other liquidation related expenses (recoveries), net and an increase in salaries, wages and benefits. We had foreclosure and other liquidation related recoveries, net in 2021 due to the release of loss reserves on servicing advances as a result of loan modification programs related to COVID-19 pandemic compared to foreclosure and other liquidation related expenses, net in 2022, partially offset by lower servicing support fees. The increase in salaries, wages and benefits was primarily due to higher headcount-related costs due to growth of our servicing portfolio. Servicing Segment Other Income (Expenses), net Total other expenses, net decreased during the six months endedJune 30, 2022 as compared to 2021, primarily due to a decrease in other interest expense due to lower compensating interest expense and bank fees.
Table 5. Servicing Portfolio - Unpaid Principal Balances
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Average UPB
MSRs
406,484 356,354 400,024 345,792
Total average UPB $ 795,739 $ 647,300 $ 772,652 $ 632,025
June 30, 2022 June 30, 2021
Carrying
UPB Amount bps UPB Carrying Amount bps
MSRs
Agency $ 364,436 $ 5,806 159 $ 248,799 $ 2,955 119
Non-agency 32,951 345 105 38,656 352 91
Total MSRs 397,387 6,151 155 287,455 3,307 115
Subservicing and other(1)
Agency 381,101 N/A 352,643 N/A
Non-agency 25,130 N/A 14,219 N/A
Total subservicing and other 406,231 N/A 366,862 N/A
Total ending balance $ 803,618 $ 6,151 $ 654,317 $ 3,307
MSRs UPB Encumbrance June 30, 2022 June 30, 2021
MSRs - unencumbered $ 308,295 $ 143,420
MSRs - encumbered(2) 89,092 144,035
MSRs UPB $ 397,387 $ 287,455
(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 MSRs consist of residential mortgage loans included within our
excess spread financing transactions and MSR financing liability.
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The following tables provide a rollforward of our MSR and subservicing and other
portfolio UPB:
Table 6. Servicing and Subservicing and Other Portfolio UPB Rollforward
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Subservicing and Subservicing and
MSR Other Total MSR Other Total
Balance - beginning of
period $ 411,840 $ 383,959 $ 795,799 $ 276,028 $ 352,481 $ 628,509
Additions:
Originations 7,794 - 7,794 20,907 1,374 22,281
Acquisitions / Increase in
subservicing(1) (6,437) 77,120 70,683 12,414 49,642 62,056
Deductions:
Dispositions (666) (40,585) (41,251) (18) (4,815) (4,833)
Principal reductions and
other (3,819) (3,520) (7,339) (2,688) (3,627) (6,315)
Voluntary reductions(2) (11,118) (10,724) (21,842) (18,989) (28,162) (47,151) Involuntary reductions(3) (112) (19) (131) (123) (31) (154) Net changes in loans serviced by others (95) - (95) (76) - (76) Balance - end of period$ 397,387 $ 406,231 $ 803,618 $ 287,455 $ 366,862 $ 654,317
(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 endedJune 30, 2022 , our MSR UPB decreased primarily due to voluntary reductions and net transfers to our subservicing and other portfolio, partially offset by originations. During the three months endedJune 30, 2022 , our subservicing and other portfolio UPB increased primarily due to portfolio growth from our subservicing clients, partially offset by dispositions.
Table 6.1 Servicing and Subservicing and Other Portfolio UPB Rollforward
Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Subservicing and Subservicing and
MSR Other Total MSR Other Total
Balance - beginning of
period $ 339,208 $ 370,520 $ 709,728 $ 271,189 $ 336,513 $ 607,702
Additions:
Originations 18,404 - 18,404 44,530 2,878 47,408
Acquisitions / Increase in
subservicing(1) 72,949 113,591 186,540 17,061 102,960 120,021
Deductions:
Dispositions (685) (45,573) (46,258) (68) (5,945) (6,013)
Principal reductions and
other (7,386) (6,888) (14,274) (5,390) (6,858) (12,248)
Voluntary reductions(2) (24,724) (25,380) (50,104) (39,463) (62,617)
(102,080)
Involuntary reductions(3) (217) (39) (256) (256) (69) (325) Net changes in loans serviced by others (162) - (162) (148) - (148) Balance - end of period$ 397,387 $ 406,231 $ 803,618 $ 287,455 $ 366,862 $ 654,317
(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.
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During the six months ended June 30, 2022 , our MSR UPB increased primarily due
to acquisitions, partially offset by voluntary reductions and principal
reductions. During the six months ended June 30, 2022 , our subservicing and
other portfolio UPB increased primarily due to portfolio growth from our
subservicing clients, partially offset by dispositions and voluntary reductions.
The table below summarizes the overall performance of the servicing and subservicing portfolio:
Table 7. Key Performance Metrics - Servicing and Subservicing Portfolio(1)
June 30, 2022 June 30, 2021
Loan count(2) 3,926,303 3,461,557
Average loan amount(3) $ 204,645 $ 189,026
Average coupon - agency(4) 3.5 % 3.8 %
Average coupon - non-agency(4) 4.4 % 4.4 %
60+ delinquent (% of loans)(5) 2.7 % 4.5 %
90+ delinquent (% of loans)(5) 2.4 % 4.2 %
120+ delinquent (% of loans)(5) 2.2 % 4.0 %
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Total prepayment speed (12-month
constant prepayment rate) 11.0 % 26.0 % 12.9 % 28.4 %
(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 June 30, 2022 and 2021, loan count includes 40,132 and 123,194 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 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 decreased from 2021 as the COVID-19 pandemic's
effect on the macroeconomic environment declines. Delinquency rates increased
slightly when compared with first quarter of 2022 and due to macro-economic
uncertainty, delinquency rates may continue to increase during the remainder of
2022; however, we do not anticipate a significant increase in foreclosures in
excess of pre-pandemic levels due to the effectiveness of the forbearance
programs in place and the historically high levels of equity that borrowers have
accrued which provides borrowers with additional options.
Table 8. MSRs Loan Modifications and Workout Units
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Modifications(1) 11,899 17,545 (5,646) 30,316 33,180 (2,864)
Workouts(2) 13,822 18,036 (4,214) 27,903 36,377 (8,474)
Total modifications and
workout units 25,721 35,581 (9,860) 58,219 69,557 (11,338)
(1)Modifications consist of agency programs, including forbearance options under
the CARES Act, designed to adjust the terms of the loan (e.g., reduced interest
rates).
(2)Workouts consist of other loss mitigation options designed to assist
borrowers and keep them in their homes, but 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.
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Total modifications during the three and six months ended June 30, 2022
decreased compared to 2021 primarily due to a decrease in modifications related
to loans impacted by the COVID-19 pandemic. Total workouts during the three and
six months ended June 30, 2022 decreased compared to 2021 primarily due to a
decrease in customers who were exiting forbearance plans, as there were fewer
customers in forbearance.
Servicing Portfolio and Related Liabilities
The following table sets forth the activities of MSRs:
Table 9. MSRs - Fair Value Rollforward
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Fair value - beginning of period
$ 4,223 $ 2,703 Additions: Servicing retained from mortgage loans sold 160 266 360 554 Purchases of servicing rights 163 151 1,178 218 Dispositions: Sales of servicing assets (285) (10) (289) (12) Changes in fair value: Due to changes in valuation inputs or assumptions used in the valuation model (MSR fair value MTM): Agency 338 (175) 1,114 197 Non-agency (12) (25) 10 124 Changes in valuation due to amortization: Scheduled principal payments (46) (25) (89) (49) Prepayments Voluntary prepayments Agency (167) (233) (344) (440) Non-agency (11) (9) (25) (20) Involuntary prepayments Agency (2) (1) (3) (2) Non-agency - - - - Other changes(1) 7 14 16 34 Fair value - end of period$ 6,151 $ 3,307 $ 6,151 $ 3,307
(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 MSRs as ofJune 30, 2022 andDecember 31, 2021 . 42
-------------------------------------------------------------------------------- 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. In
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 ofJune 30, 2022 andDecember 31, 2021 .
The following table sets forth the change in the excess spread financing:
Table 10. Excess Spread Financing - Rollforward
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Fair value - beginning of period $ 815
$ 768$ 934 Additions: New financings - - - - Deductions: Repayments (292) - (292) - Settlements (29) (40) (61) (81) Changes in fair value: Agency 32 (29) 105 9 Non-agency 6 2 12 5 Fair value - end of period $ 532$ 867 $ 532$ 867 43
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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 and purchase transaction 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 six months endedJune 30, 2022 , our total originations included loans for 15,002 customers with low FICOs (<660), 23,071 customers with income below theU.S. median household income, 12,842 first-time homebuyers, and 4,259 veterans. During this time period, we originated a total of 15,923Ginnie Mae loans, which are designed for first-time homebuyers and low- and moderate-income borrowers, comprising$4 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.
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The following tables set forth the results of operations for the Originations
segment:
Table 11. Originations Segment Results of Operations
Three Months Ended June 30,
2022 2021 Change
Revenues
Service related, net - Originations(1) $ 24 $ 45 $ (21)
Net gain on mortgage loans held for sale
Net gain on loans originated and sold(2) 10 139 (129)
Capitalized servicing rights(3) 148 246 (98)
Total net gain on mortgage loans held for sale 158 385 (227)
Total revenues 182 430 (248)
Expenses
Salaries, wages and benefits 86 164 (78)
General and administrative
Loan origination expenses 15 26 (11)
Corporate and other general administrative
expenses 15 17 (2)
Marketing and professional service fees 5 13 (8)
Depreciation and amortization 5 6 (1)
Total general and administrative 40 62 (22)
Total expenses 126 226 (100)
Other income (expenses)
Interest income 15 26 (11)
Interest expense (10) (23) 13
Total other income, net 5 3 2
Income before income tax expense $ 61 $ 207 $ (146)
Weighted average note rate - mortgage loans held
for sale 4.6 % 3.1 % 1.5 %
Weighted average cost of funds (excluding
facility fees) 3.1 % 2.1 % 1.0 %
(1)Service related revenues, net - Originations refers to fees collected from
customers for originated loans and from other lenders for loans purchased
through the correspondent channel, and includes loan application, underwriting
and other similar fees.
(2)Net gain on loans originated and sold represents the gains and losses from
the origination, purchase, and sale of loans and related derivative instruments.
Gain from the origination and sale of loans are affected by the volume and
margin of our originations activity and impacted by fluctuations in mortgage
rates.
(3)Capitalized servicing rights represent the fair value attributed to mortgage
servicing rights at the time in which they are retained in connection with the
sale of loans during the period.
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Table 11.1 Originations - Key Metrics
Three Months Ended June 30,
2022 2021 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 3,484 $ 8,634 $ (5,150)
Other locked pull through adjusted volume(1) 3,001 9,724 (6,723)
Total pull through adjusted lock volume $ 6,485 $ 18,358 $ (11,873)
Funded volume $ 7,767 $ 22,227 $ (14,460)
Volume of loans sold $ 9,400 $ 24,950 $ (15,550)
Recapture percentage(2) 29.2% 31.9% (2.7)%
Refinance recapture percentage(3) 59.7% 41.5% 18.2%
Purchase as a percentage of funded volume 37.2% 23.9% 13.3%
Value of capitalized servicing on retained
settlements 194 bps 128 bps 66 bps
Originations Margin
Revenue $ 182 $ 430 $ (248)
Pull through adjusted lock volume $ 6,485 $ 18,358 $ (11,873)
Revenue as a percentage of pull through
adjusted lock volume(4) 2.81 % 2.34 % 0.47 %
Expenses(5) $ 121 $ 223 $ (102)
Funded volume $ 7,767 $ 22,227 $ (14,460)
Expenses as a percentage of funded volume(6) 1.56 % 1.00% 0.56 %
Originations Margin 1.25 % 1.34 % (0.09) %
(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 occur
as a result of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(3)Refinance recapture percentage includes new loan originations for refinance
transactions where borrower retention and property retention occurs as a result
of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(4)Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(5)Expenses include total expenses and total other income (expenses), net.
(6)Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income before income tax expense decreased for the three months ended June 30,
2022 as compared to 2021 primarily due to a decrease in total revenues from net
gain on loans originated and sold and a decrease in capitalized servicing
rights, partially offset by a decrease in total expenses due to lower salaries,
wages, and benefits. The Originations Margin for the three months ended June 30,
2022 decreased as compared to 2021 primarily due to a higher ratio of expenses
as a percentage of funded volume driven by a lower funded volume due to higher
mortgage rates in 2022, partially offset by higher revenue as a percentage of
pull through adjusted lock volume.
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Originations Segment Revenues
Total revenues decreased during the three months ended June 30, 2022 compared to
2021 primarily driven by a decline in net gain on loans originated and sold and
a decrease in capitalized servicing rights. Revenues from net gain on loans
originated and sold decreased in connection with lower favorable fair value
adjustment on loans held for sale and mark-to-market on interest rate locks and
loan commitments, partially offset by a lower unfavorable mark-to-market
adjustments on loans derivatives and hedges. Additionally, the decrease in
capitalized servicing rights was primarily driven by lower origination volumes,
partially offset by an increase in value of capitalized servicing retained on
settlements due to higher mortgage rates in 2022.
Originations Segment Expenses
Total expenses during the three months ended June 30, 2022 decreased when
compared to 2021 primarily due to a decline in salaries, wages and benefits
expense, and loan origination expenses. Salaries, wages and benefits expense
declined in 2022 primarily due to decreased headcount in both the
direct-to-consumer and correspondent channels as a result of right sizing the
organization consistent with lower origination volumes. Loan origination
expenses declined in 2022 primarily due to cost reduction initiatives in
connection with decreased origination volumes.
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. Total other income, net, during the three months ended June
30, 2022 increased as compared to 2021 primarily due to lower interest expense,
partially offset by a decrease in interest income both driven by lower funded
volume.
Table 12. Originations Segment Results of Operations
Six Months Ended June 30,
2022 2021 Change
Revenues
Service related, net - Originations(1) $ 66 $ 88 $ (22)
Net gain on mortgage loans held for sale
Net gain on loans originated and sold(2) 129 417 (288)
Capitalized servicing rights(3) 311 520 (209)
Total net gain on mortgage loans held for sale 440 937 (497)
Total revenues 506 1,025 (519)
Expenses
Salaries, wages and benefits 207 331 (124)
General and administrative
Loan origination expenses 35 53 (18)
Corporate and other general administrative
expenses 32 37 (5)
Marketing and professional service fees 17 26 (9)
Depreciation and amortization 9 10 (1)
Total general and administrative 93 126 (33)
Total expenses 300 457 (157)
Other income (expenses)
Interest income 32 49 (17)
Interest expense (22) (48) 26
Total other income, net 10 1 9
Income before income tax expense $ 216 $ 569 $ (353)
Weighted average note rate - mortgage loans held
for sale 3.8 % 3.0 % 0.8 %
Weighted average cost of funds (excluding
facility fees) 2.6 % 2.2 % 0.4 %
(1)Service related revenues, net - Originations refers to fees collected from
customers for originated loans and from other lenders for loans purchased
through the correspondent channel, and includes loan application, underwriting
and other similar fees.
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(2)Net gain on loans originated and sold represents the gains and losses from
the origination, purchase, and sale of loans and related derivative instruments.
Gain from the origination and sale of loans are affected by the volume and
margin of our originations activity and impacted by fluctuations in mortgage
rates.
(3)Capitalized servicing rights represent the fair value attributed to mortgage
servicing rights at the time in which they are retained in connection with the
sale of loans during the period.
Table 12.1 Originations - Key Metrics
Six Months Ended June 30,
2022 2021 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 10,230 $ 18,956 $ (8,726)
Other locked pull through adjusted volume(1) 6,587 22,669 (16,082)
Total pull through adjusted lock volume $ 16,817 $ 41,625 $ (24,808)
Funded volume $ 19,340 $ 47,360 $ (28,020)
Volume of loans sold $ 23,090 $ 51,261 $ (28,171)
Recapture percentage(2) 34.2% 31.5% 2.7%
Refinance recapture percentage(3) 52.9% 38.6% 14.3%
Purchase as a percentage of funded volume 28.5% 17.7% 10.8%
Value of capitalized servicing on retained
settlements 179 bps 128 bps 51 bps
Originations Margin
Revenue $ 506 $ 1,025 $ (519)
Pull through adjusted lock volume $ 16,817 $ 41,625 $ (24,808)
Revenue as a percentage of pull through
adjusted lock volume(4) 3.01 % 2.46 % 0.55 %
Expenses(5) $ 290 $ 456 $ (166)
Funded volume $ 19,340 $ 47,360 $ (28,020)
Expenses as a percentage of funded volume(6) 1.50 % 0.96% 0.54 %
Originations Margin 1.51 % 1.50 % 0.01 %
(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 occur
as a result of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(3)Refinance recapture percentage includes new loan originations for refinance
transactions where borrower retention and property retention occurs as a result
of a loan payoff from our servicing portfolio. Excludes loans we are
contractually unable to solicit.
(4)Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(5)Expenses include total expenses and total other income (expenses), net.
(6)Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income before income tax expense decreased for the six months ended June 30,
2022 as compared to 2021 primarily due to a decrease in total revenues from net
gain on loans originated and sold and a decrease in capitalized servicing
rights, partially offset by a decrease in total expenses due to lower salaries,
wages, and benefits. The Originations Margin for the six months ended June 30,
2022 increased as compared to 2021 primarily due to a higher ratio of revenue as
a percentage of pull through adjusted lock volume driven by higher margins from
a shift in channel mix from correspondent to direct-to-consumer, partially
offset by higher expenses as a percentage of funded volume. Direct-to-consumer
channel mix for the six months ended June 30, 2022 was 61% compared to 46% in
2021.
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Originations Segment Revenues
Total revenues decreased during the six months ended June 30, 2022 compared to
2021 primarily driven by a decline in net gain on loans originated and sold and
a decrease in capitalized servicing rights. Revenues from net gain on loans
originated and sold decreased in connection with lower favorable mark-to-market
adjustments on loans derivatives and hedges, partially offset by a lower
unfavorable mark-to-market on interest rate locks and loan commitments and fair
value adjustment on loans held for sale. Additionally, the decrease in
capitalized servicing rights was primarily driven by lower origination volumes,
partially offset by an increase in value of capitalized servicing retained on
settlements due to higher mortgage rates in 2022.
Originations Segment Expenses
Total expenses during the six months ended June 30, 2022 decreased when compared
to 2021 primarily due to a decline in salaries, wages and benefits expense, and
loan origination expenses. Salaries, wages and benefits expense declined in 2022
primarily due to decreased headcount as we right sized the organization in both
the direct-to-consumer and correspondent channels as a result of lower
origination volumes. Loan origination expenses declined in 2022 primarily due to
cost reduction initiatives in connection with decreased origination volumes.
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. Total other income, net, during the six months ended June 30,
2022 increased as compared to 2021 primarily due to lower interest expense,
partially offset by a decrease in interest income both driven by lower funded
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 due to the sale of our Title, Valuation
and Field Services businesses. Prior periods amounts have been updated to
reflect the change in segment presentation. Xome continues to operate its REO
exchange business, which facilitates the sale of foreclosed properties. See Note
16, Segment Information, for further details on the change in reportable
segments.
The following table set forth the selected financial results for Corporate/Other:
Table 13. Corporate/Other Selected Financial Results
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Corporate/Other - Operations
Total revenues $ 22 $ 39 $ (17) $ 34 $ 135 $ (101)
Total expenses 59 78 (19) 100 191 (91)
Interest expense 40 31 9 80 61 19
Other (expense) income, net (5) 486 (491) 217 486 (269)
Key Metrics
Average exchange inventory under
management 19,454 14,196 5,258 16,812 14,203 2,609
Total revenues and total expenses decreased during the three and six months
ended
Interest expense increased in the three and six months endedJune 30, 2022 as compared to 2021 primarily due to the issuance of the unsecured senior notes due 2031 in the fourth quarter of 2021. The change in other (expense) income, net, in the three months endedJune 30, 2022 as compared to 2021 was primarily due to a gain of$487 that was recorded in the second quarter of 2021 upon completion of the sale of our Title business. The change in other (expense) income, net, in the six months endedJune 30, 2022 as compared to 2021 was primarily due to a gain of$223 that was recorded in the first quarter of 2022 upon completion of the Sagent Transaction as compared to a gain of$487 that was recorded in the second quarter of 2021 upon completion of the sale of our Title business. 49 -------------------------------------------------------------------------------- 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$514 as ofJune 30, 2022 compared to$895 as ofDecember 31, 2021 . During the six months endedJune 30, 2022 , we bought back 3.0 million shares of our outstanding common stock for a total cost of$135 as part of our stock repurchase program. We have sufficient borrowing capacity to support our operations. During the three months endedJune 30, 2022 , we increased capacity on our MSR facilities by$600 , including a new multi-year$400 facility and an additional$200 upsize to an existing facility. As ofJune 30, 2022 , total borrowing capacity was$16,000 , of which$12,588 was unused. As ofJune 30, 2022 , our total advance facility capacity was$1,175 , of which$652 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
Six Months Ended June 30,
2022 2021 Change
Net cash attributable to:
Operating activities $ 2,582 $ (114) $ 2,696
Investing activities (885) (247) (638)
Financing activities (2,109) 354 (2,463)
Net (decrease) in cash, cash equivalents, and
restricted cash $ (412) $ (7) $ (405)
50-------------------------------------------------------------------------------- Table of Contents Operating activities Our operating activities generated cash of$2,582 during the six months endedJune 30, 2022 compared to cash used of$114 in 2021. The change in cash attributable to operating activities was primarily related to continuing operations, driven by$2,454 in cash generated from originations net sales activities in 2022 compared to$449 of cash used in 2021, as a result of sales proceeds and loan payment proceeds exceeding loan purchases. Investing activities Our investing activities used cash of$885 during the six months endedJune 30, 2022 compared to cash used of$247 in 2021. The increase in cash used in investing activities was primarily related to continuing operations, driven by an increase of$934 in cash used for the purchase of mortgage servicing rights in 2022, partially offset by an increase of$262 in cash generated by proceeds on sales of mortgage servicing rights. Financing activities Our financing activities used cash of$2,109 during the six months endedJune 30, 2022 compared to cash generated of$354 in 2021. The change in cash attributable to financing activities was primarily related to continuing operations, driven by a net repayment of$1,597 in 2022 compared to net borrowing of$1,047 in 2021 on our advance and warehouse facilities.
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 ofJune 30, 2022 , 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 base of$2.5 plus 35 basis points of the issuer's total single-family effective outstanding 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. Minimum Capital Ratio ?FHFA andGinnie Mae - a ratio of TangibleNet Worth to Total Assets greater than 6%.
Secured Debt to Gross Tangible Asset Ratio •Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
As of
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. 51 -------------------------------------------------------------------------------- Table of Contents 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 June 30, 2022 December 31, 2021 Advance facilities principal amount $ 523 $
614
Warehouse facilities principal amount 1,939
4,125
MSR facilities principal amount 950
270
Unsecured senior notes principal amount 2,700 2,700 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 ofJune 30, 2022 , we had a total borrowing capacity of$1,175 , of which we could borrow an additional$652 . 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 ofJune 30, 2022 , we had a total borrowing capacity of$14,825 for warehouse and MSR facilities, of which we could borrow an additional$11,936 . Unsecured Senior Notes In 2021, we completed an offering of an unsecured senior note with a maturity date of 2031. 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 ofJune 30, 2022 , 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, 2021 . 52 -------------------------------------------------------------------------------- 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 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 endedDecember 31, 2021 . There have been no material changes to our critical accounting policies and estimates sinceDecember 31, 2021 . 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 were effective
March 2020 and January 2021 , respectively, for contract modifications, existing
hedging relationships and other impacted transactions 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 have not elected to apply any
of the amendments through June 30, 2022 and are currently assessing the impact
of ASU 2020-04 and ASU 2021-01 on our consolidated financial statements.
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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.
Exchange inventory. Consists of Xome's residential real estate inventory ranging from pre-foreclosure to bank-owned properties.
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.
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Federal Housing Administration ("FHA"). The FHA is a U.S. federal government
agency within the Department of Housing and Urban Development (HUD). It provides
mortgage insurance on loans made by FHA-approved lenders in compliance with FHA
guidelines throughout the United States .
Federal Housing Finance Agency ("FHFA"). A U.S. federal government agency that
is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator
of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"). Freddie Mac
was chartered by Congress in 1970 to stabilize the nation's residential mortgage
markets and expand opportunities for homeownership and affordable rental
housing. Freddie Mac participates in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities for investment and by issuing
guaranteed mortgage-related securities.
Forbearance. An agreement between the mortgage servicer or lender and borrower
for a temporary postponement of mortgage payments. It is a form of repayment
relief granted by the lender or creditor in lieu of forcing a property into
foreclosure.
Government National Mortgage Association ("Ginnie Mae" or "GNMA"). GNMA is a
self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae
guarantees the timely payment of principal and interest on MBS backed by
federally insured or guaranteed loans - mainly loans insured by the FHA or
guaranteed by the VA . Ginnie Mae securities are the only MBS to carry the full
faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise ("GSE"). Certain entities established by the
U.S. Congress to provide liquidity, stability and affordability in residential
housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan
Banks.
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.
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.
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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.
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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.
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