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, and a
provider of real estate services through our Xome subsidiary. 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 $654 billion as of
June 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;
•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 ofJuly 18, 2021 , approximately 3.6% 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$3,825 as ofJune 30, 2021 . See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A. 33 -------------------------------------------------------------------------------- Table of Contents Anticipated Trends In the second quarter of 2021, our forward MSR and subservicing portfolio continued to grow due to strong execution across all channels - correspondent, direct-to-consumer, subservicing and acquisitions. We expect to see continued portfolio growth in the remainder of 2021. We benefited from early-buyout gains in the first half of 2021 as we helped customers exit forbearance and expect another quarter of strong early-buyout revenues in third quarter of 2021, although down about 30% sequentially, after which revenues will begin to taper off, since we will be nearing the end of the inventory, as loans in forbearance continue to decrease. Based on the current interest rate environment, we expect prepayment speeds and amortization to be roughly flat in the third 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 prior to the end of 2021. Refer to Note 2, Discontinued Operations, for further details. The sale of the reverse servicing portfolio allows us to focus on our core business. Our Originations segment continued to generate strong funded volumes from both the correspondent and direct-to-consumer channels in the second quarter of 2021 despite competitive pricing pressure. We expect the originations profits to be relatively flat quarter-over-quarter in the third quarter of 2021. Our Xome segment completed the previously announced sale of its title business in the second quarter of 2021 for total consideration of approximately$500 and recognized a one-time gain of$487 . In connection with the sale agreement, earnings from the title business subsequent toMarch 12, 2021 were held for the benefit of the buyer, therefore, the title business did not contribute to the Xome segment's earnings in the second quarter of 2021. Xome's revenue from the Exchange division has been, negatively impacted due to the foreclosure moratoriums. The current foreclosure moratoriums are set to expire onJuly 31, 2021 . Results of Operations Table 1. Consolidated Operations Three Months Ended June 30, 2021 2020 Change Revenues - operational(1) $ 754$ 879 $ (125) Revenues - mark-to-market (180) (261) 81 Total revenues 574 618 (44) Total expenses 425 398 27 Total other income (expenses), net 418 (105) 523 Income from continuing operations before income tax expense 567 115 452 Less: Income tax expense 140 38 102 Net income from continuing operations 427 77 350 Less: Net income attributable to non-controlling interests - - - Net income from continuing operations attributable to Mr. Cooper $ 427 $
77
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
During the three months endedJune 30, 2021 , income from continuing operations before income tax expense increased to$567 from$115 in 2020. The increase was primarily driven by the completion of our previously announced sale of the title business toBlend Labs Inc. onJune 30, 2021 , which resulted in a$487 gain recorded in total other income (expenses), net. See further discussions in the Segment Results section of the MD&A. During the three months endedJune 30, 2021 and 2020, we had income tax expense from continuing operations. The effective tax rate during the three months endedJune 30, 2021 was 24.8% as compared to the effective tax rate of 33.0% in 2020. The change in effective tax rate is primarily attributable to state income taxes and discrete tax items during the three months endedJune 30, 2021 as compared to 2020. 34 -------------------------------------------------------------------------------- Table of Contents Table 1.1 Consolidated Operations Six Months Ended June 30, 2021 2020 Change Revenues - operational(1)$ 1,659 $ 1,526 $ 133 Revenues - Mark-to-market 174 (644) 818 Total revenues 1,833 882 951 Total expenses 879 822 57 Total other income (expenses), net 338 (168) 506 Income (loss) from continuing operations before income tax expense (benefit) 1,292 (108) 1,400 Less: Income tax expense (benefit) 306 (26) 332 Net income (loss) from continuing operations 986 (82) 1,068 Less: Net income (loss) attributable to non-controlling interests - (3) 3 Net income (loss) from continuing operations attributable to Mr. Cooper $ 986 $
(79)
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
During the six months endedJune 30, 2021 , we recorded income from continuing operations before income tax expense of$1,292 compared to a loss from continuing operations before income tax benefit of$108 for 2020. The change was primarily driven by the completion of our previously announced sale of the title business toBlend Labs Inc. onJune 30, 2021 , which resulted in a$487 gain recorded in total other income (expenses), net. The change was also attributable to a favorable MTM adjustments in 2021 compared to negative MTM adjustments in 2020. See further discussions in Segment Results section of the MD&A. During the six months endedJune 30, 2021 and 2020, we had an income tax expense and benefit, respectively. The effective tax rate during the six months endedJune 30, 2021 was 23.7% as compared to the effective tax rate of 24.2% in 2020. The change in effective tax rate is primarily attributable to state income taxes and nondeductible executive compensation expenses during the six months endedJune 30, 2021 as compared to 2020.
Segment Results
Our operations are conducted through three segments: Servicing, Originations, and Xome.
•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. •The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties. OnMarch 12, 2021 , we entered into an agreement to sell the title business. The sale was completed onJune 30, 2021 . For more information, see Note 1, Nature of Business and Basis of Presentation in the Notes to the Condensed Consolidated Financial Statements (unaudited).
Refer to Note 16, Segment Information, in the Notes to the Condensed Consolidated Financial Statements (unaudited) for a summary of segment results.
35
--------------------------------------------------------------------------------Table of Contents 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.
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
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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,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 443 27 $ 287 19 $ 156 8
Amortization, net of accretion (158) (10) (107) (7) (51) (3)
Mark-to-market (180) (11) (261) (17) 81 6
Total revenues 105 6 (81) (5) 186 11
Expenses
Salaries, wages and benefits 70 4 65 4 5 -
General and administrative
Servicing support fees 22 1 24 2 (2) (1)
Corporate and other general and
administrative expenses 30 2 30 2 - -
Foreclosure and other liquidation
related (recoveries) expenses, net (8) - (21) (1) 13 1
Depreciation and amortization 7 - 4 - 3 -
Total general and administrative
expenses 51 3 37 3 14 -
Total expenses 121 7 102 7 19 -
Other income (expense)
Other interest income 25 2 3 - 22 2
Interest income 25 2 3 - 22 2
Advance interest expense (4) - (8) - 4 -
Other interest expense (61) (4) (59) (4) (2) -
Interest expense (65) (4) (67) (4) 2 -
Total other expenses, net (40) (2) (64) (4) 24 2
(Loss) from continuing operations
before income tax expense (benefit) $ (56) (3) $ (247) (16) $ 191 13
Weighted average cost - advance
facilities 3.4 % 2.9 % 0.5 %
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.
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Table 3.1 Servicing - Revenues
Three Months Ended June 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Forward MSR Operational Revenue
Base servicing fees $ 221 14 $ 239 16 $ (18) (2)
Modification fees(2) 7 - 2 - 5 -
Incentive fees(2) - - 5 1 (5) (1)
Late payment fees(2) 14 1 16 1 (2) -
Other ancillary revenues(2) 208 13 44 3 164 10
Total forward MSR operational
revenue 450 28 306 21 144 7
Base subservicing fees and other
subservicing revenue(2) 69 4 69 4 - -
Total servicing fee revenue 519 32 375 25 144 7
MSR financing liability costs (6) (1) (9) (1) 3 -
Excess spread costs - principal (70) (4) (79) (5) 9 1
Total operational revenue 443 27 287 19 156 8
Amortization, Net of Accretion
Forward MSR amortization (228) (14) (186) (12) (42) (2)
Excess spread accretion 70 4 79 5 (9) (1)
Total amortization, net of
accretion (158) (10) (107) (7) (51) (3)
Mark-to-Market Adjustments
MSR fair value MTM (240) (15) (316) (21) 76 6
Other MTM(3) 31 2 (5) - 36 2
Excess spread / financing MTM 29 2 60 4 (31) (2)
Total MTM adjustments (180) (11) (261) (17) 81 6
Total revenues - Servicing $ 105 6 $ (81) (5) $ 186 11
(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)The amount of MSR MTM 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 $3 during the
three months ended June 30, 2021 and 2020, respectively.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Forward - Other ancillary revenue increased during the three months ended June
30, 2021 as compared to 2020 primarily due to the $181 gain on sale associated
with loans bought out of GNMA securitization, modified and redelivered following
GNMA guidelines.
Forward MSR amortization increased during the three months ended
Negative MTM adjustments decreased during the three months endedJune 30, 2021 compared to 2020, primarily due to favorable impact from changes in interest rates.
Subservicing - There were no material changes for Subservicing fees during the
three months ended
Servicing Segment Expenses Total expenses increased during the three months endedJune 30, 2021 as compared to 2020, primarily driven by the change in foreclosure and other liquidation related recoveries, net. Foreclosure and other liquidation related recoveries, net decreased in 2021 compared to 2020, primarily due to a decrease in the release of loss reserves on servicing advances. 38
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Servicing Segment Other Income (Expenses), net Total other expenses, net decreased during the three months endedJune 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
Six Months Ended June 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 813 26 $ 594 20 $ 219 6
Amortization, net of accretion (314) (10) (191) (7) (123) (3)
Mark-to-market 174 5 (644) (21) 818 26
Total revenues 673 21 (241) (8) 914 29
Expenses
Salaries, wages and benefits 136 4 139 5 (3) (1)
General and administrative
Servicing support fees 43 1 45 1 (2) -
Corporate and other general and
administrative expenses 60 2 62 2 (2) -
Foreclosure and other
liquidation related (recoveries)
expenses, net (20) - (23) - 3 -
Depreciation and amortization 12 - 8 - 4 -
Total general and administrative
expenses 95 3 92 3 3 -
Total expenses 231 7 231 8 - (1)
Other income (expense)
Other interest income 48 1 43 1 5 -
Interest income 48 1 43 1 5 -
Advance interest expense (10) - (13) - 3 -
Other interest expense (126) (4) (114) (4) (12) -
Interest expense (136) (4) (127) (4) (9) -
Total other expenses, net (88) (3) (84) (3) (4) -
Income (loss) from continuing
operations before income tax
expense (benefit) $ 354 11 $ (556) (19) $ 910 30
Weighted average cost - advance
facilities 3.2 % 3.0 % 0.2 %
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.
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Table 4.1 Servicing - Revenues
Six Months Ended June 30,
2021 2020 Change
Amt bps(1) Amt bps(1) Amt bps
Forward MSR Operational Revenue
Base servicing fees $ 444 14 $ 489 16 $ (45) (2)
Modification fees(2) 14 - 5 - 9 -
Incentive fees(2) 1 - 9 1 (8) (1)
Late payment fees(2) 28 1 39 1 (11) -
Other ancillary revenues(2) 349 11 82 3 267 8
Total forward MSR operational
revenue 836 26 624 21 212 5
Base subservicing fees and other
subservicing revenue(2) 136 5 134 4 2 1
Total servicing fee revenue 972 31 758 25 214 6
MSR financing liability costs (13) - (17) - 4 -
Excess spread costs - principal (146) (5) (147) (5) 1 -
Total operational revenue 813 26 594 20 219 6
Amortization, Net of Accretion
Forward MSR amortization (460) (15) (338) (12) (122) (3)
Excess spread accretion 146 5 147 5 (1) -
Total amortization, net of
accretion (314) (10) (191) (7) (123) (3)
Mark-to-Market Adjustments
MSR fair value MTM 270 8 (717) (24) 987 32
Other MTM(3) (94) (3) (16) - (78) (3)
Excess spread / financing MTM (2) - 89 3 (91) (3)
Total MTM adjustments 174 5 (644) (21) 818 26
Total revenues - Servicing $ 673 21 $ (241) (8) $ 914 29
(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)The amount of MSR MTM 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 $20 and $13 during the
six months ended June 30, 2021 and 2020, respectively.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Forward - Base servicing fee revenue decreased during the six months ended June
30, 2021 as compared to 2020 primarily due a decrease in average outstanding
forward UPB and increase in delinquencies. Other ancillary revenues increased
primarily due to the $290 gain on sale associated with loans bought out of GNMA
securitization, modified and redelivered following GNMA guidelines. Late payment
fees decreased due to loan forbearance related to the CARES Act.
Forward MSR amortization increased during the six months ended June 30, 2021 as
compared to 2020, primarily due to higher prepayments driven by the low interest
rate environment.
MTM adjustments increased during the six months ended June 30, 2021 compared to
2020, primarily due to favorable impact from changes in interest rates. Other
MTM decreased during the six months ended June 30, 2021 compared to 2020
primarily due to losses related to loan-related derivatives.
Subservicing - There were no material changes for Subservicing fees during the
six months ended
Servicing Segment Expenses There were no material changes for total expenses during the six months endedJune 30, 2021 as compared to 2020. 40 -------------------------------------------------------------------------------- Table of Contents Servicing Segment Other Income (Expenses), net There were no material changes for Total other expenses, net during the six months endedJune 30, 2021 as compared to 2020.
Table 5. Servicing Portfolio - Unpaid Principal Balances
Three Months Ended June 30 , Six Months Ended
June 30,
2021 2020 2021 2020
Average UPB
Forward MSRs $ 290,946 $ 289,707 $ 286,233 $ 296,446
Subservicing and other(1) 356,354 301,680 345,792 306,121
Total average UPB $ 647,300 $ 591,387 $ 632,025 $ 602,567
June 30, 2021 June 30, 2020
Carrying
UPB Amount bps UPB Carrying Amount bps
Forward MSRs
Agency $ 248,799 $ 2,955 119 $ 228,680 $ 2,308 101
Non-agency 38,656 352 91 49,295 449 91
Total forward MSRs 287,455 3,307 115 277,975 2,757 99
Subservicing and other(1)
Agency 352,643 N/A 286,710 N/A
Non-agency 14,219 N/A 10,082 N/A
Total subservicing and other 366,862 N/A 296,792 N/A
Total ending balance $ 654,317 $ 3,307 $ 574,767 $ 2,757
Forward MSRs UPB Encumbrance June 30, 2021 June 30, 2020
Forward MSRs - unencumbered $ 143,420 $ 83,683
Forward MSRs - encumbered(2) 144,035 194,292 Total Forward MSRs UPB$ 287,455 $ 277,975 (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 June 30, 2021 Three Months Ended June 30, 2020 Subservicing and Subservicing and Forward MSR Other Total Forward MSR Other Total Balance - beginning of period$ 276,028 $ 352,481 $ 628,509 $ 290,634 $ 316,933 $ 607,567 Additions: Originations 20,907 1,374 22,281 9,478 1,024 10,502 Acquisitions / Increase in subservicing(1) 12,414 49,642 62,056 (1,634) 16,908 15,274 Deductions: Dispositions (18) (4,815) (4,833) (31) (9,751) (9,782) Principal reductions and other (2,688) (3,627) (6,315) (2,678) (2,168)
(4,846)
Voluntary reductions(2) (18,989) (28,162) (47,151) (17,435) (26,113) (43,548) Involuntary reductions(3) (123) (31) (154) (251) (41) (292) Net changes in loans serviced by others (76) - (76) (108) - (108) Balance - end of period$ 287,455 $ 366,862 $ 654,317 $ 277,975 $ 296,792 $ 574,767
(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, 2021 , our forward MSR UPB increased primarily due to increased originations volumes and acquisition, partially offset by increased voluntary reductions in the low interest rate environment. During the three months endedJune 30, 2021 , our subservicing and other portfolio UPB increased primarily due to portfolio growth from our subservicing clients, partially offset by increased voluntary reductions in the low interest rate environment. Table 6.1 Forward Servicing and Subservicing and Other Portfolio UPB Rollforward Six Months Ended June 30, 2021 Six Months Ended June 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 44,530 2,878 47,408 21,113 1,686 22,799 Acquisitions / Increase in subservicing(1) 17,061 102,960 120,021 (2,307) 40,260 37,953 Deductions: Dispositions (68) (5,945) (6,013) (71) (20,110) (20,181) Principal reductions and other (5,390) (6,858) (12,248) (5,426) (5,133)
(10,559)
Voluntary reductions(2) (39,463) (62,617) (102,080) (31,299) (43,785)
(75,084)
Involuntary reductions(3) (256) (69) (325) (638) (109) (747) Net changes in loans serviced by others (148) - (148) (179) - (179) Balance - end of period$ 287,455 $ 366,862 $ 654,317 $ 277,975 $ 296,792 $ 574,767
(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, 2021 , our forward MSR UPB increased
primarily due to increased originations volumes and acquisitions, partially
offset by increased voluntary reductions in the low interest rate environment.
During the six months ended June 30, 2021 , our subservicing and other portfolio
UPB increased primarily driven by increased acquisitions, partially offset by
increased 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)
June 30, 2021 June 30, 2020
Loan count(2) 3,461,557 3,360,826
Average loan amount(3) $ 189,026 $ 171,022
Average coupon - agency(4) 3.8 % 4.4 %
Average coupon - non-agency(4) 4.4 % 4.7 %
60+ delinquent (% of loans)(5) 4.5 % 4.7 %
90+ delinquent (% of loans)(5) 4.2 % 2.2 %
120+ delinquent (% of loans)(5) 4.0 % 1.6 %
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Total prepayment speed (12-month
constant prepayment rate) 26.0 % 26.0 % 28.4 % 22.6 %
(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, 2021 and 2020, loan count includes 123,194 and 195,423 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. Due to the COVID-19 pandemic and the implementation of the CARES Act,
loans greater than 90 days and 120 days delinquent have increased as of June 30,
2021 compared to 2020.
Table 8. Forward Loan Modifications and Workout Units
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
Modifications(1) 17,545 4,329 13,216 33,180 9,044 24,136
Workouts(2) 18,036 2,253 15,783 36,377 5,366 31,011
Total modifications and workout
units 35,581 6,582 28,999 69,557 14,410 55,147
(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.
Total modifications and workouts during the three and six months ended June 30,
2021 increased compared to 2020 primarily due to an increase in modifications
and workouts related to loans impacted by the COVID-19 pandemic which
successfully exited their forbearance plans.
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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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
Fair value - beginning of period
$ 2,703 $ 3,496 Additions: Servicing retained from mortgage loans sold 266 126 554 249 Purchases of servicing rights 151 - 218 24 Dispositions: Sales and cancellation of servicing assets (10) - (12) - Changes in fair value: Due to changes in valuation inputs or assumptions used in the valuation model: Agency (215) (284) 146 (635) Non-agency (25) (32) 124 (82) Changes in valuation due to amortization: Scheduled principal payments (25) (23) (49) (46) Prepayments Voluntary prepayments Agency (192) (152) (389) (268) Non-agency (10) (9) (20) (18) Involuntary prepayments Agency (1) (2) (2) (6) Non-agency - - - - Other changes: Disposition of negative MSRs and other(1) 14 24 34 43 Fair value - end of period$ 3,307 $ 2,757 $ 3,307 $ 2,757
(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 (unaudited), for additional information regarding the range of assumptions and sensitivities related to the fair value measurement of forward MSRs as ofJune 30, 2021 andDecember 31, 2020 .
Excess Spread Financing
As further disclosed in Note 3, Mortgage Servicing Rights and Related
Liabilities, in the Notes to the Condensed Consolidated Financial Statements
(unaudited), 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.
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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 (unaudited), for additional
information regarding the range of assumptions and sensitivities related to the
measurement of the excess spread financing liability as of June 30, 2021 and
December 31, 2020 .
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,
2021 2020 2021 2020
Fair value - beginning of period $ 934
$ 934$ 1,311 Additions: New financings - - - 24 Deductions: Settlements and repayments (40) (52) (81) (110) Changes in fair value: Agency (29) (60) 9 (103) Non-agency 2 (6) 5 2 Fair value - end of period $ 867$ 1,124 $ 867$ 1,124 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. Growing the Originations segment has been a strategic focus for us for several years.
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,
2021 2020 Change
Revenues
Service related, net $ 45 $ 21 $ 24
Net gain on mortgage loans held for sale
Net gain on loans originated and sold 143 453 (310)
Capitalized servicing rights 246 123 123
Provision for repurchase reserves, net of release (4) (3) (1)
Total net gain on mortgage loans held for sale 385 573 (188)
Total revenues 430 594 (164)
Expenses
Salaries, wages and benefits 164 120 44 General and administrative Loan origination expenses 26 16 10 Corporate and other general administrative expenses 17 16 1 Marketing and professional service fees 13 11 2 Depreciation and amortization 6 4 2 Total general and administrative 62 47 15 Total expenses 226 167 59 Other income (expenses) Interest income 26 19 7 Interest expense (23) (13) (10) Total other income, net 3 6 (3) Income from continuing operations before income tax expense $ 207
Weighted average note rate - mortgage loans held
for sale 3.1 % 3.3 % (0.2) %
Weighted average cost of funds (excluding
facility fees) 2.1 % 2.6 % (0.5) %
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Table 11.1 Originations - Key Metrics
Three Months Ended June 30,
2021 2020 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 8,634 $ 9,595 $ (961)
Other locked pull through adjusted volume(1) 9,724 2,799 6,925
Total pull through adjusted lock volume $ 18,358 $ 12,394 $ 5,964
Funded volume $ 22,227 $ 10,729 $ 11,498
Volume of loans sold $ 24,950 $ 11,172 $ 13,778
Recapture percentage(2) 31.9 % 26.1 % 5.8 %
Refinance recapture percentage(3) 41.5 % 30.9 % 10.6 %
Purchase as a percentage of funded volume 23.9 % 10.3 % 13.6 %
Value of capitalized servicing on retained
settlements 128 bps 133 bps (5) bps
Originations Margin
Revenue $ 430 $ 594 $ (164)
Pull through adjusted lock volume $ 18,358 $ 12,394 $ 5,964
Revenue as a percentage of pull through
adjusted lock volume(4) 2.34 % 4.79 % (2.45) %
Expenses(5) $ 223 $ 161 $ 62
Funded volume $ 22,227 $ 10,729 $ 11,498
Expenses as a percentage of funded volume(6) 1.00 % 1.50 % (0.50) %
Originations Margin 1.34 % 3.29 % (1.95) %
(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 June 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
in connection with unfavorable mark-to-market loans-related derivatives/hedges
revenues. The Originations Margin for the three months ended June 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 June 30, 2021 was 53% compared to 23% in
2020.
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Originations Segment Revenues
Total revenues decreased during the three months ended June 30, 2021 compared to
2020 primarily driven by a decrease in net gain on loans originated and sold as
a result of unfavorable mark-to-market loans-related derivatives/hedges revenue,
partially offset by higher origination volumes in a lower interest rate
environment, primarily from the correspondent channel. Total revenue decreased
$164 or 28% period over period despite a total pull through adjusted lock volume
increase of 48% during the same period. There were no material changes for
repurchase reserves.
Originations Segment Expenses
Total expenses during the three months ended June 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 June 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.
Interest income during the three months ended
Six Months Ended June 30,
2021 2020 Change
Revenues
Service related, net $ 88 $ 41 $ 47
Net gain on mortgage loans held for sale
Net gain on loans originated and sold 429 636 (207)
Capitalized servicing rights 520 242 278
Provision for repurchase reserves, net of release (12) (8) (4)
Total net gain on mortgage loans held for sale 937 870 67
Total revenues 1,025 911 114
Expenses
Salaries, wages and benefits 331 237 94 General and administrative Loan origination expenses 53 32 21 Corporate and other general administrative expenses 37 34 3 Marketing and professional service fees 26 23 3 Depreciation and amortization 10 7 3 Total general and administrative 126 96 30 Total expenses 457 333 124 Other income (expenses) Interest income 49 53 (4) Interest expense (48) (40) (8) Total other income, net 1 13 (12) Income from continuing operations before income tax expense $ 569
Weighted average note rate - mortgage loans held
for sale 3.0 % 3.5 % (0.5) %
Weighted average cost of funds (excluding
facility fees) 2.2 % 2.9 % (0.7) %
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Table 12.1 Originations - Key Metrics
Six Months Ended June 30,
2021 2020 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 18,956 $ 17,018 $ 1,938
Other locked pull through adjusted volume(1) 22,669 8,053 14,616
Total pull through adjusted lock volume $ 41,625 $ 25,071 $ 16,554
Funded volume $ 47,360 $ 23,088 $ 24,272
Volume of loans sold $ 51,261 $ 24,427 $ 26,834
Recapture percentage(2) 31.5 % 27.5 % 4.0 %
Refinance recapture percentage(3) 38.6 % 33.4 % 5.2 %
Purchase as a percentage of funded volume 17.7 % 18.7 % (1.0) %
Value of capitalized servicing on retained
settlements 128 bps 135 bps (7) bps
Originations Margin
Revenue $ 1,025 $ 911 $ 114
Pull through adjusted lock volume $ 41,625 $ 25,071 $ 16,554
Revenue as a percentage of pull through
adjusted lock volume(4) 2.46 % 3.63 % (1.17) %
Expenses(5) $ 456 $ 320 $ 136
Funded volume $ 47,360 $ 23,088 $ 24,272
Expenses as a percentage of funded volume(6) 0.96 % 1.39 % (0.43) %
Originations Margin 1.50 % 2.24 % (0.74) %
(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
six months ended June 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.
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Originations Segment Revenues
Total revenues increased during the six months ended June 30, 2021 compared to
2020 primarily driven by higher origination volumes in a lower interest rate
environment, primarily from the correspondent channel, partially offset by a
decrease in net gain on loans originated and sold in connection with unfavorable
mark-to-market loans-related derivatives revenue. Total revenue increased $114
or 13% period over period as total pull through adjusted lock volume increased
66% during the same period. There were no material changes for repurchase
reserves.
Originations Segment Expenses
Total expenses during the six months ended June 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 six
months ended June 30, 2021 when compared to 2020, demonstrating an improvement
in cost efficiencies and scale.
Originations Segment Other Income (Expenses), Net
Interest income during the six months ended June 30, 2021 decreased when
compared to 2020 primarily driven by a lower average note rate on mortgage loans
held for sale partially offset by growth in originations volume. Interest
expense increased primarily due to the growth of originations volume.
Xome Segment
Xome is a real estate services company that provides services for mortgage
originators and servicers, including Mr. Cooper , as well as mortgage and real
estate investors. Xome generates fee income that complements our servicing and
origination businesses without requiring a significant amount of capital or
exposing us to the same level of interest rate or credit risk.
Xome historically has been organized into three divisions: Exchange, Solutions,
and Title. On March 12, 2021 , we entered into a Stock Purchase Agreement with
Blend Labs , in which Blend Labs will acquire our title business. Pursuant to the
Stock Purchase Agreement, all cash generated, subject to certain adjustments,
between March 13, 2021 and the closing date of the transaction, were held for
the benefit of Blend Labs . The transaction was completed on June 30, 2021 .
Consequently, we have removed any discussion of the Title division from our
results of operations from March 12, 2021 forward. Our other Xome divisions are:
•The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.
•The Solutions division consists of field services, collateral valuation, recapture and data analytic solutions to improve purchase, refinance and default transactions.
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The following tables set forth the results of operations for the Xome segment:
Table 13. Xome Segment Results of Operations
Three Months Ended June 30,
2021 2020 Change
Xome - Operations
Revenues:
Exchange $ 5 $ 9 $ (4)
Title - 52 (52)
Solutions 34 45 (11)
Total revenues 39 106 (67)
Expenses:
Salaries, wages and benefits 17 33 (16)
General and administrative
Operational expenses 25 59 (34)
Depreciation and amortization 3 3 -
Total general and administrative 28 62 (34)
Total expenses 45 95 (50)
Total other income, net 486 1 485
Income from continuing operations before income
tax expense $ 480 $ 12 $ 468
Pre-tax margin 1230.8 % 11.3 % 1219.5 %
Key Metrics
Exchange properties sold 659 1,191 (532)
Average Exchange properties under management 14,196 17,438 (3,242)
Title completed orders - 245,252 (245,252)
Solutions completed orders 475,507 521,169 (45,662)
Percentage of revenue earned from third-party
customers 35.8 % 53.4 % (17.6) %
Income from continuing operations before income tax expense increased during the
three months ended June 30, 2021 as compared to 2020 primarily due to an
increase in total other income, net, partially offset by a decrease in total
revenues. The increase in total other income, net, is a result of the gain of
$487 associated with the sale of the title business to Blend Labs, Inc. We
initially entered into a Stock Purchase Agreement with Blend Labs on March 12,
2021 to sell our title business, which was subsequently completed on June 30,
2021 . Under the Stock Purchase Agreement, all cash generated, subject to certain
adjustments, between March 13, 2021 and the closing date of the Title
Transaction would be held to the benefit of Blend Labs . As result, the title
business did not contribute to the Xome segment's revenues in the second quarter
of 2021. For more information, see Note 1, Nature of Business and Basis of
Presentation, in the Notes to the Condensed Consolidated Financial Statements
(unaudited).
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Table 13.1 Xome Segment Results of Operations
Six Months Ended June 30,
2021 2020 Change
Xome - Operations
Revenues:
Exchange $ 10 $ 25 $ (15)
Title 56 95 (39)
Solutions 69 92 (23)
Total revenues 135 212 (77)
Expenses:
Salaries, wages and benefits 46 68 (22)
General and administrative
Operational expenses 80 117 (37)
Depreciation and amortization 6 6 -
Total general and administrative 86 123 (37)
Total expenses 132 191 (59)
Total other income, net 486 2 484
Income from continuing operations before income
tax expense $ 489 $ 23 $ 466
Pre-tax margin 362.2 % 10.8 % 351.4 %
Key Metrics
Exchange properties sold 1,369 3,305 (1,936)
Average Exchange properties under management 14,203 17,608 (3,405)
Title completed orders 188,356 475,900 (287,544)
Solutions completed orders 1,022,059 951,895 70,164
Percentage of revenue earned from third-party
customers 44.6 % 54.0 % (9.4) %
Income from continuing operations before income tax expense increased during the
six months ended June 30, 2021 as compared to 2020 primarily due to an increase
in total other income, net, partially offset by a decrease in total revenues.
The increase in total other income, net, is a result of the gain associated with
the sale of the title business to Blend Labs, Inc. The decrease in total
revenues was driven by the Stock Purchase Agreement which stipulated that all
cash generated, subject to certain adjustments, between March 13, 2021 and the
closing date of the Title Transaction would be held to the benefit of Blend
Labs .
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.
The following table set forth the selected financial results for Corporate/Other: Table 14. Corporate/Other Selected Financial Results
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
Corporate/Other - Operations
Total expenses $ 33 $ 34 $ (1) $ 59 $ 67 $ (8)
Interest expense 31 47 (16) 61 99 (38)
52-------------------------------------------------------------------------------- Table of Contents There were no material changes for total expenses during the three months endedJune 30, 2021 as compared to 2020. Total expenses decreased in the six months endedJune 30, 2021 as compared to 2020 primarily due to a decrease in general and administrative expense. General and administrative expense was higher in 2020 due to an$8 loss on impairment of assets in connection with an ancillary business and higher legal reserves. Interest expense decreased in the three and six months endedJune 30, 2021 as compared to 2020 primarily due to a decrease in interest expense on unsecured senior notes as a result of 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. 53 -------------------------------------------------------------------------------- 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$716 as ofJune 30, 2021 compared to$695 as ofDecember 31, 2020 . We have sufficient borrowing capacity to support our operations. As ofJune 30, 2021 , total available borrowing capacity was$14,930 , of which$7,088 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 ofJune 30, 2021 , our total advance facility capacity was$2,040 , of which$1,463 remained unused. For more information on our advance facilities, see Note 9, Indebtedness in the Notes to the Condensed Consolidated Financial Statements (unaudited).
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
(unaudited) 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 (unaudited) 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 15. Cash Flows
Six Months Ended June 30,
2021 2020 Change
Net cash attributable to:
Operating activities $ (114) $ 2,066 $ (2,180)
Investing activities (247) (14) (233)
Financing activities 354 (1,363) 1,717
Net (decrease) increase in cash, cash
equivalents, and restricted cash $ (7) $ 689 $ (696)
54-------------------------------------------------------------------------------- Table of Contents Operating activities Our operating activities used cash of$114 during the six months endedJune 30, 2021 compared to cash generated of$2,066 in 2020. The change in cash attributable to operating activities was primarily related to continuing operations, driven by an increase of$1,853 in the cash used from originations net sale activities, as a result of an increase in repurchases of forward loan assets out ofGinnie Mae securitizations, and a decrease of$774 driven by fair values changes in MSRs. In addition, we recorded a$487 gain from the sale of the title business in 2021. Investing activities Our investing activities used cash of$247 during the six months endedJune 30, 2021 compared to cash used of$14 in 2020. The increase in used cash for investing activities was primarily related to continuing operations, driven by an increase of$186 in cash used for the purchase of forward mortgage servicing rights and a decrease in cash generated of$30 from proceeds on sale of forward mortgage servicing rights. Financing activities Our financing activities generated cash of$354 during the six months endedJune 30, 2021 compared to cash used of$1,363 in 2020. The change in cash attributable to financing activities was primarily related to continuing operations, driven by an increase of$1,567 in cash generated from advance and warehouse facilities due to net increased borrowing of$1,047 from advance and warehouse facilities compared to net repayment of$520 in 2020. Additionally, in 2020,$698 of cash was used in the redemption and repayment of the 2021 and 2022 unsecured senior notes, partially offset by$600 related to the issuance of the 2027 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 ofJune 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%.
Secured Debt to Gross Tangible Asset Ratio •Ginnie Mae - a secured debt to gross tangible asset ratios no greater than 60%.
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As of June 30, 2021 , we were in compliance with our seller/servicer financial
requirements for FHFA and Ginnie Mae .
Since we have a Ginnie 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 (unaudited) for additional
information.
Table 16. Debt
June 30, 2021 December 31, 2020
Advance facilities principal amount $ 577 $ 669
Warehouse facilities principal amount 6,470
5,330
MSR facilities principal amount 270
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 ofJune 30, 2021 , we had a total borrowing capacity of$2,040 , of which we could borrow an additional$1,463 . 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, 2021 , we had a total borrowing capacity of$12,890 for warehouse and MSR facilities, of which we could borrow an additional$5,625 . 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 (unaudited). Contractual Obligations As ofJune 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
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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 (unaudited), 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
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.
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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.
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 .
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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.
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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.
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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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