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OCWEN FINANCIAL CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)
The Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K generally discusses 2021 and 2020 items and provides year-to-year comparisons between 2021 and 2020. Discussions of year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 19, 2021 . OVERVIEW We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing 1.4 million loans with a total UPB of$268.0 billion on behalf of more than 3,900 investors and 125 subservicing clients as ofDecember 31, 2021 . We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our Originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window programs, bulk MSR purchase transactions, and subservicing agreements. The table below summarizes the volume of Originations by channel during 2021, compared with the volume of the prior years. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In 2021, we added$152.0 billion of new volume, with$55.1 billion MSR bulk acquisitions,$55.9 billion of new subservicing and$41.0 billion of non-bulk Originations volume, as further detailed in the below table. $ In billions UPB $ Change Year Ended December 31st 2021 2020 2019 2021 vs 2020 2020 vs 2019 Mortgage servicing originations Retail - Consumer Direct MSR (1) $ 2.4 $ 1.3 $ 0.7 $ 1.1 $ 0.7 Correspondent MSR (1) 16.6 5.7 0.5 10.9 5.2 Flow and Agency Cash Window MSR purchases (2) 20.4 15.1 0.9 5.3 14.2 Reverse mortgage servicing (3) 1.5 0.9 0.7 0.6 0.2 Total servicing 41.0 23.0 2.8 17.9 20.3 Bulk MSR purchases (2) 55.1 16.6 14.6 38.6 1.9 Total servicing additions 96.1 39.6 17.4 56.5 22.2 Subservicing additions (4) 55.9 17.8 12.7 38.2 5.1 Total servicing and subservicing UPB additions $ 152.0 $ 57.4 $ 30.1 $ 94.7 $ 27.3 (1)Represents the UPB of loans that have been originated or purchased during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization. (2)Represents the UPB of loans for which the MSR is purchased. (3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without separate recognition of MSRs. (4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business, with$14.7 billion ,$17.8 billion and$12.2 billion in the years 2021, 2020 and 2019, respectively. 44 -------------------------------------------------------------------------------- In addition to interim subservicing, subservicing additions for 2021 in the table above include$14.3 billion in UPB of reverse mortgage loan subservicing and$9.4 billion of new subservicing on behalf of MAV. OnOctober 1, 2021 , in connection with the transaction with MAM (RMS) and its then parent, PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately$14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we expect to add subservicing of approximately 60,000 reverse mortgage loans or approximately$13.1 billion in UPB upon boarding to our servicing platform in the first half of 2022, subject to investor approval. Furthermore, in the second quarter 2021, we launched our joint venture MSR investment with Oaktree with MAV purchasing approximately$9.4 billion GSE MSRs from unrelated third parties that PMC began subservicing in the third quarter of 2021. The following table summarizes the average volume of our Servicing segment in 2021, compared with prior years. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans drives the gross revenue and expenses, and their timing. In 2021, we have increased our total average servicing portfolio by$47.2 billion , net of runoff, with large GSE MSR bulk acquisitions driving the growth of our owned MSR portfolio, and the new subservicing volume generated from our MSR investment joint venture with Oaktree through MAV and our reverse subservicing acquisition from MAM (RMS). In addition to runoff, the NRZ portfolio declined as a result of the termination by NRZ of the PMC servicing agreement resulting in the deboarding of loans with$34.2 billion of UPB in September andOctober 2020 . The year 2021 established the foundation of a transformed servicing portfolio, with the significant addition of a high credit quality GSE MSR portfolio and the continued reduction of our non-Agency servicing through runoff, also reducing our concentration with NRZ servicing agreements. $ in billions Average UPB $ Change Year ended December 31, 2021 2020 2019 2021 vs 2020 2020 vs 2019 Owned MSR$ 117.5 $ 71.3 $ 70.0 $ 46.3 $ 1.3 NRZ 61.4 74.8 125.1 (13.4) (50.2) MAV 9.1 - - 9.1 - Subservicing 24.7 45.5 31.2 (20.7) 14.2 Reverse mortgage loans (owned) 6.8 6.5 5.8 0.3 0.7 Commercial and other servicing 1.2 0.5 0.3 0.6 0.2 Total serviced and subserviced UPB (average)$ 220.7 $ 198.6
As of
amounted to
Business Initiatives We had established five key operating objectives to drive improved value for shareholders in 2021. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives: •Accelerating growth, by expanding our client base and our product offerings, and by leveraging our MSR asset vehicle with Oaktree; •Strengthening recapture performance, by expanding our operating capacity; •Improving our cost leadership position, by driving productivity and efficiencies, with our technology and continuous improvement initiatives; •Maintaining high quality operational execution, through our technology and continuous improvement initiatives, and our commitment to employee engagement and customer satisfaction; and •Expanding servicing and other revenue opportunities.
MAV and Oaktree Relationship
OnMay 3, 2021 , we formally launched MAV, our MSR asset vehicle and entered into a number of definitive agreements with Oaktree. Oaktree and Ocwen committed 85% and 15%, respectively, to fund GSE MSR investments on a pro rata basis up to a total aggregate commitment of$250.0 million over a term of three years following closing (subject to extension). This joint venture is structured to provide Oaktree with MSR investment opportunities and returns, while providing PMC scale and incremental income through subservicing and recapture services. Additionally, PMC earns direct MSR investment income through its 15% ownership stake and carry interest on investment returns exceeding certain thresholds. Under the arrangement, MAV has a non-compete to purchase certain GSE MSRs through specific channels in cooperation with PMC. In addition, PMC must offer MAV the first opportunity to purchase GSE MSRs sold by PMC or its affiliates that meet certain criteria, which we refer to as the right of first offer. Both the non-compete and the right of first offer are subject to various restrictions and in effect 45 --------------------------------------------------------------------------------
until MAV has been fully funded, or, if earlier, in the case of the right of
first offer, until
exchange, PMC receives exclusive subservicing and recapture rights, subject
generally to ongoing performance and financial standards.
During 2021, PMC recognized$17.1 million of total servicing and subservicing fees, including ancillary income, and remitted$12.2 million servicing fees (as Pledged MSR liability expense) under its agreements with MAV (refer to Note 8 - MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements for further description of the accounting for the MAV agreements). In addition, PMC recognized$3.6 million earnings in 2021 from its equity method investment in MAV Canopy. COVID-19 Pandemic Update Our financial performance in 2020 was affected by the Coronavirus Disease 2019 (COVID-19) pandemic and the associated historical decline in interest rates, mostly due to large losses on MSRs and lower revenue in our Servicing business, partially offset by the growth and profitability of our Originations business. Furthermore, the CARES Act allowed us to recognize income tax benefits in 2020 mostly due to the carryback of a portion of our prior net operating losses. In 2021, our Servicing business continued to be impacted by the COVID-19 pandemic, with a large number of loans placed under forbearance and the moratorium on foreclosures and evictions. The collection and recognition of servicing fees and ancillary income related to forbearance loans continued to be delayed or reduced. In addition, our outreach activities with impacted borrowers have intensified to address extensions and exits of plans or to offer loan modifications. The foreclosure moratorium ended onJuly 31, 2021 , and the eviction moratorium was extended throughJanuary 1, 2022 for foreclosed borrowers. As ofDecember 31, 2021 , we managed 28,500 loans under forbearance (or 2.1% of our total portfolio), 6,800 of which related to our owned MSRs, or 1.1% of our owned MSR servicing portfolio (excluding NRZ and MAV), a reduction of 65% and 71%, respectively, compared to the prior year end. As ofDecember 31, 2020 , we managed 81,900 loans under forbearance, 23,100 of which related to our owned MSRs (excluding NRZ). During 2021, the number of loans under forbearance continued to trend down, as illustrated by the below chart of forbearance plans by investor for our owned MSR portfolio (excluding NRZ). [[Image Removed: ocn-20211231_g3.jpg]] 46 --------------------------------------------------------------------------------
The decline in open plans of our owned MSR portfolio during 2021 is mostly
driven by performing loans and pay-offs (excluding servicing transfers), as
further illustrated below:
[[Image Removed: ocn-20211231_g4.jpg]]
We outperformed the industry average as reported by the MBA relating to the percentage of borrowers with an Agency loan who exited forbearance with a reinstatement or loss mitigation solution in place. In addition, we consistently exceeded the industry benchmark for borrowers with a GSE loan who remained current while on forbearance. We undertook significant efforts to contact and educate borrowers in understanding their forbearance plans and resolution options, and believe our high-touch communication strategy resulted in these favorable outcomes. We continue to reach out to all borrowers who have not resumed making payments after exiting their plans with the goal of coming to an appropriate resolution. We continue to operate through a secure remote workforce model for approximately 95% of our global workforce and continue to adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. We monitor the impact of the pandemic on our workforce and have established business resiliency plans for all our locations. AtDecember 31, 2021 , we had approximately 5,700 employees, of which approximately 3,200 were located inIndia and approximately 500 were based inthe Philippines . While we have contingency and continuity plans in place, we cannot guarantee that our operations will not be negatively impacted. To date, our operations have not been significantly affected. Uncertainties related to the duration and severity of the pandemic and related economic impact remain and make it difficult for us to determine the continued ongoing effect the pandemic may have on us and our business, financial condition, liquidity or results of operations. 47 --------------------------------------------------------------------------------
Operations Summary
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Servicing and subservicing fees
6 % (24) % Reverse mortgage revenue, net 79.7 60.7 86.3 31 (30) Gain on loans held for sale, net 145.8 137.2 38.3 6 258 Other revenue, net 42.7 25.6 23.3 67 10 Total revenue 1,050.1 960.9 1,123.4 9 (14) MSR valuation adjustments, net (109.9) (251.9) (120.9) (56) 108 Operating expenses Compensation and benefits 297.9 265.3 313.5 12 (15) Professional services 81.9 106.9 102.6 (23) 4 Servicing and origination 113.6 77.3 109.0 47 (29) Technology and communications 56.0 59.6 79.2 (6) (25) Occupancy and equipment 36.5 47.5 68.1 (23) (30) Other expenses 23.3 19.2 1.5 22 n/m Total operating expenses 609.3 575.7 673.9 6 (15) Other income (expense) Interest income 26.4 16.0 17.1 65 (6) Interest expense (144.0) (109.4) (114.1) 32 (4) Pledged MSR liability expense (209.9) (152.3) (372.1) 38 (59) Gain (loss) on extinguishment of debt (15.5) - 5.1 n/m (100) Earnings of equity method investee 3.6 - - n/m n/m Other, net 4.1 6.7 9.0 (39) (25) Total other income (expense), net (335.2) (239.0) (455.1) 40 (47) Income (loss) before income taxes (4.4) (105.7) (126.5) (96) (16) Income tax expense (benefit) (22.4) (65.5) 15.6 (66) (519) Net income (loss) 18.1 (40.2) (142.1) (145) (72) Segment income (loss) before taxes: Servicing$ 19.9 $ (75.8) $ (72.7) (126) % 4 % Originations 93.9 104.2 (12.2) (10) (952) Corporate Items and Other (118.1) (134.1) (41.6) (12) 222$ (4.4) $ (105.7) $ (126.5) (96) % (16) % n/m: not meaningful 48
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Total Revenue
The below table presents total revenue by segment and at the consolidated level:
Years Ended December 31, % Change
Revenue 2021 2020 2019 2021 vs 2020 2020 vs 2019
Servicing $ 819.4 $ 757.7 $ 1,048.5 8% (28)%
Originations 249.9 179.3 61.7 39 191
Corporate 6.2 6.6 13.2 (6) (50)
Total segment revenue 1,075.4 943.5 1,123.4 14 (16)
Inter-segment elimination (1) (25.3) 17.4 - (245) n/m
Total revenue $ 1,050.1 $ 960.9 $ 1,123.4 9% (14)%
(1)The fair value change of inter-segment economic hedge derivatives reported
within Total revenue (Gain on loans held for sale, net) is eliminated at the
consolidated level with an offset in MSR valuation adjustments, net.
As compared to 2020, total segment revenue for 2021 was $131.9 million or 14%
higher, due to a $70.6 million increase in Originations revenue and a $61.7
million increase in Servicing revenue. The 39% increase in Originations revenue
is primarily due to a 159% increase in total forward and reverse production
volume combined, partially offset by lower margins. The increase in Servicing
revenue is primarily due to a $42.2 million increase in servicing fees and $27.1
million gain on sale of loans acquired through the exercise of call rights in
2021. The $42.2 million increase in servicing fees is mostly driven by a $123.1
million or 57% increase in servicing fee income on our owned MSRs and $15.7
million new servicing fees collected on behalf of MAV in 2021, partially offset
by $79.4 million reduction in fees collected on behalf of NRZ and a $9.3 million
reduction in ancillary income. The growth in our owned MSR portfolio is mostly
due to bulk MSR acquisitions, MSR acquisitions through the Agency Cash Window
programs and the growth in our correspondent lending volumes. The decline in the
collection of NRZ servicing fees is mostly due to portfolio runoff and the
termination of the PMC servicing agreement in February 2020 . The decline in
ancillary fees is mostly due to the COVID-19 environment and related decrease in
late fees, collection and convenience fees as well as a decrease in float
earnings due to lower interest rates, partially offset by the growth in our
owned MSR portfolio.
Total revenue (after elimination of inter-segment derivative fair value changes)
was $1.05 billion for 2021, $89.2 million or 9% higher than 2020, driven by the
segment revenue factors described above and the presentation of macro-hedging
derivative gains and losses reported within MSR valuation adjustments, net at
the consolidated level, as disclosed in Note 4 - Loans Held for Sale, Note 17 -
Derivative Financial Instruments and Hedging Activities and Note 23 - Business
Segment Reporting. Effective May 2021 , we replaced our macro-hedging strategies
with two distinct strategies to separately hedge the pipeline and our MSR
exposure with third party derivatives. However, we have and may continue to use
inter-segment derivatives between the two strategies. Refer to the MSR Hedging
Strategy section of Item 7A.Quantitative and Qualitative Disclosures About
Market Risk for further detail.
See the respective Segment Results of Operations for additional information.
MSR Valuation Adjustments, Net
The table below presents the key components of MSR valuation adjustments, net:
Years Ended December 31,
Segment Results 2021 2020 2019
MSR realization of expected cash flows (1) $ (250.2) $ (171.4) $ (197.3)
MSR fair value changes due to interest rate and
assumption updates 124.7 (149.8) 75.9
Derivative fair value gain (loss) (34.9) 44.9 0.5
Total Servicing (160.4) (276.3) (120.9)
Originations - MSR fair value changes 25.2 41.7 -
Inter-segment elimination - derivative fair value gain
(loss) (2)
25.3 (17.4) - MSR valuation adjustments, net $ (109.9)
$ (252.0) $ (120.9)
(1)The terms "realization of expected cash flows" and "runoff" may be used
interchangeably within this discussion.
(2)The fair value change of inter-segment economic hedge derivatives reported
within MSR valuation adjustments, net is eliminated at the consolidated level
with an offset in Gain on loans held for sale, net (Total Revenue). Also refer
to the description of the inter-segment derivative elimination in Note 23 -
Business Segment Reporting.
49
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We reported a $109.9 million loss in MSR valuation adjustments, net in 2021. As
detailed in the above table and further discussed below, the loss is due to
$250.2 million portfolio runoff and a $124.7 million fair value gain due to
interest rate and assumption updates, $34.9 million loss on MSR hedging
derivative instruments, $25.2 million revaluation gain on MSR purchases reported
in Originations and a $25.3 million gain on derivatives hedging the pipeline
within the Originations segment.
•MSR portfolio runoff represents the realization of expected cash flows and
yield based on projected borrower behavior, including scheduled and unscheduled
amortization of the loan UPB. MSR portfolio runoff increased by $78.8 million
mostly due to a higher MSR portfolio driven by MSR acquisitions and continued
elevated levels of prepayments in a relatively low interest rate environment.
•The $124.7 million fair value gain due to interest rate and assumption updates
is comprised of a $88.5 million gain on the MSRs transferred to NRZ and MAV
(that did not achieve sale accounting) and a $36.2 million gain on our owned
MSRs. This NRZ and MAV MSR gain is mostly driven by assumption updates
implemented in the third quarter of 2021 relating to a PLS model calibration by
our third-party valuation expert, and is largely offset by a corresponding loss
separately reported with Pledged MSR liability expense.
•Our MSR hedging policy is designed to reduce the volatility of the MSR
portfolio fair value due to market interest rates. In 2021, we reported a $36.2
million fair value gain on our owned MSR portfolio attributable to interest rate
and assumption updates and a $34.9 million hedging derivative loss. The
year-over-year fair value changes are mostly explained by interest rate changes,
with a 66 basis point increase in the 10-year swap rate during 2021. The changes
in fair value of the MSR and economically hedging derivatives were not offset to
the same extent as per their expected hedging sensitivity measures, mainly due
to non-parallel changes in the interest rate curve and the basis risk inherent
in the MSR profile and the available hedging instruments. Refer to the MSR
Hedging Strategy section of Item 7A.Quantitative and Qualitative Disclosures
About Market Risk for additional information regarding our hedging programs.
•The
Originations, from
cash window MSR originations volume and declining margins.
•In connection with our macro-hedge strategy through the second quarter of 2021, we have used our derivative instruments to economically hedge both the fair value changes of the MSR and Originations pipeline exposures. While allocated to the pipeline for risk management purposes and segment reporting, inter-segment derivatives are eliminated in our consolidated financial statements and we reported a$25.3 million gain on inter-segment derivatives in 2021 economically hedging the Originations pipeline. The change from$17.4 million loss in 2020 to$25.3 million gain on Originations inter-segment derivatives in 2021 is mostly due to the change in interest rates and related changes in our Originations pipeline.
Compensation and Benefits
Compensation and benefits expense increased$32.7 million , or 12%, as compared to 2020. Salaries and benefits, commissions, and incentive compensation increased$13.6 million ,$9.9 million , and$9.7 million , respectively. Originations segment compensation and benefits increased by$39.4 million , mostly due to additional commissions and salaries driven by additional headcount to support higher loan production levels in 2021. Servicing segment compensation and benefits expense decreased by$5.4 million , mostly driven by a decline in average headcount that was largely due to the scaling down of our platform to the number of loans serviced and the efficiencies resulting from our cost re-engineering initiatives, partially offset by the hiring of employees to support the acquisition of reverse mortgage subservicing from MAM (RMS) onOctober 1, 2021 . Corporate segment compensation and benefits expense decreased$1.3 million primarily as a result of a decrease in average corporate headcount and a decrease in annual incentive compensation, significantly offset by a$7.9 million increase in share-based compensation. Our total average headcount declined by 2%, and overall our offshore-to-total average headcount ratio decreased from 72% to 68%.
Servicing and Origination Expense
Servicing and origination expense increased$36.4 million , or 47%, as compared to 2020, with$29.8 million from Servicing (see below) and$7.8 million from Originations, due to the increase in loan production volume. Servicing expenses increased$29.8 million , or 44%, largely driven by the following: •$19.0 million provision release recorded in 2020, comprised of$9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and$9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves; •Additional subservicing expenses primarily due to a$4.5 million increase in interim subservicing expense on MSR bulk acquisitions and a$5.2 million increase largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform; 50 --------------------------------------------------------------------------------
•$8.4 million additional satisfaction and other loan expenses attributed to a
larger portfolio; and
•$6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans that was primarily due to a decline in the volume of government-insured claim receivables due to the foreclosure moratorium in effect for much of 2021. Other Operating Expenses Professional services expense decreased$25.0 million , or 23%, as compared to 2020 primarily due to a$17.2 million decline in legal expenses and an$8.5 million decline in other professional services. The decline in legal fees is primarily due to expenses recorded in 2020 related to theCFPB andFlorida matters. Cost reduction initiatives and higher utilization of professional services in 2020, including strategic vendor sourcing, cloud migration and consulting, resulted in lower other professional fees in 2021. In addition, professional services for 2021 include$3.2 million of advisory fees related to the launch of our MSR investment joint venture with Oaktree, MAV Canopy. Legal expenses and professional services for 2020 included an$8.0 million recovery of prior expenses from a mortgage insurer and$5.1 million of COVID-19 related expenses, respectively. Technology and communication expense decreased$3.6 million , or 6%, as compared to 2020. Telephone and telecommunication expense declined$4.4 million as compared to 2020, largely driven by facility closures, our transition to a more cost-effective alternative telephone system, consolidation of telecommunication vendors and other cost savings initiatives. Depreciation expense decreased$2.6 million as compared to 2020. These decreases were partially offset by a$4.0 million increase in software usage and maintenance expenses, mostly in our Originations segment to support its growth.
Occupancy and equipment expense decreased
2020. Depreciation expense, facility maintenance and utility expenses, and
interest on lease liabilities decreased
million
efforts in 2020, which included closing and consolidating certain facilities.
Other expenses increased
segment as part of our initiative to expand our origination platform and
increase volumes.
InFebruary 2020 , we announced our intention to implement certain cost re-engineering initiatives in 2020 to generate further cost savings. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, strategic sourcing and actions, off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancement. We incurred a total of$27.6 million re-engineering costs in 2020, including$6.2 million facility-related expenses reported as Occupancy and equipment,$9.7 million Compensation and benefits costs and$6.7 million Professional services costs.
Other Income (Expense)
The
primarily attributable to the Originations segment and as a result of the
increase in loan production volumes.
Interest expense increased$34.6 million , or 32%, as compared to 2020, due to an increased average debt balance to finance our increased loan production volumes and MSR portfolio, partially offset by a lower cost of funds. The$1.2 billion or 59% higher debt balance is driven by a higher MSR portfolio - largely due to bulk acquisitions - and additional warehouse loans, partially offset by lower advance match funded liabilities. The lower cost of funds on asset backed financing facilities (102 basis point lower effective interest rate) is partially offset by the issuance of higher-rate senior secured notes as part of our corporate debt refinancing onMarch 4, 2021 . Pledged MSR liability expense increased$57.6 million as compared to 2020, primarily due to a$71.1 million unfavorable fair value change, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, the lump-sum cash payments received from NRZ in 2017 and 2018 were fully amortized as of the end of the second quarter of 2020 ($34.2 million income in 2020). These increases in expense were partially offset by a$50.8 million decline in servicing fee remittance driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ inFebruary 2020 . Loss on debt extinguishment of$15.5 million for 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the Senior Secured Term Loan (SSTL) dueMay 2022 and our early redemption of the PHH 6.375% senior unsecured notes dueAugust 2021 and the PMC 8.375% senior secured notes dueNovember 2022 .
Earnings of equity method investee represent our 15% share of MAV Canopy from
detail.
51 --------------------------------------------------------------------------------
Income Tax Benefit (Expense)
For 2021 and 2020, we recognized an income tax benefit of$22.4 million and$65.5 million on pre-tax losses of$4.4 million and$105.7 million , respectively. For 2021, the income tax benefit was driven primarily by$12.6 million of additional income tax benefit recognized under the CARES Act and$9.0 million of income tax benefit recognized related to the favorable resolution of various uncertain tax positions during the year. For 2020, the income tax benefit was driven by the$79.0 million of estimated income tax benefit recognized under the CARES Act offset by$15.0 million of income tax expense for related uncertain tax positions. Income tax benefits recognized during 2021 and 2020 related primarily to resolution of prior period uncertain tax positions and utilization of prior period losses that bear no relationship to current operating results. This in turn resulted in the high effective tax rates of 513.6% and 62.0% for 2021 and 2020, respectively. The$43.1 million reduction in income tax benefit for 2021, compared with 2020, is primarily due to a$45.0 million reduction in estimated income tax benefit recognized under the CARES Act, net of related uncertain tax positions, during 2021 versus 2020 based on modification of the tax rules to allow the carryback of NOLs arising in 2018, 2019 and 2020 tax years to the five prior tax years, and the increase to the business interest expense limitation under IRC Section 163(j). In 2021 and 2020, we collected$24.6 million and$51.4 million , respectively, which represents the tax refund associated with the NOLs generated in 2019 and 2018, respectively, carried back to prior tax years. Under our transfer pricing agreements, our operations inIndia andPhilippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than theU.S. statutory rate of 21%. 52 --------------------------------------------------------------------------------
Financial Condition Summary
December 31,
2021 2020 $ Change % Change
Cash and cash equivalents $ 192.8 $ 284.8 $ (92.0) (32) %
Restricted cash 70.7 72.5 (1.8) (2)
MSRs, at fair value 2,250.1 1,294.8 955.3 74
Advances, net 772.4 828.2 (55.8) (7)
Loans held for sale 928.5 387.8 540.7 139
Loans held for investment, at fair value 7,207.6 7,006.9 200.7 3
Receivables 180.7 187.7 (7.0) (4)
Investment in equity method investee 23.3 - 23.3 n/m
Other assets 520.9 588.4 (67.5) (11)
Total assets $ 12,147.1 $ 10,651.1 $ 1,496.0 14 %
Total Assets by Segment
Servicing $ 10,999.2 $ 9,847.6 $ 1,151.6 12 %
Originations 823.5 379.2 444.3 117
Corporate Items and Other 324.4 424.3 (99.9) (24)
$ 12,147.1 $ 10,651.1 $ 1,496.0 14 %
HMBS-related borrowings, at fair value
$ 112.3 2 Other financing liabilities, at fair value 805.0 576.7 228.2 40 Advance match funded liabilities 512.3 581.3 (69.0) (12) Mortgage loan warehouse facilities 1,085.1 451.7 633.4 140 MSR financing facilities, net 900.8 437.7 463.1 106 Senior secured term loan - 179.8 (179.8) (100) Senior notes, net 614.8 311.9 302.9 97 Other liabilities 867.5 924.0 (56.5) (6) Total liabilities 11,670.4 10,235.8 1,434.7 14 Total stockholders' equity 476.7 415.4 61.3 15 Total liabilities and equity$ 12,147.1 $ 10,651.1 $ 1,496.0 14 % Total Liabilities by Segment Servicing$ 10,101.5 $ 9,163.5 $ 937.9 10 % Originations 813.3 428.5 384.8 90 Corporate Items and Other 755.7 643.7 112.0 17$ 11,670.4 $ 10,235.8 $ 1,434.7 14 % Book value per share$ 51.77 $ 47.81 $ 3.96 8 % Total assets increased by$1.5 billion , or 14%, betweenDecember 31, 2020 andDecember 31, 2021 mostly due to a$955.3 million , or 74%, increase in our MSR portfolio - mostly driven by MSR bulk acquisitions and new capitalized MSRs - and a$540.7 million , or 139%, increase in our loans held for sale portfolio - driven by higher production volumes. In addition, loans held for investment increased$200.7 million mostly due to the continued growth of our reverse mortgage business. Servicing advances declined$55.8 million mostly due to heightened payoff activity and lower delinquencies, partially offset by increased escrow advances on acquired MSRs. The$67.5 million decrease in other assets is mostly attributable to the decrease in contingent repurchase rights related to loans that have been repurchased fromGinnie Mae . 53 -------------------------------------------------------------------------------- Total liabilities increased$1.4 billion , or 14%, as compared toDecember 31, 2020 with similar effects as described above. Borrowings under our mortgage warehouse lines and MSR financing facilities increased$633.4 million and$463.1 million , respectively, due to higher loan production volumes and MSR bulk acquisitions, respectively. Our HMBS-related borrowings increased by$112.3 million due to the continued growth of our reverse mortgage business and its securitization. Our senior notes increased$302.9 million due to the refinancing transactions completed onMarch 4, 2021 andMay 3, 2021 . We issued$627.1 million of new senior notes, net of discount, redeemed in full$313.1 million of existing senior notes and repaid the$185.0 million SSTL. The$228.2 million increase in Other financing liabilities is due to the transfers of MSRs to MAV in 2021 which did not qualify for sale accounting. Advance match funded liabilities decreased$69.0 million consistent with the decline in servicing advances. Other liabilities declined$56.5 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of loans under forbearance. Total equity increased$61.3 million during 2021 mostly due to$32.1 million issuance of common stock and warrants to Oaktree in March andMay 2021 ,$18.1 million net income, a$6.5 million reduction in the unfunded pension plan obligation recognized in accumulated other comprehensive income and$4.4 million of equity-classified awards. Key Trends
The following discussion provides information regarding certain key drivers of
our financial performance. Also refer to the Segment results of operations
section for further detail, the description of our business environment,
initiatives and risks.
Servicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform in 2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume. The expected volume increase is also intended to exceed the portfolio serviced on behalf of NRZ that may end inJuly 2022 . Servicing revenue and ancillary income have been adversely impacted by COVID-19, which may persist throughout 2022, until forbearance plan exits and the end of foreclosure and eviction moratoria or related restrictions. Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with consumer direct generating relatively higher margins than correspondent. The volume mix is expected to shift to purchase as the volume of refinance activity by borrowers is expected to continue to decline, consistent with expected industry trends. While we continue to increase our recapture rate by expanding our channel operating capacity, we focus on cash-out, debt consolidation and other borrower solutions, in addition to new customer acquisitions. Based on industry origination volume projections for 2022, we expect competition to intensify and origination margins will be under pressure until industry excess capacity can be eliminated. This will impose trade-offs between volumes and margins, and potential shifts among channels. Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to grow our volumes and maintain similar margins in each channel, however the channel mix may vary. With the assignment of MAM (RMS) subservicing agreements to PMC onOctober 1, 2021 and the expected additional loans to transfer on our subservicing platform in the first half of 2022, reverse mortgage servicing revenue is expected to grow. MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is function of both UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments, Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our now larger MSR portfolio. Refer to the sensitivity analysis in the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail. Operating expenses - Compensation and benefits is a significant component of our cost-to-service and cost-per-loan and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to increase (see above), we expect an increase in our workforce with partial offset from an increased relative share of performing loans through our MSR acquisitions. We expect to swiftly scale our headcount and operating expenses to servicing volume in 2022, including due to the potential non-renewal or termination of the NRZ agreement. We expect our Originations workforce to remain largely stable or moderately increase in the near term to accompany the growth of the channels. Other operating expenses are expected to favorably correlate with volumes, as productivity and efficiencies are expected with our technology and continuous improvement initiatives. Stockholders' equity - With the above considerations, we expect our businesses to generate net income and increase our equity in 2022, absent any significant adverse change in interest rates. 54 --------------------------------------------------------------------------------
SEGMENT RESULTS OF OPERATIONS
We report our activities in three segments, Servicing, Originations (previously Lending) and Corporate Items and Other that reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance and to assess the allocation of our resources.
Servicing
We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and Speedpay/collection fees. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per-loan fees typically vary based on type of investor and on loan delinquency status. As ofDecember 31, 2021 , we serviced 1.4 million mortgage loans with an aggregate UPB of$268.0 billion , an increase of 22% and 42%, respectively, fromDecember 31, 2020 . The average UPB of loans serviced during 2021 increased by 11% or$22.1 billion compared to 2020. The increase in our servicing volume is mostly due to MSR acquisitions, subservicing additions and increased MSR originations. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on our capital availability and financial return targets. InMay 2021 , PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. In addition, inOctober 2021 , PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. NRZ remains our largest subservicing client, accounting for 21% and 31% of the UPB and loan count, respectively, in our servicing portfolio as ofDecember 31, 2021 . NRZ servicing fees retained by Ocwen represented approximately 19% and 30% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ and excluding ancillary income, for 2021 and 2020, respectively. NRZ's portfolio represents approximately 66% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ. In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of$279.6 million and$54.6 million , respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen would receive under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense) as they amortized through the remaining term of the original agreements (April 30, 2020 ). The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings, within MSR valuation adjustments, net. The value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 16 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio. For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the transferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability at fair value on our balance sheet. The changes in fair value of the MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense. Similarly, we present on a gross basis the total servicing fees collected on behalf of NRZ within Servicing and subservicing fees, net and the total servicing fee remittance to NRZ within Pledged MSR liability expense.
Our Servicing business continues to be adversely affected by the COVID-19
pandemic, with the loans placed under forbearance, the moratorium on
foreclosures and elevated prepayments of our MSR portfolio due to interest
rates. See further discussion within Overview, COVID-19 Pandemic Update.
Loan Resolutions
We have a strong track record of success as a leader in the servicing industry
in foreclosure prevention and loss mitigation that helps homeowners stay in
their homes and improves financial outcomes for mortgage loan investors.
Reducing
55 -------------------------------------------------------------------------------- delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a "short sale"), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk. Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing fees related to delinquent borrower payments were$148.4 million atDecember 31, 2021 , of which$117.7 million were attributable to NRZ agreements. Advance Obligation As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made. Most of our advances have the highest reimbursement priority (i.e., they are "top of the waterfall") so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 25 - Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Significant Variables
Aggregate UPB and Loan Count. Servicing fees are generally expressed as a
percentage of UPB and subservicing fees are earned on a per-loan basis or
expressed as a percentage of UPB. Aggregate UPB and loan count decline as a
result of portfolio run-off and increase to the extent we retain MSRs from new
originations or engage in MSR acquisitions, to the extent permitted.
Operating Efficiency. Our operating results are heavily dependent on our ability
to scale our operations to cost-effectively and efficiently perform servicing
activities in accordance with our servicing agreements.
Delinquencies. Delinquencies impact our results of operations and operating cash
flows. Non-performing loans are more expensive to service because the loss
mitigation activities that we must undertake to keep borrowers in their homes or
to foreclose, if necessary, are costlier than the activities required to service
a performing loan. These loss mitigation activities include increased contact
with the borrower for collection and the development of forbearance plans or
loan modifications by highly skilled associates who command higher compensation
as well as the higher compliance costs associated with these, and similar,
activities. While the higher cost is somewhat offset by ancillary fees, for
severely delinquent loans or loans that enter the foreclosure process the
incremental revenue opportunities are generally not sufficient to cover our
increased costs.
In addition, when borrowers are delinquent, the amount of funds that we are
required to advance to the investors increases. We utilize servicing advance
financing facilities, which are asset-backed (i.e., match funded liabilities)
securitization facilities, to finance a portion of our advances. As a result,
increased delinquencies result in increased interest expense.
Prepayment Speed. The rate at which portfolio UPB declines can have a
significant impact on our business. Items reducing UPB include scheduled and
unscheduled principal payments (runoff), refinancing, loan modifications
involving forgiveness of principal, voluntary property sales and involuntary
property sales such as foreclosures. Prepayment speed impacts future servicing
fees, amortization and valuation of MSRs, float earnings on float balances and
interest expense on advances. Increases in anticipated lifetime prepayment
speeds generally cause MSR valuation adjustments to increase because MSRs are
valued based on total expected servicing income over the life of a portfolio.
The converse is true when expectations for prepayment speeds decrease.
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Reverse Mortgage Revenue
The activities and financial performance related to reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value (internally identified as our Reverse Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations. Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of$1.5 billion atDecember 31, 2021 . These draws or tails are funded by the servicer and can be subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws. As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans are assigned to HUD and payment is received from HUD through a claims process. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market. The reverse mortgage revenue reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings. We elected the fair value accounting election for both our reverse mortgage loans held for investment and the HMBS-related borrowings. The net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following: •contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS; •cash gains on tail securitization. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums;
•fair value changes due to the realization of expected cash flows of the net
asset balance of securitized loans held for investment and HMBS-related
borrowings; and
•fair value changes due to the inputs and assumptions of the net balance of
securitized loans held for investment and HMBS-related borrowings.
The fair value of our HECM loan portfolio generally decreases as market interest
rates rise and increases as market rates fall. As our HECM loan portfolio is
predominantly comprised of ARMs, higher interest rates cause the loan balance to
accrue and reach a 98% maximum claim amount liquidation event more quickly, with
lower interest rates extending the timeline to liquidation. HECM loans have a
longer duration than HMBS-related borrowings as a result of the future draw
commitments, and our obligations as issuer of HMBS to purchase loans out of the
Ginnie Mae securitization pools once the outstanding principal balance of the
related HECM loan is equal to 98% of the maximum claim amount.
The financial performance associated with the subservicing of reverse mortgage
loans associated with the MAM (RMS) transaction is primarily reflected within
Servicing and subservicing fees, net since Reverse mortgage revenue, net
strictly reflects the financial performance of owned loans/servicing. We collect
higher subservicing fees for inactive loans relative to the base subservicing
fee for performing loans or active repurchased loans, commensurate with the
level of servicing efforts, as described above.
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The following table presents selected results of operations of our Servicing
segment. The amounts presented are before the elimination of balances and
transactions with our other segments:
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Servicing and subservicing fees $ 773.5 $ 731.2 $ 974.2 6 % (25) %
Gain on loans held for sale, net 46.6 14.7 5.4 217 171
Reverse mortgage revenue, net (2.3) 7.6 63.5 (131) (88)
Other revenue, net 1.7 4.2 5.4 (60) (24)
Total revenue 819.4 757.7 1,048.5 8 (28)
MSR valuation adjustments, net (160.4) (276.3) (120.9) (42) 129
Operating expenses
Compensation and benefits 108.1 113.6 144.0 (5) (21)
Servicing expense 98.2 68.4 101.3 44 (32)
Professional services 31.4 28.1 42.2 11 (33)
Occupancy and equipment 26.5 31.0 44.3 (14) (30)
Technology and communications 23.8 25.2 32.6 (5) (23)
Corporate overhead allocations 47.7 61.0 197.9 (22) (69)
Other expenses 6.6 4.5 (14.3) 46 (132)
Total operating expenses 342.4 331.9 548.0 3 (39)
Other income (expense)
Interest income 8.2 7.1 10.1 17 (30)
Interest expense (104.6) (90.7) (102.5) 15 (12)
Pledged MSR liability expense (209.1) (152.5) (372.2) 37 (59)
Earnings of equity method investee 3.6 - - n/m n/m
Other, net 5.2 10.8 12.3 (52) (13)
Total other income (expense), net (296.6) (225.3) (452.3) 32 (50)
Income (loss) before income taxes $ 19.9 $ (75.8) $ (72.7) (126) % 4 %
58
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The following table provides selected operating statistics for our Servicing
segment:
% Change
2021 vs. 2020 vs.
2021 2020 2019 2020 2019
Assets Serviced at December 31
Unpaid principal balance (UPB) in
billions:
Performing loans (1) $ 254.2 $ 177.6 $ 198.9 43 % (11) %
Non-performing loans 13.1 10.3 11.2 27 (8)
Non-performing real estate 0.7 0.9 2.2 (22) (59)
Total $ 268.0 $ 188.8 $ 212.4 42 (11)
Conventional loans (2) $ 166.3 $ 77.0 $ 95.3 116 % (19) %
Government-insured loans 28.8 34.8 30.1 (17) 16
Non-Agency loans 72.8 77.0 87.0 (5) (11)
Total $ 268.0 $ 188.8 $ 212.4 42 (11)
Servicing portfolio (3) $ 135.9 $ 97.4 $ 76.7 40 % 27 %
Subservicing portfolio
Subservicing - forward 29.4 24.3 17.1 21 42
Subservicing - reverse 13.9 - - n/m n/m
Total subservicing 43.3 24.3 17.1 78 42
MAV (4) 33.0 - - n/m n/m
NRZ (5) (6) 55.8 67.1 118.6 (17) (43)
$ 268.0 $ 188.8 $ 212.4 42 (11)
Number (in 000's):
Performing loans (1) 1,287.0 1,048.7 1,344.9 23 % (22) %
Non-performing loans
Non-performing loans - NRZ 30.7 33.8 54.2 (9) % (38) %
Non-performing loans - Other 30.7 18.4 6.6 67 179
61.4 52.2 60.8 18 (14)
Non-performing real estate 4.9 6.7 14.3 (27) (53)
Total 1,353.3 1,107.6 1,420.0 22 (22)
Conventional loans (2) 686.5 349.6 607.9 96 % (42) %
Government-insured loans 168.1 201.9 185.1 (17) 9
Non-Agency loans 498.7 556.1 627.0 (10) (11)
Total 1,353.3 1,107.6 1,420.0 22 (22)
59
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% Change
2021 vs. 2020 vs.
2021 2020 2019 2020 2019
Servicing portfolio 636.1 511.6 472.8 24 % 8 %
Subservicing portfolio
Subservicing - forward 105.6 96.3 77.3 10 25
Subservicing - reverse 54.7 - - n/m n/m
Total subservicing
MAV 131.6 - - n/m n/m
NRZ (5) 425.4 499.6 869.9 (15) (43)
1,353.3 1,107.6 1,420.0 22 (22)
Prepayment speed (CPR) (7)
12-month % Voluntary CPR 18 % 15 % 11 % 20 % 36 %
12-month % Involuntary CPR 1 2 2 (50) -
Total 12-month % CPR 21 20 16 5 25
Number of completed modifications 17,294 28,322 25,754 (39) % 10 %
Revenue recognized in connection with
loan modifications $ 27.8 $ 30.2 $ 38.5 (8) (22)
n/m: not meaningful
(1)Performing loans include those loans that are less than 90 days past due and
those loans for which borrowers are making scheduled payments under loan
modification, forbearance or bankruptcy plans. We consider all other loans to be
non-performing.
(2)Conventional loans at December 31, 2021 include 73,340 prime loans with a UPB
of $13.7 billion which we service or subservice. This compares to 89,458 prime
loans with a UPB of $16.1 billion at December 31, 2020 . Prime loans are
generally good credit quality loans that meet GSE underwriting standards.
(3)Includes $7.0 billion UPB of reverse mortgage loans that are recognized in
our consolidated balance sheet at December 31, 2021 .
(4)Includes $8.9 billion UPB subserviced and $24.0 billion UPB of MSRs sold to
MAV that does not achieve sale accounting treatment.
(5)Loans serviced or subserviced pursuant to our agreements with NRZ.
(6)Includes $2.1 billion UPB of subserviced loans at December 31, 2021 .
(7)Total 12-month % CPR includes voluntary and involuntary prepayments, as shown
in the table, plus scheduled principal amortization.
The following table provides selected operating statistics related to our owned
reverse mortgage loans held for investment reported within our Servicing
segment:
% Change
2021 vs. 2020 vs.
2021 2020 2019 2020 2019
Reverse Mortgage Loans at December
31
Unpaid principal balance (UPB) in
millions:
Loans held for investment (1) $ 6,546.5 $ 6,299.6 $ 5,658.3 4 % 11 %
Active Buyouts (2) 36.1 28.4 10.2 27 178
Inactive Buyouts (2) 95.3 60.9 26.4 56 131
Total $ 6,677.9 $ 6,388.9 $ 5,694.9 5 12
Inactive buyouts % to total 1.43 % 0.95 % 0.46 % 51 107
Future draw commitments (UPB) in
millions: 1,507.1 2,044.4 1,937.4 (26) 6
60
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% Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Fair value in millions:
Loans held for investment (1) $ 6,979.1 $ 6,872.3 $ 6,120.9 2 12
HMBS related borrowings 6,885.0 6,772.7 6,063.4 2 12
Net asset value $ 94.1 $ 99.6 $ 57.5 (6) 73
Net asset value to UPB 1.44 % 1.58 % 1.02 %
(1)Securitized loans only; excludes unsecuritized loans as reported within the
Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO
depending on the loan and foreclosure status.
The following table provides selected operating statistics related to advances
for our Servicing segment:
Advances by investor type (Carrying value in
millions)
Foreclosures,
Principal and bankruptcy, REO and
December 31, 2021 Interest Taxes and Insurance other Total
Conventional $ 2 $ 66 $ 7 $ 75
Government-insured 1 55 23 79
Non-Agency 225 261 133 618
Total, net $ 228 $ 381 $ 164 $ 772
Foreclosures,
Principal and bankruptcy, REO and
December 31, 2020 Interest Taxes and Insurance other Total
Conventional $ 4 $ 30 $ 5 $ 38
Government-insured 1 55 28 84
Non-Agency 272 279 155 705
Total, net $ 277 $ 365 $ 187 $ 828
The following table provides the rollforward of activity of our portfolio of
mortgage loans serviced for the years ended
whole loans and subserviced loans, both forward and reverse:
Amount of UPB (in billions) Count (in 000's)
2021 2020 2019 2021 2020 2019
Portfolio at beginning of
year $ 188.8 $ 212.4 $ 256.0 1,107.6 1,420.0 1,562.2
Additions (1) (2) 152.0 57.4 30.1 567.9 194.5 100.6
Sales - (0.2) (1.2) (0.2) (1.6) (8.3)
Servicing transfers (2) (3) (23.1) (40.5) (34.3) (102.0) (303.1) (48.5)
Runoff (49.7) (40.3) (38.3) (220.0) (202.2) (186.0)
Portfolio at end of year $ 268.0 $ 188.8 $ 212.3 1,353.3 1,107.6 1,420.0
(1)2021 additions include purchased MSRs on portfolios consisting of 287 loans
with a UPB of $0.1 billion that have not yet transferred to the Black Knight MSP
servicing system as of December 31, 2021 . Because we have legal title to the
MSRs, the UPB and count of the loans are included in our reported servicing
portfolio. The seller continues to subservice the loans on an interim basis
between the transaction closing date and the servicing transfer date.
(2)Includes the volume UPB associated with short-term interim subservicing for
some clients as a support to their originate-to-sell business, where loans are
boarded and deboarded within the same quarter.
(3)2020 includes 270,218 deboarded loans with a UPB of $34.2 billion related to
the termination of the subservicing agreement between NRZ and PMC on February
20, 2020 . Refer to Note 8 - MSR Transfers Not Qualifying for Sale Accounting.
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Year Ended
Servicing and Subservicing Fees
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Loan servicing and subservicing fees
Servicing $ 339.3 $ 216.2 $ 227.5 57 % (5) %
Subservicing 21.1 28.9 15.4 (27) 87
MAV 15.7 - - n/m n/m
NRZ 304.2 383.7 577.0 (21) (34)
Servicing and subservicing fees 680.3 628.8 820.0 8 (23)
Ancillary income 93.2 102.5 154.2 (9) (34)
Total $ 773.5 $ 731.2 $ 974.2 6 % (25) %
The $42.2 million , or 6% increase in total servicing and subservicing fees in
2021 as compared to 2020 is primarily driven by servicing volume, with a $123.1
million or 57% increase in servicing fee income on our owned MSR, partially
offset by $79.4 million reduction in fees collected on behalf of NRZ. The
increase in servicing fee income on our owned MSR as compared to 2020 is due to
a 60% increase in our average volume serviced, primarily driven by bulk
acquisitions, MSR acquisitions through the Agency Cash Window programs and the
growth in our correspondent lending volumes. The decline in the collection of
NRZ servicing fees is mostly due to portfolio runoff and the PMC servicing
termination in February 2020 .
Additional changes between 2020 and 2021 include $15.7 million of servicing fees
collected on behalf of MAV, launched in 2021 and $9.2 million subservicing fees
related to the MAM (RMS) reverse subservicing portfolio acquired in the fourth
quarter of 2021. The average subservicing fee per loan increased, driven by the
inclusion of reverse mortgage loans, with relatively higher compensation for
inactive loans. These fee increases were offset by a $9.3 million decline in
ancillary income and a $15.8 million decrease in NRZ subservicing fees. The $7.8
million decrease in subservicing fees is mostly due to NRZ fees being reported
as subservicing fees during 2020 from PMC servicing termination through loan
deboarding, partially offset by MAM (RMS) reverse subservicing fees.
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The following table presents the respective drivers of loan servicing and
subservicing fees.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Servicing and subservicing fee
Servicing fee $ 339.3 $ 216.2 $ 227.5 57 % (5) %
Average servicing fee (% of UPB) 0.27 0.28 0.30 (4) % (7) %
Subservicing fee (1) (2) $ 21.1 $ 28.9 $ 15.4 (27) 88 %
Average monthly fee per loan (in dollars)
(2) $ 18 $ 9 $ 12 100 (25) %
Assets serviced
Average UPB ($ in billions):
Servicing portfolio $ 125.48 $ 78.30 $ 76.14 60 % 3 %
Subservicing portfolio
Subservicing - forward 21.46 45.46 31.23 (53) 46 %
Subservicing - reverse 3.26 - - n/m n/m
MAV 9.08 - - n/m n/m
NRZ 61.43 74.84 125.07 (18) (40) %
Total $ 220.71 $ 198.60 $ 232.44 11 % (15) %
Average number (in 000's):
Servicing portfolio 609.1 466.1 471.8 31 % (1) %
Subservicing portfolio
Subservicing - forward 83.6 268.5 106.2 (69) 153 %
Subservicing - reverse 12.9 - - n/m n/m
MAV 37.4 - - n/m n/m
NRZ 463.1 561.6 913.2 (18) (39) %
1,206.1 1,296.2 1,491.2 (7) % (13) %
(1)Subservicing fees for the year ended
of fees earned on the NRZ PMC MSR Agreements upon receiving the notice of
cancellation in
(2)Excludes MAV portfolio and includes reverse subservicing in the fourth
quarter of 2021.
The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements, together with the previously recognized amortization gain of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements (through the second quarter of 2020 only). See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information. NRZ Servicing and Subservicing Fees Years
Ended
2021 2020 2019
Servicing fees collected on behalf of NRZ
Servicing fees remitted to NRZ (1)
(215.8) (278.8) (437.7) Retained subservicing fees on NRZ agreements (2)$ 88.4 $ 104.8 $ 139.3 Amortization gain of the lump-sum cash payments received (including fair value change) (1) (3) - 34.2 95.1 Total retained subservicing fees and amortization gain of lump-sum payments (including fair value change)$ 88.4 $
139.0
Average NRZ UPB (in billions) (4)$ 61.4 $ 74.8 $ 125.1 Average retained subservicing fees as a % of NRZ UPB (excluding amortization gain of lump-sum cash payments) 0.14 % 0.14 % 0.11 % 63
-------------------------------------------------------------------------------- (1)Reported within Pledged MSR liability expense. The NRZ servicing fee includes the total servicing fees collected on behalf of NRZ relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense. (2)Excludes the servicing fees of loans under the PMC Servicing Agreement afterFebruary 20, 2020 due to the notice of termination by NRZ, and subservicing fees earned under subservicing agreements. Excludes ancillary income. (3)In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of$279.6 million and$54.6 million , respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020 ). See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information. (4)Excludes the UPB of loans subserviced under the PMC Servicing Agreement afterFebruary 20, 2020 due to the notice of termination by NRZ, and excludes the UPB of loans under subservicing agreements. The net retained fee on our NRZ portfolio declined by$16.4 million , or 16% as compared to 2020. The decline in the NRZ fee collection and remittance is primarily driven by the decline in the average UPB of 18%, partially offset by an increased fee margin due to the nature of remaining collateral, which was non-Agency with higher delinquencies, as compared to the performing Agency portfolio that deboarded in connection with the termination of the PMC agreement by NRZ onFebruary 20, 2020 . The decline in serviced volume is explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement. As the NRZ relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.
The following table presents the detail of our ancillary income:
Years Ended December 31, % Change
Ancillary Income 2021 2020 2019 2021 vs 2020 2020 vs 2019
Late charges $ 40.9 $ 47.7 $ 57.2 (14) % (17) %
Custodial accounts (float earnings) 4.7 9.9 47.5 (52) (79)
Loan collection fees 11.7 13.0 15.5 (10) (16)
Recording fees 16.0 14.3 13.0 12 10
Boarding and deboarding fees 4.3 5.0 3.3 (15) 52
GSE forbearance fees 1.5 1.2 - 28 n/m
Reverse subservicing 1.4 - - n/m n/m
HAMP fees 0.6 0.6 5.5 13 (89)
Other 12.0 10.8 12.2 11 (11)
Ancillary income $ 93.2 $ 102.5 $ 154.2 (9) % (34) %
Ancillary income declined by $9.3 million as compared to 2020 primarily due to
$6.8 million lower late fees, driven by the combined effect of lower servicing
volume of delinquent loans, through acquisitions of primarily performing
portfolios and sales of delinquent portfolios in 2021, and the COVID-19
environment restricting late fees. Float earnings were $5.2 million lower driven
by the decline in interest rates, with average one-month LIBOR declining by
approximately 40 basis points in 2021 as compared to 2020, partially offset by
larger account balances due to the MSR portfolio growth.
Gain on Loans Held for Sale, Net
Gain on loans held for sale, net of$46.6 million increased$31.9 million as compared to 2020 primarily due to a$27.1 million gain recognized in 2021 on the sale of loans acquired in connection with the exercise of call rights relating to certain Non-Agency trusts, and additional gains on repurchased loans in connection withGinnie Mae loan modifications and early buyout (EBO) activities.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net is the net change in fair value of securitized
loans held for investment and HMBS-related borrowings. The following table
presents the components of the net fair value change and is comprised of net
interest income and other fair value gains or losses. Net interest income is
primarily driven by the volume of securitized UPB as it is the interest
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income earned on the securitized loans offset against interest expense incurred
on the HMBS-related borrowings, and represents our compensation for servicing
the portfolio, that is typically a percentage of the outstanding UPB. Other fair
value changes are primarily driven by changes in market-based inputs or
assumptions. Lower interest rates generally result in favorable net fair value
impacts on our HECM reverse mortgage loans and the related HMBS financing
liability and higher interest rates generally result in unfavorable net fair
value impacts.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Net interest income (servicing fee) $ 19.9 $ 19.2 $ 16.9 4 % 13 %
Other fair value changes (1) (22.3) (11.6) 46.6 91 (125) %
Reverse mortgage revenue, net
(Servicing) $ (2.3) $ 7.6 $ 63.5 (131) % (88) %
(1) Includes
securitization in 2021 and 2020, respectively. On
irrevocable election to account for tails at fair value.
The decline in Reverse mortgage revenue, net of$9.9 million , or 131%, as compared to 2020 is primarily due to unrealized losses on the HECM loan portfolio attributable to market rate conditions. Specifically, fair value losses are driven by increasing interest rates and widening yield spread directly impacting the tail value of the HECM reverse mortgage loans. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization. Net interest income, that effectively represents our servicing fee increased in 2021 as compared with 2020 mostly due to the growth of the loan portfolio.
MSR Valuation Adjustments, Net
The following table summarizes the MSR valuation adjustments, net reported in
our Servicing segment, with the breakdown of the total MSRs recorded on our
balance sheet between our owned MSR and the MSRs transferred to NRZ and MAV that
did not achieve sale accounting treatment:
Years Ended December 31,
2021 2020 2019
Total (1) Owned MSR (1) Pledged MSR (NRZ Total (1) Owned MSR (1) Pledged MSR (NRZ) (2)
Total Owned MSR (1) Pledged MSR
and MAV) (2) (NRZ) (2) Runoff (3) (4)$ (250.2) (159.9) (90.3) (171.4) (93.5) (77.9) (197.3) (90.4)$ (106.9) Rate and assumption change (1) 124.7 36.2 88.5 (149.8) (145.1) (4.7) 75.9 (64.7) 140.6 Hedging gain (loss) (34.9) (34.9) - 44.9 44.9 - 0.5 0.5 - Total$ (160.4) (158.6) (1.8) (276.3) (193.7) (82.6) (120.9) (154.6)$ 33.8 (1)Excludes gains of$25.2 million and$41.7 million in 2021 and 2020, respectively (nil in 2019), on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net. (2)MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information. (3)EffectiveJanuary 1, 2021 , changes in fair value due to actual versus model variances are presented as Changes in valuation inputs or assumptions. Activity for 2020 and 2019 in the table above has been recast to conform to current year disclosure, resulting in a$1.8 million and$18.1 million gain, respectively, reclassified from Runoff to Rate and assumption change. (4)The terms runoff and realization of expected future cash flows may be used interchangeably within this discussion. We reported a$160.4 million loss in MSR valuation adjustments, net in 2021, comprised of$158.6 million loss on our owned MSRs and$1.8 million loss on the MSRs transferred to NRZ and MAV. The$158.6 million loss on our owned MSRs is comprised of$159.9 million MSR portfolio runoff,$36.2 million gain on the MSR portfolio attributed to rate and assumption change and a$34.9 million hedging loss. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The gain on rate and assumption change is primarily due to an increase in market interest rates (the 10 year swap rate increased by 66 basis points in 2021), partially offset by a loss on assumption updates driven by unfavorable prepayment model variance and related calibrations. Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging 65 -------------------------------------------------------------------------------- sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. Refer to the Market Risk sections for further detail on our hedging strategy and its effectiveness. The following table provides information regarding the changes in the fair value and the UPB of our portfolio of Owned MSRs (excluding NRZ and MAV related MSRs) during 2021, with the breakdown by investor type. Owned MSR Fair Value (4) Owned MSR UPB ($ in billions) (4) GSEs Ginnie Mae Non- Total GSEs Ginnie Mae Non- Total Agency Agency Beginning balance$ 507.9 $ 75.4 $ 144.5 $ 727.8 $ 55.1 $ 13.1 $ 22.1 $ 90.3 Additions New cap. 199.2 23.5 1.9 224.6 16.9 1.7 - 18.6 Purchases (1) 833.2 11.3 - 844.5 74.6 0.9 - 75.6 Sales/servicing transfers - - - - - - - - Sales/calls (3) (271.0) - (4.5) (275.5) (25.1) - - (25.1) Change in fair value: Inputs and assumptions (1) 47.7 9.9 3.5 61.0 - - - - Realization of cash flows (118.5) (10.7) (30.8) (159.9) (23.1) (3.7) (4.6) (31.5) Ending balance$ 1,198.5 $ 109.4 $ 114.6 $ 1,422.5 $ 98.4 $ 12.0$ 17.5 $ 127.9 Fair value (% of UPB) 1.22 % 0.91 % 0.65 % 1.11 % Fair value multiple (2) 4.8 2.6 2.0 4.0 (1)Mostly changes in interest rates, except for gains of$25.2 million on the revaluation of purchased MSRs, that are reported in the Originations segment. (2)Multiple of average servicing fee and UPB. (3)Includes$274.8 million fair value and$24.9 billion UPB of MSR sales to MAV in 2021 that did not achieve sale accounting treatment. (4)See Note 7 - Mortgage Servicing and Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information on the NRZ and MAV portfolios. The$1.8 million loss on the transferred MSRs not qualifying for sale accounting (transferred to NRZ and MAV) includes$90.3 million runoff and$88.5 million fair value gain attributable to rates and assumptions. The runoff is explained by the same factors underlying our owned MSR, discussed above, and the transfers of MSRs to MAV in 2021 and the decline in the NRZ MSR portfolio, due to runoff and the termination of the PMC servicing agreement by NRZ inFebruary 2020 . The$88.5 million fair value gain attributable to rates and assumptions in 2021 is mostly driven by PLS model calibrations by our third-party valuation expert. The model calibrations more accurately reflect the favorable delinquency and default performance of the PLS collateral across the valuation expert's client base and was supported by our fair value benchmarking and back-testing analysis. This MSR fair value gain is offset by a fair value loss recorded on the associated NRZ MSR pledged liability.
Compensation and Benefits
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Compensation and benefits $ 108.1 $ 113.6 $ 144.0 (5) % (21) %
Average Employment - Servicing
India and other 2,432 2,880 3,360 (16) % (14)
U.S. 740 730 1,158 1 (37)
Total 3,172 3,610 4,518 (12) (20)
Compensation and benefits expense declined $5.4 million , or 5%, as compared to
2020 primarily due to a $5.3 million decrease in salaries and benefit expense as
a result of the 12% decline in our average servicing headcount, mostly offshore.
A $0.8 million decline in commissions also contributed to the decline in
Compensation and benefits expense. During 2021, we serviced 7% fewer loans, on
average, as compared to 2020. The decline in servicing headcount reflects the
scaling down of our
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platform to the number of loans being serviced and the efficiencies resulting
from our cost re-engineering initiatives, partially offset by the hiring of
employees to support the acquisition of reverse mortgage subservicing from MAM
(RMS) on October 1, 2021 .
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on
government-insured loans, provision expense for advances and servicing
representation and warranties, and certain loan volume related expenses.
Servicing expense increased$29.8 million , or 44%, as compared to 2020 largely driven by a$4.5 million increase in interim subservicing expense on MSR bulk acquisitions, a$5.2 million increase in our subservicer expenses largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform, and an$8.4 million increase in satisfaction and other loan expenses attributed to a larger portfolio. In addition, Servicing expense for 2020 included a$19.0 million provision release comprised of$9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and$9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves. The effects of the above factors were partially offset by a$6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans and receivables primarily due to a decline in the volume of government-insured claim receivables and claim losses due to the foreclosure moratorium in effect for much of 2021.
Other Operating Expenses
Other operating expenses (total operating expenses less compensation and benefit expense and servicer expense) decreased by$13.8 million in 2021 as compared to 2020, in large part due to a$13.3 million decline in Corporate overhead allocations and other cost savings attributed to our re-engineering initiatives. Professional services increased by$3.2 million primarily due to$1.6 million increase in other professional services fee expense driven by additional expense related to reverse sub-servicing business. Professional services expenses in 2020 included$1.1 million reimbursement credits for the NRM consent deal-related shared expenses. Occupancy and equipment expense decreased$4.5 million primarily due to a$3.8 million decrease in office space occupancy allocations resulting from a reduction in Servicing headcount and the cost savings of prior year office space rationalization initiatives. Technology and communications expense declined$1.4 million primarily due to cost savings associated with the implementation of data solutions as well as consolidation of telecommunication vendors in the second quarter of 2020. The$13.3 million decline in Corporate overhead allocations is attributable to the decline in support group operating expenses, including technology savings, and the lower relative weight of Servicing headcount to the consolidated organization. 67 --------------------------------------------------------------------------------
Other Income (Expense)
Other income (expense) primarily includes net interest expense and the Pledged
MSR liability expense.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Interest Expense
Advance match funded liabilities
(41) % (10) % Mortgage loan warehouse facilities 8.9 5.4 3.5 65 53 MSR financing facilities 26.0 15.9 8.1 64 96 Corporate debt interest expense allocation 48.8 38.2 54.9 28 (30) Escrow and other 6.5 7.0 9.1 (7) (23) Total interest expense$ 104.6 $ 90.7 $ 102.5 15 % (12) %
Average balances
Average balance of advances
(15) % (11) % Advance match funded liabilities 505.4 603.7 671.8 (16) (10) Mortgage loan warehouse facilities 265.4 116.0 49.4 129 135 MSR financing facilities 701.2 308.4 148.5 127 108 Effective average interest rate Advance match funded liabilities 2.82 % 4.00 % 4.00 % (29) % - % Mortgage loan warehouse facilities 3.36 4.66 7.14 (28) (35) MSR financing facilities 3.71 5.15 5.46 (28) (6) Facility costs included in interest expense$ 9.8 $ 13.1 $ 6.2 (25) 112 Average one-month LIBOR 0.10 % 0.52 % 1.75 % (81) % (70) % Interest expense increased by$13.9 million , or 15%, compared to 2020, due to an overall increase in the average debt balances to finance the growth of the business, partially offset by a lower funding cost. The$10.2 million increase in interest expense on MSR financing facilities,$10.6 million increase in the corporate debt interest expense allocation and$3.5 million increase in interest expense on mortgage loan warehouse facilities, are mostly the result of larger MSR and Loans held for sale portfolios, partially offset by lower funding costs. The$9.9 million decline in interest expense on advance match funded facilities is due to lower average balances of advances and borrowings and a lower cost of funds. Pledged MSR liability expense relates to the MSR transfers that do not qualify for sale accounting and are presented on a gross basis in our financial statements. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance for these transfers and the fair value changes of the pledged MSR liability. The following table provides information regarding the Pledged MSR liability expense: Years Ended December 31, 2021 2020 2019 Net servicing fee remittance (1)$ 228.0 $ 278.8 $ 437.7 Pledged MSR liability fair value (gain) loss (1) (11.4) (82.6) 33.8 NRZ 2017/18 lump sum amortization gain - (34.2) (95.1) Other (7.6) (9.6) (4.2) Pledged MSR liability expense$ 209.1 $
152.4
(1)See Note 8 - MSR Transfers Not Qualifying for Sale Accounting
68 -------------------------------------------------------------------------------- Pledged MSR liability expense increased$56.7 million as compared to 2020, primarily due to a$71.1 million unfavorable fair value change on the Pledged MSR liability, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, we recognized a$34.2 million amortization gain recorded in 2020 (through the end of the second quarter of 2020, nil in 2021), related to the lump-sum cash payments received from NRZ in 2017 and 2018. These increases in the expense were partially offset by a$50.8 million decline in servicing fee remittance, driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ inFebruary 2020 . Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ and MAV) and Servicing and subservicing fees (NRZ).
Originations
We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases. We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA orVA ) forward mortgage loans. The GSEs andGinnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HECM mortgage-backed securities (HMBS) that are guaranteed byGinnie Mae . Within retail, our Consumer Direct channel for forward mortgage loans (previously called Recapture) focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV subservicing agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the joint-marketing agreement. In addition to refinance activities, our Consumer Direct channel targets cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition. Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them. As ofDecember 31, 2021 , we have relationships with 438 approved correspondent sellers, or 307 new sellers sinceDecember 31, 2020 . OnJune 1, 2021 , we expanded our network through the assignment byTexas Capital Bank (TCB) to us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers). We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default. After origination, we package and sell the loans in the secondary mortgage market, through GSE andGinnie Mae securitizations on a servicing retained basis. Origination revenues mostly include interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date. We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers. We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs. As ofDecember 31, 2021 , we have relationships with 154 approved sellers through the Agency Cash Window co-issue programs, or 121 new sellers sinceDecember 31, 2020 . 69 -------------------------------------------------------------------------------- We recognize our MSR origination with the associated economics in our Originations business, and transfer the MSR to our Servicing segment at fair value once the MSR is recognized on our balance sheet. Our Servicing segment reflects all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes. We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment. For 2021, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of$19.0 billion and$1.5 billion , respectively. In addition, we purchased$20.4 billion UPB MSR through the Agency Cash Window / Flow MSR during 2021. Significant Variables Economic Conditions. General economic conditions impact the capacity for consumer credit and the supply of capital. More specifically, employment and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices. Market Size and Composition. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding. As the time and cost to refinance has decreased, relatively small reductions in mortgage rates can trigger higher refinancing activity. Given the large size ofU.S. residential forward mortgage debt outstanding, the impact of mortgage rate changes can drive significant swings in mortgage refinance volume. Market size is likewise impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages. Investor Demand. The liquidity of the secondary market impacts the size of the market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards). Margins. Changes in pricing margin are closely correlated with changes in market size. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. Among our channels, our margins per loan are highest in the retail channel and lowest in the correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility. 70
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The following table presents the results of operations of our Originations
segment. The amounts presented are before the elimination of balances and
transactions with our other segments:
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Gain on loans held for sale, net $ 124.5 $ 105.2 $ 32.9 18 % 220 %
Reverse mortgage revenue, net 82.0 53.1 22.9 54 133
Other revenue, net (1) 43.4 21.0 6.0 107 251
Total revenue 249.9 179.3 61.7 39 191
MSR valuation adjustments, net 25.2 41.7 - (40) n/m
Operating expenses
Compensation and benefits 101.6 62.2 43.8 63 42
Origination expense 15.0 7.2 7.0 109 3
Occupancy and equipment 6.9 5.4 6.4 27 (15)
Technology and communications 9.8 5.5 3.2 76 76
Professional services 10.2 9.3 1.3 10 620
Corporate overhead allocations 20.0 18.2 6.0 10 202
Other expenses 9.4 6.5 4.8 43 36
Total operating expenses 172.8 114.4 72.5 51 58
Other income (expense)
Interest income 17.7 7.0 5.2 152 34
Interest expense (23.0) (9.8) (7.6) 134 30
Other, net (3.1) 0.4 0.9 (988) (61)
Total other income (expense), net (8.4) (2.5) (1.5) 239 70
Income (loss) before income taxes $ 93.9 $ 104.2 $ (12.2) (10) (952)
(1)Includes $8.5 million , $6.0 million , and $1.3 million ancillary fee income
related to MSR acquisitions reported as Servicing and subservicing fees at the
consolidated level for 2021, 2020 and 2019, respectively.
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The following table provides selected operating statistics for our Origination
segment:
Years Ended December 31, % Change
UPB in millions 2021 2020 2019 2021 vs 2020 2020 vs 2019
Loan Production by Channel
Forward loans
Correspondent $ 16,577.8 $ 5,685.5 $ 494.0 192 % n/m
Consumer Direct 2,411.7 1,309.8 656.6 84 99
$ 18,989.5 $ 6,995.3 $ 1,150.5 171 508
% Purchase production 32 20 18 63 10
% Refinance production 68 80 82 (15) (2)
Reverse loans (1)
Correspondent $ 807.1 $ 470.3 $ 411.6 72 % 14 %
Wholesale 275.4 300.5 238.2 (8) 26
Retail 445.5 170.8 79.6 161 115
$ 1,527.9 $ 941.6 $ 729.4 62 29
MSR Purchases by Channel (Forward
only)
Agency Cash Window / Flow MSR 20,443.4 15,111.6 908.3 35 n/m
Bulk MSR purchases 55,133.5 16,566.2 14,616.7 233 13
$ 75,576.9 $ 31,677.7 $ 15,525.0 139 104
Total $ 96,094.3 $ 39,614.7 $ 17,405.0 143 128
Short-term loan commitment (at year end)
Forward loans $ 1,022.0 $ 619.7 204.0 65 % 204 %
Reverse loans 63.3 11.7 28.5 442 (59)
Average Employment
U.S. 653 461 387 42 % 19 %
India and other 400 177 97 126 82
Total 1,053 638 484 65 32
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed
subsequent to origination that are reported within the Servicing segment.
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Gain on Loans Held for Sale
The following table provides information regarding Gain on loans held for sale
by channel and the related forward loan origination volume and margins
(excluding fees that are presented in Other revenue, net):
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Gain on Loans Held for Sale (1)
Correspondent $ 18.5 $ 20.8 $ 0.1 (11) % n/m
Consumer Direct 106.0 84.4 32.8 26 158
$ 124.5 $ 105.2 $ 32.9 18 % 220 %
% Gain on Sale Margin (2)
Correspondent 0.11 % 0.35 % 0.02 % (69) % n/m
Consumer Direct 4.36 5.41 5.00 % (19) 8
0.64 % 1.42 % 2.65 % (55) % (46) %
Origination UPB (3)
Correspondent $ 16,957.0 $ 5,851.1 $ 584.6 190 % 901 %
Consumer Direct 2,432.0 1,560.4 655.5 56 138
$ 19,389.0 $ 7,411.5 $ 1,240.1 162 % 498 %
(1)Includes realized gains on loan sales and related new MSR capitalization,
changes in fair value of IRLCs, changes in fair value of loans held for sale and
economic hedging gains and losses.
(2)Ratio of gain on Loans held for sale to Origination UPB - see (3) below. Note
that the ratio differs from the day-one gain on sale margin upon lock.
(3)Defined as the UPB of loans funded in the period plus the change in the
period in the pull-through adjusted UPB of IRLCs.
Gain on loans held for sale, net, increased $19.3 million , or 18%, as compared
to 2020, all attributed to our consumer direct channel, with a 56% increase in
our loan production volume, partially offset by a lower margin. The effect of
nearly three times higher production volume in our correspondent channel was
more than offset by lower margin and resulted in a 11% lower gain on sale as
compared to 2020. The combined $12.0 billion , or 162% new production volume
increase in our correspondent and consumer direct channels is due to favorable
market conditions for borrower refinancing, the successful integration of the
TCB correspondent lending resources and network of correspondent sellers, and
the demonstrated capability of our Originations platform. We have expanded our
correspondent seller network from 131 to 438, a 234% increase in twelve months.
In addition, the increase in the new production volume of our consumer direct
channel is the result of investments in staffing we made to develop the
production capabilities of our platform. Overall, the average gain on sale
margin for forward loans declined from 142 basis points in 2020 to 64 basis
points in 2021, mostly due to the continued shift in the channel mix, with
higher volume in correspondent, a lower-margin channel.
Reverse Mortgage Revenue, Net
The following table provides information regarding Reverse mortgage revenue, net
of the Originations segment that comprises fair value changes of the pipeline
and unsecuritized reverse mortgage loans held for investment, at fair value,
together with volume and margin:
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Origination UPB (1) $ 1,547.0 $ 915.4 $ 731.4 69 % 25 %
Origination margin (2) 5.30 % 5.81 % 3.12 % (9) 86 %
Reverse mortgage revenue, net
(Originations) (3) $ 82.0 $ 53.1 $ 22.9 54 % 133 %
(1)Defined as the UPB of loans funded in the period plus the change in the
period in the pull-through adjusted UPB of IRLCs.
(2)Ratio of origination gain and fees - see (3) below - to origination UPB - see
(1) above.
(3)Includes gain on new origination, and loan fees and other. Includes $34.1
million , $26.9 million and $16.6 million non-cash gain on securitization of
newly originated loans in 2021, 2020 and 2019, respectively.
We reported
or 54% increase as compared to 2020. The increase is primarily driven by an
increase in volume of our higher-margin retail channel that generated an
additional
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million revenue. The historical record increase in the volume of our reverse
correspondent and retail channels were partially offset by a lower average
margin in those channels mostly due to unfavorable yield spread widening
observed in the market.
Other revenue, net
Other revenue, net increased$22.4 million as compared to 2020 primarily due to higher fees earned on increased loan origination volume and setup fees earned for loans boarded on our servicing platform, mostly driven by our forward correspondent and consumer direct channels.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes gains of$25.2 million and$41.7 million in 2021 and 2020, respectively, due to the revaluation gains on certain MSRs purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net, within the Originations segment because the segment's business objective is the sourcing of new MSRs at targeted returns. We transfer the MSR from the Originations segment to the Servicing segment at fair value.
MSR valuation adjustments, net decreased
Opportunities for fair value discount or margins were larger in the early period
of the pandemic and have reduced as markets normalized.
Operating Expenses
Operating expenses increased$58.4 million , or 51%, as compared to 2020, due to our increased production volumes. Compensation and benefits increased by$39.4 million , or 63%, with a$23.1 million increase in salary and benefits and$10.9 million higher commissions. Originations average headcount increased 65% as compared to 2020, reflecting an increase in loan production levels, and reflecting the integration of the TCB correspondent lending resources in the second half of 2021. The offshore-to-total average headcount ratio for Originations increased from 28% for 2020 to 38% for 2021. Other operating expenses increased primarily due to a$7.8 million increase in Origination expense driven by increased origination volumes, a$4.2 million increase in Technology and communications mostly due to higher software usage and maintenance expenses to support the growth in originations volumes, a$3.5 million increase in advertising expense as part of Origination business expansion, and a$2.0 million increase in postage and mailing expenses in support of increased volumes. Certain other operating expenses are variable, and as a result, as origination volume increased so did the related expenses. Examples include credit reports, appraisals, settlement fees, and tax service fees recorded in origination expenses or certain outsourced services including surge resources recorded in Professional services.
Other Income (Expense)
Interest income consists primarily of interest earned on newly-originated and
purchased loans prior to sale to investors. Interest expense is incurred to
finance the mortgage loans. We finance originated and purchased forward and
reverse mortgage loans with repurchase and participation agreements, commonly
referred to as warehouse lines. The increases in interest income and interest
expense as compared to 2020 is primarily the result of the increase in the
average held-for-sale loan and warehouse debt balances, due to increased loan
production volumes.
Corporate Items and Other
Corporate Items and Other includes revenues and expenses of corporate support
services, our reinsurance business CRL, inactive entities, and our other
business activities that are currently individually insignificant, revenues and
expenses that are not directly related to other reportable segments, interest
income on short-term investments of cash, gain or loss on repurchases of debt,
interest expense on unallocated corporate debt and foreign currency exchange
gains or losses. Interest expense on direct asset-backed financings are recorded
in the respective Servicing and Originations segments. Interest expense on
corporate debt is allocated to the Servicing segment and the Originations
segment (starting in the fourth quarter of 2021) based on relative financing
requirements.
Corporate support services include finance, facilities, human resources,
internal audit, legal, risk and compliance and technology functions. Certain
expenses incurred by corporate support services are allocated to the Servicing
and Originations segments using various methodologies intended to approximate
the utilization of such services. Various measurements of utilization of
corporate support services are maintained, primarily time studies, personnel
volumes and service consumption levels. In 2019, corporate support services
costs were primarily allocated based on relative segment size. Support service
costs not allocated to the Servicing and Originations segments are retained in
the Corporate Items and Other segment along with certain other costs including
certain litigation and settlement related expenses or recoveries, and other
costs related to operating as a public company. Corporate Items and Other also
includes severance, retention, facility-related and other expenses incurred in
2020 and 2019 related to our re-engineering initiatives and have not been
allocated to other segments.
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CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance
related to coverage on REO properties owned or serviced by us. CRL assumes a
quota share of REO insurance coverage written by a third-party insurer under a
blanket policy issued to PMC. The underlying REO policy provides coverage for
direct physical loss on commercial and residential properties, subject to
certain limitations. Under the terms of the reinsurance agreement, CRL assumes a
60% quota share of premiums and all related losses incurred by the third-party
insurer, effective March 2021 , with a 50% and 40% quota share through February
2021 and May 2020 , respectively. The reinsurance agreement expires December 31,
2023 , but may be terminated by either party at any time with six months advance
written notice. The agreement will automatically renew for additional one-year
terms unless either party provides 60 days advance written notice prior to
renewal.
The following table presents selected results of operations of Corporate Items
and Other. The amounts presented are before the elimination of balances and
transactions with our other segments:
Years Ended December 31, % Change
2020 vs.
2021 2020 2019 2021 vs 2020 2019
Revenue
Premiums (CRL) $ 5.9 $ 6.2 $ 12.9 (5) % (52) %
Other revenue 0.3 0.4 0.3 (28) 55
Total revenue 6.2 6.6 13.2 (6) (50)
Operating expenses
Compensation and benefits 88.2 89.6 125.7 (1) (29)
Professional services 40.3 69.4 59.2 (42) 17
Technology and communications 22.5 28.9 43.4 (22) (34)
Occupancy and equipment 3.1 11.1 17.4 (72) (36)
Servicing and origination 0.4 1.7 0.7 (74) (94)
Other expenses 7.3 8.1 11.0 (10) (26)
Total operating expenses before corporate
overhead allocations 161.8 208.7 257.4 (22) (19)
Corporate overhead allocations
Servicing segment (47.7) (61.0) (197.9) (22) (69)
Originations segment (20.0) (18.2) (6.0) 10 202
Total operating expenses 94.1 129.5 53.5 (27) 142
Other income (expense), net
Interest income 0.5 1.9 1.8 (77) 9
Interest expense (16.4) (8.9) (4.0) 85 121
Gain (loss) on extinguishment of debt (15.5) - 5.1 n/m (100)
Other, net 1.2 (4.3) (4.1) (129) 3
Total other (expense) income, net (30.2) (11.2) (1.3) 170 775
Income (loss) before income taxes $ (118.1) $ (134.1) $ (41.6) (12) 222
n/m: not meaningful
Compensation and Benefits
Compensation and benefits expense decreased $1.3 million , or 1%, as compared to
2020 primarily as a result of a $4.2 million decline in salaries and benefit
expense driven by a 7% decrease in average corporate headcount, including a 13%
decrease in average onshore headcount from 308 to 267. In addition, the decline
in compensation and benefits expense is driven by a $2.2 million decrease in
annual incentive compensation and a $1.8 million decline in severance expense.
These lower expenses were largely offset by a $7.9 million increase in
share-based compensation mostly due to an increase in the fair value of
cash-settled share-based awards associated with the increase in our common stock
price during the year.
Professional Services
Professional services expense declined $29.1 million , or 42%, as compared to
2020, primarily due to a $16.9 million decrease in legal expenses and an $11.1
million decline in other professional services expenses. The net decline in
legal expenses is largely due to expenses and provision for litigation
settlement recorded in 2020 related to the CFPB and Florida
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matters. Legal expenses and professional services for 2020 included an $8.0
million recovery of prior expenses from a mortgage insurer and $3.5 million of
COVID-19 related expenses, respectively. Cost reduction initiatives and higher
utilization of professional services in 2020, including strategic vendor
sourcing, cloud migration and consulting, resulted in lower other professional
fees in 2021. Other professional services for 2021 includes $3.2 million of
advisory fees related to the setup of our MSR investment joint venture with
Oaktree, MAV Canopy.
Other Operating Expenses
Technology and communications expense decreased$6.4 million , or 22%, as compared to 2020, primarily due to a$3.5 million decline in telephone and telecommunication expense, and a$2.5 million decline in hardware and software depreciation expense. Cost re-engineering initiatives in 2020 resulted in lower expenses in 2021 through facility closure and the transition to a more cost-effective alternative telephone system. In addition, during 2020, we recognized accelerated depreciation for certain of our hardware and software assets and incurred additional expenses related to COVID-19. Occupancy and equipment expense decreased$8.0 million or 72%, as compared to 2020, primarily due to the rationalization of our facilities. In 2020, we partially abandoned certain leased properties and recognized accelerated depreciation and exit costs. Depreciation and lease interest expense for 2021 declined$7.9 million as compared to 2020. Occupancy allocations to Servicing and Originations segments were lower by$4.3 million due to the above mentioned facility rationalization, partially offset by a$2.7 million decrease in repair, maintenance and utilities related expenses and a$1.1 million decline in postage and mailing expenses attributed to COVID-19.
Corporate overhead allocations decreased
2020 largely due to the benefits of cost savings achieved at the corporate
level, most significantly technology expenses, achieved through our cost
re-engineering initiatives in 2020.
Other Income (Expense)
Interest expense of the Corporate segment relates to the remaining corporate debt unallocated to other segments. Interest expense increased$7.6 million , or 85%, as compared to 2020. The increase is primarily driven by a higher cost of corporate debt that is mostly due to the senior secured notes issued at a discount onMarch 4, 2021 andMay 3, 2021 .
On
resulting from our early repayment of the SSTL due
redemption of our 6.375% PHH senior unsecured notes due
8.375% PMC senior secured notes due
We reported$1.2 million Other income in 2021, as compared to$4.3 million Other expense in 2020. Loss adjustment expense, related to our CRL business decreased by$1.8 million due to a decline in the number of covered REO properties and claims filed during 2021 compared to 2020. In 2020, we recognized a$2.2 million net loss on the sale of a vacant office facility. In addition, we recorded foreign currency remeasurement gains of$0.3 million in 2021, as compared to losses of$1.0 million in 2020, related to our operations inIndia andthe Philippines .
LIQUIDITY AND CAPITAL RESOURCES
Overview
OnMarch 4, 2021 , we successfully completed a comprehensive refinancing of our corporate debt and a capital contribution to our licensed entity PMC, through the following transactions: •We redeemed all of PHH's outstanding 6.375% Senior Notes dueAugust 2021 at a price of 100% of the$21.5 million principal amount, plus accrued and unpaid interest, and all of PMC's 8.375% Senior Secured Notes dueNovember 2022 at a price of 102.094% of the$291.5 million principal amount, plus accrued and unpaid interest. •We repaid in full the$185.0 million outstanding principal balance of the SSTL dueMay 2022 , with a 2% prepayment premium of the outstanding principal balance, or$3.7 million . •PMC completed the issuance and sale of$400.0 million aggregate principal amount of 7.875% senior secured notes dueMarch 15, 2026 (the PMC Senior Secured Notes). •Ocwen Financial Corporation, completed the private placement of$199.5 million aggregate principal amount of senior secured notes dueMarch 4, 2027 (the OFC Senior Secured Notes) together with the issuance of warrants to certain entities owned by funds and accounts managed byOaktree Capital Management, L.P. (theOaktree Investors ). •Ocwen Financial Corporation contributed the$175.0 million net proceeds from the issuance of the OFC Senior Secured Notes to its wholly owned subsidiary, PHH, and PHH contributed$153.4 million to its wholly owned subsidiary PMC, as permanent equity, after redeeming PHH's 6.375% Senior Notes disclosed above. With the completion of the corporate debt refinancing, we have reduced corporate indebtedness at the PHH and PMC level by approximately$100 million and extended overall corporate debt maturities by over three years resulting in a better 76 --------------------------------------------------------------------------------
alignment of the debt profile with our investments. We now have greater
financial flexibility than with the prior capital structure, and we believe, an
opportunity to negotiate better terms for our future financing needs.
OnMay 3, 2021 , concurrent with the closing of the MAV transaction, we issued to Oaktree the second tranche of the OFC Senior Secured Notes dueMarch 4, 2027 in an aggregate principal amount of$85.5 million , together with the issuance of common shares and additional warrants.
In addition, we have successfully completed at market terms the following during
2021 with respect to our current and anticipated financing needs:
•We increased the total borrowing capacity on our mortgage loan warehouse facilities by$1.1 billion to support growth in our Originations business. We reduced our weighted average interest rate on these facilities by 0.72% during the year. •We increased the borrowing capacity of our MSR financing facilities by$410.0 million to fund our MSR bulk acquisitions and portfolio growth, and extended the duration of our debt. We reduced our weighted average interest rate on these facilities by 1.11% during the year. •We voluntarily reduced total borrowing capacity on our advance facilities by$200.0 million as we continue to experience better than expected forbearance performance. We reduced our weighted average interest rate on these facilities by 0.42% during the year.
In the normal course of business, we are actively engaged with our lenders and
as a result, have renewed, replaced or extended our debt agreements to the
extent necessary to finance our operations. See Note 14 - Borrowings to the
Consolidated Financial Statements for additional information.
A summary of borrowing capacity under our advance facilities, mortgage warehouse
facilities and MSR financing facilities is as follows at the dates indicated:
December 31, 2021 December 31, 2020
Available Borrowing Available Borrowing Available Borrowing Available Borrowing
Total Borrowing Capacity - Committed Capacity - Uncommitted Total Borrowing
Capacity - Committed Capacity - Uncommitted
Capacity (1) (1) (1) Capacity (1) (1) (1) Advance facilities $ 595.0 $ 82.7 $ - $ 795.0 $ 213.7 $ - Mortgage loan warehouse facilities 2,119.3 240.3 794.0 1,037.0 186.9 398.4 MSR financing facilities 785.0 40.4 18.3 375.0 39.2 13.0 Total $ 3,499.3 $ 363.4 $ 812.3 $ 2,207.0 $ 439.9 $ 411.3 Total Capacity increase (decrease) $ 1,292.3 $ (76.5) 59% (17)% Advance facilities $ (200.0) $ (131.0) (25)% (61)% Mortgage loan warehouse facilities $ 1,082.3 $ 53.4 104% 29% MSR financing facilities $ 410.0 $ 1.2 109% 3% (1)Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings. Our total borrowing capacity increased by approximately$1.3 billion (or 59%) in 2021, mostly driven by a$1.1 billion (104%) increase in our mortgage loan warehouse capacity to fund the growth in our Originations business. In addition, we increased the capacity of our MSR financing facilities by$410.0 million to fund our MSR bulk acquisitions and portfolio growth. The available borrowing capacity under our advance financing facilities decreased by$131.0 million as compared toDecember 31, 2020 due to a$170.0 million voluntary reduction in total borrowing capacity of the OMART variable funding notes and a$30.0 million reduction in total borrowing capacity of the OFAF facility, offset in part by a$69.0 million decrease in outstanding borrowings, consistent with a decrease in our servicer advances. AtDecember 31, 2021 , none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances atDecember 31, 2021 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral.
We may utilize committed borrowing capacity under our mortgage warehouse
facilities and MSR financing facilities to the extent we have sufficient
eligible collateral to borrow against and otherwise satisfy the applicable
conditions to funding. At
capacity under our mortgage loan warehouse facilities, based on the
77 --------------------------------------------------------------------------------
amount of eligible collateral. Uncommitted amounts can be advanced at the
discretion of the lender, and there can be no assurance that any uncommitted
amounts will be available to us at any particular time.
AtDecember 31, 2021 , our unrestricted cash position was$192.8 million compared to$284.8 million atDecember 31, 2020 . We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets. We strive to optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk.
In assessing our liquidity outlook, our primary focus is on available cash on
hand, unused available funding and the following forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan repurchases; •Requirements for amortizing and maturing liabilities; •The projected change in advances compared to the projected borrowing capacity to fund such advances under our facilities, including capacity for monthly peak needs; •Projected funding requirements for acquisitions of MSRs and other investment opportunities; •Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements; •Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and others; and •Margining requirements associated with our borrowing facilities and hedging program. Use of Funds
Our primary near-term uses of funds in the normal course include:
•Payment of operating costs and corporate expenses; •Payments for advances in excess of collections; •Investing in our servicing and originations businesses, including MSR, other asset acquisitions and MAV Canopy equity contribution; •Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans; •Payment of margin calls under our MSR financing facilities and derivative instruments; •Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and •Net negative working capital and other general corporate cash outflows. We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of$1.5 billion atDecember 31, 2021 . This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During 2021, we funded$226.6 million out of the$2.0 billion borrowing capacity available as ofDecember 31, 2020 . We also had short-term commitments to lend$1.0 billion and$63.3 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding atDecember 31, 2021 . As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). See Note 25 - Commitments to the Consolidated Financial Statements for additional information. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines. Regarding the current maturities of our borrowings, as ofDecember 31, 2021 , we have approximately$2.09 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of$1.09 billion of borrowings under forward and reverse mortgage warehouse facilities,$512.3 million of notes under advance financing facilities that will enter their respective amortization periods,$449.2 million outstanding under Agency and Ginnie Mae MSR financing facilities maturing in 2022, and$41.7 million of scheduled principal amortization on thePLS Notes secured by PLS MSRs. 78 -------------------------------------------------------------------------------- In our liquidity management, we consider two factors more specifically as a result of the COVID-19 environment and the volatile interest rate environment: our increased advancing requirements as servicer during each investor remittance period, and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments due to interest rate fluctuations. First, as servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance plans. Loan payoffs and prepayments are a source of additional liquidity and are dependent on the interest rate environment. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. Refer to Note 25 - Commitments to the Consolidated Financial Statements for further description of our servicer advance obligations. As subservicer, we are also required to make P&I, T &I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by NRZ the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements. Second, we are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. Our exposure to changes in fair value of our MSRs and the associated liquidity risk have increased as a result of the GSE MSR bulk acquisitions inJune 2021 . Refer to the sensitivity analysis in the Market Risk section of Risk Management for our quantitative and qualitative disclosures about market risk.
Our medium- and long-term requirements for cash include:
•Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027; •Any payments associated with the confirmation of loss contingencies; and •Any other payments required under contractual obligations discussed above that extend beyond one year, e.g., lease payments. We are focused on ensuring that we have sufficient liquidity sources to continue to operate through the pandemic as well as after. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. See "Sources of Funds" below.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing and subservicing fees and ancillary revenues; •Collections of advances in excess of new advances; •Proceeds from match funded advance financing facilities; •Proceeds from other borrowings, including warehouse facilities and MSR financing facilities; •Proceeds from sales and securitizations of originated loans and repurchased loans; and •Net positive working capital from changes in other assets and liabilities. Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued by our advance financing facilities to financial institutions typically have a revolving period of 12 months. Term notes are generally issued to institutional investors with one-, two- or three-year revolving periods. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity. We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated loans on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certainGinnie Mae forward loans, HECM loans, second-lien loans and other types of loans. Warehouse facilities are structured as repurchase or participation agreements under which ownership of the loans is temporarily transferred to the lender. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our master repurchase and participation agreements generally have maximum terms of 364-days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days. We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage 79 --------------------------------------------------------------------------------
backed securities guaranteed by
guaranteed by the FHA,
We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. While our investment in MAV Canopy exposes us to additional capital contributions, the relationship provides PMC an additional means to finance MSRs and maintain liquidity while maintaining servicing volume - See Item 1. Business, Oaktree Relationship for further details. With the launch of MAV and our relationships with other clients, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in additional sales of MSRs while we would perform subservicing for the sold portfolio.
Covenants
Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 14 - Borrowings to the Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of$125.0 million in consolidated liquidity, as defined, under certain of our advance match funded debt and MSR financing facilities agreements. AtDecember 31, 2021 , we held unrestricted cash in excess of this minimum amount. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as ofDecember 31, 2021 .
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a
company's debt obligations. Lower ratings generally result in higher borrowing
costs and reduced access to capital markets. The following table summarizes our
current ratings and outlook by the respective nationally recognized rating
agencies. A credit rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time.
Long-term Corporate
Rating Agency Rating Review Status / Outlook Date of last action
Moody's Caa1 Stable February 24, 2021
S&P B- Stable February 24, 2021
On February 24, 2021 , concurrent with the launch of the $400.0 million PMC
Senior Secured Notes offering, both Moody's and S&P reaffirmed the corporate
ratings at Caa1 and B-, respectively. In addition, both agencies revised the
outlook of the corporate ratings to Stable from Negative. This change in outlook
was driven by the elimination of the short debt maturity runway and refinancing
risk, which was listed as an area of concern by both Moody's and S&P. On January
24, 2022 , S&P affirmed the corporate rating at B-.
On January 24, 2022 , S&P raised the assigned rating to the PMC Senior Secured
Notes from 'B-' to 'B' and maintained a stable outlook citing improved
profitability and increase in assets. It is possible that additional actions by
credit rating agencies could have a material adverse impact on our liquidity and
funding position, including materially changing the terms on which we may be
able to borrow money.
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Cash Flows
Our operating cash flow is primarily impacted by operating results, including Originations gains on loan sales, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify purchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions as investing activity. MSR investments represent a key indicator of our ability to generate future income in our Servicing business, together with originated MSRs. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity. Our NRZ agreements represent an important component of our liquidity and our liquidity management, and have a significant impact on our consolidated statements of cash flows. Because the lump-sum payments we received in connection with our 2017 Agreements and New RMSR Agreements were recorded as secured financings, additions to, and reductions in, the balance of those secured financings were recognized as financing activity in our consolidated statements of cash flows throughApril 2020 . Excluding the impact of changes to the secured financings attributed to changes in fair value, changes in the balance of these secured financings are reflected in cash flows from operating activities despite having no impact on our consolidated cash balance. Net cash provided by operating activities for the years endedDecember 31, 2021 and 2020 includes $- million and$35.1 million , respectively, of such cash flows and they were offset by corresponding amounts in net cash used in financing activities in the same periods.
Our cash flows are summarized as follows:
$ in millions For
the Year Ended
2021 2020
Net cash provided by (used in) operating activities $ (472) $ 261
Net cash provided by (used in) investing activities (1,001) (528)
Net cash provided by (used in) financing activities 1,380 132
Net increase (decrease) in cash, cash equivalents and restricted
cash
$ (93)$ (135) Cash, cash equivalents and restricted cash at end of period $
263
Cash flows for the year ended
Our operating activities used$472.2 million of cash largely due to the growth of our new Originations production with net cash paid on loans held for sale of$623.0 million , partially offset by the$28.9 million of net collections of servicing advances, mostly P&I advances. Our investing activities used$1.0 billion of cash. The primary uses of cash in our investing activities include$831.2 million to purchase MSRs, mostly through bulk acquisitions, net cash outflows in connection with our HECM reverse mortgages of$135.1 million , and$27.9 million of capital contributions to our equity method investee MAV Canopy. Our financing activities provided$1.4 billion of cash. Cash inflows include$647.9 million of proceeds from the issuance of the PMC Senior Secured Notes and the OFC Senior Secured Notes, warrants and common stock to Oaktree and$1.7 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, largely offset by repayments on the related financing liability of$1.6 billion ,$247.0 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, and a$1.1 billion net increase in borrowings under our mortgage warehouse and MSR financing facilities. Cash outflows include$319.2 million to repay our 6.375% senior unsecured notes and 8.375% senior secured notes,$188.7 million repayment of the SSTL,$69.0 million of net repayments on advance match funded liabilities, and$91.2 million of net payments on the financing liabilities related to MSRs transferred.
Cash flows for the year ended
Our operating activities provided$261.0 million of cash largely due to$213.3 million of net collections of servicing advances, mostly P&I advances, partially offset by net cash paid on loans held for sale during the year of$121.5 million . Our investing activities used$527.9 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of$258.9 million and$273.2 million to purchase MSRs. Our financing activities provided$131.8 million of cash. Cash inflows include$1.2 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, less repayments on the related financing liability of$935.8 million . In addition, we increased borrowings under our mortgage loan warehouse facilities and MSR financing facilities by$119.5 million and$66.9 million , respectively. Cash outflows include repayments of$141.1 million on the SSTL,$97.8 million of net repayments on advance match funded liabilities, and$101.8 million of net payments on the 81 -------------------------------------------------------------------------------- financing liabilities related to MSRs transferred. In addition, we also paid$7.7 million of debt issuance costs related to our SSTL facility amendment and repurchased shares of our common stock for$4.6 million .
RISK MANAGEMENT
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, assess, monitor and manage the types of risk to which we are subject, including strategic, market, credit, liquidity and operational risks. OurChief Risk and Compliance Officer is responsible for the design, implementation and oversight of our global risk management and compliance programs. Risks unique to our businesses are governed through various management processes and governance committees to oversee risk and related control activities across our company and provide a framework for potential issues to be identified, assessed and remediated under the direction of senior executives from our business, finance, risk, compliance, internal audit and law departments, as applicable. Information is aggregated and reports on risk matters are made to the Board of Directors, itsRisk and Compliance Committee or its other committees, as applicable, to enable the Board of Directors and its committees to fulfill their governance and oversight responsibilities.
Strategic Risk
We are exposed to risk with respect to the strategic initiatives we need to undertake in order to return to sustainable growth and profitability. Strategic risk represents the risk to shareholder or enterprise value, current or future earnings, capital and liquidity from adverse business decisions and/or improper implementation of business strategies. Management is responsible for developing and implementing business strategies that leverage our core competencies and are appropriately structured, resourced and executed. Oversight for our strategic actions is provided by the Board of Directors. Our performance, relative to our business plans and our longer-term strategic plans, is reviewed by management and the Board of Directors. To achieve our near-term financial objectives, we believe we need to execute on the key business initiatives discussed above under "Overview". Our ability to achieve our objectives is highly dependent on the success of our business relationships with our critical counterparties like the GSEs, FHFA,Ginnie Mae , our lenders, regulators, significant customers and our ability to attract new customers, all of which are impacted by our capability to adequately address the competitive challenges we face. There can be no assurance that we will be successful in executing on these initiatives. Further, there can be no assurance that even if we execute on these initiatives we will be able to return to profitability. In addition to successful operational execution of our key initiatives, our success will also depend on market conditions and other factors outside of our control. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Market Risk
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Liquidity Risk
We are exposed to liquidity risk through our ongoing needs to: originate,
purchase, repurchase and finance mortgage loans; sell mortgage loans into
secondary markets; retain, acquire and finance MSRs, make and finance advances;
fund and sell additional future draws by borrowers under variable rate HECM
loans; meet our HMBS issuer obligations with respect to MCA repurchases; repay
maturing debt; meet our contractual obligations; and otherwise fund our
operations. Liquidity is an essential component of our ability to operate and
grow our business; therefore, it is crucial that we maintain adequate levels of
excess liquidity to fund our businesses during normal economic cycles and events
of market stress.
We estimate how our liquidity needs may be impacted by a number of factors,
including fluctuations in asset and liability levels due to our business
strategy, asset valuations, changes in cash flows from operations, levels of
interest rates, debt service requirements including contractual amortization and
maturities, and unanticipated events, including legal and regulatory expenses.
We also assess market conditions and capacity for debt issuance in the various
markets that we access to fund our business needs. We have established internal
processes to anticipate future cash needs and continuously monitor the
availability of funds pursuant to our existing debt arrangements. We monitor MSR
asset valuations and communicate closely with our lenders for this asset class
to ensure adequate liquidity is maintained for mark-to-market valuation changes
within MSR financing facilities. We manage this risk in multiple ways, including
but not limited to engaging in MSR hedging activities, and maintaining liquidity
earmarks at levels to support potential changes in MSR fair values.
We regularly evaluate capital structure options that we believe will most
effectively provide the necessary capacity to support our investment objectives,
address upcoming debt maturities and contractual amortization, and accommodate
our business needs. Our objective is to maximize the total investment capacity
through diversification of our funding sources while optimizing cost, advance
rates and terms. Historical losses have significantly eroded our stockholders'
equity and weakened our
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financial condition. To the extent we are not successful in achieving our
near-term objective of returning to sustainable profitability, funding
continuing losses will limit opportunities to grow our business.
In general, we finance our business operations through a variety of activities - cash on hand, operating cash flow, term borrowings and both committed and non-committed asset-based lending facilities for our significant MSR, mortgage warehouse and servicing advance activities. We address liquidity risk by actively managing our sources and uses of funds and maintaining contingency funding capacities, including but not limited to undrawn excess borrowing capacity on credit lines beyond our expected needs and by extending the tenor of our financing arrangements from time to time. Management closely monitors growth, and can adjust originations pricing quickly to manage its liquidity profile as needed. We have typically "upsized" existing warehouse or advance facilities or entered into new secured facilities in anticipation of our liquidity needs.
Operational Risk
Operational risk is inherent in each of our business lines and related support
activities. This risk can manifest itself in various ways, including process
execution errors, clerical or technological failures or errors, business
interruptions and frauds, all of which could cause us to incur losses.
Operational risk includes the following key risks:
•legal risk, as we can have legal disputes with borrowers or counterparties;
•compliance risk, as we are subject to many federal and state rules and
regulations;
•third-party risk, as we have many processes that have been outsourced to third
parties;
•information technology risk, as we operate many information systems that depend
on proper functioning of hardware and software;
•information security risk, as our information systems and associates handle
personal financial data of borrowers.
The Board of Directors provides direction to senior executives by setting our
organization's risk appetite, and delegates to our Chief Executive Officer and
senior executives the primary ownership and responsibility for operational risk
management and control. Senior executives in our risk department oversee the
establishment of policies and control frameworks that are designed, executed and
administered to provide a sound and well-controlled operational environment in
accordance with our risk appetite framework. We mandate training for our
employees in respect to these policies, require business line change management
control oversight, and we conduct targeted control assessment/reviews on a
regular basis. Risk issues identified are tracked in our Governance, Risk and
Compliance (GRC) system, Process Unity. Remediation and assurance testing are
also tracked in our GRC system. We also have several channels for employees to
report operational and/or technological issues affecting their operations to
management, the operational risk or compliance teams or the Board.
We seek to embed a culture of compliance and business line responsibility for
managing operational and compliance risks in our enterprise-wide approach toward
risk management. Ocwen has adopted a "Three Lines of Defense" model to enable
risks and controls to be properly managed on an on-going basis. The model
delineates business line management's accountabilities and responsibilities over
risk management and the control environment and includes mechanisms to assess
the effectiveness of executing these responsibilities.
The first line of defense consists of business line management, dedicated
control directors and quality assurance personnel who are accountable and
responsible for their day-to-day activities, processes and controls. The first
line of defense is responsible for ensuring that key risks within their
activities and operations are identified, assessed, mitigated and monitored by
an appropriate control environment that is commensurate with the operations risk
profile.
The second line of defense is independent from the business and comprises a Risk
Management function (including Third-Party Risk and Information Security) and a
Compliance function, which are responsible for:
•providing assurance, oversight, and credible challenge over the effectiveness
of the risk and control activities conducted by the first line;
•establishing frameworks to identify and measure the risks being taken by
different parts of the business;
•monitoring risk levels, through key indicators and oversight/assurance and
testing programs; and
•provide periodic reporting to Senior Management and the Board of Directors for
transparency.
The third line of defense, Internal Audit, provides independent assurance as to
the effectiveness of the design, implementation and embedding of the risk
management frameworks, as well as the management of the risks and controls by
the first line and control oversight by the second line. The Internal Audit
function provides periodic reporting on its activities to Senior Management and
the Board of Directors for transparency.
All business units and overhead functions are subject to unrestricted audits by
our internal audit department. Internal audit is granted unrestricted access to
our records, physical properties, systems, management and employees in order to
perform these audits. The internal audit department reports to the Audit
Committee of the Board and assists the Audit Committee in fulfilling its
governance and oversight responsibility.
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Compliance risk is managed through an enterprise-wide compliance risk management
program designed to monitor, detect and deter compliance issues. Our compliance
and risk management policies assign primary responsibility and accountability
for the management of compliance risk in the lines of business to business line
management.
Information Security Risk oversight is performed by our Chief Information
Security Officer. Ocwen's information security plans are developed to meet or
exceed
Credit Risk
Consumer Credit Risk
The typical obligor credit-related risks inherent in maintaining a mortgage loan portfolio as an investment tend to impact us less than a typical long-term investor because we generally sell the mortgage loans that we originate in the secondary market shortly after origination through GSE andGinnie Mae guaranteed securitizations and whole loan transactions. We are exposed to early payment defaults from the time that we originate a loan to the time that the loan is sold in the secondary market or shortly thereafter. Early payment defaults are monitored and loans are audited by our quality assurance teams for origination defects. Our exposure to early payment defaults remains very limited and we do not anticipate material losses from this exposure. Servicing costs are generally higher on higher credit risk loans. In addition, higher credit risk loans are generally affected to a greater extent by an economic downturn or a deterioration of the housing market. An increase in delinquencies and foreclosure rates generally results in increased advances for delinquent principal and interest, taxes and insurance, foreclosure costs and the upkeep of vacant property in foreclosure. Interest expense on advances and higher operating expenses decrease the value of our servicing portfolio. We track the credit risk profile of our servicing portfolio, including the recoverability of advances, with a view to ensuring that changes in portfolio credit risk are identified on a timely basis. We have loan repurchase and indemnification obligations arising from potential breaches of the representation and warranty provisions in connection with loans we sell in the secondary market. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and we may bear any subsequent loss on the mortgage loan. We endeavor to minimize our losses from loan repurchases and indemnifications by focusing on originating fully compliant mortgage loans and closely monitoring investor and agency eligibility requirements for loan sales. Our quality assurance teams perform independent testing related to the processing and underwriting of mortgage loans to investor guidelines prior to closing, as well as after the closing but before the sale of loans, to identify potential repurchase exposures due to breach of representations and warranties. In addition, we perform a comprehensive review of the loan files where we receive investor requests for repurchase and indemnification to establish the validity of the claims and determine our obligation. In limited circumstances, we may retain the full risk of loss on loans sold to the extent that the liquidation value of the asset collateralizing the loan is insufficient to cover the loan itself and associated servicing expenses. In instances where we have purchased loans from third parties, we usually have the ability to recover the loss from the third-party originator. Counterparty Credit Risk Counterparty credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. We regularly evaluate the financial position and creditworthiness of our counterparties and disperse risk among multiple counterparties to the extent possible. We manage derivative counterparty credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties and using mutual margining agreements whenever possible to limit potential exposure. NRZ is contractually obligated, pursuant to our agreements with them related to the Rights to MSRs, to make all advances required in connection with the loans underlying such MSRs. If NRZ's advance financing facilities do not perform as envisaged or should NRZ otherwise be unable to meets its advance financing obligations, we would be required to meet our advance financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition and servicing operations. Due to its concentration in our portfolio, we monitor NRZ's payment performance, liquidity and capital on a regular basis. Counterparty credit risk exists with our third-party originators, including our correspondent lenders, from whom we purchase originated mortgage loans. The third-party originators make certain representations and warranties to us when we acquire the mortgage loan from them, and they agree to reimburse us for losses incurred due to an origination defect. We become exposed to losses for origination defects if the third-party originator is not able to reimburse us for losses incurred for indemnification or repurchase. We mitigate this risk by monitoring purchase levels from our third-party originators (to reduce concentration risk), by performing regular quality control reviews of the third-party originators' underwriting standards and by regular reviews of the creditworthiness of third-party originators. 84 --------------------------------------------------------------------------------
Concentration Risk
Our Servicing segment has exposure to concentration risk and client retention risk. As ofDecember 31, 2021 , our servicing portfolio included significant client relationships with NRZ which represented 21% and 31% of our servicing portfolio UPB and loan count, respectively. The NRZ servicing portfolio accounts for approximately 66% of all delinquent loans that Ocwen services. During 2021, NRZ-related servicing fees retained by Ocwen represented approximately 19% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ (excluding ancillary income). The current terms of our agreements with NRZ extend throughJuly 2022 (legacy Ocwen agreements). OnFebruary 20, 2020 , we received a notice of termination from NRZ with respect to the PMC servicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. As the sale accounting criteria were met upon the notice of termination, the MSRs and the Rights to MSRs were derecognized from our balance sheet onFebruary 20, 2020 without any gain or loss on derecognition. We serviced these loans until deboarding inOctober 2020 representing$34.2 billion of UPB, and accounted for them as a subservicing relationship. Accordingly, we recognized subservicing fees associated with the subservicing agreement subsequent toFebruary 20, 2020 and have not reported any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. OnSeptember 1, 2020 , 133,718 loans representing$18.2 billion of UPB were deboarded and the remaining 136,500 loans representing$16.0 billion of UPB were deboarded onOctober 1, 2020 . Currently, subject to proper notice (generally180 days) and the payment of termination fees, NRZ has rights to terminate the legacy Ocwen agreements for convenience. Following the initial term endingJuly 2022 , NRZ may extend the term of the Subservicing Agreements and Servicing Addendum for additional three-month periods by providing proper notice. In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. At times, we discuss modifications to our relationship that we believe could be to our mutual benefit as our respective businesses evolve over time. We also discuss alternatives to the outcomes contemplated under our agreements when they were originally executed as facts and circumstances change over time. Examples of these discussions include our discussions with respect to the Rights to MSRs. As part of these discussions, we discussed several potential changes to existing contracts. It is possible that NRZ could exercise its rights to terminate for convenience or not renew some or all of the legacy Ocwen servicing agreements. Given the NRZ concentration in our servicing segment, senior management has been monitoring two main risks associated with our NRZ relationship, in addition to its strategic component. First, management has been monitoring the profitability of the NRZ servicing agreements. As performing loans in the NRZ servicing portfolio have run-off, delinquencies have remained high, resulting in a relatively elevated average cost per loan. Because the NRZ portfolio contains a high percentage of delinquent accounts, it has an inherently high level of potential operational and compliance risk and requires a disproportionately high level of operating staff, oversight support infrastructure and overhead which drives the elevated average cost per loan. We actively pursue cost re-engineering initiatives to continue to reduce our cost-to-service and our corporate overhead, as well as pursue actions to grow our non-NRZ servicing portfolio. Second, because NRZ has rights to terminate for convenience subject to certain conditions, senior management has been monitoring our risks associated with a potential early termination or non-renewal of some or all of the Ocwen legacy agreements with NRZ. Management developed stress scenarios to assess the operational and financial impact of such termination scenarios, and the necessary mitigating actions. Management's responses to the different scenarios are all based on the appropriate right-sizing or restructuring of our operations and include, but are not limited to the adequate reduction of direct servicing resources, the closure of certain facilities in different locations to rationalize property utilization, the appropriate planning of loan deboarding, and the potential reduction in corporate support functions without impairing our ability to effectively operate in a controlled environment. It is possible that the unwinding of all or a significant portion of our relationship with NRZ may not occur in an orderly or timely manner, which could be disruptive and could result in us incurring additional costs or even in disagreements with NRZ relating to our respective rights and obligations. Furthermore, if NRZ were to take actions to limit or terminate our relationship, that could impact perceptions of other servicing clients, lenders, GSEs or others, which could cause them to take actions that materially and adversely impact our business, liquidity, results of operations and financial condition. Market conditions, including interest rates and future economic projections, could impact investor demand to hold MSRs, which may result in our loss of additional subservicing relationships, or significantly decrease the number of loans under such relationships. The mortgaged properties securing the residential loans that we service are geographically dispersed throughout all 50 states, theDistrict of Columbia and twoU.S. territories. The five largest concentrations of properties are located inCalifornia ,Texas ,Florida, New York andNew Jersey , comprising 42% of the number of loans serviced atDecember 31, 2021 .California has the largest concentration with 16% of the total loans serviced. 85 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. The following is a summary of certain accounting policies and estimates involving significant judgments. Our significant accounting policies and critical accounting estimates are described in Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures. Refer to Note 3 - Fair Value to the Consolidated Financial Statements for the fair value hierarchy, descriptions of valuation methodologies used to measure significant assets and liabilities at fair value and details of the valuation models, key inputs to those models, significant assumptions utilized, and sensitivity analyses. We follow the fair value hierarchy to prioritize the inputs utilized to measure fair value and classify instruments as Level 3 when the valuation technique requires significant unobservable inputs or assumptions. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. The determination of the fair value of these Level 3 financial assets and liabilities and MSRs requires significant management judgment and estimation. See the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for a sensitivity analysis reflecting the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale carried at fair value as well as any related derivatives atDecember 31, 2021 , given hypothetical instantaneous parallel shifts in the yield curve. The following table summarizes assets and liabilities measured at fair value on a recurring and nonrecurring basis and the amounts measured using Level 3 inputs: December 31, 2021 2020 Loans held for sale$ 928.5 $ 387.8 Loans held for investment - Reverse mortgages 7,199.8 6,997.1 MSRs 2,250.1 1,294.8 Other 29.8 35.2 Assets at fair value$ 10,408.2 $ 8,715.0
As a percentage of total assets 86 %
82 %
Assets at fair value using Level 3 inputs
As a percentage of assets at fair value 93 %
96 %
HMBS-related borrowings 6,885.0 6,772.7
Pledged MSR liabilities 797.1 567.0
Other 11.0 14.4
Liabilities at fair value$ 7,693.1 $
7,354.1
As a percentage of total liabilities 66 %
72 %
Liabilities at fair value using Level 3 inputs
As a percentage of liabilities at fair value 100 %
100 %
We have various internal controls in place to ensure the appropriateness of fair
value measurements. Significant fair value measures are subject to analysis and
management review and approval. Additionally, we utilize a number of operational
controls to ensure the results are reasonable, including comparison, or "back
testing," of model results against actual performance and monitoring the market
for recent trades, including our own price discovery in connection with
potential and completed sales, and other market information that can be used to
benchmark inputs or outputs. Considerable judgment is used in forming
conclusions about Level 3 inputs such as prepayment speeds and discount rates.
Changes to these inputs could have a significant effect on fair value
measurements.
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Valuation of Reverse Mortgage Loans Held for Investment
Reverse mortgage loans are insured by the FHA and transferred intoGinnie Mae guaranteed securities (or HMBS) that we sell into the secondary market. Loan transfers in theseGinnie Mae securitizations do not qualify for sale accounting and are recorded as secured borrowings. We record both loans held for investment and the corresponding HMBS borrowings at fair value. Our net exposure to reverse mortgages and the HMBS-related borrowings is limited to the residual value we retain, including future draw commitments. Changes in the fair value of the loans held for investment are largely offset by changes in the value of the related secured financing. As ofDecember 31, 2021 , we reported$6.98 billion securitized loans held for investment at fair value and$6.89 billion HMBS-related borrowings at fair value, with a residual, net asset value of$94.1 million . In 2021, we recorded a net$2.3 million loss on change in fair value of securitized loans held for investment and HMBS-related borrowings reported in Reverse mortgage revenue, net in our Servicing segment. The fair value of both reverse mortgage loans held for investment and corresponding HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail spread gains, conditional prepayment rate (including voluntary and involuntary prepayments) and discount rate. The determination of fair value requires management judgment due to the significant unobservable assumptions, including conditional prepayment rate and discount rate. We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant
unobservable assumptions used (expressed as a percentage of UPB) by class
projected for the five-year period beginning
December 31,
Significant unobservable assumptions 2021 2020
Life in years
Range 1.0 to 8.2 0.9 to 8.0
Weighted average 5.7
5.9
Conditional prepayment rate (1)
Range 11.2 % to 36.6% 10.6% to 28.8%
Weighted average 16.0 % 15.4 %
Discount rate 2.6 % 1.9 %
(1)Includes voluntary and involuntary prepayments.
Valuation of MSRs and Pledged MSR Liabilities
We originate MSRs from our lending activities and acquire MSRs through flow purchase agreements, Agency Cash Window programs, bulk purchases, asset acquisitions or business combinations. We account for MSRs and pledged MSR liabilities at fair value. As ofDecember 31, 2021 , we reported a$2.3 billion fair value of MSRs. In 2021, we recognized a$149.5 million fair value gain on the revaluation of our MSRs. We determine the fair value of MSRs and pledged MSR liabilities primarily using discounted cash flow methodologies. The significant estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees and cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. The determination of the fair value of MSRs and pledged MSR liabilities requires management judgment relating to the significant unobservable assumptions that underlie the valuation, including prepayment speed, delinquency rates, cost to service and discount rate. Our judgement is informed by the transactions we observe in the market, by our actual portfolio performance and by the advice and information we obtain from our valuation experts, amongst other factors. To assist in the determination of fair value, we engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and a prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, incorporating available industry survey results, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we 87 -------------------------------------------------------------------------------- understand the methodologies and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts, and we perform additional verification and analytical procedures. We evaluate the reasonableness of our third-party experts' assumptions using historical experience adjusted for prevailing market conditions and benchmarks with third-party expert valuation and market participant surveys. We believe that our procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant
unobservable assumptions used (expressed as a percentage of UPB) by class
projected for the five-year period beginning
Conventional Government-Insured Non-Agency
Prepayment speed
Range 6.0% to 12.5% 7.2% to 16.5% 11.7% to 14.5%
Weighted average 9.0% 11.5% 12.5%
Delinquency
Range 0.6% to 1.3% 6.0% to 13.7% 9.9% to 20.0%
Weighted average 0.8% 7.7% 14.1%
Cost to service (in dollars)
Range $68 to $69 $96 to $125 $193 to $235
Weighted average $68 $106 $214
Discount rate 8.3% 10.1% 11.2%
Changes in these assumptions are generally expected to affect our results of
operations as follows:
•Increases in prepayment speeds generally reduce the value of our MSRs as the underlying loans prepay faster which causes accelerated MSR portfolio runoff, higher compensating interest payments and lower overall servicing fees, partially offset by a lower overall cost of servicing, increased float earnings on higher float balances and lower interest expense on lower servicing advance balances. •Increases in delinquencies generally reduce the value of our MSRs as the cost of servicing increases during the delinquency period, and the amounts of servicing advances and related interest expense also increase. •Increases in the discount rate reduce the value of our MSRs due to the lower overall net present value of the net cash flows. •Increases in interest rate assumptions will increase interest expense for financing servicing advances although this effect is partially offset because rate increases will also increase the amount of float earnings that we recognize.
Allowance for Losses on Servicing Advances and Receivables
Advances are generally fully reimbursed under the terms of servicing agreements. However, servicing advances may include claimable (with investors) but non-recoverable expenses, for example due to servicer error, such as lack of reasonable documentation as to the type and amount of advances. We record an allowance for losses on servicing advances to the extent we believe that a portion of advances are uncollectible under the provisions of each servicing contract taking into consideration, among other factors, our historical collection rates, probability of default, cure or modification, length of delinquency and the amount of the advance. We continually assess collectability using proprietary cash flow projection models that incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, the probable loan liquidation path, estimated time to a foreclosure sale, estimated costs of foreclosure action, estimated future property tax payments and the estimated value of the underlying property net of estimated carrying costs, commissions and closing costs. AtDecember 31, 2021 , the allowance for losses on servicing advances was$7.0 million , which represented 1% of total servicing advances. In 2021, we recorded an$8.1 million provision expense for losses on servicing advances. We record an allowance for losses on receivables in our Servicing business, including related to defaulted FHA orVA insured loans repurchased fromGinnie Mae guaranteed securitizations. This allowance is based upon continuing assessments of collectability, historical loss experience, current conditions and reasonable and supportable forecasts. AtDecember 31, 2021 , the allowance for losses on receivables related to government-insured claims was$41.5 million , which represented 32% of total government-insured claims receivables. In 2021, we recorded a$14.4 million provision expense on receivables related to government-insured claims. Determining an allowance for losses involves management judgment and assumptions that, given similar information at any given point, may result in a different but reasonable estimate. 88 --------------------------------------------------------------------------------
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses. For the three-year periods endedDecember 31, 2021 and 2020, theU.S. and USVI filing jurisdictions were in material cumulative loss positions. We recognize that cumulative losses in recent years is an objective form of negative evidence in assessing the need for a valuation allowance and that such negative evidence is difficult to overcome. Other factors considered in these evaluations are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted. As a result of these evaluations, we recognized a full valuation allowance of$175.4 million and$182.7 million on ourU.S. deferred tax assets atDecember 31, 2021 and 2020, respectively, and a full valuation allowance of$0.4 million on our USVI deferred tax assets at bothDecember 31, 2021 and 2020. TheU.S. and USVI jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend to continue maintaining a full valuation allowance on our deferred tax assets in both theU.S. and USVI until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the profitability that we achieve. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate our NOL and tax credit carryforwards and whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize a portion of our NOL and tax credit carryforwards. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL and tax credit carryforwards under Sections 382 and 383 (or comparable provisions of foreign or state law). Ocwen and PHH have both experienced historical ownership changes that have caused the use of certain tax attributes to be limited and have resulted in the write-off of certain of these attributes based on our inability to use them in the carryforward periods defined under the tax laws. Ocwen continues to monitor the ownership in its stock to evaluate whether any additional ownership changes have occurred that would further limit its ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
Indemnification Obligations
We have exposure to representation, warranty and indemnification obligations because of our lending, sales and securitization activities, our acquisitions to the extent we assume one or more of these obligations, and in connection with our servicing practices. We initially recognize these obligations at fair value. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination, to the extent applicable, and estimated loss severity based on current loss rates for similar loans, our historical rescission rates and the current pipeline of unresolved demands. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan as well as current market conditions. We monitor the adequacy of the overall liability and make adjustments, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with our counterparties. As ofDecember 31, 2021 , we have recorded a liability for representation and warranty obligations and 89 -------------------------------------------------------------------------------- similar indemnification obligations of$49.4 million . In 2021, we recorded a$3.2 million provision expense for indemnification. See Note 26 - Contingencies for additional information. Litigation In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending litigation matters. We monitor our litigation matters, including advice from external legal counsel, and regularly perform assessments of these matters for potential loss accrual and disclosure. We establish liabilities for settlements, judgments on appeal and filed and/or threatened claims for which we believe it is probable that a loss has been or will be incurred and the amount can be reasonably estimated based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. Management's assessment involves the use of estimates, assumptions, and judgments, including progress of the matter, prior experience, available defenses, and the advice of legal counsel and other experts. Accruals are adjusted as more information becomes available or when an event occurs requiring a change. In 2021, we recorded a$9.4 million provision expense for loss contingencies. Our total accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was$44.0 million atDecember 31, 2021 . It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded atDecember 31, 2021 .
RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
For additional information, see Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements for additional information.
Our adoption of the standards listed below on
material impact on our consolidated financial statements:
•Investments-Equity Securities (ASC Topic 321),Investments-Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) (ASU 2020-01)
•Debt-Debt with Conversion and Other Options and Derivatives and
Hedging-Contracts in Entity's Own Equity-Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity (ASU 2020-06)
•Income Taxes: Simplifying the Accounting for Income Taxes (ASU 2019-12)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
Our principal market risk exposure is the impact of interest rate changes on our mortgage-related assets and commitments, including MSRs, loans held for sale, loans held for investment, interest rate lock commitments (IRLCs) and other derivative instruments. In addition, changes in interest rates could materially and adversely affect the amount of escrow and float income, the volume of mortgage loan originations or result in MSR fair value changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including MSR and advance financing facilities. Our management-level Market Risk Committee establishes and maintains policies that govern our risk appetite and associated hedging programs, including such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the hedge instruments that we are permitted to use in our hedging activities and the counterparties with whom we are permitted to enter into hedging transactions and our liquidity risk profile. See Note 17 - Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for additional information regarding our use of derivatives. Our market risk exposure may also be affected by the replacement of LIBOR, which is expected to be fully phased out and completely replaced byJune 30, 2023 . The LIBOR administrator has advised that no new contracts usingU.S. dollar LIBOR should be entered into afterDecember 31, 2021 and that beginningJanuary 1, 2022 , renewals of existing contracts should provide for the replacement ofU.S. dollar LIBOR with an alternative reference rate. Many of our debt facilities incorporate LIBOR. These facilities either matured prior to the end of 2021 or have terms in place that provide for an alternative to LIBOR upon its phase-out. As we renew or replace these debt facilities, we are working with our counterparties to incorporate alternative benchmarks. 90 --------------------------------------------------------------------------------
MSR Hedging Strategy
MSRs are carried at fair value with changes in fair value being recorded in
earnings in the period in which the changes occur. The fair value of MSRs is
subject to changes in market interest rates and prepayment speeds.
EffectiveMay 2021 , management started hedging its MSR portfolio and its pipeline separately (see below for further description of pipeline hedging), effectively ending the macro hedge strategy previously in place. Under the new MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure is now defined as follows: •Agency MSR portfolio, •expected Agency MSR bulk transactions subject to letters of intent (LOI), •less the Agency MSRs subject to our sale agreements with NRZ and MAV (See Note 8 - MSR Transfers Not Qualifying for Sale Accounting), •less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (Reverse). Our MSR policy's objective is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement is subject to lower and upper thresholds, as modeled, of 40% and 60%, respectively. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. We periodically evaluate the 40-60% coverage ratio to determine if it warrants adjustment based on market conditions and the symmetry of interest rate risk exposure and liquidity impacts of the hedge and asset profile under shock scenarios. In addition, while DV01 measures remain within the range of our hedging strategy's objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy.
Effective
MSRs subject to LOI to be covered under a separate hedge coverage ratio
requirement sufficient to preserve the economics of the intended transactions.
The following table illustrates the interest rate sensitivity of our MSR portfolio exposure and associated hedges atDecember 31, 2021 . Hypothetical change in values of the MSR and hedges are presented under a set instantaneous +/- 25 basis point parallel move in rates. Refer to the description below under Sensitivity Analysis for more details. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear. The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only. Hypothetical Hypothetical change in fair change in fair value due to 25 value due to 25 Fair value at bps rate bps rate December 31, 2021 decrease (2) increase (2) Agency MSRs - interest rate sensitive (excluding NRZ and MAV)$ 1,307.90 $
(68.3)
Asset value of securitized HECM loans, net of HMBS-related borrowing 94.1 3.4 (3.5) MSR hedging derivative instruments 1.2 28.8 (28.4) Total hedge position 32.2 (31.9) Hypothetical hedge coverage ratio (1) 47 % 48 % Hypothetical residual exposure to changes in interest rates $
(36.1)
(1)The hypothetical hedge coverage ratio above is calculated as the change in fair value of the total hedge position divided by the change in value of the Agency MSR position. (2)The baseline for the hypothetical change in fair value is based on a 10-year Treasury Rate of 1.25% atDecember 31, 2021 . Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures and interest rate options. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. 91 -------------------------------------------------------------------------------- The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Loans Held for Investment and HMBS-related Borrowings
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. The fair value of our HECM loan portfolio net of the fair value of the HMBS-related borrowings comprise the fair value of reverse mortgage loans and tails that are unsecuritized at the balance sheet date (reverse pipeline) and the fair value of securitized HECM loans net of the corresponding HMBS-related borrowings that represent the reverse mortgage economic MSR (HMSR) for risk management purposes. The HMSR acts as a partial hedge for our forward MSR value sensitivity. This HMSR exposure is used as an offset to our forward MSR exposure and managed as part of our MSR hedging strategy described above.
Pipeline Hedging Strategy - Loans Held for Sale and IRLCs
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 60 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 5 to 20 days. This interest rate exposure was not individually hedged untilMay 2021 , but rather used as an offset to our MSR exposure and managed as part of our MSR macro-hedging strategy described above. EffectiveMay 2021 , we implemented a new pipeline hedging strategy, whereby the interest rate exposure of loans held for sale and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The pipeline hedging strategy's objective is to provide hedge coverage of locks and loans within certain tolerance levels. The net daily market risk position of net pull-though adjusted locks and loans held for sale, less the offsetting hedges of the forward and reverse pipelines, is monitored daily and its daily limit is the greater of +/- 15% or +/-$15 million . During the fourth quarter 2021, the daily limit was revised to +/-7.5% or +/-$7.5 million . We report changes in fair value of these derivative instruments in gain on loans held for sale in our consolidated statements of operations, within the Originations segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. Reverse pipeline is hedged under the same principles as described below, for unsecuritized loans held for investment.
Advance Match Funded Liabilities
We monitor the effect of increases in interest rates on the interest paid on our variable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. We purchase interest rate caps as economic hedges (not designated as a hedge for accounting purposes) when required by our advance financing arrangements.
Sensitivity Analysis
Fair Value MSRs, Loans Held for Sale, Loans Held for Investment and Related
Derivatives
The following table summarizes the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale that we have elected to carry at fair value as well as any related derivatives atDecember 31, 2021 , given hypothetical instantaneous parallel shifts in the yield curve. We usedDecember 31, 2021 market rates to perform the sensitivity analysis. The estimates are based on the interest rate risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship to the change in fair value may not be linear. 92 --------------------------------------------------------------------------------
Change in Fair Value
Down 25 bps Up 25 bps
Asset value of securitized HECM loans, net of HMBS-related
borrowing
$ 3.4 $ (3.5) Loans held for investment - Unsecuritized HECM loans and tails 0.04 (0.04) Loans held for sale 15.8 (19.1) Derivative instruments 12.1 (9.7) Total MSRs - Agency and non-Agency (1) (68.4) 66.1 Interest rate lock commitments (2) (1.6) 1.3 Total, net$ (38.7) $ 35.1 (1)Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio and on advance funding costs on the non-Agency MSR portfolio carried at fair value. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ and MAV financing liabilities, which are recorded in Pledged MSR liability expense. (2)Forward mortgage loans only. The increase in our net sensitivity as ofDecember 31, 2021 as compared toDecember 31, 2020 (from approximately$15 million to$35 -$39 million for a 25 basis point parallel shift in the yield curve) is primarily due to the growth of our Servicing and Originations businesses, with the significant increase in the size of our Agency MSR portfolio through bulk acquisitions and the increase in our pipeline, as our hedging strategy objectives and coverage ratio remained broadly similar. Borrowings The majority of the debt used to finance much of our operations is exposed to interest rate fluctuations. We may purchase interest rate swaps and interest rate caps to minimize future interest rate exposure from increases in interest rates, or when required by the financing agreements. Based onDecember 31, 2021 balances, if interest rates were to increase by 1% on our variable rate debt and interest earning cash and float balances, we estimate a net positive impact of approximately$9.8 million resulting from an increase of$22.6 million in annual interest income and an increase of$12.8 million in annual interest expense.
Foreign Currency Exchange Rate Risk
Our operations inIndia andthe Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso.
Home Prices
Inactive reverse mortgage loans for which the maximum claim amount has not been met are generally foreclosed upon on behalf ofGinnie Mae with the REO remaining in the related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed upon and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate REO within the FHA program guidelines. As our reverse mortgage portfolio seasons, and the volume of MCA repurchases increases, our exposure to this risk will increase.
Interest Rate Sensitive Financial Instruments
The tables below present the notional amounts of our financial instruments that
are sensitive to changes in interest rates categorized by expected maturity and
the related fair value of these instruments at December 31, 2021 and 2020. We
use certain assumptions to estimate the expected maturity and fair value of
these instruments. We base expected maturities upon contractual maturity and
projected repayments and prepayments of principal based on our historical
experience. The actual maturities of these instruments could vary substantially
if future prepayments differ from our historical experience. Average interest
rates are based on the contractual terms of the instrument and, in the case of
variable rate instruments, reflect estimates of applicable forward rates. The
averages presented represent weighted averages.
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Expected Maturity Date at December 31, 2021
2022 2023 2024 2025 2026 Thereafter Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 136.7 $ -
$ - $ - $ - $ - $
136.7 $ 136.7 Average interest rate 0.27 % - % - % - % - % - % 0.27 % Loans held for sale, at fair value 917.5 - - - - - 917.5 917.5 Average interest rate 3.59 % - % - % - % - % - % 3.59 % Loans held for sale, at lower of cost or fair value (2) 6.1 0.4 - - 4.5 11.0 11.0 Average interest rate 4.19 % 5.51 % - % - % - % 3.59 % 3.98 % Loans held for investment 414.3 628.4 899.7 1,152.8 761.6 3,342.9 7,199.8 7,199.8 Average interest rate 3.13 % 3.23 % 3.23 % 2.96 % 2.93 % 2.74 % 2.78 % Debt service accounts and interest-earning time deposits 10.0 0.1 - - 0.1 0.5 10.6 10.6 Average interest rate 0.03 % 4.00 % - % - % 4.00 % 5.40 % 0.30 % Total rate-sensitive assets $ 1,484.5 $ 628.9 $ 899.7 $ 1,152.8 $ 761.7 $ 3,347.9 $ 8,275.5 $ 8,275.5 Percent of total 17.94 % 7.60 % 10.87 % 13.93 % 9.20 % 40.46 %
100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 512.3 $ - $ - $ - $ - $ - $ 512.3 $ 512.0
Average interest rate 1.54 % - % - % - % - % - % 1.54 %
Senior notes (4) - - - - 400.0 285.0 685.0 674.9
Average interest rate - % - % - % - % 7.88 % 12.00 % 9.59 %
Mortgage loan warehouse facilities 1,085.1 - - - - - 1,085.1 1,085.1
Average interest rate 2.60 % - % - % - % - % - % 2.60 %
MSR financing facilities (4) 490.9 94.2 - - 277.1 39.5 901.7 873.8
Average interest rate 3.94 % 2.69 % - % - % 2.69 % - % 4.55 %
Total rate-sensitive liabilities $ 2,088.3 $ 94.2 $ - $ - $ 677.1 $ 324.5 $ 3,184.1 $ 3,145.8
Percent of total 65.59 % 2.96 % - % - % 21.27 % 10.19 % 100.00 %
Expected Maturity
Date at December 31, 2021 (Notional Amounts)
Total Fair
2022 2023 2024 2025 2026 There- after Balance Value (1)
Rate-Sensitive Derivative
Financial Instruments:
Derivative assets (liabilities)
Forward MBS trades 175.0 - - - - - $ 175.0 $ 0.4
Average coupon 2.07 % - % - % - % - % - % 2.07 %
TBA / Forward MBS Trades 550.0 - - - - - 550.0 (0.3)
Average coupon 2.00 % - % - % - % - % - % 2.00 %
Derivatives futures 792.5 - - - - - 792.5 1.7
Average coupon 1.53 % - % - % - % - % - % 1.53 %
IRLCs 1,085.3 - - - - - 1,085.3 18.1
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA forward Pipeline trades 1,232.0 - - - - - 1,232.0 -
Average coupon 2.44 % - % - % - % - % - % 2.44 %
Option contracts 575.0 - - - - - 575.0 (0.3)
Average coupon - % - % - % - % - % - % - %
Total derivatives, net $ 4,409.8 $ - $ - $ - $ - $ - $ 4,409.8 $ 19.7
Forward LIBOR curve (5) 0.45 % 1.22 % 1.46 % 1.52 % 1.52 % 1.64 %
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Expected Maturity Date at December 31, 2020
2021 2022 2023 2024 2025 There- after Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 261.5 $ - $ - $ - $ - $ - $ 261.5 $ 261.5
Average interest rate 0.30 % - % - % - % - % - % 0.30 %
Loans held for sale, at fair value 366.4 - - - - - 366.4 366.4
Average interest rate 3.33 % - % - % - % - % - % 3.33 %
Loans held for sale, at lower of cost
or fair value (2) 0.2 - 0.5 - - 20.8 21.5 21.5
Average interest rate 5.00 % - % 5.51 % - % - % 4.21 % 4.42 %
Loans held for investment 396.4 385.9 729.0 1,550.2 1,392.1 2,543.5 6,997.1 6,997.1
Average interest rate 3.26 % 3.46 % 3.64 % 3.52 % 3.53 % 3.44 % 4.82 %
Debt service accounts and
interest-earning time deposits 20.5 0.3 - - - - 20.8 20.8
Average interest rate 0.09 % 5.55 % - % - % - % - % 0.17 %
Total rate-sensitive assets $ 1,045.0 $ 386.2
$ 729.5 $ 1,550.2 $ 1,392.1 $ 2,564.3
$ 7,667.3 $ 7,667.3
Percent of total 13.63 % 5.04 % 9.51 % 20.22 % 18.16 % 33.44 % 100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 106.3 $ 475.0 $ - $ - $ - $ - $ 581.3 $ 582.0
Average interest rate 4.10 % 1.49 % - % - % - % - % 1.96 %
Senior notes (4) 21.5 291.5 - - - - 313.1 320.9
Average interest rate 6.38 % 8.38 % - % - % - % - % 8.24 %
Mortgage loan warehouse facilities 451.7 - - - - - $ 451.7 451.7
Average interest rate 3.30 % - % - % - % - % - % 3.30 %
MSR financing facilities (4) 349.4 41.7 - - - 47.5 438.6 406.9
Average interest rate 4.79 % 5.07 % - % - % - % - % 4.82 %
Senior secured term loan (4) 20.0 165.0 - - - - 185.0 184.6
Average interest rate 7.00 % 7.00 % - % - % - % - % 7.00 %
Total rate-sensitive liabilities $ 949.0 $ 973.2 $ - $ - $ - $ 47.5 $ 1,969.6 $ 1,946.1
Percent of total 48.18 % 49.41 % - % - % - % 2.41 % 100.00 %
Expected Maturity Date
at December 31, 2020 (Notional Amounts)
Total Fair
2021 2022 2023 2024 2025 There- after Balance Value (1)
Rate-Sensitive Derivative
Financial Instruments:
Derivative assets (liabilities)
Forward MBS trades 50.0 - - - - - 50.0 $ (0.1)
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA / Forward MBS Trades 400.0 - - - - - 400.0 (4.6)
Average coupon 2.22 % - % - % - % - % - % 2.22 %
Derivatives futures 593.5 - - - - - 593.5 0.5
Average coupon 0.75 % - % - % - % - % - % 0.75 %
IRLCs 631.4 - - - - - 631.4 22.7
Average coupon 2.89 % - % - % - % - % - % 2.89 %
Total derivatives, net $ 1,675 $ - $ - $ - $ - $ - $ 1,675 $ 19
Forward LIBOR curve (5) 0.14 % 0.13 % 0.20 % 0.36 % 0.60 % 0.86 %
(1)See Note 3 - Fair Value to the Consolidated Financial Statements for
additional fair value information on financial instruments.
(2)Net of valuation allowances and including non-performing loans.
(3)Excludes financing liabilities that result from sales of assets that do not
qualify as sales for accounting purposes and, therefore, are accounted for as
secured financings, which have no contractual maturity and are amortized over
the life of the related assets.
(4)Amounts are exclusive of any related discount or unamortized debt issuance
costs.
(5)Average 1-Month LIBOR for the periods indicated.
95
--------------------------------------------------------------------------------
KINSALE CAPITAL GROUP, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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