NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Amounts)
(unaudited)
Note 1 – Organization and Operations
Nature of Business
Home Point Capital Inc., a Delaware corporation (“HPC” or the “Company”), through its subsidiaries, is a residential mortgage originator and servicer with a business model focused on growing originations by leveraging a network of partner relationships. The Company manages the customer experience through its in-house servicing operation and proprietary Home Ownership Platform. The Company’s business operations are organized into the following two segments: (1) Origination and (2) Servicing. Home Point Financial Corporation, a New Jersey corporation (“HPF”), a wholly owned subsidiary of the Company, originates, sells, and services residential real estate mortgage loans throughout the United States. Home Point Asset Management LLC, a Delaware limited liability company (“HPAM”), is a wholly owned subsidiary of the Company and manages certain servicing assets. HPAM’s wholly owned subsidiary, Home Point Mortgage Acceptance Corporation, an Alabama Corporation (“HPMAC”), services residential real estate mortgage loans.
HPF and HPMAC are each an approved seller and servicer of one-to-four family first mortgages by the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and are each an approved issuer by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) (collectively, the “Agencies”), and as such, HPF and HPMAC must meet certain Agency eligibility requirements.
Note 2 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated financial statements include the financial statements of HPC and all its wholly owned subsidiaries, including HPF and HPMAC. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with Article 10 of Regulation S-X promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The consolidated balance sheet as of December 31, 2020 and related notes were derived from the audited consolidated financial statements but do not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments) necessary to fairly state, in all material respects, the Company’s financial position as of March 31, 2021 and its results of operations and its cash flows for the three months ended March 31, 2021 and 2020. The unaudited condensed consolidated financial information should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires HPC to make estimates and assumptions about future events that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.
Examples of reported amounts that rely on significant estimates include mortgage loans held for sale, mortgage servicing rights (“MSRs”), servicing advances reserve, derivative assets, derivative liabilities, assets acquired and liabilities assumed in business combinations, reserves for mortgage repurchases and indemnifications, and deferred tax valuation allowance considerations. Significant estimates are also used in determining the recoverability and fair value of property and equipment, goodwill, and intangible assets.
Stock Split: On January 21, 2021, the Company effected a stock split of its outstanding common stock pursuant to which the 100 outstanding shares were split into 1,380,601.11 shares each, for a total of 138,860,103 shares of outstanding common stock. As a result, all amounts relating to share and per share amounts have been retroactively adjusted to reflect this stock split.
Initial Public Offering: On February 2, 2021, the Company completed its initial public offering (“IPO”) in which the Company’s stockholders sold 7,250,000 shares of its common stock at a public offering price of $13 per share. In conjunction with the IPO, the Company’s board of directors also approved a reorganization of the Company through merging Home Point Capital LP (“HPLP”) with and into the Company, with the Company as the surviving entity. As a secondary offering, there were no proceeds from the sale of the shares being sold by the selling stockholders and all related expenses for the IPO were recorded in General and administrative expenses. Following the completion of the IPO, investment entities directly or indirectly managed by Stone
Point Capital LLC, which are referred to as the Trident Stockholders, beneficially owned approximately 92% of the voting power of the Company’s common stock.
COVID-19 Pandemic Update: While the financial markets have demonstrated volatility due to the economic impacts of COVID-19, the impact to the Company has been comprised of increased demand, resulting in record levels of Origination volume. Another area of impact is the result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, in response to the pandemic. The CARES Act allows borrowers with federally backed loans to request a temporary mortgage forbearance. In addition, in February 2021, the federal government announced an additional extension of the eligible forbearance period of three to six months depending on loan type. The CARES Act imposes several new compliance obligations on mortgage servicing activities, including, but not limited to mandatory forbearance offerings, altered credit reporting obligations, and moratoriums on foreclosure actions and late fee assessments. As of March 31, 2021, approximately 10,000 loans, or 2.4% of the loans in our MSR Servicing Portfolio had elected the forbearance option. Of the 2.4% of the loans in our MSR Servicing Portfolio that had elected the forbearance option as of March 31, 2021, approximately 10% remained current on their March 31, 2021 payments. As a result of the CARES Act forbearance requirements, there has been increases in delinquencies in the MSR Servicing Portfolio and the Company is monitoring delinquencies through the expiration of the applicable CARES Act programs. While the Company has not experienced a material adverse effect on its results of operations, financial position, or liquidity due to COVID-19, it is difficult to predict what the ongoing impact of the pandemic will be on the economy, the Company’s customers or its business. If the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity during the remainder of fiscal year 2021.
Summary of Significant Accounting Policies
Mortgage loans held for sale are accounted for using the fair value option. Therefore, mortgage loans originated and intended for sale in the secondary market are reflected at fair value. Changes in the fair value are recognized in current period earnings in Gain on loans, net, within the unaudited condensed consolidated statements of operations. Refer to Note 3 – Mortgage Loans Held for Sale.
Mortgage servicing rights are recognized as assets on the condensed consolidated balance sheets when loans are sold and the associated servicing rights are retained. The Company maintains one class of MSR asset and has elected the fair value option. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The Company obtains valuations from an independent third party on a quarterly basis and records an adjustment based on this third-party valuation.
Changes in the fair value are recognized in Change in fair value of mortgage servicing rights, net on the Company's unaudited condensed consolidated statements of operations. Purchased mortgage servicing rights are recorded at the purchase price at the date of purchase. Refer to Note 4 – Mortgage Servicing Rights.
Derivative financial instruments, including economic hedging activities, are recorded at fair value as either Derivative assets or in Other liabilities on the condensed consolidated balance sheets on a gross basis. The Company has accounted for its derivative instruments as non-designated hedge instruments and uses the derivative instruments to manage risk. The Company’s derivative instruments include, but are not limited to, forward mortgage-backed securities sales commitments, interest rate lock commitments, and other derivative instruments entered into to hedge fluctuations in MSRs’ fair value. The impact of the Company’s Derivative assets is reported in Change in fair value of derivative assets on the unaudited condensed consolidated statements of cash flows and the impact of the Company’s derivative liabilities is reported in Increase in other liabilities on the unaudited condensed consolidated statements of cash flows. The Company records derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty. Refer to Note 5 – Derivative Financial Instruments.
Forward mortgage-backed securities (“MBS”) sale commitments that have not settled are considered derivative financial instruments and are recognized at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized, new originations, and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments. Gain or loss on derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.
Interest rate lock commitments (“IRLCs”) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Forward MBS sale commitments or whole loans and options on forward contracts are used to manage the interest rate and price risk. These derivatives are not designated as hedging instruments. Historical
commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. Change in fair value of IRLC derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.
Mortgage servicing rights hedges are accounted for at fair value. MSRs are subject to substantial interest rate risk as the mortgage notes underlying the servicing rights permit the borrowers to prepay the loans. Therefore, the value of MSRs generally tend to diminish in periods of declining interest rates as prepayments increase and increase in periods of rising interest rates as prepayments decrease. Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, and product characteristics.
The Company manages the impact that the volatility associated with changes in fair value of its MSRs has on its earnings with a variety of derivative instruments. The amount and composition of derivatives used to economically hedge the value of MSRs will depend on the Company's exposure to loss of value on the MSRs, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. This serves as a business hedge of the MSRs, providing a benefit when increased borrower refinancing activity results in higher loan origination volumes, which would partially offset declines in the value of the MSRs thereby reducing the need to use derivatives. The benefit of this business hedge depends on the decline in interest rates required to create an incentive for borrowers to refinance their mortgage loans and lower their interest rates; however, this benefit may not be realized under certain circumstances regardless of the change in interest rates. The change in fair value of MSR hedges is recorded in Change in fair value of mortgage servicing rights, net in the unaudited condensed consolidated statements of operations.
Earnings per share (“EPS”) is calculated and presented in the unaudited condensed consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is based on the weighted average number of common shares outstanding during the period. There were 138.9 million and 127.4 million weighted average shares outstanding for the three months ended March 31, 2021 and 2020, respectively. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if the Company’s dilutive outstanding stock options and stock awards were issued. For the three months ended March 31, 2021, 139.7 million shares would be outstanding on a fully-diluted basis. For the three months ended March 31, 2020, 103,229 shares were excluded from the computation of diluted (loss) per share due to their anti-dilutive effect.
Recently Adopted Accounting Standards
Accounting Standards Update (“ASU”) 2019-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2019-13), provides final guidance that eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. This amendment is effective for annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and there was no impact to the unaudited condensed consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, eliminates particular exceptions related to the method for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects on the accounting for income taxes. This amendment is effective for annual periods beginning after December 15, 2021. This will be effective for the Company beginning January 1, 2022. The Company is currently assessing the potential impact the adoption of this standard will have on its condensed consolidated financial statements.
ASU 2021-01, Reference Rate Reform (Topic 848) Scope, clarifies some of the guidance of the Financial Accounting Standards Board (“FASB” or “the Board”) as part of the Board’s monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The Company is in the process of reviewing its derivative and hedging instruments that utilize LIBOR (as defined below) as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. This guidance is effective upon issuance and allows application to contract changes as early as January 1, 2020. The Company is in the process of reviewing its funding facilities and financing facilities that utilize LIBOR as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.
Note 3 – Mortgage Loans Held for Sale
The Company sells its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. The following presents mortgage loans held for sale at fair value, by type, as of March 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Unpaid
Principal
|
|
Fair Value
Adjustment
|
|
Total
Fair Value
|
Conventional(1)
|
$
|
3,756,193
|
|
|
$
|
38,519
|
|
|
$
|
3,794,712
|
|
Government(2)
|
1,367,552
|
|
|
28,805
|
|
|
1,396,357
|
|
Reverse(3)
|
275
|
|
|
(83)
|
|
|
192
|
|
Total
|
$
|
5,124,020
|
|
|
$
|
67,241
|
|
|
$
|
5,191,261
|
|
(1)Conventional includes FNMA and FHLMC mortgage loans.
(2)Government includes GNMA mortgage loans (including Federal Housing Administration, Department of Veterans Affairs, and United States Department of Agriculture).
(3)Reverse loan presented in Mortgage loans held for sale on the condensed consolidated balance sheets as a result of a repurchase
The Company had $58.0 million of unpaid principal balances, which had a fair value of $57.1 million, of mortgage loans held for sale on nonaccrual status at March 31, 2021.
The following presents mortgage loans held for sale at fair value, by type, as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Unpaid
Principal
|
|
Fair Value
Adjustment
|
|
Total
Fair Value
|
Conventional(1)
|
$
|
2,183,480
|
|
|
$
|
91,939
|
|
|
$
|
2,275,419
|
|
Government(2)
|
974,908
|
|
|
51,175
|
|
|
1,026,083
|
|
Reverse(3)
|
275
|
|
|
(83)
|
|
|
192
|
|
Total
|
$
|
3,158,663
|
|
|
$
|
143,031
|
|
|
$
|
3,301,694
|
|
(1)Conventional includes FNMA and FHLMC mortgage loans.
(2)Government includes GNMA mortgage loans (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agriculture).
(3)Reverse loan presented in Mortgage loans held for sale on the condensed consolidated balance sheets as a result of a repurchase
The Company had $26.3 million of unpaid principal balances, which had a fair value of $23.5 million, of mortgage loans held for sale on nonaccrual status at December 31, 2020.
The following presents a reconciliation of the changes in mortgage loans held for sale to the amounts presented on the unaudited condensed consolidated statements of cash flows as of March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Fair value at beginning of period
|
$
|
3,301,694
|
|
|
$
|
1,554,230
|
|
Mortgage loans originated and purchased
|
31,055,708
|
|
|
8,344,755
|
|
Proceeds on sales and payments received
|
(29,001,344)
|
|
|
(8,311,842)
|
|
Change in fair value
|
(75,790)
|
|
|
35,040
|
|
(Loss) gain on loans(1)
|
(89,007)
|
|
|
110,201
|
|
Fair value at end of period
|
$
|
5,191,261
|
|
|
$
|
1,732,384
|
|
(1)This line as presented on the condensed consolidated statements of cash flows excludes OMSR and MSR hedging.
Note 4 – Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold.
The MSRs give the Company the contractual right to receive service fees and other remuneration in exchange for performing loan servicing functions on behalf of investors in mortgage loans and securities. Upon sale, an MSR asset is capitalized, which represents the current fair value of the future net cash flows that are expected to be realized for performing servicing activities.
The following presents an analysis of the changes in capitalized mortgage servicing rights as of March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Balance at beginning of period
|
$
|
748,457
|
|
|
$
|
575,035
|
|
MSRs originated
|
294,357
|
|
|
94,972
|
|
MSRs purchased
|
4,817
|
|
|
—
|
|
Changes in valuation model inputs
|
197,896
|
|
|
(157,984)
|
|
Change due to cash payoffs and principal amortization
|
(89,170)
|
|
|
(36,152)
|
|
Balance at end of period
|
$
|
1,156,357
|
|
|
$
|
475,871
|
|
The following presents the Company’s total capitalized mortgage servicing portfolio (based on the unpaid principal balance (“UPB”) of the underlying mortgage loans) as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Ginnie Mae
|
$
|
25,287,243
|
|
$
|
26,206,612
|
Fannie Mae
|
45,670,884
|
|
36,395,373
|
Freddie Mac
|
34,815,557
|
|
25,621,697
|
Other
|
47,688
|
|
53,567
|
Total mortgage servicing portfolio
|
$
|
105,821,372
|
|
$
|
88,277,249
|
|
|
|
|
MSR balance
|
$
|
1,156,357
|
|
|
$
|
748,457
|
|
MSR balance as % of unpaid mortgage principal balance
|
1.09
|
%
|
|
0.85
|
%
|
The following presents the key weighted average assumptions used in determining the fair value of the Company’s MSRs as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Discount rate
|
9.37
|
%
|
|
9.47
|
%
|
Prepayment speeds
|
10.23
|
%
|
|
14.43
|
%
|
The key assumptions used to estimate the fair value of the MSRs are discount rate and the Conditional Prepayment Rate (“CPR”). Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase. Decreases in prepayment speeds generally have a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value.
The following table illustrates the hypothetical effect on the fair value of the Company’s MSR portfolio when applying unfavorable discount rate and prepayment speeds at two different data points as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Prepayment Speeds
|
|
100 BPS
Adverse Change
|
|
200 BPS
Adverse Change
|
|
10% Adverse
Change
|
|
20% Adverse
Change
|
March 31, 2021
|
|
|
|
|
|
|
|
HPF Portfolio
|
$
|
(47,935)
|
|
|
$
|
(91,953)
|
|
|
$
|
(46,751)
|
|
|
$
|
(90,842)
|
|
HPMAC Portfolio
|
(295)
|
|
|
(566)
|
|
|
(235)
|
|
|
(454)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
HPF Portfolio
|
$
|
(26,327)
|
|
|
$
|
(50,702)
|
|
|
$
|
(44,961)
|
|
|
$
|
(85,383)
|
|
HPMAC Portfolio
|
(27)
|
|
|
(52)
|
|
|
(53)
|
|
|
(101)
|
|
MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties. Refer to Note 12 – Fair Value Measurements, for further discussions on the key assumptions used to estimate the fair value of the MSRs.
The following presents information related to loans serviced for which the Company has continuing involvement through servicing agreements as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Total unpaid principal balance
|
$
|
110,064,444
|
|
|
$
|
91,590,114
|
|
Loans 30-89 days delinquent
|
899,244
|
|
|
1,353,029
|
|
Loans delinquent 90 or more days or in foreclosure(1)
|
2,722,036
|
|
|
3,641,183
|
|
(1)Of the $2.7 billion and $3.6 billion of loans delinquent 90 days or more, approximately $1.7 billion and $2.5 billion are in forbearance primarily related to COVID-19 forbearance provided under the CARES Act as of March 31, 2021 and December 31, 2020, respectively.
The following presents components of Loan servicing fees as reported in the Company’s unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Contractual servicing fees
|
$
|
67,483
|
|
|
$
|
42,905
|
|
Late fees
|
1,142
|
|
|
2,065
|
|
Other
|
1,713
|
|
|
(1,724)
|
|
Loan servicing fees
|
$
|
70,338
|
|
|
$
|
43,246
|
|
The Company held $25.6 million and $20.6 million of escrow funds within Other liabilities in the condensed consolidated balance sheets for its customers for which it services mortgage loans as of March 31, 2021 and December 31, 2020, respectively.
Note 5 – Derivative Financial Instruments
The Company’s derivative instruments include but are not limited to forward mortgage-backed securities sales commitments, interest rate lock commitments, and other derivative instruments entered into to hedge MSRs’ fluctuations in fair value. The Company records derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty.
The following presents the outstanding notional balances for derivative instruments not designated as hedging instruments for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Notional
Value
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Recorded
Gain/(Loss)
|
Mortgage-backed securities forward trades
|
$
|
13,274,522
|
|
|
$
|
123,084
|
|
|
$
|
2,334
|
|
|
$
|
180,554
|
|
Interest rate lock commitments
|
14,423,428
|
|
|
20,193
|
|
|
—
|
|
|
(239,588)
|
|
Hedging mortgage servicing rights
|
5,409,000
|
|
|
137
|
|
|
39,763
|
|
|
(92,042)
|
|
Margin
|
|
|
43,495
|
|
|
222,243
|
|
|
|
Total
|
|
|
$
|
186,909
|
|
|
$
|
264,340
|
|
|
|
Cash placed with counterparties, net
|
|
|
$
|
178,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Notional
Value
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Recorded
Gain/(Loss)
|
Mortgage-backed securities forward trades
|
$
|
4,498,053
|
|
|
$
|
843
|
|
|
$
|
95,965
|
|
|
$
|
(90,934)
|
|
Interest rate lock commitments
|
6,719,412
|
|
|
131,962
|
|
|
—
|
|
|
106,774
|
|
Hedging mortgage servicing rights
|
5,595,000
|
|
|
28,929
|
|
|
—
|
|
|
94,661
|
|
Margin
|
|
|
119,503
|
|
|
537
|
|
|
|
Total
|
|
|
$
|
281,237
|
|
|
$
|
96,502
|
|
|
|
Cash held with counterparties, net
|
|
|
$
|
118,966
|
|
|
|
|
|
The following presents a summary of derivative assets and liabilities and related netting amounts as of March 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Gross Amount of
Recognized Assets
(liabilities)
|
|
Gross Offset
|
|
Net Assets
(Liabilities)
|
Balance at March 31, 2021
|
|
|
|
|
|
Derivatives subject to master netting agreements:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Mortgage-backed securities forward trades
|
$
|
123,084
|
|
|
$
|
(91,333)
|
|
|
$
|
31,751
|
|
Hedging mortgage servicing rights
|
137
|
|
|
(137)
|
|
|
—
|
|
Margin (cash placed with counterparties)
|
43,495
|
|
|
(22,659)
|
|
|
20,836
|
|
Liabilities:
|
|
|
|
|
|
Mortgage-backed securities forward trades
|
(2,334)
|
|
|
2,334
|
|
|
—
|
|
Hedging mortgage servicing rights
|
(39,763)
|
|
|
22,796
|
|
|
(16,967)
|
|
Margin (cash placed with counterparties)
|
(222,243)
|
|
|
88,999
|
|
|
(133,244)
|
|
|
|
|
|
|
|
Derivatives not subject to master netting agreements:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Interest rate lock commitments
|
20,193
|
|
|
—
|
|
|
20,193
|
|
Hedging mortgage servicing rights
|
—
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
|
|
|
|
|
Assets
|
$
|
186,909
|
|
|
$
|
(114,129)
|
|
|
$
|
72,780
|
|
Liabilities
|
$
|
(264,340)
|
|
|
$
|
114,129
|
|
|
$
|
(150,211)
|
|
The following presents a summary of derivative assets and liabilities and related netting amounts as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross Amount of
Recognized Assets
(liabilities)
|
|
Gross Offset
|
|
Net Assets
(Liabilities)
|
Balance at December 31, 2020
|
|
|
|
|
|
Derivatives subject to master netting agreements:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Mortgage-backed securities forward trades
|
$
|
1,320
|
|
|
$
|
—
|
|
|
$
|
1,320
|
|
Hedging mortgage servicing rights
|
4,419
|
|
|
—
|
|
|
4,419
|
|
Margin (cash placed with counterparties)
|
58,290
|
|
|
(45,427)
|
|
|
12,863
|
|
Liabilities:
|
|
|
|
|
|
Mortgage-backed securities forward trades
|
(61,124)
|
|
|
45,595
|
|
|
(15,529)
|
|
Hedging mortgage servicing rights
|
—
|
|
|
—
|
|
|
—
|
|
Margin (cash held with counterparties)
|
—
|
|
|
(168)
|
|
|
(168)
|
|
|
|
|
|
|
|
Derivatives not subject to master netting agreements:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Interest rate lock commitments
|
257,785
|
|
|
—
|
|
|
257,785
|
|
Hedging mortgage servicing rights
|
12,509
|
|
|
—
|
|
|
12,509
|
|
Total derivatives
|
|
|
|
|
|
Assets
|
$
|
334,323
|
|
|
$
|
(45,427)
|
|
|
$
|
288,896
|
|
Liabilities
|
$
|
(61,124)
|
|
|
$
|
45,427
|
|
|
$
|
(15,697)
|
|
For information on the determination of fair value, refer to Note 12 – Fair Value Measurements.
Note 6 – Accounts Receivable, net
The following presents principal categories of Accounts receivable, net as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
2021
|
|
As of December 31,
2020
|
Servicing advance receivable
|
$
|
79,849
|
|
|
$
|
97,893
|
|
Servicing advance reserves
|
(8,749)
|
|
|
(8,380)
|
|
Servicing receivable-general
|
4,033
|
|
|
2,660
|
|
Income tax receivable
|
47,877
|
|
|
54,347
|
|
Interest on servicing deposits
|
188
|
|
|
165
|
|
Pair off receivable
|
158,938
|
|
|
—
|
|
Other
|
8,419
|
|
|
6,160
|
|
Accounts receivable, net
|
$
|
290,555
|
|
|
$
|
152,845
|
|
Servicing advances are an important component of the business and are amounts that the Company, as servicer, is required to advance to, or on behalf of, the Company’s servicing clients, if such amounts are not received from borrowers. These amounts include principal and interest payments, property taxes and insurance premiums, and amounts to maintain, repair, and market real estate properties on behalf of the Company’s servicing clients. In general, servicing advances have the highest reimbursement priority such that the Company is entitled to repayment of the advances from the loan or property liquidation proceeds before most other claims on these proceeds. However, not all advances are collectable and an allowance for servicing advance reserves is recognized. This allowance represents management’s estimate of current expected losses and is maintained at a level that management considers adequate based upon continuing assessments of collectability, current trends, and historical loss experience.
The following presents changes to the servicing advance reserve for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Servicing advance reserve, at beginning of period
|
$
|
(8,380)
|
|
|
$
|
(4,308)
|
|
Additions
|
(1,343)
|
|
|
(1,976)
|
|
Charge-offs
|
974
|
|
|
911
|
|
Servicing advance reserve, at end of period
|
$
|
(8,749)
|
|
|
$
|
(5,373)
|
|
Note 7 – Warehouse Lines of Credit
The Company maintains mortgage warehouse lines of credit arrangements with various financial institutions, primarily to fund the origination of mortgage loans. The Company held mortgage funding arrangements with twelve separate financial institutions with a total maximum borrowing capacity of $6.4 billion at March 31, 2021 and $4.2 billion at December 31, 2020. As of March 31, 2021, the Company had $1.5 billion of unused capacity under its warehouse lines of credit.
The following presents the amounts outstanding as of March 31, 2021 and December 31, 2020 and maturity dates under the Company’s various mortgage funding arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Balance at March 31, 2021
|
|
Balance at December 31, 2020
|
$1,000M Warehouse Facility
|
May 2021
|
|
$
|
914.4
|
million
|
|
$
|
466.0
|
million
|
$600M Warehouse Facility
|
August 2021
|
|
543.7
|
million
|
|
421.9
|
million
|
$300M Warehouse Facility
|
September 2021
|
|
250.3
|
million
|
|
223.9
|
million
|
$500M Warehouse Facility
|
September 2021
|
|
441.4
|
million
|
|
401.2
|
million
|
$500M Warehouse Facility
|
September 2021
|
|
473.4
|
million
|
|
437.8
|
million
|
$500M Warehouse Facility
|
January 2022
|
|
445.4
|
million
|
|
232.1
|
million
|
$500M Warehouse Facility
|
January 2022
|
|
437.9
|
million
|
|
—
|
million
|
$1,200M Warehouse Facility
|
February 2022
|
|
675.8
|
million
|
|
459.9
|
million
|
$500M Warehouse Facility
|
March 2023
|
|
14.2
|
million
|
|
—
|
million
|
$550M Warehouse Facility
|
Evergreen
|
|
465.1
|
million
|
|
171.0
|
million
|
$88.5M Warehouse Facility
|
Evergreen
|
|
39.3
|
million
|
|
40.6
|
million
|
Gestation
|
Evergreen
|
|
146.7
|
million
|
|
151.0
|
million
|
Total warehouse lines of credit
|
|
|
$
|
4,847.4
|
million
|
|
$
|
3,005.4
|
million
|
The Company’s warehouse facilities’ variable interest rates are calculated using a base rate generally tied to 1-month LIBOR plus applicable interest rate margins, with varying interest rate floors. The weighted average interest rate for the Company’s warehouse facilities was 2.46% as of March 31, 2021 and 2.75% as of December 31, 2020. The Company’s borrowings are 100% secured by the fair value of the mortgage loans held for sale at fair value.
The Company’s warehouse facilities generally require the maintenance of certain financial covenants relating to net worth, profitability, liquidity, and ratio of indebtedness to net worth, among others. As of March 31, 2021, the Company was in compliance with all warehouse facility covenants.
The Company continually evaluates its warehouse capacity in relation to expected financing needs.
Note 8 – Term Debt and Other Borrowings, net
The Company maintains term debt and other borrowings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Collateral
|
|
Balance at March 31, 2021
|
|
Balance at December 31, 2020
|
$500M MSR Facility
|
January 2023
|
|
Mortgage Servicing Rights
|
|
$
|
346.6
|
million
|
|
$
|
411.6
|
million
|
$550M Senior Notes
|
February 2026
|
|
|
|
550.0
|
million
|
|
—
|
million
|
$85M Servicing Advance Facility
|
May 2021
|
|
Servicing Advances
|
|
1.0
|
million
|
|
43.2
|
million
|
$10M Operating Line of Credit
|
May 2021
|
|
Mortgage Loans
|
|
3.3
|
million
|
|
1.0
|
million
|
Total
|
|
|
|
|
900.9
|
million
|
|
455.8
|
million
|
Debt issuance costs
|
|
|
|
|
(12.4)
|
million
|
|
(1.8)
|
million
|
Term debt and other borrowings, net
|
|
|
|
|
$
|
888.4
|
million
|
|
$
|
454.0
|
million
|
The Company maintains a $500 million MSR financing facility (the “MSR Facility”), which is comprised of $450 million of committed capacity and $50 million of uncommitted capacity and is collateralized by the Company’s FNMA, FHLMC, and GNMA mortgage servicing rights. Interest on the MSR Facility is based on 3-Month LIBOR plus the applicable margin with advance rates generally ranging from 62.5% to 72.5% of the value of the underlying mortgage servicing rights. The MSR Facility has a three-year revolving period ending on January 31, 2022 followed by a one-year period during which the balance drawn must be repaid and no further amounts may be drawn down, which ends on January 31, 2023. The MSR Facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of March 31, 2021, the Company was in compliance with all covenants.
On January 19, 2021, the Company issued $550 million aggregate principal amount of its 5.00% Senior Notes due 2026 (the “Senior Notes”) in a private placement transaction. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than Home Point Asset Management LLC and Home Point Mortgage Acceptance Corporation. The Senior Notes bear interest at a rate of 5.00% per annum, payable semi-annually in arrears. The Senior Notes will mature on February 1, 2026. $269.7 million of the gross proceeds from the issuance of the Senior Notes was used to repay outstanding amounts under the Company’s $500 million MSR Facility, $269.3 million of the gross proceeds from the issuance was used to fund a distribution to the shareholders of the Company’s parent entity at the time, HPLP, and the remaining gross proceeds were used to pay costs related to the transaction.
The Indenture governing the Senior Notes contains covenants and restrictions that, among other things and subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries to (i) incur additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets.
The Company has an $85 million servicing advance facility which is collateralized by all of the Company’s servicing advances. The facility carries an interest rate of LIBOR plus a margin and advance rate ranging from 85-95%. The servicing advance facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of March 31, 2021, the Company was in compliance with all covenants.
The Company also has a $10 million operating line with an interest rate based on the Wall Street Journal prime rate.
As of March 31, 2021, the Company had total unused capacity for its servicing advance facility and operating line of credit of $61.3 million and $9.0 million, respectively.
The servicing advance facility and the operating line of credit each has a maturity date of May 27, 2021. As of the date of these unaudited condensed consolidated financial statements were issued, the Company is in discussions with the lender to renew both facilities and the Company expects to execute a renewal prior to the maturity date.
Note 9 – Commitments and Contingencies
Commitments to Extend Credit
The Company’s IRLCs expose the Company to market risk if interest rates change and the applicable loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the applicable loan is originated and not sold to an investor and the customer does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans were $14.4 billion as of March 31, 2021 and $16.0 billion as of December 31, 2020.
Litigation
The Company is subject to various legal proceedings arising out of the ordinary course of business. There is a putative class action lawsuit alleging a single cause of action under the Real Estate Settlement Procedures Act (“RESPA”) for which the Company had accrued $2.0 million as of March 31, 2021. There were no current or pending claims against the Company which are expected to have a material impact on the Company's condensed consolidated balance sheets, statements of operations, or cash flows.
Regulatory Contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those conducted as part of regulatory oversight of our mortgage origination, servicing, and financing activities. Such audits and examinations could result in additional actions, penalties, or fines by state or federal governmental bodies, regulators, or the courts with respect to our mortgage origination, servicing, and financing activities, which may be applicable generally to the mortgage industry or to the Company in particular. The Company did not pay any material penalties or fines during the three months ended March 31, 2021 or 2020 and is not currently required to pay any such penalties or fines.
Note 10 – Regulatory Net Worth Requirements
The Company is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development (“HUD”), which govern non-supervised, direct endorsement mortgagees. The Company is also subject to regulatory capital requirements administered by Ginnie Mae, Fannie Mae, and Freddie Mac, which govern issuers of Ginnie Mae, Fannie Mae, and Freddie Mac securities. Additionally, the Company is required to maintain minimum net worth requirements for many of the states in which it sells and services loans. Each state has its own minimum net worth requirement; these range from $0 to $1,000, depending on the state.
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could (i) remove the Company’s ability to sell and service loans to, or on behalf of, the Agencies and (ii) have a direct material effect on the Company’s condensed consolidated financial statements. In accordance with the regulatory capital guidelines, the Company must meet specific quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Further, changes in regulatory and accounting standards, as well as the impact of future events on the Company’s results, may significantly affect the Company’s net worth adequacy.
The Company is subject to the following minimum net worth, minimum capital ratio, and minimum liquidity requirements established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
•Base of $2,500 plus 25 basis points of outstanding UPB for total loans serviced.
•Adjusted/Tangible Net Worth consists of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
•Base of $2,500 plus 35 basis points of the issuer’s total single-family effective outstanding obligations.
•Adjusted/Tangible Net Worth consists of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets and certain pledged assets.
Minimum Capital Ratio
For Fannie Mae, Freddie Mac, and Ginnie Mae, the Company is also required to hold a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
•3.5 basis points of total Agency servicing.
•Incremental 200 basis points of total nonperforming Agency, measured as 90 plus day delinquencies, servicing in excess of 6% of the total Agency servicing UPB.
•Allowable assets for liquidity may include: cash and cash equivalents (unrestricted); available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of Government Sponsored Entities (“GSE”), US Treasury Obligations); and unused/available portion of committed servicing advance lines.
The minimum liquidity requirement for Ginnie Mae is defined as follows:
•Maintain liquid assets equal to the greater of $1,000 or 10 basis points of our outstanding single-family MBS.
The most restrictive of the minimum net worth and capital requirements require the Company to maintain a minimum adjusted net worth balance of $276.3 million as of March 31, 2021. As of March 31, 2021, the Company was in compliance with this requirement.
The Company met all minimum net worth requirements to which it was subject as of March 31, 2021.
The following presents the Company’s required and actual net worth amounts as of March 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Home Point Financial Corporation
|
|
Adjusted Net Worth
|
|
Net Worth Required
|
HUD
|
$
|
1,243,055
|
|
|
$
|
2,500
|
|
Ginnie Mae
|
$
|
1,243,055
|
|
|
$
|
102,149
|
|
Fannie Mae
|
$
|
1,243,055
|
|
|
$
|
276,254
|
|
Freddie Mac
|
$
|
1,243,055
|
|
|
$
|
276,254
|
|
Various States
|
$
|
1,243,055
|
|
|
$0 - 1,000
|
Home Point Mortgage Acceptance Corporation
|
|
Adjusted Net Worth
|
|
Net Worth Required
|
HUD
|
$
|
18,954
|
|
|
$
|
2,500
|
|
Ginnie Mae
|
$
|
18,954
|
|
|
$
|
2,816
|
|
Fannie Mae
|
$
|
18,954
|
|
|
$
|
3,907
|
|
Freddie Mac
|
$
|
18,954
|
|
|
$
|
3,907
|
|
Various States
|
$
|
18,954
|
|
|
$0 - 1,000
|
Note 11 – Representation and Warranty Reserve
Certain whole loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. Additionally, the Company may receive relief of certain representations and warranty obligations on loans sold to FNMA or FHLMC on or after January 1, 2013 if FNMA or FHLMC satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to FNMA or FHLMC. The current UPB of loans sold by the Company represents the maximum potential exposure to repurchases related to representations and warranties. Reserve levels are a function of expected losses based on historical experience and loan volume. While the amount of repurchases is uncertain, the Company considers the liability to be appropriate.
The following presents the activity of the outstanding repurchase reserves for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Repurchase reserve, at beginning of period
|
$
|
18,080
|
|
|
$
|
3,964
|
|
Additions
|
6,593
|
|
|
1,458
|
|
(Charge-offs)/recoveries
|
(863)
|
|
|
109
|
|
Repurchase reserves, at end of period
|
$
|
23,810
|
|
|
$
|
5,531
|
|
Note 12 – Fair Value Measurements
The Company uses fair value measurements to record certain assets and liabilities at fair value on a recurring basis, such as MSRs, derivatives, and mortgage loans held for sale. The Company has elected fair value accounting for loans held for sale and
MSRs to more closely align the Company’s accounting with its interest rate risk strategies without having to apply the operational complexities of hedge accounting.
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
|
|
|
|
|
|
|
Level Input:
|
|
Input Definition:
|
|
|
|
Level 1
|
|
Unadjusted, quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2
|
|
Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others.
|
|
|
|
Level 3
|
|
Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity), unobservable inputs may be used. Unobservable inputs reflect the Company's own assumptions about the factors that market participants would use in pricing the asset or liability and are based on the best information available in the circumstances.
|
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the condensed consolidated financial statements.
The following describes the methods used in estimating the fair values of certain condensed consolidated financial statements items:
Mortgage Loans Held for Sale: The majority of the Company's mortgage loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of the Company's mortgage loans held for sale consist of loans repurchased from the GSEs that have subsequently been deemed to be non-saleable. These loans are considered Level 3.
Derivative Financial Instruments: The Company estimates the fair value of an IRLC based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The Company estimates the fair value of forward sales commitments based on quoted MBS prices. The average pull-through rate for IRLCs was 83% for the three months ended March 31, 2021 and 73% for the year ended December 31, 2020. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3. The Company treats forward mortgage-backed securities sale commitments that have not settled as derivatives and recognizes them at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized and new originations and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments; therefore, the Company reports the loss in fair value in Gain on loans, net in the unaudited condensed consolidated statements of operations. These derivatives are classified as Level 2.
MSR-related derivatives represent a combination of derivatives used to offset possible adverse changes in the fair value of MSRs, which include options on swap contracts, interest rate swap contracts, and other instruments. These derivatives are not designated as hedging instruments; therefore, the Company reports the loss in fair value in Change in fair value of mortgage servicing rights, net in the condensed consolidated statements of operations. The fair value of MSR-related derivatives is determined using quoted prices for similar instruments. These derivatives are classified as Level 2.
Mortgage Servicing Rights: The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The Company obtains valuations from an independent third party on a monthly basis to support the reasonableness of the fair value estimate. The key assumptions used in the estimation of the fair value of MSRs include prepayment speeds, discount rates, default rates, cost to service, contractual servicing fees, and escrow earnings, resulting in a Level 3 classification.
The following presents the major categories of assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
5,145,683
|
|
|
$
|
6,529
|
|
|
$
|
5,152,212
|
|
Mortgage loans held for sale – EBO
|
—
|
|
|
—
|
|
|
39,049
|
|
|
39,049
|
|
Derivative assets (IRLCs)
|
—
|
|
|
—
|
|
|
20,193
|
|
|
20,193
|
|
Derivative assets (MBS forward trades)
|
—
|
|
|
123,084
|
|
|
—
|
|
|
123,084
|
|
Derivative assets (MSRs)
|
—
|
|
|
137
|
|
|
—
|
|
|
137
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
1,156,357
|
|
|
1,156,357
|
|
Total assets
|
$
|
—
|
|
|
$
|
5,268,904
|
|
|
$
|
1,222,128
|
|
|
$
|
6,491,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities (MBS forward trades)
|
$
|
—
|
|
|
$
|
2,334
|
|
|
$
|
—
|
|
|
$
|
2,334
|
|
Derivative liabilities (MSR)
|
—
|
|
|
39,763
|
|
|
—
|
|
|
39,763
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
42,097
|
|
|
$
|
—
|
|
|
$
|
42,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
3,257,321
|
|
|
$
|
3,800
|
|
|
$
|
3,261,121
|
|
Mortgage loans held for sale – EBO
|
—
|
|
|
—
|
|
|
40,574
|
|
|
40,574
|
|
Derivative assets (IRLCs)
|
—
|
|
|
—
|
|
|
257,785
|
|
|
257,785
|
|
Derivative assets (MBS forward trades)
|
—
|
|
|
2,994
|
|
|
—
|
|
|
2,994
|
|
Derivative assets (MSRs)
|
—
|
|
|
15,254
|
|
|
—
|
|
|
15,254
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
748,457
|
|
|
748,457
|
|
Total assets
|
$
|
—
|
|
|
$
|
3,275,569
|
|
|
$
|
1,050,616
|
|
|
$
|
4,326,185
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities (MBS forward trades)
|
$
|
—
|
|
|
$
|
61,124
|
|
|
$
|
—
|
|
|
$
|
61,124
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
61,124
|
|
|
$
|
—
|
|
|
$
|
61,124
|
|
The following presents a reconciliation of Level 3 assets measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
MSRs
|
|
IRLC
|
|
MLHS
|
|
EBO
|
Balance at beginning of period
|
$
|
748,457
|
|
|
$
|
257,785
|
|
|
$
|
3,800
|
|
|
$
|
40,573
|
|
Purchases, sales, issuances, contributions and settlements
|
299,174
|
|
|
—
|
|
|
2,973
|
|
|
(1,367)
|
|
Change in fair value
|
108,726
|
|
|
(237,592)
|
|
|
(244)
|
|
|
(157)
|
|
Transfers in/out(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
1,156,357
|
|
|
$
|
20,193
|
|
|
$
|
6,529
|
|
|
$
|
39,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
MSRs
|
|
IRLC
|
|
MLHS
|
|
EBO
|
Balance at beginning of period
|
$
|
575,035
|
|
|
$
|
25,618
|
|
|
$
|
1,159
|
|
|
$
|
3,094
|
|
Purchases, Sales, Issuances, Contributions and Settlements
|
94,972
|
|
|
—
|
|
|
26
|
|
|
(2,178)
|
|
Change in fair value
|
(194,137)
|
|
|
106,344
|
|
|
43
|
|
|
—
|
|
Transfers in/out(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
475,870
|
|
|
$
|
131,962
|
|
|
$
|
1,228
|
|
|
$
|
916
|
|
(1)Transfers in/out represents acquired assets and assets transferred out due to reclassification as real estate owned, foreclosure or claims.
The following presents an estimated fair value and UPB of mortgage loans held for sale that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for mortgage loans held for sale as the Company believes fair value best reflects its expected future economic performance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Principal
Amount Due
Upon Maturity
|
|
Difference(1)
|
Balance at March 31, 2021
|
$
|
5,152,211
|
|
|
$
|
5,080,974
|
|
|
$
|
71,237
|
|
Balance at December 31, 2020
|
$
|
3,261,121
|
|
|
$
|
3,117,552
|
|
|
$
|
143,569
|
|
(1)Represents the amount of gains related to changes in fair value of items accounted for using the fair value option included in Gain on loans, net within the condensed consolidated statements of operations.
The Company did not transfer any assets or liabilities between categories during the three months ended March 31, 2021 or 2020 other than the transfers between EBO loans to Other assets. The Company had no significant assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2021 and December 31, 2020, respectively.
The following is a summary of the key unobservable inputs used in the valuation of the Level 3 assets as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
Asset
|
|
Key Input
|
|
Range
|
|
Weighted
Average
|
Mortgage servicing rights
|
|
Discount rate
|
|
9.0% - 12.2%
|
|
9.4%
|
|
|
Prepayment speeds
|
|
7.3% - 13.8%
|
|
10.2%
|
Interest rate lock commitments
|
|
Pull-through rate
|
|
27% - 100%
|
|
83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Asset
|
|
Key Input
|
|
Range
|
|
Weighted
Average
|
Mortgage servicing rights
|
|
Discount rate
|
|
9.0% - 12.2%
|
|
9.5%
|
|
|
Prepayment speeds
|
|
13.8% - 16.4%
|
|
14.4%
|
Interest rate lock commitments
|
|
Pull-through rate
|
|
16% - 100%
|
|
73%
|
The key assumptions used to estimate the fair value of the MSRs are discount rate and the CPR. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase. Decreases in prepayment speeds generally have a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.
Fair Value of Other Financial Instruments: As of March 31, 2021 and December 31, 2020, all financial instruments were either recorded at fair value or the carrying value approximated fair value. For financial instruments that were not recorded at fair value, such as cash and cash equivalents, restricted cash, servicing advances, warehouse and operating lines of credit, and accounts payable, and accrued expenses, their carrying values approximated fair value due to the short-term nature of such instruments. For our long-term secured borrowings not recorded at fair value, the carrying value approximated fair value due to the collateralization of such borrowings.
Note 13 – Stock Options
On January 21, 2021, the Company’s board of directors approved the adoption of the Company’s 2021 Incentive Plan (“2021 Plan”) and designated 6.9 million shares of the Company’s authorized common stock that may be granted as stock options and restricted stock awards thereunder. The 2021 Plan allows for the assumption and substitution of outstanding options to purchase common units of HPLP granted under the Home Point Capital LP 2015 Option Plan (the “2015 Option Plan”). The aggregate number of shares of the Company’s common stock available will be reduced by the number of shares of common stock underlying the award. The expiration date of the 2021 Plan shall be the tenth (10th) anniversary of the effective date of the 2021 Plan, which is January 21, 2031. The 2021 Plan contains vesting conditions based on both time-vesting service criteria, as well as performance based vesting terms, which are based on the achievement of specified performance criteria outlined in the underlying award agreement.
Prior to the consummation of the merger in connection with the IPO, the 2015 Option Plan governed awards of stock options to key persons conducting business for HPLP and its direct and indirect subsidiaries, including the Company. The 2015 Option Plan allowed awards in the form of options that are exercisable into common units of HPLP. In connection with the IPO, all outstanding options under the 2015 Option Plan were canceled and “substitute options” were granted under the 2021 Plan. The substitute options have an exercise price and cover a number of shares of common stock that results in the substitute options having the same (subject to rounding) intrinsic value as the outstanding options granted under the 2015 Option Plan.
The Company recognized $1.8 million and $0.1 million of compensation expense related to stock options within Compensation and benefits expense on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively. The unrecognized compensation expense related to outstanding and unvested stock options was $15.0 million as of March 31, 2021 which are expected to vest and be recognized over a weighted-average period of 5.33 years. As of March 31, 2021, the number of options vested and exercisable was 2,343,173 and the weighted-average exercise price of the options currently exercisable was $2.78. The remaining contractual term of the options currently exercisable was 7.43 years as of March 31, 2021.
The following presents the activity of the Company’s stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Life (Years)
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
13,381,516
|
|
|
4.13
|
|
|
7.28
|
|
6.29
|
|
Exercised
|
|
357,400
|
|
|
1.78
|
|
|
—
|
|
|
3.59
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at March 31, 2021
|
|
13,024,116
|
|
|
$
|
4.19
|
|
|
7.43
|
|
$
|
6.36
|
|
The following presents a summary of the Company’s non-vested activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2020
|
—
|
|
|
$
|
—
|
|
Granted
|
13,381,516
|
|
|
6.29
|
|
Vested
|
2,343,173
|
|
|
3.78
|
|
Exercised
|
357,400
|
|
|
3.59
|
|
Forfeited
|
—
|
|
|
—
|
|
Non-vested at March 31, 2021
|
10,680,943
|
|
|
$
|
6.36
|
|
The Company applied certain assumptions in determining the fair value of the options granted during the three months ended March 31, 2021. Expected life was estimated to be 8.3 years, risk-free interest rate applied was 1.7% and expected volatility utilized was 24.9%. The expected life of each stock option is estimated based on its vesting and contractual terms. The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was based on an analysis of the historical volatilities of peer companies, adjusted for certain characteristics specific to the Company. The Company applied an estimated forfeiture rate of 0 - 10.4% to unvested options outstanding during the three months ended March 31, 2021.
Note 14 – Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Income (loss) before income taxes
|
$
|
194,923
|
|
$
|
(16,353)
|
Total provision (benefit) from income taxes
|
50,117
|
|
(3,489)
|
Effective tax provision rate
|
25.7%
|
|
21.3%
|
The Company’s effective income tax rate was 25.7% and 21.3% for the three months ended March 31, 2021 and 2020, respectively, compared to the statutory rate of 21%. The Company calculated the provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income and adjusted for discrete items that occurred during the period. Several factors influence the effective tax rate, including the impact of equity investments, state taxes and permanent disallowed deductions for tax such as officer's compensation limitations applicable to a public entity and non-deductible transaction costs.
Note 15 – Segments
Management has organized the Company into two reportable segments based primarily on its services as follows: (1) Origination and (2) Servicing. The key factors used to identify these reportable segments is how the chief operating decision maker (“CODM”) monitors performance, allocates capital, and makes strategic and operational decisions that aligns with the Company and Company's internal operations. The Origination segment consists of a combination of retail and third-party loan production options. The Servicing segment performs loan servicing for both newly originated loans the Company is holding for sale and loans the Company services for others.
Origination
In the Origination segment, the Company originates and sells residential real estate mortgage loans in the United States through its consumer direct third party originations, and correspondent channels that offer a variety of loan programs that support the financial needs of the borrowers. In each of the channels, the Company’s primary source of revenue is the difference between the cost of originating or purchasing the loan and the price which the loan is sold to investors as well as the fair value of originated MSRs and hedging gains and losses. Loan origination fees and interest income earned on loans held pending sale or securitization are also included in the revenues for this segment.
Servicing
In the Servicing segment, the Company generates revenue through contractual fees earned by performing daily administrative and management activities for mortgage loans. These activities include collecting loan payments, remitting payments to investors, sending monthly statements, managing escrow accounts, servicing delinquent loan work-outs, and managing and disposing of foreclosed properties. Servicing of the Company’s customers is primarily conducted in-house.
Other Information About the Company’s Segments
The Company's CODM evaluates performance, makes operating decisions, and allocates resources based on the Company's contribution margin. Contribution margin is the Company’s measure of profitability for its two reportable segments. Contribution margin is defined as revenue from Gain on loans, net, Loan fee income, Loan servicing fees, Change in fair value of MSRs, Interest income, and Other income (which includes Income from equity method investment) less directly attributable expenses. The accounting policies applied by the Company’s segments are the same as those described in Note 2 – Basis of Presentation and Significant Accounting Policies, and the decrease in MSRs due to valuation assumptions is consistent with the changes described in Note 4 - Mortgage Servicing Rights. Directly attributable expenses include salaries, commissions and associate benefits, general and administrative expenses, and other expenses, such as servicing costs and origination costs. Direct operating expenses incurred in connection with the activities of the segments are included in the respective segments.
The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting. In addition, the Company does not enter into transactions between its reportable segments.
The Company also reports an “All Other” category that includes unallocated corporate expenses, such as IT, finance, and human resources. These operations are neither significant individually or in aggregate and therefore do not constitute a reportable segment.
The following tables present the key operating data for our business segments for the three months ended March 31, 2021 and 2020 (in thousands). For the three months ended March 31, 2021, the Company changed how contribution margin is calculated. Contribution margin is calculated as Total U.S. GAAP Revenue less directly attributable expenses. The Company previously calculated the contribution margin by excluding the Change in MSRs due to valuation assumptions, net of hedge. The updated calculation of the contribution margin presented herein aligns with how management and the CODM view the contribution margin for the Servicing segment. The Company intends to use such presentation on a go-forward basis, and previous periods have been revised to conform with this new calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Origination
|
|
Servicing
|
|
Segments
Total
|
|
All Other
|
|
Total
|
|
Reconciliation
Item(1)
|
|
Total
Consolidated
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on loans, net
|
$
|
301,228
|
|
|
$
|
—
|
|
|
$
|
301,228
|
|
|
$
|
—
|
|
|
$
|
301,228
|
|
|
$
|
—
|
|
|
$
|
301,228
|
|
Loan fee income
|
44,115
|
|
|
—
|
|
|
44,115
|
|
|
—
|
|
|
44,115
|
|
|
—
|
|
|
44,115
|
|
Loan servicing fees
|
(8)
|
|
|
70,346
|
|
|
70,338
|
|
|
—
|
|
|
70,338
|
|
|
—
|
|
|
70,338
|
|
Change in FV of MSRs, net
|
—
|
|
|
12,848
|
|
|
12,848
|
|
|
—
|
|
|
12,848
|
|
|
—
|
|
|
12,848
|
|
Interest income (loss), net
|
1,288
|
|
|
252
|
|
|
1,540
|
|
|
(8,898)
|
|
|
(7,358)
|
|
|
—
|
|
|
(7,358)
|
|
Other income
|
—
|
|
|
128
|
|
|
128
|
|
|
4,836
|
|
|
4,964
|
|
|
(4,163)
|
|
|
801
|
|
Total U.S. GAAP Revenue
|
346,623
|
|
|
83,574
|
|
|
430,197
|
|
|
(4,062)
|
|
|
426,135
|
|
|
$
|
(4,163)
|
|
|
$
|
421,972
|
|
Contribution margin
|
$
|
188,808
|
|
|
$
|
64,852
|
|
|
$
|
253,660
|
|
|
$
|
(54,574)
|
|
|
$
|
199,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)The Company includes the income from its equity method investments in the All Other category. In order to reconcile to Total net revenue on the condensed consolidated statements of operations, it must be removed as is presented above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Origination
|
|
Servicing
|
|
Segments
Total
|
|
All Other
|
|
Total
|
|
Reconciliation
Item(1)
|
|
Total
Consolidated
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on loans, net
|
$
|
102,563
|
|
|
$
|
—
|
|
|
$
|
102,563
|
|
|
$
|
—
|
|
|
$
|
102,563
|
|
|
$
|
—
|
|
|
$
|
102,563
|
|
Loan fee income
|
12,031
|
|
|
—
|
|
|
12,031
|
|
|
—
|
|
|
12,031
|
|
|
—
|
|
|
12,031
|
|
Loan servicing fees
|
(562)
|
|
|
43,808
|
|
|
43,246
|
|
|
—
|
|
|
43,246
|
|
|
—
|
|
|
43,246
|
|
Change in FV of MSRs, net
|
—
|
|
|
(91,527)
|
|
|
(91,527)
|
|
|
—
|
|
|
(91,527)
|
|
|
—
|
|
|
(91,527)
|
|
Interest income (loss), net
|
526
|
|
|
5,264
|
|
|
5,790
|
|
|
(5,854)
|
|
|
(64)
|
|
|
—
|
|
|
(64)
|
|
Other income
|
—
|
|
|
58
|
|
|
58
|
|
|
3,638
|
|
|
3,696
|
|
|
(2,316)
|
|
|
1,380
|
|
Total U.S. GAAP Revenue
|
114,558
|
|
|
(42,397)
|
|
|
72,161
|
|
|
(2,216)
|
|
|
69,945
|
|
|
$
|
(2,316)
|
|
|
$
|
67,629
|
|
Contribution margin
|
$
|
62,728
|
|
|
$
|
(55,664)
|
|
|
$
|
7,064
|
|
|
$
|
(21,102)
|
|
|
$
|
(14,037)
|
|
|
|
|
—
|
|
(1)The Company includes the income from its equity method investments in the All Other segment. In order to reconcile to Total net revenue on the condensed consolidated statements of operations, it must be removed as is presented above.
The following table presents a reconciliation of contribution margin to consolidated U.S. GAAP Income (loss) before income tax (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Income (loss) before income tax
|
$
|
194,923
|
|
|
$
|
(16,353)
|
|
Income from equity method investment
|
4,163
|
|
|
2,316
|
|
Contribution margin
|
$
|
199,086
|
|
|
$
|
(14,037)
|
|
Note 16 – Related Parties
The Company entered into transactions and agreements to purchase various services and products from certain affiliates of our sponsor, Stone Point Capital LLC. The services range from valuation services of mortgage servicing rights, insurance brokerage services, and loan review services for certain loan originations. The Company incurred expenses of $6.3 million and $0.2 million, in the three months ended March 31, 2021 and 2020, respectively, for products, services, and other transactions, which are included in Occupancy and equipment, General and administrative and Other expenses in the unaudited condensed consolidated statements of operations.
Note 17 – Subsequent Events
The Company has evaluated all subsequent events through the date these condensed consolidated financial statements were issued.
Amendment of MSR Facility
On May 4, 2021, HPF entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with the Company, as guarantor, Goldman Sachs Bank USA, as the administrative agent, and the financial institutions that may from time to time become parties thereto as lenders. The Credit Agreement amends and restates that certain Amended and Restated Credit Agreement, dated as of July 11, 2019 (as amended, supplemented or otherwise modified, the “Prior Credit Agreement”), which related to the MSR Facility. The Credit Agreement provides for amendments to certain terms set forth in the Prior Credit Agreement, including (i) increasing the maximum facility amount, collateralized by FNMA, FHLMC, and GNMA mortgage servicing rights, from $500.0 million to $1.0 billion, of which $650.0 million is committed and $350.0 million is uncommitted, and (ii) extending the three-year revolving period from January 31, 2022 to May 4, 2024, followed by a one-year period during which the balance drawn must be repaid and no further amounts may be drawn down, which ends on May 4, 2025. The changes to the GNMA extended three-year revolving period will take effect upon acknowledgement and approval by GNMA.
The Credit Agreement contains certain customary events of default and certain financial maintenance covenants under the Credit Agreement, which require each of HPF and the Company to not exceed a specified ratio of debt to tangible net worth at the end of each calendar month, to maintain certain minimum liquidity and tangible net worth requirements, and to comply with a limitation on additional indebtedness.