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MR. COOPER GROUP INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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 $796
billion as of March 31, 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 ofMarch 31, 2022 , approximately 1.2% 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 decreased to$1,003 as ofMarch 31, 2022 from$1,301 as ofDecember 31, 2021 . See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A.
Anticipated Trends
In the first quarter of 2022, our servicing portfolio continued to grow due to strong execution across all channels, primarily through MSR acquisitions and subservicing. We expect to see continued portfolio growth in 2022, at a measured pace of acquisition for the remainder of the year. We completed servicing acquisitions of$81 billion in UPB in the first quarter of 2022. In addition, we expect the servicing segment to benefit from rising interest rates, including lower amortization expense and increased interest income, partially offset by increased interest expense. 28 -------------------------------------------------------------------------------- Table of Contents Our Originations segment produced declining funding volumes as interest rates increased, with a channel mix shifting to direct-to-consumer in the first quarter of 2022. Although the direct-to-consumer channel continues to generate strong margins, we expect origination profit margins to compress quarter-over-quarter in the second quarter of 2022 and overall expect our margins to gradually decline towards the historical average as a result of continued pricing pressure and lower funding volumes. 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 mortgage transactions. Inflationary pressures, along with supply chain disruptions, may also increase our operation costs. However, we believe changes in interest rates historically have a greater impact on our financial results than changes in the inflation rate. 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 March 31, 2022 2021 Change
Revenues - operational(1) $ 499$ 894 $ (395) Revenues - mark-to-market 553 365 188 Total revenues 1,052 1,259 (207) Total expenses 338 454 (116) Total other income (expenses), net 152 (80) 232 Income from continuing operations before income tax expense 866 725 141 Less: Income tax expense 208 166 42 Net income from continuing operations $ 658
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
During the three months endedMarch 31, 2022 , income from continuing operations before income tax expense increased to$866 from$725 in 2021. The increase was primarily driven by an increase in total other income (expenses), net and favorable mark-to-market adjustments. Total other income (expenses), net increased primarily due to completion of the Sagent Transaction, which resulted in a$223 gain in 2022. Meanwhile, the increase in favorable mark-to-market adjustments from our Servicing segment was offset by a decrease in revenues from our Originations segment due to lower origination volumes, both primarily driven by higher mortgage rates in 2022. See further discussions in Note 2, Dispositions, in the Notes to the Condensed Consolidated Financial Statements and the Segment Results section of the MD&A. The effective tax rate for continuing operations during the three months endedMarch 31, 2022 was 24.0% as compared to 22.8% 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.
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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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 March 31,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
Revenues
Operational $ 365 19 $ 370 24 $ (5) (5)
Amortization, net of accretion (202) (11) (167) (11) (35) -
Mark-to-market 553 30 365 24 188 6
Total revenues 716 38 568 37 148 1
Expenses
Salaries, wages and benefits 75 4 66 4 9 -
General and administrative
Servicing support fees 11 1 21 2 (10) (1)
Corporate and other general and
administrative expenses 26 1 30 2 (4) (1)
Foreclosure and other liquidation
related expenses (recoveries), net 6 - (12) (1) 18 1
Depreciation and amortization 5 - 5 - - -
Total general and administrative
expenses 48 2 44 3 4 (1)
Total expenses 123 6 110 7 13 (1)
Other income (expense)
Other interest income 19 1 23 1 (4) -
Advance interest expense (6) - (9) (1) 3 1
Other interest expense (48) (3) (62) (3) 14 -
Interest expense (54) (3) (71) (4) 17 1
Total other expenses, net (35) (2) (48) (3) 13 1
Income before income tax expense $ 558 30 $ 410 27 $ 148 3
Weighted average cost - advance
facilities 2.4 % 3.0 % (0.6) %
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. Servicing - Revenues
Three Months Ended March 31,
2022 2021 Change
Amt bps(1) Amt bps(1) Amt bps
MSR Operational Revenue
Base servicing fees $ 272 15 $ 224 15 $ 48 -
Modification fees(2) 5 - 6 - (1) -
Incentive fees(2) - - 1 - (1) -
Late payment fees(2) 15 1 15 1 - -
Other ancillary revenues(2) 42 2 142 9 (100) (7)
Total MSR operational revenue 334 18 388 25 (54) (7)
Base subservicing fees and other
subservicing revenue(2) 69 3 65 4 4 (1)
Total servicing fee revenue 403 21 453 29 (50) (8)
MSR financing liability costs (5) - (7) - 2 -
Excess spread payments and
portfolio runoff (33) (2) (76) (5) 43 3
Total operational revenue 365 19 370 24 (5) (5)
Amortization, Net of Accretion
MSR amortization (235) (13) (243) (16) 8 3
Excess spread accretion 33 2 76 5 (43) (3)
Total amortization, net of
accretion (202) (11) (167) (11) (35) -
Mark-to-Market Adjustments
MSR MTM 798 43 521 34 277 9
MTM Adjustments(3) (146) (8) (125) (8) (21) -
Excess spread / financing MTM (99) (5) (31) (2) (68) (3)
Total MTM adjustments 553 30 365 24 188 6
Total revenues - Servicing $ 716 38 $ 568 37 $ 148 1
(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 three months ended March 31, 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 $6 and $12 during the three months
ended March 31, 2022 and 2021, respectively. In addition, MTM Adjustments
included a negative $140 and $113 impact from MSR hedging activities during the
three months ended March 31, 2022 and 2021, respectively.
Servicing Segment Revenues
The following provides the changes in revenues for the Servicing segment:
Servicing - Other ancillary revenue decreased during the three months ended
March 31, 2022 as compared to 2021 primarily due to a decrease from early-buyout
revenues associated with loans bought out of GNMA securitization, modified and
redelivered following GNMA guidelines 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 greater servicing UPB portfolio in 2022.
MSR amortization decreased during the three months ended
compared to 2021, primarily due to lower prepayments driven by higher mortgage
rates in 2022, partially offset by a higher average MSR UPB.
MSR MTM increased and excess spread and financing MTM decreased during the three months endedMarch 31, 2022 compared to 2021, primarily due to an increase in mortgage rates in 2022 compared to 2021. 32 -------------------------------------------------------------------------------- Table of Contents Subservicing - There were no material changes for Subservicing fees during the three months endedMarch 31, 2022 as compared to 2021. Servicing Segment Expenses Total expenses increased during the three months endedMarch 31, 2022 as compared to 2021, primarily driven by a change in foreclosure and other liquidation related expenses (recoveries), net. 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. Servicing Segment Other Income (Expenses), net Total other expenses, net decreased during the three months endedMarch 31, 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 (1)
Three Months Ended March 31,
2022 2021
Average UPB
MSRs $ 356,092 $ 281,519
Subservicing and other(2) 393,120 335,230
Total average UPB $ 749,212 $ 616,749
March 31, 2022 March 31, 2021
Carrying
UPB Amount bps UPB Carrying Amount bps
MSRs
Agency $ 377,225 $ 5,635 149 $ 234,589 $ 2,965 126
Non-agency 34,615 371 107 41,439 389 94
Total MSRs 411,840 6,006 146 276,028 3,354 122
Subservicing and other(2)
Agency 372,080 N/A 338,064 N/A
Non-agency 11,879 N/A 14,417 N/A
Total subservicing and other 383,959 N/A 352,481 N/A
Total ending balance $ 795,799 $ 6,006 $ 628,509 $ 3,354
MSRs UPB Encumbrance March 31, 2022 March 31, 2021 MSRs - unencumbered$ 291,167 $ 121,311 MSRs - encumbered(3) 120,673 154,717 MSRs UPB$ 411,840 $ 276,028 (1)TheMarch 31, 2022 UPB excludes retained reverse mortgage UPB of an interim subserviced portfolio of$4 billion that transferred onApril 1, 2022 , and a retained portfolio with carrying amount of$53 . See further discussion in Note 2, Dispositions, to the Notes to the Condensed Consolidated Financial Statements. (2)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. (3)The encumbered MSRs consist of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. 33 -------------------------------------------------------------------------------- Table of Contents 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 March 31, 2022 Three Months Ended March 31, 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 10,610 - 10,610 23,623 1,504 25,127
Acquisitions / Increase in
subservicing(1) 79,386 36,471 115,857 4,647 53,318 57,965
Deductions:
Dispositions (19) (4,988) (5,007) (50) (1,130) (1,180)
Principal reductions and
other (3,567) (3,368) (6,935) (2,702) (3,231) (5,933)
Voluntary reductions(2) (13,606) (14,656) (28,262) (20,474) (34,455) (54,929)
Involuntary reductions(3) (105) (20) (125) (133) (38) (171)
Net changes in loans
serviced by others (67) - (67) (72) - (72)
Balance - end of period $ 411,840 $ 383,959 $ 795,799 $ 276,028 $ 352,481 $ 628,509
(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 endedMarch 31, 2022 , our MSR UPB increased primarily due to acquisitions, partially offset by voluntary reductions. During the three months endedMarch 31, 2022 , our subservicing and other portfolio UPB increased primarily due to portfolio growth from our subservicing clients, partially offset by 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)
March 31, 2022 March 31, 2021
Loan count(2) 3,873,434 3,373,173
Average loan amount(3) $ 205,452 $ 186,328
Average coupon - agency(4) 3.5 % 4.0 %
Average coupon - non-agency(4) 4.3 % 4.4 %
60+ delinquent (% of loans)(5) 2.5 % 5.3 %
90+ delinquent (% of loans)(5) 2.2 % 4.9 %
120+ delinquent (% of loans)(5) 2.0 % 4.6 %
Three Months Ended March 31,
2022 2021
Total prepayment speed (12-month constant prepayment
rate) 14.8 % 30.8 %
(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 March 31, 2022 and 2021, loan count includes 46,444 and 154,194 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.
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Delinquency is an assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. Delinquency rates have continued to decrease as the COVID-19 pandemic's effect on the macroeconomic environment declines. 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 March 31,
2022 2021 Change
Modifications(1) 18,417 15,635 2,782
Workouts(2) 14,081 18,341 (4,260)
Total modifications and workout units 32,498 33,976 (1,478)
(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.
Total modifications during the three months ended March 31, 2022 increased
compared to 2021 primarily due to an increase in modifications related to loans
impacted by the COVID-19 pandemic. Total workouts during the three months ended
March 31, 2022 decreased compared to 2021 primarily due to a decrease in
customers who were exiting forbearance plans, as there were fewer customers in
forbearance.
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Servicing Portfolio and Related Liabilities
The following table sets forth the activities of MSRs:
Table 9. MSRs - Fair Value Rollforward
Three Months Ended March 31,
2022 2021
Fair value - beginning of period $ 4,223 $ 2,703
Additions:
Servicing retained from mortgage loans sold 200 288
Purchases of servicing rights 1,015 67
Dispositions:
Sales of servicing assets (4) (2)
Changes in fair value:
Due to changes in valuation inputs or assumptions used in the
valuation model (MSR fair value MTM):
Agency 776 372
Non-agency 22 149
Changes in valuation due to amortization:
Scheduled principal payments (43) (24)
Prepayments
Voluntary prepayments
Agency (177) (207)
Non-agency (14) (11)
Involuntary prepayments
Agency (1) (1)
Non-agency - -
Other changes(1) 9 20
Fair value - end of period $ 6,006 $ 3,354
(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 ofMarch 31, 2022 andDecember 31, 2021 . Excess Spread Financing
As further disclosed in Note 3, Mortgage Servicing Rights and Related
Liabilities, in the Notes to the Condensed Consolidated Financial Statements, we
have entered into sale and assignment agreements treated as financing
arrangements whereby the acquirer has the right to receive a specified
percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs and the purchase of loans. We do not currently utilize these transactions as a primary source of financing due to the availability of lower cost sources of funding. Excess spread financings are recorded at fair value, and the impact of fair value adjustments varies primarily due to (i) prepayment speeds (ii) recapture rates and (iii) discount rates. See Note 3, Mortgage Servicing Rights and Related Liabilities and Note 13, Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as ofMarch 31, 2022 andDecember 31, 2021 . 36
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The following table sets forth the change in the excess spread financing:
Table 10. Excess Spread Financing - Rollforward
Three Months Ended March 31,
2022
2021
Fair value - beginning of period $ 768$ 934 Additions: New financings - - Deductions: Settlements and repayments (32) (41) Changes in fair value: Agency 73 38 Non-agency 6 3 Fair value - end of period $ 815$ 934 Originations Segment The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Our Originations segment is one way that we help underserved consumers access the financial markets. In the three months endedMarch 31, 2022 , our total originations included loans for 8,728 customers with low FICOs (<660), 14,592 customers with income below theU.S. median household income, 7,312 first-time homebuyers, and 3,176 veterans. During this time period, we originated a total of 9,979Ginnie Mae loans, which are designed for first-time homebuyers and low- and moderate-income borrowers, comprising$2.4 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 March 31,
2022 2021 Change
Revenues
Service related, net - Originations(1) $ 42 $ 43 $ (1)
Net gain on mortgage loans held for sale
Net gain on loans originated and sold(2) 119 278 (159)
Capitalized servicing rights(3) 163 274 (111)
Total net gain on mortgage loans held for sale 282 552 (270)
Total revenues 324 595 (271)
Expenses
Salaries, wages and benefits 121 167 (46)
General and administrative
Loan origination expenses 20 27 (7)
Corporate and other general administrative
expenses 17 20 (3)
Marketing and professional service fees 12 13 (1)
Depreciation and amortization 4 4 -
Total general and administrative 53 64 (11)
Total expenses 174 231 (57)
Other income (expenses)
Interest income 17 23 (6)
Interest expense (12) (25) 13
Total other income (expense), net 5 (2) 7
Income before income tax expense $ 155 $ 362 $ (207)
Weighted average note rate - mortgage loans held
for sale 3.4 % 2.9 % 0.5 %
Weighted average cost of funds (excluding
facility fees) 2.1 % 2.2 % (0.1) %
(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 12. Originations - Key Metrics
Three Months Ended March 31,
2022 2021 Change
Key Metrics
Consumer direct lock pull through adjusted
volume(1) $ 6,746 $ 10,322 $ (3,576)
Other locked pull through adjusted volume(1) 3,586 12,945 (9,359)
Total pull through adjusted lock volume $ 10,332 $ 23,267 $ (12,935)
Funded volume $ 11,573 $ 25,133 $ (13,560)
Volume of loans sold $ 13,690 $ 26,311 $ (12,621)
Recapture percentage(2) 37.4% 31.0% 6.4%
Refinance recapture percentage(3) 50.3% 36.5% 13.8%
Purchase as a percentage of funded volume 22.7% 12.2% 10.5%
Value of capitalized servicing on retained
settlements 167 bps 128 bps 39 bps
Originations Margin
Revenue $ 324 $ 595 $ (271)
Pull through adjusted lock volume $ 10,332 $ 23,267 $ (12,935)
Revenue as a percentage of pull through
adjusted lock volume(4) 3.14 % 2.56 % 0.58 %
Expenses(5) $ 169 $ 233 $ (64)
Funded volume $ 11,573 $ 25,133 $ (13,560)
Expenses as a percentage of funded volume(6) 1.46 % 0.93% 0.53 %
Originations Margin 1.68 % 1.63 % 0.05 %
(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 March 31,
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. The Originations Margin for the three months ended March 31, 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 DTC, partially offset by higher
expenses as a percentage of funded volume. DTC channel mix for the three months
ended March 31, 2022 was 65% compared to 44% in 2021.
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Originations Segment Revenues
Total revenues decreased during the three months ended March 31, 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. There were no material changes
for repurchase reserves.
Originations Segment Expenses
Total expenses during the three months ended March 31, 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 the direct-to-consumer
channel as a result of lower origination volumes. Loan origination expenses
declined in 2022 primarily due to cost reduction initiatives and 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. The change in total other income (expense), net, during the
three months ended March 31, 2022 as compared to 2021 was primarily due to a
decrease in interest expense 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 period 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 March 31,
2022 2021 Change
Corporate/Other - Operations Total revenues $ 12 $ 96$ (84) Total expenses 41 113 (72) Interest expense 40 30 10 Other income, net 222 - 222 Key Metrics Average exchange inventory under management 14,170 14,210 (40) Total revenues and total expenses decreased during the three months endedMarch 31, 2022 as compared to 2021 primarily due to sale of our Title, Valuations and Field Services businesses in 2021. Interest expense increased in the three months endedMarch 31, 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 income, net, in the three months endedMarch 31, 2022 as compared to 2021 was primarily a result of the$223 gain recorded in the first quarter of 2022 upon completion of the Sagent Transaction. 40 -------------------------------------------------------------------------------- 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$579 as ofMarch 31, 2022 compared to$895 as ofDecember 31, 2021 . During the three months endedMarch 31, 2022 , we bought back 721 thousand shares of our outstanding common stock for a total cost of$35 as part of our stock repurchase program. We have sufficient borrowing capacity to support our operations. During the three months endedMarch 31, 2022 , we temporarily increased borrowing on our MSR facilities by$530 to fund MSR acquisitions. As ofMarch 31, 2022 , total borrowing capacity was$16,500 , of which$11,695 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 ofMarch 31, 2022 , our total advance facility capacity was$1,175 , of which$589 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.
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Cash Flows
The table below presents cash flows information:
Table 14. Cash Flows
Three Months Ended March 31,
2022 2021 Change
Net cash attributable to:
Operating activities $ 926 $ (76) $ 1,002
Investing activities (964) (82) (882)
Financing activities (294) 180 (474)
Net (decrease) increase in cash, cash
equivalents, and restricted cash $ (332) $ 22 $ (354)
Operating activities
Our operating activities generated cash of $926 during the three months ended
March 31, 2022 compared to cash used of $76 in 2021. The change in cash
attributable to operating activities was primarily related to continuing
operations, driven by $880 in cash generated from originations net sale
activities in 2022 compared to $421 of cash used in 2021, as a result of higher
sales proceeds and loan payment proceeds from mortgage loans held for sale on
lower volume of mortgage loans originated and purchased for sale, partially
offset by the decrease in cash generated of $137 from working capital in 2022
compared to $371 in 2021.
Investing activities
Our investing activities used cash of $964 during the three months ended March
31, 2022 compared to cash used of $82 in 2021. The increase in cash used in
investing activities was primarily related to continuing operations, driven by
$965 in cash used for the purchase of mortgage servicing rights in 2022 compared
to $69 of cash used in 2021.
Financing activities
Our financing activities used cash of $294 during the three months ended March
31, 2022 compared to cash generated of $180 in 2021. The change in cash
attributable to financing activities was primarily related to continuing
operations, driven by a net repayment of $204 in 2022 compared to net borrowing
of $608 in 2021 on our advance and warehouse facilities, partially offset by
cash used of $35 to repurchase outstanding shares of our common stock in 2022
compared to $148 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 of March 31, 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 the Federal Housing Finance Agency ("FHFA") for Fannie Mae and
Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers, as
summarized below. These requirements apply to our operating subsidiary,
Nationstar Mortgage, LLC .
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Minimum Net 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 and Ginnie Mae - a ratio of Tangible Net 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
requirements for FHFA and
Since we have aGinnie Mae single-family servicing portfolio that exceeds$75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. We are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents. In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 14, Capital Requirements, in the Notes to the Condensed Consolidated Financial Statements for additional information. Table 15. Debt March 31, 2022 December 31, 2021 Advance facilities principal amount $ 586 $
614
Warehouse facilities principal amount 3,419
4,125
MSR facilities principal amount 800
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 ofMarch 31, 2022 , we had a total borrowing capacity of$1,175 , of which we could borrow an additional$589 . 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 ofMarch 31, 2022 , we had a total borrowing capacity of$15,325 for warehouse and MSR facilities, of which we could borrow an additional$11,106 . 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. 43 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations As ofMarch 31, 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 .
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 March 31, 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 TERMS
This 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.
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.
secured by a group of mortgage loans.
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.
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.
46 -------------------------------------------------------------------------------- Table of Contents 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.
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.
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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.
of the
qualified borrowers.
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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