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Filed pursuant to 424(b)(4)
Registration No. 333-251963
Prospectus
7,250,000 Shares

Home Point Capital Inc.
Common Stock
This is our initial public offering. The selling stockholders identified in this prospectus are offering 7,250,000 shares of our common stock. We will not receive any proceeds from the sale of the shares being sold by the selling stockholders. No public market currently exists for our common stock.
The initial public offering price is $13.00 per share of common stock. Our common stock has been approved for listing on the NASDAQ Global Select Market, or NASDAQ, under the symbol “HMPT.”
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and under applicable Securities and Exchange Commission, or the SEC, rules and have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.
Following the completion of this offering, investment entities directly or indirectly managed by Stone Point Capital, which we refer to as the Trident Stockholders, will beneficially own approximately 92.0% of the voting power of our common stock (or 91.2% if the underwriters exercise their option to purchase additional shares in full). As long as the Trident Stockholders continue to own a majority of the voting power of our outstanding common stock, they will be able to control any action requiring the general approval of our stockholders, including the election and removal of directors, any amendments to our amended and restated certificate of incorporation and the approval of any merger or sale of all or substantially all of our assets. Accordingly, we will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See “Management—Controlled Company” and “Principal and Selling Stockholders.”
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 32 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
Per Share
Total
Price to the public
$13.00
$94,250,000
Underwriting discounts and commissions(1)
$0.845
$6,126,250
Proceeds to the selling stockholders (before expenses)
$12.155
$88,123,750
(1)
See “Underwriting (Conflicts of Interest)” for additional information regarding underwriter compensation.
The selling stockholders have granted the underwriters an option to purchase up to an additional 1,087,500 shares of common stock from the selling stockholders at the initial price to the public less the underwriting discounts and commissions, to cover over-allotments, if any, within 30 days from the date of this prospectus. We will not receive any proceeds from the sale of our common stock by the selling stockholders pursuant to any exercise of the underwriters’ option to purchase additional shares.
The underwriters expect to deliver the shares of common stock on or about February 2, 2021.
Joint Book-Running Managers
Goldman Sachs & Co. LLC
Wells Fargo Securities
Morgan Stanley
UBS Investment Bank
Credit Suisse
J.P. Morgan
BofA Securities
Co-Managers
JMP Securities
Piper Sandler
R. Seelaus & Co., LLC
SPC Capital Markets LLC
Wedbush Securities
Zelman Partners LLC
The date of this prospectus is January 28, 2021.







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None of us, the selling stockholders or the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. None of us, the selling stockholders or the underwriters take responsibility for, or can provide assurance as to the reliability of, any other information that others may give to you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of the date hereof, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.
For investors outside the United States: the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. None of us, the selling stockholders or the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
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GLOSSARY
As used in this prospectus, unless the context otherwise requires:
“An Agency” or “Agencies” refers to Ginnie Mae, the FHA, the VA, the USDA and/or GSEs.
“CFPB” refers to the Consumer Financial Protection Bureau.
“Fannie Mae” refers to the Federal National Mortgage Association.
“FHA” refers to the Federal Housing Administration.
“Freddie Mac” refers to the Federal Home Loan Mortgage Corporation.
“Ginnie Mae” refers to the Government National Mortgage Association.
“GSE” refers to Government-Sponsored Enterprises, such as Fannie Mae and Freddie Mac.
“Holdings” refers to Home Point Capital LP, a Delaware limited partnership, the direct parent of Home Point Capital Inc.
“HUD” refers to the U.S. Department of Housing and Urban Development.
“MBS” refers to mortgage-backed securities—a type of asset-backed security that is secured by a group of mortgage loans.
“MSRs” refers to mortgage servicing rights—the right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
“Sponsor” or “Stone Point Capital” refers to Stone Point Capital LLC.
“Trident Stockholders” refers, collectively, to one or more investment entities directly or indirectly managed by Stone Point Capital, including Trident VI, L.P., Trident VI Parallel Fund, L.P., Trident VI DE Parallel Fund, L.P. and Trident VI Professionals Fund, L.P.
“USDA” means the U.S. Department of Agriculture.
“VA” means the U.S. Department of Veterans Affairs.
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INDUSTRY AND MARKET DATA
The data included elsewhere in this prospectus regarding the markets and industry in which we operate, including the size of certain markets and our position and the position of our competitors within these markets, are based on reports of government agencies, published industry sources and estimates based on our management’s knowledge and experience in the markets in which we operate. Data regarding the industries in which we compete and our market position and market share within these industries are inherently imprecise and are subject to significant business, economic and competitive uncertainties beyond our control, but we believe that they generally indicate size, position and market share within these industries. Our own estimates have been based on information obtained from our trade and business organizations and other contacts in the markets in which we operate.
We believe these estimates to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. Third-party industry and general publications, research, surveys and studies generally state that the information contained therein has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, none of us, the selling stockholders or the underwriters have independently verified any of the data from third-party sources. As a result, you should be aware that market, ranking and other similar industry data included elsewhere in this prospectus, and estimates and beliefs based on that data, may not be reliable and are subject to change based on various factors, including those discussed under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Except as otherwise specified, such data is derived from Inside Mortgage Finance as of or for the period ended September 30, 2020. We believe that presentation of business metrics that are measured over the same length of time are meaningful in properly assessing the growth rates in such metrics. Because the full year 2020 results are not yet available, we have included data covering the latest twelve months as a point of comparison against the full years 2018 and 2019. Business metrics and data for the twelve months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year 2020.
TRADEMARKS, TRADE NAMES AND COPYRIGHTS
We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business. Our name, logo and registered domain names are our proprietary service marks or trademarks. Each trademark, trade name or service mark by any other company appearing in this prospectus, to our knowledge, belongs to its holder. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this prospectus are listed without the ®, TM and ©, symbols, respectively, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks, trade names and copyrights. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
PRESENTATION OF FINANCIAL INFORMATION
Except as otherwise disclosed in this prospectus, the consolidated historical financial statements and summary and selected historical consolidated financial data and other financial information included elsewhere in this prospectus are those of Home Point Capital Inc., together with its consolidated subsidiaries, and have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America, or GAAP, except for the presentation of Adjusted net income (loss), Adjusted EBITDA and Adjusted revenue, each a non-GAAP financial measure. For definitions of, and more information about, these non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” This historical financial information does not give effect to this offering.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the matters discussed in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this prospectus before making an investment decision. In this prospectus, we make certain forward-looking statements, including expectations relating to our future performance. These expectations reflect our management’s view of our prospects and are subject to the risks described under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our expectations of our future performance may change after the date of this prospectus and there is no guarantee that such expectations will prove to be accurate. In this prospectus, unless the context otherwise indicates, any reference to “Home Point,” “our Company,” “the Company,” “us,” “we” and “our” refers, to Home Point Capital Inc., the issuer of the shares of common stock being offered hereby, together with its direct and indirect subsidiaries.
Company Overview
We are a leading residential mortgage originator and servicer driven by a mission to create financially healthy, happy homeowners. We do this by delivering scale, efficiency and savings to our partners and customers. Our business model is focused on leveraging a nationwide network of partner relationships to drive sustainable origination growth. We support our origination operations through a robust operational infrastructure and a highly responsive customer experience. We then manage the customer experience through our in-house servicing operations and our proprietary customer servicing portal, which we refer to as our Home Ownership Platform. We believe that the complementary relationship between our origination and servicing businesses allows us to provide a best-in-class experience to our customers throughout their homeownership lifecycle.
Our primary focus is our Wholesale channel, which is a business-to-business-to-customer distribution model in which we utilize our relationships with independent mortgage brokerages, which we refer to as our Broker Partners, to reach our end-borrower customers. In this channel, while our Broker Partners establish and maintain the relationship with the end-borrower, we as the lender underwrite the loan in-house and act as the original lender. This differentiates our Wholesale channel from our other two channels of mortgage origination: in our Direct channel, we as the lender engage with the end-borrower customers directly to originate mortgages, and in our Correspondent channel, we as the lender engage with original lenders, which we refer to as our Correspondent Partners, to purchase loans already issued to end-borrower customers.
According to Inside Mortgage Finance, we are the third largest wholesale lender by origination volume in 2020 through September 30. Through our Wholesale channel, we propel the success of our nearly 5,000 Broker Partners through a combination of full service, localized sales coverage and an efficient loan fulfillment process supported by our fully integrated technology platform. We differentiate ourselves from our peers focused on the wholesale channel by following a partnership approach towards our Broker Partners, where we seek to mitigate any conflict of interest by allowing the Broker Partners to maintain their customer relationships while we support them with our best-in-class technology platform.
While we initiate our customer relationships at the time the mortgage is originated, we maintain ongoing connectivity with our more than 300,000 customers through our servicing platform, with the ultimate objective of securing them as a Customer for Life. Our retention strategy and partnership model has differentiated us from our competitors and is a key driver of our continued growth in the wholesale channel.
Our growth is bolstered by a rising tide from the overall wholesale channel, which has garnered an increased share of the overall U.S. residential mortgage market every year since 2016. We benefit from these trends, as well as from our distinct wholesale strategy, which together enable highly scalable production volumes, a strong mix of purchase transactions and favorable unit economics, driven by lower fixed costs.
Our Wholesale strategy further propels our growth, with total loan originations of $46.3 billion through our Broker Partner network in the twelve months ended September 30, 2020. This represents an annualized growth rate of 133% since 2018. Our total loan originations for the nine months ended September 30, 2020 were $38.0 billion.
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Our at-scale, in-house servicing approach is a key differentiator to our Wholesale strategy. We also operate in the Correspondent channel, to source customers efficiently, and in the Direct channel, to provide lending to customers which we service.
By executing on this strategy, we have developed from a de novo platform into an industry leader with a market-leading growth profile. As of September 30, 2020, we are the third largest wholesale lender with the fastest growth of the top five wholesale originators, according to Inside Mortgage Finance. Overall, Home Point is the 10th largest non-bank originator in the United States, according to Inside Mortgage Finance, having originated $46.3 billion in the twelve months ended September 30, 2020.
Total Funded Volume & Market Share


(1)
Total origination volume excludes origination volume from the Distributed Retail channel, which was included in discontinued operations in our results of operations for the year ended December 31, 2018.
(2)
Origination volume figures used to calculate market share include $1.0 billion of Distributed Retail originations in our results of operations for the year ended December 31, 2018.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
We believe that the most efficient loan origination process results from scaled originators, such as Home Point, providing support to Broker Partners through a trusted and predictable origination infrastructure. Our scale allows us to provide our Broker Partners an efficient and personalized financing experience for their customers. With the combination of localized, in-market coverage and a customer service centric approach to managing the customer relationship in our servicing platform, we have developed into an industry leading mortgage originator.
We have grown our Broker Partner network from 1,623 as of December 31, 2018 to nearly 5,000 as of September 30, 2020, which represents an annualized growth rate of 88%. As of September 30, 2020, we held a 6.4% market share in the wholesale channel according to Inside Mortgage Finance, which represents an approximately 4x increase from our market share of 1.6% in 2017. We expect to continue to grow our presence in the wholesale channel by expanding our Broker Partner network, as well as increasing the wallet share we have with our partners.
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Home Point Wholesale Market Share as % of Total Wholesale Market


Broker Partners represent wholesale and non-delegated correspondent accounts that Home Point is authorized to conduct business with at a given point in time (whether or not we have recently originated mortgages through such broker).
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
The rate of growth in our Wholesale channel also demonstrates its scalability. We believe that our extensive network of in-market Broker Partners, a durable yet flexible operating infrastructure and a highly leverageable cost structure allow us to quickly flex origination capacity through different origination environments, while maximizing profitability.
Our Correspondent channel provides significant scale to our originations and acts as a low-cost source of acquiring customer relationships. Correspondent originations are accessed through a network of nearly 600 Correspondent Partners. These small- and medium-scale originators can underwrite, process and fund loans, but typically do not desire to retain the servicing due to the capital requirements and scale that is needed to profitably service loans. Our scale in servicing, and expertise in managing, mortgage servicing rights, or MSRs, allows us to cost-effectively aggregate servicing from our Correspondent Partners. As a result, this channel provides an opportunity for flexible, low-cost customer acquisition that can be scaled quickly as our internal capacity and/or market conditions allow. As of September 30, 2020, we are the seventh largest non-bank correspondent originator, according to Inside Mortgage Finance.
Correspondent Channel Originations and Number of Partners


*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
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We view our servicing platform as a key component to our strategy of providing a highly responsive customer experience. Retaining the servicing on our originations and managing a servicing platform in-house gives us the opportunity to establish a deeper relationship with our customers. This relationship is enhanced through our proprietary customer servicing portal, the Home Ownership Platform, which is our primary point of contact with our customers and is designed to house all interactions post-closing. These interactions can include servicing monthly loan payments, applying for a refinance or shopping for third-party homeowners’ insurance. This curated experience improves customer satisfaction and supports lasting customer relationships, which we believe allows us to better understand our customers’ future financing needs and extend the life of the relationship.
Number of Home Ownership Platform Unique Users in 2020

Our Home Ownership Platform differentiates us from our competitors in that it personalizes the experience for borrowers through the use of customized dashboards, such as allowing us to deliver critical information about borrowers’ accounts, including payment deadlines, forbearance status and escrow distributions and customized offerings, which allow us to connect borrowers to other third-party financial products such as insurance policies and home equity loans. We have continued to focus on using technology, data and analytics to enhance the home buying and homeownership experience for both our partners and our customers.
We have built a flexible technology infrastructure that is highly componentized, which we believe allows us to leverage nimble internal development teams and market leading third-party systems to provide a best-in-class experience for our partners and customers. We believe that our ability to rapidly reconfigure individual solutions using technology in areas such as underwriting, pricing and disclosure preparation reduces the complexity and improves the efficiency of the origination process.
These efforts have resulted in rapid growth in our originations and profitability. As we continue to grow, we believe the scalability of our partner-driven business model will produce significant operating leverage and increased profitability. We have grown our total net revenue from $164.3 million to $922.3 million and our total net income (loss) from $(24.2) million to $422.6 million, in each case, from 2018 to the nine months ended September 30, 2020. We have also grown our non-GAAP core operating metrics for the same periods, with our Adjusted revenue growing from $154.1 million to $1,034.7 million and our Adjusted net income (loss) growing from $(32.0) million to $494.6 million. For a reconciliation of these non-GAAP financial measures to their closest GAAP financial measures, please see note (1) in “—Summary Historical Consolidated Financial and Other Data.” Also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for more information.
Our Business
Our business model is focused on growing originations by leveraging a network of partner relationships that we support through reliable loan origination infrastructure and a highly responsive customer experience. Our operations are organized into two separate reportable segments: Origination and Servicing.
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Origination
We originate mortgages in three distinct channels – our Wholesale channel, our Correspondent channel and our Direct channel. We choose to operate in these channels because we believe that together they:
provide us efficient access to both purchase and refinance transactions throughout market cycles;
benefit from the premise that in-market advisors will continue to be a cornerstone of the mortgage origination process;
are highly scalable and flexible; and
provide an optimized experience for our customers.
Funded Volume by Channel & Number of Third-Party Partners


(1)
Total origination volume excludes origination volume from the Distributed Retail channel, which was included in discontinued operations in our results of operations for the year ended December 31, 2018.
(2)
Third Party Partners includes both Broker Partners and Correspondent Partners.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
In each of these channels, our primary source of revenue consists of (i) gains on loans, which is the difference between the cost of originating or purchasing the mortgage loans and the price at which we sell such loans to investors, primarily the GSEs, and (ii) gains on fair value of MSRs.
Wholesale Channel
We originate residential mortgages in our Wholesale channel through a nationwide network of nearly 5,000 mortgage brokerages. We are strategically focused on this channel given that the underlying cost structure is more efficient than that of Distributed retail, where the costs and overhead associated with originating loans are the responsibility of the lender. As a result, we are able to operate with a lower fixed cost than many of our competitors. This highly leverageable cost structure allows for improved financial flexibility in varying interest rate environments.
Our Broker Partners have local and personal relationships with their customers and therefore can provide tailored and thoughtful advice. However, they do not have the underwriting, funding, distributing or servicing capabilities for these loans. We provide these resources, which allow them to operate with scale and compete against larger market participants. This can be seen through the rapid growth of our originations in this channel, which increased from $5 billion in 2018 to $28 billion in the twelve months ended September 30, 2020, representing an annualized growth rate of 173%. Our originations in this channel for the nine months ended September 30, 2020 were $23.8 billion. This enables our Broker Partners to be nimble and run their business in an entrepreneurial fashion. Our Broker Partners are focused on providing the best possible experience, service, and price to their customers, while we concentrate on maximizing the efficiency of the origination platform leveraged by our partners. While our Broker Partners are responsible for originating the loan, we, as the lender, are responsible for making the loan.
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Wholesale Channel Originations


*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
We use an in-market, highly experienced sales team to acquire and build Broker Partner relationships throughout the country. Because our active Broker Partners increase their origination productivity as they become trained on our platform, we employ two additional strategies to drive growth. First, we aim to increase the rate at which we approve and activate new Broker Partners on our platform and second, we aim to increase the percentage of originations we capture with our existing Broker Partners (our “wallet share”). Of the new Broker Partners we added in 2018, 32% were active during 2018 whereas 54% were active during the nine months ended September 30, 2020, and of the Broker Partners we added in 2019, 41% were active during 2019 whereas 55% were active during the nine months ended September 30, 2020. Of the Broker Partners we added in 2020, 38% were active during the nine months ended September 30, 2020. The wallet share captured by the new Broker Partners we added in 2018 increased from 11.5% in 2018 to 23.8% for the nine months ended September 30, 2020, and the wallet share captured by the new Broker Partners we added in 2019 increased from 13.6% in 2019 to 26.4% for the nine months ended September 30, 2020. The wallet share captured by the new Broker Partners we added in 2020 was 25.6% for the nine months ended September 30, 2020.
   Activation Rate by Broker Partner Cohort
Wallet Share Growth by Broker Partner
Cohort Following Initial Onboarding


We have been able to achieve a competitive advantage in our sales cost structure through scale as our sales associates are highly productive, averaging $36.3 million in monthly loan volume generation in 2020 to date for each associate with a tenure greater than six months. In addition, our distributed and flexible staffing model has allowed us to drive down per unit operating costs in our Wholesale channel from $2,085 per loan in 2018 to $1,700 per loan in the twelve months ended September 30, 2020, which represents a 18.5% improvement on an annualized basis and $629 per loan lower than the average of our competitors in the first half of 2020. Our cost per loan for the nine months ended September 30, 2020 was $1,680.
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Wholesale Channel Cost per Loan


Source: Mortgage Bankers Association and STRATMOR Peer Group Roundtable Program.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
The efficiency of our sales team, combined with our flexible cost structure, has positioned us to further consolidate volume from the smaller and less efficient wholesale lenders that still control over 50% of the wholesale market. We plan to do this by increasing the number of independent brokerages that serve as our Broker Partners. Our current market coverage, defined as the number of our Broker Partners as a percentage of the total number of brokerages in the market, has increased from 10% to 20% from December 31, 2018 to September 30, 2020. Further penetration of the highly fragmented brokerage market would allow us to maintain our industry leading growth profile.
Growth in Number of Accounts & Market Coverage


(1)
Third Party Partners includes both Broker Partners and Correspondent Partners.
(2)
Active broker market coverage is calculated as the total number of active brokers at Home Point divided by the total number of brokers in the market.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
The strategy we employ in our Wholesale channel is closely tied to our servicing strategy. Through our in-house servicing platform, we control the customer experience. This gives us the ability to include our Broker Partners in
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the management of the customer relationship and ultimately the retention of customers in our collective ecosystem. Our competitors either (i) sell servicing, which can result in inconsistent or adverse customer experiences or (ii) retain servicing and attempt to refinance these customers directly, creating friction in the partner relationship. We believe that our retention strategy and partnership model has differentiated us from others and is a key driver of our continued growth in the wholesale channel.
Correspondent Channel
In our Correspondent channel, we purchase closed and funded mortgages from a trusted network of our Correspondent Partners. Our Correspondent Partners include primarily small- to medium-sized independent mortgage banks, builder affiliates and financial institutions, with financial institutions representing 42% of these sellers. Our partners underwrite, process and fund loans, but typically lack the scale to economically retain servicing. Our financial institution partners prefer to sell to non-bank originators to avoid conflicting customer solicitation. This channel provides a flexible alternative for us to achieve our customer acquisition goals at a low cost. When favorable market opportunities present themselves, the channel can quickly be scaled up. We acquired $12.7 billion in production through 594 Correspondent Partner relationships during the nine months ended September 30, 2020.
Growth in Correspondent Production and Partners


*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
The sales associates in our Correspondent channel are highly seasoned with an average of 28 years of mortgage experience and have strong, long-tenured relationships with their customer base. Both our sales and our internal operations are highly efficient. During the nine months ended September 30, 2020, our operations platform processed an average of 357 loans per full time associate per quarter, and our sales associates with a tenure greater than six months averaged $101 million in loan volume per associate per month. We have decreased our operating costs in our Correspondent channel from $573 per loan in 2018 to $279 per loan in the twelve months ended September 30, 2020, which represents a 51.3% improvement on an annualized basis and $383 per loan lower than the average of our competitors in the first half of 2020. Our cost per loan for the nine months ended September 30, 2020 was $278.
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Correspondent Channel Cost per Loan


Source: Mortgage Bankers Association and STRATMOR Peer Group Roundtable Program.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
Direct Channel
In our Direct channel, we originate residential mortgages primarily for existing servicing customers who are seeking new financing options. Our Direct strategy is focused on maximizing the customer retention opportunity in our servicing portfolio, but is differentiated from our competitors in that it is designed to be inclusive of both of our customers’ preferences and our Broker Partners’ in-market presence. For example, if a Broker Partner initiated customer proactively contacts us about a refinancing, we will refer the customer to the applicable Broker Partner that originally established the relationship. This strategy removes the conflict of interest that some competitors have between their direct and wholesale channels. If the customer prefers to use our Direct functionality, or if there is no Broker Partner perhaps because the customer was sourced through a Correspondent Partner, we can still fulfill the customer’s preference and retain the customer relationship. We call this our omni-channel retention strategy.
Due to our omni-channel retention strategy, we maintain stronger Broker Partner relationships and create a key point of differentiation when winning new Broker Partners. We do not compete with our Broker Partners, but instead help them maintain their end customers when having an in-market loan originator is important. This strategy enhances our ability to grow originations and retain customers.
Servicing our customers in-house provides an opportunity for more frequent customer contact. These interactions are enhanced through our proprietary Home Ownership Platform. This makes the process for a customer’s next transaction more efficient because we have an ongoing relationship with the customer and a rich data set that can be leveraged to better the loan origination process. By striving to make the process streamlined, reliable, and focused on the customer’s preference as to who they want as their loan originator, we believe we are able to create Customers for Life.
Over the course of the past year, we have significantly increased retention rates by leveraging our data and analytics to better understand our customers’ future financing needs. This allows us to proactively monitor our customer relationships over time. Our retention rate has increased from 37% for the three months ended March 31, 2020 to 51% for the three months ended September 30, 2020.
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Retention Rate


Retention Rate is defined by the total unpaid principal balance (UPB) of refinancing originations in the Consumer Direct channel divided by the total UPB of loan payoffs in Consumer Direct where Home Point actively pitched for refinancing opportunity.
Our Direct channel has been rapidly growing since we founded it in 2019. For the nine months ended September 30, 2020, we have originated $1.6 billion in loans, representing a greater than 400% annual growth rate from the same period in 2019. We have also decreased our per unit operating costs in our Direct channel from $7,336 per loan in 2018 to $4,786 per loan in the twelve months ended September 30, 2020, which represents a 34.8% improvement on an annualized basis and $89 per loan lower than the average of our competitors in the first half of 2020. Our cost per loan for the nine months ended September 30, 2020 was $4,750.
Direct Channel Originations

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Direct Channel Cost per Loan


Source: Mortgage Bankers Association and STRATMOR Peer Group Roundtable Program.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
We maintain liquidity that is designed to allow us to fund our loan origination business and manage our day-to-day operations. Our sources of liquidity include loan funding facilities, secured and unsecured financing facilities as well as cash on hand. As our business continues to grow, we regularly reassess our funding strategy. To support our increased origination volumes in 2020, we negotiated increases in our existing warehouse line facilities and added new warehouse line facilities from our counterparties. As of September 30, 2020, we have increased the capacity of our warehouse lines by $1.4 billion since the beginning of 2020. From September 30, 2020 through January 8, 2021, we have increased the capacity of our warehouse lines by an additional $1.8 billion.
The agreements governing our warehouse line facilities contain certain restrictive and financial covenants, including maintenance of certain minimum amounts of liquidity and tangible net worth, compliance with certain leverage ratios and compliance with certain profitability requirements. If we are unable to maintain compliance with such requirements, the use of our warehouse line facilities may be limited, which may adversely impact our ability to grow. We maintain active dialogue with our lending partners and frequently monitor the capital markets as we consider additional ways in which we can supplement our liquidity should the need arise. We believe we have the ability to access the appropriate amount of capital to support our growth from internally generated cash flows and current debt agreements in place, along with alternative sources of secured and unsecured debt financing that we may consider in the future.
Servicing
Servicing is a strategic cornerstone of our business and central to our Customer for Life strategy. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio in compliance with state and federal regulations and our investors’ guidelines. Strategically retaining servicing on the loans we originate and managing an in-house servicing platform allows us to establish deeper relationships with our customers. The relationship is enhanced through our proprietary Home Ownership Platform. The Home Ownership Platform offers our customers a curated experience with frequent touchpoints, which we believe supports a superior homeownership
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journey. This connectivity and ongoing dialogue helps us proactively find ways to help our customers, either through a refinancing of their mortgage or savings on another home-related product. Through frequency of interaction, coupled with providing effective solutions beyond a mortgage, we strive to develop a trusted relationship and ultimately increase the lifetime value of our customers.
Servicing UPB and Number of Customers


MSR servicing portfolio includes all loans that have been sold with the servicing rights retained and excludes loans held on the Company’s balance sheet that have not yet been sold, as the Company does not include earnings servicing fees on these balance sheet loans.
*
LTM 3Q’20 represents the twelve months ended September 30, 2020.
While servicing is a strategic priority for us, we also view it as financially attractive given the significant cash flow and recurring fee income it provides.
Because servicing is such an integral component of our business, we seek to preserve the value of our portfolio. This is done in two ways: (i) through the natural hedge that our originations business provides and (ii) by employing an active MSR hedging strategy to further reduce volatility and mitigate the risks associated with changes in interest rates.
Asset Management
Over the course of the past year, we have initiated an asset management strategy to help us scale our servicing operation and support continued origination growth in a more capital-light manner. To execute on this strategy, we acquired a licensed entity, which will house servicing assets over time. We are preparing the launch of this investment vehicle and expect to begin raising third-party capital to grow the strategy in 2021. Our history of managing servicing assets for our balance sheet has given us the experience necessary to manage third-party capital.
Technology
Mortgage banking technology is evolving rapidly. Historically, it has been an advantage to develop technology in-house, but in today’s marketplace, there are various alternative technology solutions that provide a competitive advantage through increased flexibility and lower costs. Building and maintaining a monolithic, proprietary loan origination system is not only costly, but highly complex. This makes it increasingly challenging to evolve with emerging technologies. We have developed a multi-prong strategy whereby we (i) partner with best-in-class third-party software providers to meet our core technology needs and (ii) deploy internal resources to build proprietary software in areas where we believe we can create a strategic advantage. We integrate our third-party providers with our proprietarily built software to provide a unified, seamless experience for our partners and customers. We believe that our componentized approach promotes nimbleness and allows us to provide technology solutions faster than our competition, while retaining control in areas that we deem strategically important.
Our Home Ownership Platform is an example of our approach to technology. We have built a proprietary user interface that leverages third-party solutions to create a differentiated customer experience. The Home Ownership Platform presents our customers with a curated experience, which more broadly supports their home ownership journey. This is done together with third-party providers that offer a variety of products and services to our customers,
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including insurance, loans and other ancillary home service products. In addition to revenue generation, the successful execution of these offerings is intended to build a stronger relationship between us and our customers with the goal of retaining the customer in our ecosystem – Customers for Life.
We believe the combination of customer-centric technology and process execution is key to creating the best platform. As a result, we have placed a heavy emphasis on process design and have assembled a team of process engineers that possess a unique combination of business acumen and an understanding of how to deploy mortgage technology. This process engineering team is integrated within the operations of our business to ensure our technology solutions are strategically aligned in developing and delivering efficiencies to the business. These efficiencies promote our ability to drive scale and better serve the needs of both our customers and our partners. The dedicated focus of this team enables us to constantly identify and streamline operational areas that can be best served through technological improvement.
For example, we recently redesigned our Broker Partner loan submission process. Prior to the redesign, this function involved 115 associates producing, on average, 285 units per day, or approximately three units per associate. Through process re-engineering and improved technology, we successfully improved our operational leverage so that our associates can now produce, on average, approximately seven units per associate, which represents approximately 800 units per day in the aggregate. This has benefited our Broker Partners by reducing the overall processing time from an average of four days to less than 24 hours. The self-serve automation provides an intuitive experience for our Broker Partners with built in business logic to ensure disclosures are accurate and compliant, which allows rapid deployment to their customers.
Focus on Technology and Process Design

Through these investments in our technology and process, we have been able to significantly reduce the time and manual input for origination and servicing processes, resulting in a significant reduction in operating costs in each of our channels as discussed above.
Market Opportunity
Sizeable and Growing Total Addressable Market
The mortgage market is one of the largest and consistently growing financial markets in the world. As of September 30, 2020, there was approximately $10.2 trillion of residential mortgage debt outstanding in the United States. The mortgage origination market has averaged $2.0 trillion in annual originations since 2000, evidencing the consistency in market loan volume production. According to Fannie Mae’s Housing Forecast, total purchase and refinance originations are expected to reach $3.5 trillion in 2021. Periods of outsized refinancing opportunities, such as 2020, provide significant upside in the mortgage market, while purchase mortgages, which represent $1.7 trillion of the market of the 2021 forecast, provide stability in market volumes.
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Fannie Mae Mortgage Market Historical & Estimated Volume


Macroeconomic Tailwinds Supporting Market Growth
The current low interest rate environment provides a tailwind to origination volumes through decreased borrowing costs. According to the Federal Reserve’s September FOMC Statement, the Federal Reserve is expected to maintain rates at their current levels through 2023. Lower borrowing costs aid in increasing home ownership affordability, as well as provide homeowners with an opportunity to refinance their existing mortgage and lock-in lower borrowing costs. Periods of higher refinance volumes provide the opportunity for mortgage originators with the right scalability to benefit from elevated origination volumes without needing to invest additional capital to expand operational infrastructure. This market dynamic remains relevant today, where an estimated 90% of mortgages in the market, and 79% of mortgages that we service as of October 2020, are eligible to be refinanced at a lower rate than the original mortgage coupon. Additional macroeconomic factors, independent of the rate environment, are also expected to aid mortgage origination volume growth.
Distribution of Mortgages in the Money

(1) Freddie Mac Primary Mortgage Market Survey, December 10, 2020. 50bps buffer represents an assumption on the cost of refinancing.
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Demographic Trends Driving Purchase Volume Growth
Purchase volume growth is expected to continue given the prevailing demographic trend in which more young Americans are buying homes. The home ownership rate of individuals under age 35 has grown from 35% to 39% since 2015, according to the U.S. Census Bureau. According to the 2020 NAR Home Buyer and Generational Trends survey, in 2020, millennials made up 38% of home buyers, the highest of any age bracket. In addition, 88% of younger millennials (aged 22–29) and 52% of older millennials (aged 30-39) were first-time home buyers. A shifting trend toward telepresence, telecommunication, suburban living and remote working is expected to continue to support growth in the purchase market via increased home ownership.
First-Time Home Buyers in Age Group

Rise of the Non-Banks in Mortgage Banking
The mortgage industry has experienced a significant shift following the 2008 financial crisis, which has contributed to a favorable competitive landscape for non-bank originators. In 2008, non-banks represented 24% of the mortgage origination market. As of September 30, 2020, non-banks represent 72% of the mortgage origination market, according to Inside Mortgage Finance. Post-crisis regulations resulted in conditions that have not favored significant bank participation in the market. In addition, business models of non-bank mortgage originators have been quicker to adapt to consumer preferences for a more efficient, engaging consumer experience.
There has been a similar trend taking place in the mortgage servicing market. Following the 2008 financial crisis, incumbent banks reduced their footprint in mortgage servicing. In 2008, non-banks represented 12% of the mortgage servicing market. As of September 30, 2020, non-banks represent 57% of the mortgage servicing market, according to Inside Mortgage Finance. Banks have scaled back participation due to higher risk-based capital required to retain MSRs.
Non-bank servicers with a strong financial backing are expected to continue growing market share. Smaller non-banks have struggled given the regulatory complexity, scale and liquidity requirements required to run a profitable servicing operation.
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Shift from Bank to Non-Bank Originators


Shift from Bank to Non-Bank Servicers

Despite its size, the mortgage industry is highly fragmented. In 2019, the top 10 originators accounted for 40.9% of total originations compared to 73.8% in 2009.
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Mortgage Market Fragmentation


Growing Wholesale Channel
The Wholesale channel continues to benefit from outsized growth as both consumers and brokers have seen the benefits which the channel offers:
economies of scale: allows brokers to benefit from the scale of a larger organization while being able to run their business at a size that can be most responsive to their customers;
optimal choice: rather than needing to work with one originator, brokers have the ability to partner with multiple lenders to determine the best financing alternative for their customers; and
scalability of cost structure: reduce cost per loan and limited overhead.
These benefits have led to material growth in the channel over time. Wholesale has grown from 15% of originations in 2016 to 20% for the twelve months ended September 30, 2020. At the same time, the wholesale channel is highly fragmented and multiple lenders with sub-scale operations in the channel account for a meaningful market share. According to Inside Mortgage Finance, excluding the top three wholesale lenders, approximately 42% of overall wholesale channel origination volume in the first nine months of 2020 was split among more than 20 lenders, with none accounting for more than 4.4% of the market share individually.
Wholesale Share Growth and Wholesale Channel Fragmentation

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Source: Inside Mortgage Finance.
These wholesale market trends are in line with the broader trend of independent brokers increasing their presence in various subsectors of financial services. Increased regulation has driven producers away from regulated institutions and into independent relationships. By moving heavily regulated elements of the origination process into their operations, wholesale originators shoulder this regulation and free up brokers to focus on the customer experience. This provides a barrier to entry for current wholesale market participants as significant expertise in regulatory matters is a key to success in the channel.
We believe that our branding, which helps build greater customer recognition, together with our best-in-class technology platform and operations capabilities, which free up our Broker Partners to pursue new customers, position us strongly to capture market share.
Business Strengths
We Care Operating Philosophy
Home Point’s operating philosophy is rooted in a very simple but defining statement – “We Care.” This philosophy guides every interaction with our partners, our customers and each other. For example, during 2020 we have established 11 different We Care programs to support our associates and their families. This includes programs which enabled and supported the transition of over 91% of our associates to remote work.
Our culture also enables the addition of top talent and is the primary driver behind our ability to quickly add capacity. As an example, over 44% of our new hires since March 2020 came to us through our Family First referral program.
As we grow, “We Care” is defined and extended through our Home Point Principles and Home Point Stakes. The Home Point Principles define for our associates who we are as an organization. The Home Point Stakes provide more specific guidance on how our associates operationalize our Principles and demonstrate “We Care” every day.
Positioned for Leadership in the Wholesale Channel
Home Point is one of the fastest growing companies in the mortgage industry. This is a result of both the growing wholesale channel and our growing share of the channel. In the past five years, according to Inside Mortgage Finance, the wholesale channel has grown its market share from 15% of overall originations to 20%, and we expect this trend to continue. The benefits to both the customers and to the brokers are significant, and we believe this will continue to drive growth in the channel.
We are the third largest wholesale lender according to Inside Mortgage Finance as of September 30, 2020. Our Broker Partner relationships have grown from 1,623 in 2018 to nearly 5,000 as of September 30, 2020. We expect this growth trend to continue going forward, as our Broker Partners constitute only 20% of the addressable market
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as of September 30, 2020. Our scale, best-in-class in-market sales force and operational efficiencies are sustainable competitive advantages for our business. We believe our competitive advantages, coupled with the significant opportunity to add new relationships, positions us as the most likely consolidator of market share from smaller competitors.
Home Point Broker Penetration


Broker Penetration is calculated as the total number of active brokers at Home Point divided by the total number of brokers in the market. An active broker represents a broker that has originated a loan with Home Point over the past 12 months.
Platform Focused on Partner Networks with Focus on Purchase Production
We have built a platform focused on serving third-party participants in the mortgage market. Our partner relationships and operating platform are intended to be reliable and scalable and to provide us flexibility to respond to different market environments. We believe that this provides us with significant operating leverage during market expansions without requiring a high level of fixed overhead.
Our Broker Partners’ and Correspondent Partners’ in-market presence positions them well to serve the financing needs of their customers. As a result, our platform is more focused on purchase mortgages than many of our competitors. In 2019, our purchase origination mix was 51%. In 2020, which was a significantly stronger refinance environment, our purchase mix was 32% through September 30, 2020. Given the stability and ongoing growth of the purchase market, this reduces our volatility relative to our competitors.
In-House Servicing Can Drive Increased Lifetime Value
A core tenet of our strategy is that strategically retaining servicing and controlling the customer experience through our in-house platform provides the best opportunity to retain customers in our ecosystem, or as we describe it, create Customers for Life. We work to enhance this experience through our proprietary Home Ownership Platform. The data exchanged during the dialogue with our customers through the Home Ownership Platform can be used to better understand where they are in their home ownership lifecycle. Ultimately, we expect the combination of a richer data set, the building of a trusted relationship and the leverage afforded by using in-market Broker Partners to result in greater customer retention and increased lifetime values of our customers.
Continuous Investment in Process and Technology Drives Efficiency and Experience
We believe that continuously investing in and developing process improvements and supporting technology provides our partner networks with the ability to compete against at-scale originators.
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Our strategy is to partner with best-in-class third-party software providers to meet our core technology needs. We then deploy our internal resources to build proprietary software when we can create a strategic advantage. We integrate our third-party and proprietary solutions such that we can provide a seamless experience to our partners and customers.
We believe our componentized approach promotes nimbleness and allows us to evolve technology solutions faster than our competition while retaining control in areas we deem strategically important.
Growing and Highly Scalable Operating Model
We were built to take advantage of the massive opportunity in the mortgage market over time through a dedication to a highly scalable low-cost structure, including in areas such as compliance, fraud prevention procedures and personnel training and retention, which is capable of handling substantial increases in loan origination volume with minimal increases in expenses. We believe that our advantages will help us face substantial competition in this market.
We expect that our commitment to efficient operations, a scalable origination platform supporting partner networks, and strategically utilized servicing capabilities will allow us to compete successfully across market cycles. This has translated to our ability to achieve robust growth. Since 2018, our funded volume has grown from $10.6 billion to $46.3 billion in twelve months ended September 30, 2020, representing a compounded annualized growth rate of 133%. Our funded volume for the nine months ended September 30, 2020 was $38.0 billion. Our profitability and capital efficiency has translated into net income for the nine months ended September 30, 2020 of $422.6 million and Adjusted Net Income for the nine months ended September 30, 2020 of $494.6 million.
Proven Leadership
Our executive management team has a track record of growth and superior execution throughout economic cycles and market trends. Led by our Chief Executive Officer and President Willie Newman, a proven leader in the industry, the executive management team has an average of more than 25 years of industry experience across all disciplines and multiple business models.
Our Growth Strategies
Continue to Grow Market Share in the Wholesale Channel
We see significant opportunities to grow in the wholesale channel. The data strongly supports continued share growth within the wholesale channel in the overall mortgage market. The combination of at-scale lenders with local mortgage brokerages provides cost and service benefits to customers.
In addition, we intend to continue to take significant market share within the wholesale channel, especially from smaller market participants. Although we have experienced the fastest growth in the channel in recent years, we only have relationships with 20% of all active mortgage brokerages. This provides significant upside for us in any origination environment.
Continued Expansion of Correspondent Business with Consistent Returns
We have invested in consistently growing our Correspondent channel over time in a disciplined, return-focused manner. We will continue to take a measured approach to growth by leveraging further improvements in process and cost along with a highly tenured account management team to expand market share.
Aligned Investment in Process and Technology to Enhance Efficiency, Customer Experience
We believe our foundation of process engineering expertise and a componentized technology architecture has resulted in a competitive cost structure with significant upside opportunity. We are making material investments in our technology program by deploying enterprise workflow and rules engines to better support the execution of our process engineering priorities. These components are both industrial strength and highly configurable by the business. This gives us the ability to rapidly enhance our processes. This also will give us the ability to extend self-serve functionality. We believe this will result in a material advantage against competitors that are encumbered with costly proprietary systems that are challenging to rapidly enhance. We expect that the combination of superior process engineering and componentized technology will create a best-in-class cost structure and experience for our partners and customers.
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Evolve the Retention of our Customers, Create Lifetime Value
The combination of an in-house servicing platform and the retention of servicing gives us the opportunity to create an ongoing two-way dialogue with our customers. Our Home Ownership Platform is designed to drive increasing frequency of interaction. We expect that the expansion of the relationship with our customers as well as the rich data provided through frequent interaction can be leveraged to further understand our customers’ needs and preferences. Finally, our focus on providing the solutions our customers prefer, which includes engagement with our Broker Partners, results in an optimal execution for the customer and a deeper relationship with our Broker Partners.
Recent Developments
Payment of Cash Dividend
On September 30, 2020, our board of directors declared a cash dividend in the amount of $154.5 million, which was paid to Holdings, the sole stockholder, on October 5, 2020. In addition, on January 12, 2021, our board of directors declared a cash dividend in the amount of $25.7 million, which was paid to Holdings on January 14, 2021. As described below, we also made a distribution with a portion of the net proceeds from the offering of the Senior Unsecured Notes.
Issuance of Senior Unsecured Notes
On January 19, 2021, we issued $550.0 million aggregate principal amount of our 5.000% senior unsecured notes due 2026 (the “Senior Unsecured Notes”), the proceeds of which were used to fund a distribution of $269.3 million to Holdings, to repay $270.0 million of indebtedness outstanding under our MSR Facility (as defined herein) and to pay fees and expenses related thereto. We refer to the issuance of the Senior Unsecured Notes and the use of proceeds therefrom as the “Debt Transaction.” See “Unaudited Pro Forma Consolidated Financial Information.”
Interest on the Senior Unsecured Notes is payable at a rate of 5.000% per annum, semi-annually on February 1 and August 1 of each year, beginning August 1, 2021. The Senior Unsecured Notes will mature on February 1, 2026. The indenture governing the Senior Unsecured Notes also contains customary covenants and events of default. The foregoing description is included for informational purposes only and is qualified in its entirety by the indenture governing the Senior Unsecured Notes, which is filed as an exhibit to the registration statement of which this prospectus forms a part.
New Chairperson of the Board of Directors
Effective January 11, 2021, Andrew Bon Salle joined Home Point as Chairperson of our board of directors. Mr. Bon Salle joined Home Point from Fannie Mae where he served in various leadership positions, most recently as Executive Vice President of Single-Family Mortgage Business. We also entered into a consulting agreement with Mr. Bon Salle, which is filed as an exhibit to the registration statement of which this prospectus forms a part. See “Management.”
Preliminary Estimated Financials Results as of and for the Three Months and the Year Ended December 31, 2020
We are presenting certain preliminary estimated unaudited financial results for the three months and year ended December 31, 2020. The estimated unaudited financial results set forth below are preliminary and subject to revision based upon the completion of our year-end financial closing processes as well as the related audit of the results of operations for the year ended December 31, 2020. Such estimated results reflect management’s current views and may change as a result of management’s review of results and other factors, including a wide variety of significant business, economic and competitive risks and uncertainties. Such preliminary results are subject to the closing of the quarter, finalization of accounting procedures and completion of our audit, and should not be viewed as a substitute for full financial statements prepared in accordance with GAAP.
In addition, the estimated results are based solely on information available to us as of the date of this prospectus. As a result, our actual results for such periods may differ materially from the preliminary estimated financial results set forth below upon the completion of our financial closing procedures, final adjustments, and other developments
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that may arise prior to the time our financial results are finalized. Further, these preliminary financial results have not been audited or reviewed by our independent auditors, BDO USA, LLP. Accordingly, BDO USA, LLP does not express an opinion or any other form of assurance with respect thereto and assumes no responsibility for, and disclaims any association with, this information.
These preliminary results should be read in conjunction with the sections titled “—Summary Historical Consolidated Financial and Other Data”, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto presented elsewhere in this prospectus. Adjusted net income (loss) and Adjusted EBITDA are non-GAAP measures. For more information on these measures see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Our preliminary estimates for Total origination volume, Total net revenue, Total net income, Adjusted net income and Adjusted EBITDA for the three months and the year ended December 31, 2020 are presented in the following table. The following table also presents our actual results for the corresponding prior periods. See footnote 1 under “—Summary Historical Consolidated Financial and Other Data” for the definitions of, and additional information about, Adjusted net income and Adjusted EBITDA.
 
Three months ended
December 31,
2020
Three months ended
December 31,
2019
Year ended
December 31,
2020
Year ended
December 31,
2019
In millions (except Total origination volume in billions)
Estimated
Actual
Estimated
Actual
Total origination volume
$24.0
$8.3
$62.0
$22.2
Total net revenue
$456.7
$96.8
$1,394.2
$202.4
Total net income (loss)
$184.5
$16.1
$607.0
$(29.2)
Adjusted net income(1)
$171.0
$7.9
$667.7
$28.2
Adjusted EBITDA(2)
$221.9
$17.1
$910.6
$69.4
(1)
The following is a reconciliation of Adjusted net income to Total net income (loss), the nearest U.S. GAAP financial measure.
 
Three months ended
December 31,
2020
Three months ended
December 31,
2019
Year ended
December 31,
2020
Year ended
December 31,
2019
In millions
Estimated
Actual
Estimated
Actual
Total net income (loss)
$184.5
$16.1
$607.0
$(29.2)
Change in fair value of MSR (due to inputs and assumptions), net of hedge
$(17.2)
$(10.4)
$81.1
$74.0
Income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge
$3.7
$2.3
$(20.4)
$(17.0)
Adjusted net income
$171.0
$7.9
$667.7
$28.2
(2)
The following is a reconciliation of Adjusted EBITDA to Total Net Income (Loss), the nearest U.S. GAAP financial measure.
 
Three months ended
December 31,
2020
Three months ended
December 31,
2019
Year ended
December 31,
2020
Year ended
December 31,
2019
In millions
Estimated
Actual
Estimated
Actual
Total net income (loss)
$184.5
$16.1
$607.0
$(29.2)
Interest expense on Term debt and other borrowings
$4.0
$5.4
$18.4
$27.7
Income tax expense (benefit) from continuing operations
$49.2
$4.6
$198.6
$(9.5)
Depreciation and amortization
$1.4
$1.5
$5.5
$5.9
Change in fair value of MSR (due to inputs and assumptions), net of hedge
$(17.2)
$(10.4)
$81.1
$74.5
Adjusted EBITDA
$221.9
$17.1
$910.6
$69.4
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Our preliminary estimates for MSR servicing portfolio – UPB, Cash and cash equivalents (excluding Restricted cash), Mortgage servicing rights (at fair value), Term debt and other borrowings, net and Tangible Common Equity as of December 31, 2020 are presented in the following table. The following table also presents our actual balances as of September 30, 2020.
 
As of December 31,
2020
As of September 30,
2020
In millions (except MSR servicing portfolio – UPB in billions)
Estimated
Actual
MSR servicing portfolio – UPB
$88.3
$74.0
Cash and cash equivalents(1)
$165.2
$271.5
Mortgage servicing rights (at fair value)
$748.5
$583.3
Warehouse lines of credit
$3,005.4
$2,092.5
Term debt and other borrowings, net
$454.0
$374.1
Total Debt(2)
$ 3,459.4
$2,466.6
Tangible Common Equity
$916.7
$731.7
Total Common Equity
$927.5
$742.7
(1)
Does not reflect the $25.7 million cash dividend that our board of directors declared and paid to Holdings on January 14, 2021. See “—Recent Developments—Payment of Cash Dividend.”
(2)
Represents the sum of Term debt and other borrowings, net and Warehouse lines of credit.
Summary Risks Related to Our Business and this Offering
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. In such case, the trading price of our common stock may decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:
the spread of the COVID-19 (as defined below) outbreak and severe disruptions in the U.S. and global economy and financial markets it has caused;
our reliance on our financing arrangements to fund mortgage loans and otherwise operate our business;
the dependence of our loan origination and servicing revenues on macroeconomic and U.S. residential real estate market conditions;
the requirement to repurchase mortgage loans or indemnify investors if we breach representations and warranties;
counterparty risk;
the requirement to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances;
competition for mortgage assets that may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns;
our ability to continue to grow our loan origination business or effectively manage significant increases in our loan production volume;
competition in the industry in which we operate;
our ability to acquire loans and sell the resulting MBS in the secondary markets on favorable terms in our production activities;
our being a “controlled company” within the meaning of NASDAQ rules and, as a result, qualifying for exemptions from certain corporate governance requirements; and
our Sponsor controlling us and its interests conflicting with ours or yours in the future.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to: (1) presenting only two years of audited financial statements in addition
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to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus; (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; (3) having reduced disclosure obligations regarding executive compensation in our periodic reports and proxy or information statements; (4) being exempt from the requirements to hold a non-binding advisory vote on executive compensation or seek stockholder approval of any golden parachute payments not previously approved; and (5) not being required to adopt certain accounting standards until those standards would otherwise apply to private companies.
Although we are still evaluating our options under the JOBS Act, we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company” and thus the level of information we provide may be different than that of other public companies. If we do take advantage of any of these exemptions, some investors may find our securities less attractive, which could result in a less active trading market for our common stock, and the price of our common stock may be more volatile. As an “emerging growth company” under the JOBS Act, we are permitted to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We are electing to take advantage of such extended transition period, and as a result, we will not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.
We could remain an “emerging growth company” until the earliest to occur of:
the last day of the year following the fifth anniversary of this offering;
the last day of the first year in which our annual gross revenues exceed an amount specified by regulation (currently $1.07 billion);
the day we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second quarter of such year; and
the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period.
Our Sponsor
Stone Point Capital is a financial services-focused private equity firm based in Greenwich, CT. The firm has raised and managed eight private equity funds – the Trident Funds – with aggregate committed capital of more than $26 billion. Stone Point Capital targets investments in companies in the global financial services industry and related sectors.
Corporate Information
We were incorporated under the laws of the state of Delaware on August 27, 2014. Our principal executive offices are located at 2211 Old Earhart Road, Suite 250, Ann Arbor, Michigan 48105. Our telephone number is (888) 616-6866. Our website is located at www.homepointfinancial.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our common stock.
Prior to the commencement of this offering, all of our outstanding and authorized equity interests, consisting of 100 shares of common stock, were held directly by Holdings, an affiliate of the Trident Stockholders. On January 21, 2021, we filed an amendment to our certificate of incorporation with the Secretary of State for the State of Delaware to increase the total number of shares of authorized common stock of the Company to one billion (1,000,000,000) and to effectuate a 1,388,601.11-for-one stock split. As a result, Holdings holds 138,860,103 shares of our common stock, representing all shares of common stock issued and outstanding, as of the date of this prospectus.
We expect that, immediately prior to the consummation of this offering, Holdings will merge with and into the Company, with the Company as the surviving entity. As a result of the merger, each issued and outstanding limited partnership unit of Holdings will be exchanged for approximately 2.6964 issued and outstanding shares of common stock of the Company. As of the date of this prospectus, there were 51,499,016 limited partnership units of Holdings
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issued and outstanding. Upon completion of the merger, the 138,860,103 shares of our common stock currently held by Holdings will be held by the current holders of limited partnership units of Holdings.
Unless we indicate otherwise or the context otherwise requires, this prospectus reflects the impact of the stock split and the merger, and therefore certain data may not be comparable to similar data presented in our historical consolidated financial statements included elsewhere in this prospectus.
Following the completion of this offering, the Trident Stockholders will beneficially own approximately 92.0% of the voting power of our common stock (or 91.2% if the underwriters exercise their option to purchase additional shares in full). See “Management—Controlled Company” and “Principal and Selling Stockholders.”
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The Offering
Common stock offered by the selling stockholders
7,250,000 shares.
Option to purchase additional shares of common stock
The selling stockholders have granted the underwriters an option to purchase up to an additional 1,087,500 shares of common stock from the selling stockholders at the initial price to the public less the underwriting discounts and commissions, to cover over-allotments, if any, within 30 days from the date of this prospectus.
Common stock to be outstanding immediately after this offering
138,860,103 shares.
Use of proceeds
We will not receive any proceeds from the sale of shares of common stock by the selling stockholders named in this prospectus. The selling stockholders will receive all of the net proceeds and bear the underwriting discount attributable to their sale of our common stock. See “Use of Proceeds.”
Controlled company
Following the completion of this offering, the Trident Stockholders will beneficially own approximately 92.0% of the voting power of our common stock (or 91.2% if the underwriters exercise their option to purchase additional shares in full). As long as the Trident Stockholders continue to own a majority of the voting power of our outstanding common stock, they will be able to control any action requiring the general approval of our stockholders, including the election and removal of directors, any amendments to our amended and restated certificate of incorporation and the approval of any merger or sale of all or substantially all of our assets. Accordingly, we will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ.
Dividend policy
Beginning with the first full quarter following the completion of this offering, we intend to pay cash dividends on a quarterly basis. Initially, we expect the quarterly dividends to be $0.15 per share, which equals $0.60 per share on an annualized basis and an annual yield of 4.6% based on a price of $13.00 per share. We cannot assure you that we will continue to pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future. See “Dividend Policy.”
Conflicts of Interest
Because affiliates of SPC Capital Markets LLC beneficially own in excess of 10% of our issued and outstanding common stock, SPC Capital Markets LLC is deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering will be conducted in accordance with Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering because the
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underwriters primarily responsible for managing the offering do not have a conflict of interest, are not affiliates of SPC Capital Markets LLC and meet the requirements of Rule 5121(f)(12)(E). SPC Capital Markets LLC will not confirm sales of the securities to any account over which it exercises discretionary authority without the specific written approval of the account holder.
Risk factors
Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” for a discussion of factors you should carefully consider before investing in shares of our common stock.
Certain U.S. federal income and estate tax consequences to non-U.S. holders
For a discussion of certain U.S. federal income and estate tax consequences that may be relevant to non-U.S. stockholders, see “Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders.”
Nasdaq trading symbol
“HMPT”
Unless we indicate otherwise or the context otherwise requires, this prospectus reflects and assumes:
no exercise of the underwriters’ option to purchase additional shares of our common stock from the selling stockholders;
the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the consummation of this offering;
the 1,388,601.11-for-one stock split of our common stock, which we effectuated on January 21, 2021; and
the merger of Holdings with and into the Company immediately prior to the consummation of this offering, with the Company as the surviving entity, whereby each issued and outstanding limited partnership unit of Holdings will be exchanged for approximately 2.6964 issued and outstanding shares of our common stock.
The number of shares of common stock to be outstanding after this offering excludes:
14,012,669 shares of common stock issuable upon exercise of outstanding options, (i) 2,654,234 of which are vested, with a weighted-average exercise price of $4.61 per share, and (ii) 11,358,435 of which are not vested, with a weighted-average exercise price of $6.29 per share, in each case, issued under our 2015 Option Plan. See “Executive Compensation—Narrative Disclosure to Summary Compensation Table—Equity Awards”; and
6,943,005 shares of common stock reserved for future issuance under the 2021 Incentive Plan and 1,388,601 shares of common stock reserved for future issuance under the 2021 Employee Stock Purchase Plan, each of which we intend to adopt in connection with this offering. See “Executive Compensation—Actions in Connection with this Offering.”
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Summary Historical Consolidated Financial and Other Data
The following tables set forth our summary historical consolidated financial and other data as of the dates and for the periods indicated. The summary historical consolidated financial and other data as of and for the years ended December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial and other data as of and for the nine month periods ended September 30, 2020 and 2019 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in our opinion, have included all adjustments, which include normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. Unless otherwise indicated, shares and per share data for all periods presented in the table below have been retroactively adjusted to give effect to the 1,388,601.11-for-one stock split, which we effectuated on January 21, 2021.
Historical results are not necessarily indicative of the results that may be expected in any future period, and our results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The following information should be read in conjunction with the sections entitled “Capitalization,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
Nine months ended
September 30,
Year ended
December 31,
(In thousands, except shares and per share amounts)
2020
2019
2019
2018
 
(unaudited)
(audited)
Statement of Operations Data
 
 
 
 
Gain on loans, net
$962,778
$135,495
$199,501
$84,068
Loan fee income
60,630
19,829
32,112
19,603
Interest income
42,370
35,101
51,801
35,179
Interest expense
  (47,845)
(41,933)
(57,942)
(47,486)
Interest loss, net
(5,475)
(6,832)
(6,141)
(12,307)
Loan servicing fees
133,904
104,089
144,228
119,049
Change in fair value of mortgage servicing rights
(230,524)
(151,168)
(173,134)
(47,312)
Other income
1,022
1,591
3,159
1,156
Total net revenue
922,335
103,004
199,725
164,257
 
 
 
 
 
Compensation and benefits
251,462
104,571
156,197
109,577
Loan expense
28,581
10,182
15,626
16,882
Loan servicing expense
22,742
15,781
20,924
18,488
Occupancy and equipment
17,006
12,567
16,768
20,521
General and administrative
28,373
14,687
21,407
29,165
Depreciation and amortization
4,222
4,394
5,918
7,612
Other expenses
12,087
2,770
4,296
4,060
Total expenses
364,473
164,952
241,136
206,305
 
 
 
 
 
Income (loss) from continuing operations before income tax
557,862
(61,948)
(41,411)
(42,048)
Income tax expense (benefit) from continuing operations
149,306
(14,080)
(9,500)
(10,485)
Income from equity method investment
14,050
2,591
2,701
209
Net income (loss) from continuing operations
422,606
(45,277)
(29,210)
(31,354)
Net income from discontinued operations before tax
9,707
Income tax provision
2,550
Income from discontinued operations, net of tax
7,157
Total net income (loss)
$422,606
$(45,277)
$(29,210)
$(24,197)
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Nine months ended
September 30,
Year ended
December 31,
(In thousands, except shares and per share amounts)
2020
2019
2019
2018
 
(unaudited)
(audited)
Basic and diluted earnings per share
 
 
 
 
Basic and diluted income (loss) per share from continuing operations
$3.04
$(0.33)
$(0.21)
$(0.23)
Basic and diluted earnings per share from discontinued operations
0.05
Basic and diluted total net income (loss) per share
$3.04
$(0.33)
$(0.21)
$(0.17)
Weighted average shares of common stock outstanding
 
 
 
 
Basic and diluted
138,860,103
138,860,103
138,860,103
138,860,103
 
September 30,
December 31,
(In thousands, except shares and per share amounts)
2020
2019
2018
 
(unaudited)
(audited)
Balance Sheet Data:
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$271,483
$30,630
$44,010
Restricted cash
41,907
51,101
38,234
Cash and cash equivalents and restricted cash
313,390
81,731
82,244
Mortgage loans held for sale (at fair value)
2,281,835
1,554,230
421,754
Mortgage servicing rights (at fair value)
583,263
575,035
532,526
Property and equipment, net
18,595
12,051
10,075
Accounts receivable, net
79,320
57,872
44,422
Derivative assets
314,794
40,544
18,990
Goodwill and intangibles
11,083
11,935
10,957
GNMA loans eligible for repurchase
2,919,881
499,207
451,209
Other assets
65,745
76,162
64,214
Total assets
$6,587,906
$2,908,767
$1,636,391
 
 
 
 
Liabilities and Shareholder’s equity:
 
 
 
Liabilities:
 
 
 
Warehouse lines of credit
$2,092,477
$1,478,183
$404,237
Term debt and other borrowings, net
374,090
424,958
276,277
Accounts payable and accrued expenses
269,016
39,739
21,243
GNMA loans eligible for repurchase
2,919,881
499,207
451,209
Other liabilities
189,700
56,368
44,654
Total liabilities
$5,845,164
2,498,455
1,197,620
 
 
 
 
Shareholder’s equity:
 
 
 
Common stock (138,860,103 shares issued and outstanding, par value $0.0000000072 per share)
Additional paid-in-capital
519,177
454,861
454,110
Retained earnings (accumulated deficit)
223,565
(44,549)
(15,339)
Total shareholder’s equity
742,742
410,312
438,771
Total liabilities and shareholder’s equity
$6,587,906
$2,908,767
$1,636,391
 
Nine months ended
September 30,
Year ended
December 31,
 
2020
2019
2019
2018
Other financial data
 
 
 
 
Adjusted revenue(1)
$1,034,687
$190,522
$276,907
$154,118
Adjusted net income (loss)(1)
494,598
20,347
28,185
(32,006)
Adjusted EBITDA(1)
688,847
52,288
69,410
(19,613)
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Key Performance Indicators (KPIs)
 
Nine Months Ended
September 30,
Year Ended
December 31,
($ in thousands)
2020
2019
2019
2018(2)
Origination Segment KPIs
 
 
 
 
 
 
 
 
 
Origination Volume by Channel
 
 
 
 
Wholesale(3)
$23,772,112
$7,023,411
$11,564,971
$4,889,220
Correspondent(3)
12,696,815
6,676,458
10,215,300
5,081,719
Direct(3)
1,576,959
291,302
487,322
608,148
Origination volume(3)
$38,045,886
$13,991,171
$22,267,593
$10,579,087
 
 
 
 
 
Gain on sale margin
 
 
 
 
Gain on sale margin (bps)(4)
253.1
96.8
89.6
79.5
 
 
 
 
 
Market Share
 
 
 
 
Overall share of origination market(5)
1.4%
0.9%
1.0%
0.7%
Share of wholesale channel(6)
6.4%
3.0%
3.5%
2.6%
 
 
 
 
 
Origination Volume by Purpose(7)
 
 
 
 
Purchase
31.7%
54.4%
50.6%
66.5%
Refinance
68.3%
45.6%
49.4%
33.5%
 
 
 
 
 
Third Party Partners
 
 
 
 
Number of Broker Partners(8)
4,921
2,684
3,085
1,623
Number of Correspondent Partners(9)
594
516
537
451
 
Nine Months Ended
September 30,
Year Ended
December 31,
($ in thousands)
2020
2019
2019
2018(2)
Servicing Segment KPIs
 
 
 
 
 
 
 
 
 
Mortgage Servicing
 
 
 
 
MSR servicing portfolio - UPB(10)
$73,951,042
$47,887,643
$52,600,546
$41,423,825
Servicing portfolio - Units(11)
307,236
217,558
236,362
189,513
 
 
 
 
 
60 days or more delinquent(12)
6.6%
2.0%
1.7%
2.3%
 
 
 
 
 
MSR Portfolio
 
 
 
 
MSR multiple(13)
2.6x
3.2x
3.4x
4.3x
(1)
We define Adjusted revenue as Total net revenue exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs hedge and adjusted for Income from equity method investment.
We define Adjusted net income as Net income (loss) exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs hedge.
We define Adjusted EBITDA as earnings before interest (without adjustment for net warehouse interest related to loan fundings and payoff interest related to loan prepayments), taxes, depreciation and amortization exclusive of the impact of the change in fair value of MSRs related to changes in valuation inputs and assumptions, net of MSRs hedge.
We exclude changes in fair value of MSRs, net of hedge from each of Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA as they add volatility and are not indicative of the Company’s operating performance or results of operation. This adjustment does not include changes in fair value of MSRs due to realization of cash flows, which remain in each of Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA. Realization of cash flows occurs when cash is collected as customers make scheduled payments, partial prepayments of principal, or pay their mortgage in full.
We believe that these non-GAAP financial measures presented in this prospectus, including Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA can provide useful information to investors and others in understanding and evaluating our operating results. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, or any other operating performance measure calculated in accordance with GAAP and may not be comparable to a similarly titled measure reported by other companies.
We believe that the presentation of Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA provide indicators of
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performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period, and management relies on these measures for planning and forecasting of future periods. The Company measures the performance of the segments primarily on a contribution margin basis. Additionally, these measures allow management to compare our results with those of other companies that have different financing and capital structures. However, other companies may define Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA differently, and as a result, our measures of Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA may not be directly comparable to those of other companies.
The non-GAAP information presented above and elsewhere in this prospectus should be read in conjunction with our combined financial statements and the related notes included elsewhere in this prospectus and the information set forth in the section entitled “Selected Historical Combined Financial Information.”
The following is a reconciliation of Adjusted revenue, Adjusted net income (loss) and Adjusted EBITDA to the nearest U.S. GAAP financial measures, pre-tax Net income (loss) and Net income (loss), respectively:
Reconciliation of Adjusted revenue to Total net revenue
 
Nine Months Ended
September 30,
Year Ended
December 31,
($ in thousands)
2020
2019
2019
2018
Total net revenue
$922,335
$103,004
$199,725
$164,257
Income from equity method investment
14,050
2,591
2,701
209
Change in fair value of MSR (due to inputs and assumptions), net of hedge
98,302
84,927
74,481
(10,348)
Adjusted revenue
$1,034,687
$190,522
$276,907
$154,118
Reconciliation of Adjusted Net Income (Loss) to Total Net Income (Loss)
 
Nine Months Ended
September 30,
Year Ended
December 31,
($ in thousands)
2020
2019
2019
2018
Total net income (loss)
$422,606
$(45,277)
$(29,210)
$(24,197)
Change in fair value of MSR (due to inputs and assumptions), net of hedge
98,302
84,927
74,481
(10,348)
Income tax effect of change in fair value of MSR (due to inputs and assumptions), net of hedge
(26,310)
(19,303)
(17,086)
2,539
Adjusted net income (loss)
$494,598
$20,347
$28,185
$(32,006)
Reconciliation of Adjusted EBITDA to Total Net Income (Loss)
 
Nine Months Ended
September 30,
Year Ended
December 31,
($ in thousands)
2020
2019
2019
2018
Total net income (loss)
$422,606
$(45,277)
$(29,210)
$(24,197)
Income from discontinued operations, net of tax
(7,157)
Interest expense on corporate debt
14,411
22,324
27,721
24,962
Income tax expense (benefit) from continuing operations
149,306
(14,080)
(9,500)
(10,485)
Depreciation and amortization
4,222
4,394
5,918
7,612
Change in fair value of MSR (due to inputs and assumptions), net of hedge
98,302
84,927
74,481
(10,348)
Adjusted EBITDA
$688,847
$52,288
$69,410
$(19,613)
(2)
Unless otherwise indicated, our Distributed Retail channel was included in discontinued operations in our results of operations for the year ended December 31, 2018 and as such it has been excluded from our key performance indicators for the year ended December 31, 2018.
(3)
Origination dollar value of new loans funded by channel. Origination volume excludes Origination volume from the Distributed Retail channel, which was included in discontinued operations in our results of operations for the year ended December 31, 2018.
(4)
Calculated as Gain on sale, net divided by Origination volume.
(5)
Calculated as the Company’s originations dollar value for the year divided by the total residential originations in the United States of America per Inside Mortgage Finance, a third party provider of residential mortgage industry news and statistics each year. Origination volume figures used to calculate market share include $1 billion of Distributed Retail originations in our results of operations for the year ended December 31, 2018.
(6)
Calculated as the Company’s originations dollar value for the year divided by the total wholesale originations in the United States of America per Inside Mortgage Finance, each year.
(7)
Origination volume excludes Origination volume from the Distributed Retail channel, which was included in discontinued operations in our results of operations for the year ended December 31, 2018.
(8)
Number of Broker Partners with whom the Company sources loans from.
(9)
Number of Correspondent Partners from whom the Company purchases loans from.
(10)
The unpaid principal balance of loans we service on behalf of Ginnie Mae, Fannie Mae, Freddie Mae and others, at period end.
(11)
Number of loans in our serving portfolio at period end.
(12)
Total balances of outstanding loan principals for which installment payments are at least 60 days past due as a percentage of the outstanding loan principal as of a specified date.
(13)
Calculated as the MSR fair market value as of a specified date divided by the related UPB divided by the weighted average service fee.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information set forth in this prospectus before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Business
General Business Risks
The current outbreak of the novel coronavirus, or COVID-19, has caused, and will continue to cause, disruption to our business, liquidity, financial condition and results of operations. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. The outbreak has triggered a period of global economic slowdown and many experts predict that it may trigger a global recession. COVID-19 or another pandemic could have material and adverse effects on our ability to successfully operate due to, among other factors:
a general decline in business activity;
negatively impacting demand for our mortgage loan products, as well as borrowers’ ability to fulfill their loan obligations leading to an increase in delinquency rates, which could have a significant impact on the value of our mortgage assets;
the requirement for us to advance material amounts of cash for delinquent principal, interest, taxes and insurance typically paid by borrowers, which may not be reimbursed for an extended period of time;
the costs of preserving and liquidating defaulted properties, as a result of increased serious delinquencies and defaults;
the destabilization of the real estate and mortgage markets, which could negatively impact fair value of our assets, reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans;
difficulty accessing the capital markets on attractive terms, or at all, and a severe disruption and instability in the global financial markets, including the MBS market, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;
the inability to promptly foreclose on defaulted mortgage loans and liquidate the underlying real property due to the rapidly changing regulatory and administrative climate, including the suspension of foreclosures and evictions as mandated by governmental bodies;
the potential negative impact on the health of our highly qualified personnel, in particular skilled managers, loan servicers, debt default specialists and underwriters, especially if a significant number of them are impacted; and
a deterioration in our ability to ensure business continuity during a disruption.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and may also exacerbate the other risks described herein, which may negatively impact our business, liquidity, financial condition and results of operations.
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Our business relies on our financing arrangements to fund mortgage loans and otherwise operate our business. If one or more of such facilities are terminated, we may be unable to find replacement financing at commercially favorable terms, or at all, which could be detrimental to our business.
We currently fund substantially all of the MSRs and mortgage loans we close through borrowings under our financing arrangements and warehouse lines of credit along with funds generated by our operations. As of September 30, 2020, we held mortgage funding arrangements with seven separate financial institutions with a total maximum borrowing capacity of $3.1 billion. We entered into an additional mortgage funding arrangement in October 2020, which was amended in December 2020, with a total maximum borrowing capacity of $700 million. Furthermore, in January 2021, we entered into an additional mortgage funding arrangement with a total maximum borrowing capacity of $500 million. Each mortgage funding arrangement is collateralized by the underlying mortgage loans.
Of the seven existing funding facilities as of September 30, 2020, six of the facilities are 364-day facilities and the other funding facility is an evergreen agreement. The facilities entered into in October 2020 and January 2021 are also 364-day facilities. As of September 30, 2020, approximately $350 million of borrowing capacity under our mortgage loan funding facilities was committed, while the remaining borrowing capacity under our mortgage loan funding facilities was uncommitted and can be terminated by the applicable lender at any time. Three of the facilities require that we establish a cash reserve of $11.0 million which is reflected within Restricted cash on the unaudited consolidated balance sheet as of September 30, 2020.
Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We are currently, and may in the future continue to be, dependent upon our lenders to provide the primary funding facilities for our loans. While we currently expect to be able to renew our existing warehouse facilities prior to their expiration, there is no guarantee that our current uncommitted facilities will be available for future financing needs, nor that we will be able to secure alternative funding facilities to replace any current facilities that we are unable to renew upon their scheduled expiration. In the event that any of our loan funding facilities is terminated or is not renewed, or if the principal amount that may be drawn under our funding agreements that provide for immediate funding at closing were to significantly decrease, we may be unable to find replacement financing on commercially favorable terms, or at all, which could be detrimental to our business.
Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors, including:
restrictive covenants and borrowing conditions in our existing or future financing arrangements that may limit our ability to raise additional debt;
a decline in the liquidity in the credit markets;
prevailing interest rates;
the financial strength of our lenders;
the decisions of lenders from whom we borrow to reduce their exposure to mortgage loans; and
accounting changes that impact the calculations of covenants in our debt agreements.
If we are unable to refinance our existing debt or borrow additional funds due to any of the foregoing or other factors, our ability to maintain or grow our business could be limited. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Our loan origination and servicing revenues are highly dependent on macroeconomic and U.S. residential real estate market conditions.
Our success depends largely on the health of the U.S. residential real estate industry, which is seasonal, cyclical and affected by changes in general economic conditions beyond our control. We also have significant dependence on some states such as California and are subject to conditions in those states. Economic factors such as increased interest rates, slow economic growth or recessionary conditions, the pace of home price appreciation or lack thereof, changes in household debt levels and increased unemployment or stagnant or declining wages affect our customers’ income and thus their ability and willingness to make loan payments. National or global events including, but not
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limited to, the COVID-19 pandemic, affect all such macroeconomic conditions. Weak or a significant deterioration in economic conditions reduces the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of qualified potential borrowers to take out loans. As a result, such economic factors affect loan origination volume.
Additional macroeconomic factors including, but not limited to, rising government debt levels, the withdrawal or augmentation of government interventions into the financial markets, changing U.S. consumer spending patterns, changing expectations for inflation and deflation, and weak credit markets may create low consumer confidence in the U.S. economy or the U.S. residential real estate industry or result in increased volatility in the United States and worldwide financial markets and economy. Excessive home building or historically high foreclosure rates resulting in an oversupply of housing in a particular area may also increase the amount of losses incurred on defaulted mortgage loans, or may limit our ability to make additional loans in those affected areas. The economic impact of these events could also adversely affect the credit quality of some of our loans and investments and the properties underlying our interests.
Recently, financial markets have experienced significant volatility as a result of the effects of the COVID-19 pandemic. Many state and local jurisdictions have enacted measures requiring closure of businesses and other economically restrictive efforts to combat the COVID-19 pandemic. Unemployment levels have increased significantly and may remain at elevated levels or continue to rise. There may be a significant increase in the rate and number of mortgage payment delinquencies, and house sales, home prices and multifamily fundamentals may be adversely affected, which could lead to a material adverse decrease of our mortgage origination activities. For more information, see the risk factor entitled, “The current outbreak of the novel coronavirus, or COVID-19, has caused, and will continue to cause, disruption to our business, liquidity, financial condition and results of operations. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
Furthermore, several state and local governments in the United States are experiencing, and may continue to experience, budgetary strain, which will be exacerbated by the impact of the COVID-19 pandemic. One or more states or significant local governments could default on their debt or seek relief from their debt under the U.S. bankruptcy code or by agreement with their creditors. Any or all of the circumstances described above may lead to further volatility in or disruption of the credit markets at any time and adversely affect our financial condition.
Any uncertainty or deterioration in market conditions or prolonged economic slowdown or recession that leads to a decrease in loan originations will result in lower revenue on loans sold into the secondary market. Lower loan origination volumes generally place downward pressure on margins, thus compounding the effect of the deteriorating market conditions. Such events could be detrimental to our business. Moreover, any deterioration in market conditions that leads to an increase in loan delinquencies will result in lower revenue for loans we service for the GSEs and Ginnie Mae because we collect servicing fees from them only for performing loans. While increased delinquencies generate higher ancillary revenues, including late fees, these fees are likely unrecoverable when the related loan is liquidated.
Increased delinquencies may also increase the cost of servicing loans. The decreased cash flow from lower servicing fees could decrease the estimated value of our MSRs, resulting in recognition of losses when we write down those values. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts and increases our obligation to advance certain principal, interest, tax and insurance obligations owed by the delinquent mortgage loan borrower. An increase in delinquencies could therefore be detrimental to our business. See the risk factor entitled, “A significant increase in delinquencies for the loans we service could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.”
Additionally, origination of loans can be seasonal. Historically, our loan origination has increased activity in the second and third quarters and reduced activity in the first and fourth quarters as home buyers tend to purchase their homes during the spring and summer in order to move to a new home before the start of the school year. As a result, our loan origination revenues vary from quarter to quarter. However, this historical pattern may be disrupted for the foreseeable future as a result of the shelter-in-place and similar protective orders that have been issued in response to the COVID-19 pandemic.
Any of the circumstances described above, alone or in combination, may lead to volatility in or disruption of the credit markets at any time and have a detrimental effect on our business.
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We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties.
When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser. If a mortgage loan does not comply with the representations and warranties that we made with respect to it at the time of its sale, we could be required to repurchase the loan, replace it with a substitute loan and/or indemnify secondary market purchasers for losses.
As part of our correspondent production activities, we re-underwrite a percentage of the loans that we acquire, to ensure quality underwriting by our Correspondent Partners, accurate third-party appraisals and strict compliance with the representations and warranties that we require from our Correspondent Partners and that are required from us by our investors. No assurance can be given that the re-underwriting of a sample population of loans will identify any and all underwriting and regulatory compliance issues related to such loans or to any of the other loans we acquire from Correspondent Partners. In our Direct and Wholesale channels, we underwrite each loan prior to funding and attempt to comply with applicable investor guidelines. However, no assurance can be given that such underwriting will result in all cases with loans that fully comply with such guidelines, and state or federal law.
In the event of a breach of any representations or warranties we make to purchasers, insurers or investors, we believe, based on our experience, that in a majority of cases, for correspondent originated loans acquired using the “delegated underwriting” option, we will have recourse to the Correspondent Partner that sold the mortgage loans to us and breached similar or other representations and warranties. Although we believe we will have the right to seek a recovery of related repurchase losses from that Correspondent Partner, we cannot assure you that this will always be the case. For Correspondent loans where we do the underwriting, referred to as the “non-delegated underwriting” option, our ability to seek a recovery of repurchase and other losses from Correspondent Partners is more limited.
In addition to the customary representations and warranties we make, the documents governing our securitized pools of loans and our contracts with certain purchasers of our whole loans contain additional provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if the borrower fails to make loan payments due to the purchaser on a timely basis in the first few months after we sell the loan. We have been and continue to be subject to repurchase claims from investors for various reasons, and we will continue to be subject to such claims in the future. If we are required to indemnify or repurchase loans that we have sold or securitized, or will sell or securitize in the future, and this results in losses that exceed our reserve, such occurrence could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, the repurchased loan typically can only be financed at a steep discount to its repurchase price, if at all, and can generally be sold only at a discount to the unpaid principal balance, which in some cases can be significant. Significant repurchase activity on Direct or Wholesale loans or on Correspondent loans without offsetting recourse to a counterparty that we purchased the loan from could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are subject to counterparty risk and may be unable to seek indemnity from, or require our correspondent counterparties or sellers to repurchase mortgage loans if they breach representations and warranties, which could cause us to suffer losses.
When we purchase mortgage assets, our correspondent counterparty or seller typically makes customary representations and warranties to us about such assets. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches such a representation or warranty. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its obligations under our mortgage loan purchase agreements. Our inability to obtain indemnity or enforce repurchase obligations of counterparties and sellers for a significant number of loans could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances, which could adversely affect our business, financial condition, liquidity and results of operations.
During any period in which a borrower is not making payments, we are required under most of our servicing agreements in respect of our loans to advance our own funds to pass through scheduled principal and interest
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payments to security holders of the MBS or whole loans into which the loans are sold, and pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. In certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. If a mortgage loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or a liquidation occurs. When a relatively young MSR portfolio such as ours ages, it is expected that the percentage of delinquent loans will typically increase and the amount of advances that are required and become outstanding in connection with such loans will increase in the aggregate. This increase in advances could have a material adverse effect on our business, financial condition, liquidity and results of operations.
In response to the COVID-19 pandemic, on March 27, 2020, the CARES Act was signed into law, allowing borrowers affected by the COVID-19 pandemic to request temporary loan forbearance for federally backed mortgage loans. Nevertheless, servicers of mortgage loans are contractually bound to advance monthly payments to investors, insurers and taxing authorities regardless of whether the borrower actually makes those payments. We expect that such payments may continue to increase throughout the duration of the COVID-19 pandemic. While the GSEs recently issued guidance limiting the number of payments a servicer must advance in the case of a forbearance, we expect that a borrower who has experienced a loss of employment or a reduction of income may not repay the forborne payments at the end of the forbearance period. Additionally, we are prohibited by the CARES Act from collecting certain servicing related fees, such as late fees, during the forbearance plan period. We are further prohibited from initiating foreclosure and/or eviction proceedings under applicable investor and/or state law requirements. As of December 31, 2020, approximately 36,000 loans, or 10.0% of the loans in our MSR Servicing Portfolio had elected the forbearance option. We have so far successfully utilized other prepayments and mortgage payoffs to fund principal and interest advances relating to forborne loans, and have not advanced material amounts of principal or interest associated with forbearances. But, there is no assurance that we will be successful in doing so in the coming months and we will ultimately have to replace such funds to make payments in respect of such prepayments and mortgage payoffs. As a result, we may have to use our cash, including borrowings under our debt agreements, to make the payments required under our servicing operation.
In addition, multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to the COVID-19 pandemic are being issued by states, agencies and regulators. These measures could stay in place for an extended period of time. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties and restrictions on our business. In addition, we could face litigation and reputational damage.
Competition for mortgage assets may limit the availability of desirable originations, acquisitions and result in reduced risk-adjusted returns and adversely affect our business, financial condition, liquidity and results of operations.
We face substantial competition in originating and acquiring attractive assets, both in our loan origination activities and our correspondent production activities. The competition for mortgage loan assets may compress margins and reduce yields, making it difficult for us to acquire assets with attractive risk-adjusted returns. There can be no assurance that we will be able to successfully maintain returns, transition from assets producing lower returns into investments that produce better returns, or that we will not seek investments with greater risk to obtain the same level of returns. Any or all of these factors could cause the profitability of our operations to decline substantially and have a material adverse effect on our business, financial condition, liquidity and results of operations.
In addition, the financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. We may not be able to effectively implement new technology-driven products and services as quickly as competitors or be successful in marketing these products and services to our Correspondent Partners and consumers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to attract customers and adversely affect our results of operations, financial condition and liquidity.
Our profitability depends, in part, on our ability to continue to acquire our targeted mortgage assets at favorable prices. We compete with mortgage REITs, specialty finance companies, private funds, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, depository institutions, governmental bodies and other entities, many of which focus on acquiring mortgage assets. Many of our competitors
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also have competitive advantages over us, including size, financial strength, access to capital, cost of funds, federal pre-emption and higher risk tolerance. Competition may result in fewer acquisitions, higher prices, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs.
We may not be able to continue to grow our loan origination business or effectively manage significant increases in our loan production volume, both of which could negatively affect our reputation and business, financial condition and results of operations.
Our mortgage loan origination business consists of providing purchase money loans to homebuyers and refinancing existing loans. The origination of purchase money mortgage loans is greatly influenced by traditional business customers in the home buying process such as realtors and builders. As a result, our or our partners’ ability to secure relationships with such traditional business customers will influence our ability to grow our loan origination business. Our loan origination business also operates through third-party mortgage professionals who do business with us on a best efforts basis (i.e., they are not contractually obligated to do business with us). Further, our competitors also have relationships with these brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we may not be successful in maintaining our existing relationships or expanding our broker networks. Our business is also subject to overall market factors that can impact our ability to grow our loan production volume. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or slow growth in the level of new home purchase activity can impact our ability to continue to grow our loan production volumes, and we may be forced to accept lower margins in our respective businesses in order to continue to compete and keep our volume of activity consistent with past or projected levels. If we are unable to continue to grow our loan origination business, this could adversely affect our business, financial condition and results of operations.
On the other hand, we may experience material growth in our mortgage loan volume and MSRs. If we do not effectively manage our growth, the quality of our services could suffer. For example, in connection with our increased loan origination volume in 2020, we identified a higher rate of errors in our post-closing loan quality control review of our originations function, and we implemented certain remedial measures to address these errors, including additional training programs for our associates. If these remedial measures are not effective or if these or other errors arise in connection with future growth in our loan volume, the quality of our loans could be impacted, which could in turn negatively affect our reputation and business, financial condition and results of operations.
Difficult conditions or disruptions in the MBS, mortgage, real estate and financial markets and the economy generally may adversely affect our business, financial condition, liquidity and results of operations.
Most of the Agency-eligible mortgage loans that we originate or acquire are delivered to the GSEs or Ginnie Mae to be pooled into an Agency MBS or sold directly to the Agencies through the cash window or other third parties. Any significant disruption or period of illiquidity in the general MBS market would directly affect our liquidity because no existing alternative secondary market would likely be able to accommodate on a timely basis the volume of loans that we typically acquire and sell in any given period. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we acquire into the secondary market in a timely manner or at favorable prices or we may be required to repay a portion of the debt securing these assets, which could impact the availability and cost of financing arrangements and would likely result in a material adverse effect on our business, financial condition and results of operations.
The success of our business strategies and our results of operations are also materially affected by current conditions in the broader mortgage markets, the financial markets and the economy generally. Continuing concerns over factors including inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, geopolitical issues, the availability and cost of credit, the mortgage markets and the real estate markets have contributed to increased volatility and unclear expectations for the economy and markets going forward. The mortgage markets have been and continue to be affected by changes in the lending landscape, defaults, credit losses and significant liquidity concerns. A destabilization of the real estate and mortgage markets or deterioration in these markets may adversely affect the performance and fair value of our assets, reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.
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The industry in which we operate is highly competitive, and is likely to become more competitive, which could adversely affect us.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. Non-banks of various sizes and types are becoming increasingly competitive in the acquisition of newly originated mortgage loans and servicing rights. Many banks and large savings institutions have significantly greater resources or access to capital than we do, as well as a lower cost of funds. Additionally, some of our existing and potential competitors may decide to modify their business models to compete more directly with our wholesale and correspondent production business. For example, non-bank loan servicers may try to leverage their servicing operations to develop or expand a wholesale and correspondent production business. Since the withdrawal of a number of large participants from the mortgage markets following the financial crisis in 2007, non-bank participants have become more active in these markets. As more non-bank entities enter these markets, or if more of the large commercial banks decide to become aggressive in the mortgage space once again, our production activities may generate lower volumes and/or margins. Accordingly, our inability to compete successfully or a material decrease in profit margins resulting from increased competition could adversely affect our business, financial condition, liquidity and results of operations.
We depend on our ability to acquire loans and sell the resulting MBS in the secondary markets on favorable terms in our production activities. If our ability to acquire and sell is impaired, this could subject us to increased risk of loss.
In our production activities, we acquire and originate new loans, including non-Agency loans, from our Broker Partners and Correspondent Partners and sell or securitize those loans to or through the Agencies or other third-party investors. We also may sell the resulting securities into the MBS markets. However, there can be no assurance that we will continue to be successful in operating this business or that we will continue to be able to capitalize on these opportunities on favorable terms or at all. In particular, we have committed, and expect to continue to commit, capital and other resources to this operation. However, we may not be able to continue to source sufficient loan acquisition opportunities to justify the expenditure of such capital and other resources. In the event that we are unable to continue to source sufficient opportunities for this operation, there can be no assurance that we would be able to acquire such assets on favorable terms or at all, or that such loans, if acquired, would be profitable to us. In addition, we may be unable to finance the acquisition of these loans or may be unable to sell the resulting loans or MBS in the secondary mortgage market on favorable terms or at all. We are also subject to the risk that the fair value of the acquired loans may decrease prior to their disposition either due to changes in market conditions, the delinquencies of our mortgage loans or a change in the condition of the underlying mortgage property. The occurrence of any one or more of these risks could adversely impact our business, financial condition, liquidity and results of operations.
The gain recognized from sales in the secondary market represents a significant portion of our revenues and net earnings. Further, we are dependent on the cash generated from such sales to fund our future loan closings and repay borrowings under our loan funding facilities. A decrease in the prices paid to us upon sale of our loans could materially adversely affect our business, financial condition and results of operations. The prices we receive for our loans vary from time to time and may be materially adversely affected by several factors, including, without limitation:
an increase in the number of similar loans available for sale;
conditions in the loan securitization market or in the secondary market for loans in general or for our loans in particular, which could make our loans less desirable to potential investors;
defaults under loans in general;
loan-level pricing adjustments imposed by Fannie Mae and Freddie Mac, including the recently imposed adjustments for the purchase of loans in forbearance and, although deferred for later implementation, refinancing loans;
the types and volume of loans being originated or sold by us;
the level and volatility of interest rates; and
the quality of loans previously sold by us.
Further, to the extent we become subject to delays in our ability to sell future mortgage loans which we originate, we would need to reduce our origination volume to the amount that we can sell plus any excess capacity under our
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loan funding facilities. Delays in the sale of mortgage loans also increase our exposure to increases in interest rates, which could adversely affect our profitability on sales of loans.
The success and growth of our production and servicing activities will depend, in part, upon our ability to adapt to and implement technological changes.
The production process and our servicing platform are becoming more dependent upon technological advancement and depends, in part, upon our ability to effectively interface with our Broker Partners, Correspondent Partners and other third parties. Maintaining, improving and becoming proficient with new technology may require us to make significant capital expenditures. To the extent we are dependent on any particular technology or technological solution, we may be harmed if such technology or technological solution becomes non-compliant with existing industry standards, fails to meet or exceed the capabilities of our competitors’ equivalent technologies or technological solutions, becomes increasingly expensive to service, retain and update, becomes subject to third-party claims of intellectual property infringement, misappropriation or other violation or malfunctions or functions in a way we did not anticipate that results in loan defects potentially requiring repurchase.
We also rely on third-party software products and services to operate our business. If we lose our rights to such products or services, or our current software vendors become unable to continue providing services to us on acceptable terms, we may not be able to procure alternatives in a timely and efficient manner and on acceptable terms, or at all.
Additionally, new technologies and technological solutions are continually being released. We need to continue to develop and invest in our technological capabilities to remain competitive and our failure to do so could adversely affect our business, financial condition, liquidity and results of operations.
There is no assurance that we will be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. Additionally, if we fail to respond to technological developments in a cost-effective manner, or fail to acquire, integrate or interface with third-party technologies effectively, we may experience disruptions in our operations, lose market share or incur substantial costs.
Our risk management efforts may not be effective.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk and other market-related risks, as well as operational, tax and legal risks related to our business, assets and liabilities. We also are subject to various federal, state, local and foreign laws, regulations and rules that are not industry specific, including health and safety laws, environmental laws, privacy laws and other federal, state, local and foreign laws and other regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified or identify additional risks to which we may become subject in the future. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks including risks related to our hedging transactions and strategy, as well as access to cash reserves, and we may not effectively identify, manage, monitor and mitigate these risks as our business activity changes or increases.
We could be harmed by misconduct or fraud that is difficult to detect.
We are exposed to risks relating to fraud and misconduct by our associates, contractors, custodians, brokers and Correspondent Partners and other third parties with whom we have relationships. For example, associates could execute unauthorized transactions, use our assets improperly or without authorization, use confidential information for improper purposes or misreport or otherwise try to hide improper activities from us. This type of misconduct can be difficult to detect and if not prevented or detected could result in claims or enforcement actions against us or losses. In addition, such persons or entities may misrepresent facts about a mortgage loan, including the information contained in the loan application, property appraisal, title information and employment and income stated on the loan application. If any of this information was intentionally or negligently misrepresented and such misrepresentation was not detected prior to the acquisition or funding of the loan, the value of the loan could be significantly lower than expected. A mortgage loan subject to a material misrepresentation is typically unsalable or subject to repurchase if it is sold before detection of the misrepresentation. In addition, the persons and entities making a misrepresentation
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are often difficult to locate and it is often difficult to collect from them any monetary losses we have suffered. Our controls may not be completely effective in detecting this type of activity. Accordingly, such undetected instances of fraud may subject us to regulatory sanctions, litigation and losses, including those under our indemnification arrangements, and may seriously harm our reputation.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot assure you that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we continue to grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in a default and cross-defaults under our financing arrangements.
There is the risk that material weaknesses could be identified in the future and a risk exists that we may not successfully remediate future material weaknesses. Accordingly, our failure to maintain effective internal control over our business could result in financial risk and losses that would be reflected in our financial statements or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our business could suffer if we fail to attract and retain a highly skilled workforce, including our senior executives.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, in particular skilled managers, loan servicers, debt default specialists, loan officers and underwriters. Trained and experienced personnel are in high demand and may be in short supply in some areas. Many of the companies with which we compete for experienced associates have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our associates, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses, and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us, and this could materially affect our business, financial condition and results of operations.
The experience of our senior executives is a valuable asset to us. Our management team has significant experience in the residential mortgage origination and servicing industry. Changes to our senior executive team may occur, which could have an adverse effect on our business, financial condition and results of operations. We do not maintain and do not currently plan to obtain key life insurance policies on any of our senior managers.
We could be adversely affected if we inadequately obtain, maintain, protect and enforce our intellectual property and proprietary rights, and we may encounter disputes from time to time relating to our use of the intellectual property of third parties.
We rely on a combination of strategies to protect our intellectual property and proprietary rights, including the use of trademarks, service marks, domain names, trade secrets and unregistered copyrights, as well as confidentiality procedures and contractual provisions. Nevertheless, these measures may not prevent misappropriation, infringement, reverse engineering or other violation of these rights by third parties. Any intellectual property rights owned by or licensed to us may be challenged, invalidated, held unenforceable or circumvented in litigation or other proceedings, and such intellectual property rights may be lost or no longer provide us meaningful competitive advantages. We cannot guarantee that we will be able to conduct our operations in such a way as to avoid all alleged infringements, misappropriations or other violations of such intellectual property rights. Third parties may raise claims against us alleging an infringement, misappropriation or other violation of their intellectual property or proprietary rights.
Whether it is to defend against such claims or to protect and enforce our intellectual property and proprietary rights, we may be required to spend significant resources including bringing litigation, which could be costly, time consuming and could divert the time and attention of our management team and result in the impairment or loss of portions of our rights, and we may not prevail. Our failure to secure, maintain, protect and enforce our intellectual property and proprietary rights, or defend against claims related to same, could adversely affect our brands and adversely impact our business.
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Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, an unauthorized use or disclosure of confidential or regulated data and information, and/or damage to our business relationships, all of which could negatively impact our business.
The financial services industry as a whole is characterized by rapidly changing technologies. As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems and the information therein, both internal and those of third-party service providers.
A cyber incident refers to any adverse event that threatens the confidentiality, integrity or availability of our information technology resources, or those of our third-party providers, that result in the unauthorized access to, or disclosure, use, loss or destruction of, personally identifiable information or other sensitive, non-public, confidential or regulated data and information (including our borrowers’ personal information and transaction data), the misappropriation of assets, or a significant breakdown, invasion, corruption, destruction or interruption of any part of such information technology resources and the data therein. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, computer viruses and disabling devices, employee and contractor error, negligence or malfeasance, failures during the process of upgrading or replacing software and databases, hardware failures, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers.
We have undertaken measures intended to protect the safety and security of our information systems and the information systems of our third-party providers and the data therein, including physical and technological security measures, employee training, contractual precautions and business continuity plans, and implementation of policies and procedures designed to help mitigate the risk of system disruptions and failures and the occurrence of cyber incidents. Despite our efforts, there can be no assurance that any such risks will not occur or, if they do occur, that they will be adequately addressed in a timely manner. It is possible that advances in computer capabilities, undetected fraud, inadvertent violations of our policies or procedures or other developments could result in a cyber incident or system disruption or failure. We may not be able to anticipate or implement effective preventive measures against all such risks, especially with respect to cyber incidents, as the methods of attack change frequently or are not recognized until launched, and because cyber incidents can originate from a wide variety of sources, including persons involved with organized crime or associated with external service providers. Those parties may also attempt to fraudulently induce associates, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our Broker Partners and Correspondent Partners or borrowers. These risks have increased in recent years and may increase in the future as we continue to increase our reliance on the internet and use of web-based product offerings and on the use of cybersecurity. In addition, our current work-from-home policy may increase the risk for the unauthorized disclosure or use of personal information or other data.
We may also be held accountable for the actions and inactions of third-party vendors regarding cybersecurity and other consumer-related matters, which may not be covered by indemnification arrangements with our third-party vendors.
Additionally, cyberattacks on local and state government databases and offices, including the rising trend of ransomware attacks, expose us to the risk of losing access to critical data and the ability to provide services to our customers.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, regulatory action or investigation, fines or penalties, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We may be required to expend significant capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. In addition, our remediation efforts may not be successful and we may not have adequate insurance to cover these losses.
Material changes to the laws, regulations or practices applicable to reverse mortgage programs operated by FHA and HUD could adversely affect the reverse mortgage business of Longbridge Financial, LLC.
We own a 49.7% equity interest in Longbridge Financial, LLC, which participates in the reverse mortgage business. The reverse mortgage industry is largely dependent upon the Federal Housing Administration, or the FHA, and HUD, and there can be no guarantee that these entities will continue to participate in the reverse mortgage industry or that they will not make material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs. The reverse mortgage loan products originated by Longbridge Financial, LLC are Home Equity
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Conversion Mortgages, or HECM, an FHA-insured loan that must comply with the FHA’s and other regulatory requirements. Longbridge Financial, LLC also originates non-HECM reverse mortgage products, for which there is a limited secondary market. The FHA regulations governing the HECM product have changed from time to time. For example, on September 3, 2013, the FHA announced changes to the HECM program, pursuant to authority under the Reverse Mortgage Stabilization Act. The changes impact initial mortgage insurance premiums and principal limit factors, impose restrictions on the amount of funds that senior borrowers may draw down at closing and during the first 12 months after closing and require a financial assessment for all HECM borrowers to ensure they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage. In addition, the changes require borrowers to set aside a portion of the loan proceeds they receive at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and homeowners insurance based on the results of the financial assessment. The FHA also amended or clarified requirements related to HECMs through a series of issuances in 2014, including three Mortgagee Letters issued in June of 2014. The new requirements relate to advertising, restrictions on loan provisions, limitations on payment methods, new underwriting requirements, revised principal limits, revised financial assessment and property charge requirements and the treatment of non-borrowing spouses. The FHA has continued to issue additional guidance aimed at strengthening the HECM program. Most recently, the FHA issued a Mortgagee Letter changing initial and annual mortgage insurance premium rates and the principal limit factors for all HECMs. The reverse mortgage business of Longbridge Financial, LLC is also subject to state statutory and regulatory requirements including, but not limited to, licensing requirements, required disclosures and permissible fees. It is unclear how the various new requirements, including the financial assessment requirement, will impact the reverse mortgage business and ultimately, our investment in Longbridge Financial, LLC. In addition, because many of these guidance and regulations relate to protection of customers who faced foreclosures and evictions which led to adverse publicity in the reverse mortgage industry, negative publicity due to actions by other reverse mortgage lenders could cause regulatory focus on the business of Longbridge Financial, LLC.
Our vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us with financial, technology and other services to support our mortgage loan servicing and origination businesses. If our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies due to poor economic conditions or other events, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations. Additionally, in April 2012, the CFPB issued Bulletin 2012-03, as amended in 2016 by bulletin 2016-02, which states that supervised banks and non-banks could be held liable for actions of their service providers. As a result, we could be exposed to liability, CFPB enforcement actions or other administrative actions and/or penalties if the vendors with whom we do business violate consumer protection laws.
Our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements, could cause harm to our business and adversely affect our business and financial condition and may negatively impact our reputation.
Maintaining our reputation is critical to attracting and retaining customers, trading and financing counterparties, investors and associates. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business. Reputational risk could negatively affect our financial condition and business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain customers, trading counterparties, investors and associates and adversely affect our business, financial condition, liquidity and results of operations.
Reputational risk from negative public opinion is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Like other consumer-facing companies, we have received some amount of negative comment. These factors could tarnish or otherwise strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading and financing counterparties and associates and adversely affect our business, financial condition, liquidity and results of operations.
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Large-scale natural or man-made disasters may lead to further reputational risk in the servicing area. Our mortgage properties are generally required to be covered by hazard insurance in an amount sufficient to cover repairs to or replacement of the residence. However, when a large scale disaster occurs, the demand for inspectors, appraisers, contractors and building supplies may exceed availability, insurers and mortgage servicers may be overwhelmed with inquiries, mail service and other communications channels may be disrupted, borrowers may suffer loss of employment and unexpected expenses which cause them to default on payments and/or renders them unable to pay deductibles required under the insurance policies, and widespread casualties may also affect the ability of borrowers or others who are needed to effect the process of repair or reconstruction or to execute documents. Loan originations may also be disrupted, as lenders are required to re-inspect properties which may have been affected by the disaster prior to funding. In these situations, borrowers and others in the community may believe that servicers and originators are penalizing them for being the victims of the initial disaster and making it harder for them to recover, potentially causing reputational damage to the us.
Moreover, the proliferation of social media websites as well as the personal use of social media by our associates and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our associates interacting with our customers in an unauthorized manner in various social media outlets.
In addition, our ability to attract and retain customers is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters—even if related to seemingly isolated incidents, or even if related to practices not specific to the origination or servicing of loans, such as debt collection—could erode trust and confidence and damage our reputation among existing and potential customers. In turn, this could decrease the demand for our products, increase regulatory scrutiny and detrimentally effect our business, financial condition and results of operations.
Employment litigation and related unfavorable publicity could negatively affect our business.
Team members and former team members may, from time to time, bring lawsuits against us regarding injury, creation of a hostile workplace, discrimination, wage and hour, employee benefits, sexual harassment and other employment issues. In recent years there has been an increase in the number employment-related actions in states with favorable employment laws, such as California, as well as an increase in the number of discrimination and harassment claims against employers generally. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their businesses. If we experience significant incidents involving employment or harassment related claims, we could face substantial out-of-pocket losses and fines if claims are not covered by our liability insurance, as well as negative publicity. In addition, such claims may give rise to litigation, which may be time-consuming, costly and distracting to our management team.
Initiating new business activities or strategies or significantly expanding existing business activities or strategies may expose us to new risks and will increase our cost of doing business.
Initiating new business activities or strategies or significantly expanding existing business activities or strategies may expose us to new or increased financial, regulatory, reputational and other risks. Such innovations are important and necessary ways to grow our businesses and respond to changing circumstances in our industry; however, we cannot be certain that we will be able to manage the associated risks and compliance requirements effectively. Such risks include a lack of experienced management-level personnel, increased administrative burden, increased logistical problems common to large, expansive operations, increased credit and liquidity risk and increased regulatory scrutiny.
Furthermore, our efforts may not succeed and any revenues we earn from any new or expanded business initiative or strategy may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative, strategy or acquisition.
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Certain of our material vendors have operations in India that could be adversely affected by changes in political or economic stability or by government policies.
Certain of our material vendors currently have operations located in India, which is subject to relatively higher political and social instability than the United States and may lack the infrastructure to withstand political unrest, natural disasters or global pandemics. The political or regulatory climate in the United States, or elsewhere, also could change so that it would not be lawful or practical for us to use vendors with international operations in the manner in which we currently use them. If we could no longer utilize vendors operating in India or if those vendors were required to transfer some or all of their operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations. In some foreign countries with developing economies, it may be common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act of 1977, as amended, or the FCPA. Any violations of the FCPA or local anti-corruption laws by us, our subsidiaries or our local vendors could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
We may not be able to fully utilize our net operating loss, or NOL, and other tax carryforwards.
As of September 30, 2020, we had $34.1 million of NOL carryforwards for federal income tax purposes, which begin to expire in 2035. Our ability to utilize NOLs and other tax carryforwards to reduce taxable income in future years could be limited due to various factors, including (i) our projected future taxable income, which could be insufficient to recognize the full benefit of such NOL carryforwards prior to their expiration; (ii) limitations imposed as a result of one or more ownership changes under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, (which subject NOLs to an annual limitation on usage); and/or (iii) challenges by the Internal Revenue Service, or the IRS, that a transaction or transactions were concluded with the principal purpose of evasion or avoidance of federal income tax. As of September 30, 2020, $24.9 million of our NOL carryforwards for federal income tax purposes are subject to limitations under Section 382 of the Code, which we anticipate being able to fully utilize in the normal course. However, it is possible that this offering, together with other ownership changes, could further limit our ability to use these NOLs.
The IRS could challenge the amount, timing and/or use of our NOL carryforwards.
The amount of our NOL carryforwards has not been audited or otherwise validated by the IRS after the tax year ended December 31, 2016. Among other things, the IRS could challenge the amount, timing and/or our use of our NOLs. Any such challenge, if successful, could significantly limit our ability to utilize a portion or all of our NOL carry forwards. In addition, calculating whether an ownership change has occurred within the meaning of Section 382 is subject to inherent uncertainty, both because of the complexity of applying Section 382 and because of limitations on a publicly traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our utilizable NOL carryforwards could be changed as a result of a successful challenge by the IRS or as a result of new information about the ownership of, and transactions in, our securities.
Possible changes in legislation could negatively affect our ability to use the tax benefits associated with our NOL carryforwards.
The rules relating to U.S. federal income taxation are periodically under review by persons involved in the legislative and administrative rulemaking processes, by the IRS and by the U.S. Department of the Treasury, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes, including decreases in the tax rate. Future revisions in U.S. federal tax laws and interpretations thereof could adversely impact our ability to use some or all of the tax benefits associated with our NOL carryforwards.
Changes in tax laws may adversely affect us.
The Tax Cuts and Jobs Act, or the TCJA, enacted on December 22, 2017, significantly affected U.S. federal tax law, including by changing how the U.S. imposes tax on certain types of income of corporations and by reducing the U.S. federal corporate income tax rate to 21%. It also imposed new limitations on a number of tax benefits, including deductions for business interest, use of net operating loss carryforwards, taxation of foreign income, and the foreign tax credit, among others.
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It also imposed new limitations on deductions for mortgage interest, which may affect the demand for loans which we acquire and service. The CARES Act, enacted on March 27, 2020, in response to the COVID-19 pandemic, further altered U.S. federal tax law, including in respect of certain changes that were made by the TCJA, generally on a temporary basis. There can be no assurance that future tax law changes will not increase the rate of the corporate income tax significantly, impose new limitations on deductions, credits or other tax benefits, or make other changes that may adversely affect our business, cash flows or financial performance. In addition, the IRS has yet to issue guidance on a number of important issues regarding the changes made by the TCJA and the CARES Act.
Market Risks
Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Due to the unprecedented events surrounding the COVID-19 pandemic along with the associated severe market dislocation, there is an increased degree of uncertainty and unpredictability concerning current interest rates, future interest rates and potential negative interest rates. Interest rate fluctuations present a variety of risks to our operations. Our primary interest rate exposures relate to the yield on our assets, their fair values and the financing cost of our debt, as well as to any derivative financial instruments that we utilize for hedging purposes. Decreasing interest rates may cause a large number of borrowers to refinance, which could result in the loss of future net servicing revenues with an associated write-down of the related MSRs. In addition, significant savings in interest rate movement may impact our gains and losses from interest rate hedging arrangements and result in our need to change our hedging strategy. Any such scenario could have a material adverse effect on our business, results of operations and financial condition.
Changes in the level of interest rates also may affect our ability to acquire assets (including the purchase or origination of mortgage loans), the value of our assets (including our pipeline of mortgage loan commitments and our portfolio of MSRs) and any related hedging instruments, the value of newly originated or purchased loans, and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates and may impact our ability to refinance or modify loans and/or to sell real estate owned, or REO, assets.
Borrowings under some of our financing agreements are at variable rates of interest, which also expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable-rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. We currently have entered into, and in the future we may continue to enter into, interest rate swaps or interest rate swap futures that involve the exchange of floating for fixed-rate interest payments to reduce interest rate volatility. However, we may not maintain interest rate swaps or interest rate swap futures with respect to all of our variable-rate indebtedness, and any such swaps may not fully mitigate our interest rate risk, may prove disadvantageous, or may create additional risks.
In addition, our business is materially affected by the monetary policies of the U.S. government and its agencies. We are particularly affected by the policies of the U.S. Federal Reserve, which influence interest rates and impact the size of the loan origination market. In 2017, the U.S. Federal Reserve ended its quantitative easing program and started its balance sheet reduction plan. The U.S. Federal Reserve’s balance sheet consists of U.S. Treasuries and MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. To shrink its balance sheet prior to the COVID-19 pandemic, the U.S. Federal Reserve had slowed the pace of MBS purchases to a point at which natural runoff exceeded new purchases, resulting in a net reduction. Recently, in response to the COVID-19 pandemic, state and federal authorities have taken several actions to provide relief to those negatively affected by COVID-19, such as the CARES Act and the Federal Reserve’s support of the financial markets. In particular, the U.S. Federal Reserve announced programs to increase its purchase of certain MBS products in response to the COVID-19 pandemic’s effect on the U.S. economy, and the market for MBS in particular. The U.S. Federal Reserve also reduced the target range for the federal funds rate to 0 to 0.25% and announced a policy change in August 2020 to the way it sets interest rates that will likely keep interest rates in the U.S. relatively low for an extended period of time. The results of this recent policy change by the U.S. Federal Reserve are unknown at this time, as is its duration, but could affect the liquidity of MBS in the future.
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Hedging against interest rate exposure may materially and adversely affect our business, financial condition, liquidity and results of operations.
We pursue hedging strategies to reduce our exposure to changes in interest rates. However, while we enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in poorer overall performance than if we had not engaged in any such hedging transactions, in addition to directly affecting the percentage of loan applications in the underwriting process that ultimately close. Interest rate hedging may fail to protect or could adversely affect us because, among other things, it may not fully eliminate interest rate risk, it could expose us to counterparty and default and cross-default risk that may result in greater losses or the loss of unrealized profits, and it will create additional expense. Generally, hedging activity requires the investment of capital and the amount of capital required often varies as interest rates and asset valuations change. Thus, hedging activity, while intended to limit losses, may materially and adversely affect our business, financial condition, liquidity and results of operations.
A prolonged economic slowdown, recession or declining real estate values could materially and adversely affect us.
Our business and earnings are sensitive to general business and economic conditions in the U.S. A downturn in economic conditions resulting in adverse changes in interest rates, inflation, the debt capital markets, unemployment rates, consumer and commercial bankruptcy filings, the general strength of national and local economies and other factors that negatively impact household incomes could decrease demand for our mortgage loan products as a result of a lower volume of housing purchases and reduced refinancings of mortgages and could lead to higher mortgage defaults and lower prices for our loans upon sale.
In addition, a weakening economy, high unemployment and declining real estate values may increase the likelihood that borrowers will become delinquent and ultimately default on their debt service obligations. Our cost to service increases when borrowers become delinquent. In the event of a default, we may incur additional costs, the size of which depends on a number of factors, including, but not limited to, the instruction of the loan investor, location and condition of the underlying property, the terms of the guarantee or insurance on the loan, the level of interest rates and the time it takes to liquidate the property.
We finance our assets with borrowings, which may materially and adversely affect the income derived from our assets.
We currently leverage and, to the extent available, we intend to continue to leverage our assets through borrowings, the level of which may vary based on the particular characteristics of our asset portfolio and on market conditions. We have financed certain of our assets through repurchase agreements, pursuant to which we sell mortgage loans to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the assets to the lender is less than our cost to acquire the assets as well as the fair value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the difference in asset value sold back to us reduced further by interest accrued on the financing (assuming there was no change in the fair value of the assets).
The value of our collateral may decrease, which could lead to our lenders initiating margin calls and requiring us to post additional collateral or repay a portion of our outstanding borrowings.
We originate or acquire certain assets, including MSRs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs under secured financing arrangements. Our MSRs are pledged to secure borrowings under a loan and security agreement. Our Fannie Mae, Freddie Mac, and Ginnie Mae MSRs are financed on a $500 million line of credit with a three year revolving period ending on January 31, 2022, followed by a one year amortization period which ends on January 31, 2023. Our secured financing arrangements pursuant to which we finance MSRs are further subject to the terms of an acknowledgement agreement with the related GSE and Ginnie Mae, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable GSE or Ginnie Mae and subject to financial covenants similar to our financing arrangements. Accordingly, the exercise by any GSE or Ginnie Mae of its rights under the applicable acknowledgment agreement, including at the direction of the secured parties and whether or not we are in breach of our financing arrangement, could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.
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We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our asset portfolio’s cash flow.
Our operations are dependent on access to our financing arrangements, which are mostly uncommitted. If the lenders under these financing facilities terminate, or modify the terms of, these facilities, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We depend on short-term debt financing in the form of secured borrowings under various financing arrangements with financial institutions. These facilities are primarily uncommitted, which means that any request we make to borrow funds under these facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. We may not be able to obtain additional financing under our financing arrangements when necessary, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and exposing us to, among other things, liquidity risks which could adversely affect our profitability and operations.
Our financing agreements contain financial and restrictive covenants that could adversely affect our financial condition and our ability to operate our businesses.
The lenders under our financing agreements require us and/or our subsidiaries to comply with various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position and maintain collateral having a market value sufficient to support the related borrowings. If we are unable to meet these financial covenants, our financial condition could deteriorate rapidly and could also result in a default or cross-defaults under our financing arrangements.
Our existing financing agreements also impose other financial and non-financial covenants and restrictions on us that impact our flexibility to determine our operating policies by limiting our ability to, among other things: incur certain types of indebtedness; grant liens; engage in consolidations and mergers and asset sales; make restricted payments and investments; and enter into transactions with affiliates. In our financing agreements, we agree to certain covenants and restrictions and we make representations about the assets sold or pledged under these agreements. We also agree to certain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of financial and other covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades, bankruptcy or insolvency proceedings, legal judgments against us, loss of licenses, loss of Agency, FHA, VA and/or USDA approvals and other events of default and remedies customary for these types of agreements. If we default on our obligations under our financing arrangements, fail to comply with certain covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, repurchase the assets, and/or cease entering into any other financing arrangements with us, which could also result in defaults or cross-defaults in our financing arrangements.
Because our financing agreements typically contain cross-default provisions, a default that occurs under any one agreement could allow the lenders under our other agreements to also declare a default, thereby exposing us to a variety of lender remedies, such as those described above, and potential losses arising therefrom. In addition, defaults and cross-defaults under our financing arrangements could trigger a cross-defaults under our trading agreements, which could have a negative impact on our ability to enter into hedging transactions. Any losses that we incur on our financing agreements could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We may be adversely affected by changes in the London Inter-Bank Offered Rate, or LIBOR, reporting practices, the method in which LIBOR is determined, the possible transition away from LIBOR and the possible use of alternative reference rates.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom Financial Conduct Authority, announced plans to consult on
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ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted.
The possible withdrawal and replacement of LIBOR with alternative benchmarks introduces a number of risks for us, our customers and our industry more widely. These risks include legal implementation risks, as extensive changes to documentation for new and existing customers, including lenders and real estate investors/owners, may be required. There are also financial risks arising from any changes in the valuation of financial instruments, which may impact our loan production and servicing businesses. There are also operational risks due to the potential requirement to adapt information technology systems and operational processes to address the withdrawal and replacement of LIBOR. In addition, the withdrawal or replacement of LIBOR may temporarily reduce or delay transaction volume and could lead to various complexities and uncertainties related to our industry.
Additionally, Fannie Mae and Freddie Mac have announced that they will stop purchasing adjustable-rate mortgages (“ARMs”) based on LIBOR by the end of 2020 and plan to begin accepting ARMs based on the Secured Overnight Financing Rate (“SOFR”) in late 2020. Fannie Mae’s and Freddie Mac’s switch to SOFR may result in a disruption of business flow for our business due to changes in loan pricing as a result of spread differential between LIBOR and SOFR and hedging issues, both from a differential in cost and uncertainty with timing for the transition to the new index. Additionally, our business may face operational risks associated with documentation for existing loans that may not adequately address the LIBOR transition and implementing SOFR into our systems and processes properly to ensure interest is accurately calculated.
While it is not currently possible to determine precisely whether, or to what extent, the possible withdrawal and replacement of LIBOR would affect us, the implementation of alternative benchmark rates to LIBOR could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may not be able to raise the debt or equity capital required to finance our assets and grow our businesses.
The growth of our businesses requires continued access to debt and equity capital that may or may not be available on favorable terms, at the desired times or at all. In addition, we own certain assets, including MSRs, for which financing has historically been difficult to obtain. Our inability to continue to maintain debt financing for MSRs could require us to seek equity capital that may be more costly or unavailable to us.
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks and risk thresholds and tolerances, any of which may materially and negatively impact their willingness to extend credit to us specifically or mortgage lenders and servicers generally. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital.
Our access to any debt or equity capital on favorable terms or at all is uncertain. Our inability to raise such capital or obtain such debt or equity financing on favorable terms or at all could materially and adversely impact our business, financial condition, liquidity and results of operations.
We utilize derivative financial instruments, which could subject us to risk of loss.
We enter into a variety of hedging arrangements such as derivative contracts, to hedge the fair value of the MSR portfolio and minimize market rate risk although we cannot assure you that these hedging arrangements will protect the value of our MSR assets. We utilize derivative financial instruments for hedging purposes, which may include swap futures, options, “to be announced” contracts and futures. However, the prices of derivative financial instruments, including futures and options, are highly volatile. As a result, the cost of utilizing derivatives may reduce our income and liquidity, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions.
The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and its implementing
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regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations.
Regulatory Risks
We operate in a highly regulated industry with continually changing federal, state and local laws and regulations.
The mortgage industry is highly regulated, and we are required to comply with a wide array of federal, state and local laws and regulations that restrict, among other things, the manner in which we conduct our loan production and servicing businesses, including the fees that we may charge and the collection, use, retention, protection, disclosure and other processing of personal information. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. Both the scope of the laws and regulations and the intensity of the supervision to which our business is subject have increased over time in response to the financial crisis, as well as other factors, such as technological and market changes.
The laws and regulations and judicial and administrative decisions relating to mortgage loans and consumer protection to which we are subject include, for example, those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, unfair, deceptive and abusive acts and practices, federal and state advertising requirements, high-cost loans and predatory lending, compliance with net worth and financial statement delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, ability-to-repay and qualified mortgages, licensing of loan originators and other personnel, loan originator compensation, secured transactions, property valuations, insurance, servicing transfers, payment processing, escrow, communications with consumers, loss mitigation, debt collection, prompt payment crediting, periodic statements, foreclosure, bankruptcies, repossession and claims-handling procedures, disclosures related to and cancellation of private mortgage insurance, flood insurance, the reporting of loan application and origination data, and other trade practices. For a more detailed description of the regulations to which we are subject, see “Business—Regulation.”
We also must comply with federal, state and local laws related to data privacy and the handling of personally identifiable information, or PII, and other sensitive, regulated or non-public data. These include the recently enacted California Consumer Privacy Act, or the CCPA, and we expect other states to enact legislation similar to the CCPA, which limit how companies can use customer data and impose obligations on companies in their management of such data, and require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to opt out of certain sales of personal information, in addition to limiting our ability to use their information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result from a failure to implement reasonable safeguards. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The service providers we use, including outside counsel retained to process foreclosures and bankruptcies, must also comply with some of these legal requirements. Changes to laws, regulations or regulatory policies or their interpretation or implementation and the continued heightening of regulatory requirements could affect us in substantial and unpredictable ways.
The influx of new laws, regulations, and other directives adopted by federal, state and local governments in response to the recent COVID-19 pandemic exemplifies the ever-changing and increasingly complex regulatory landscape in which we operate. While some regulatory reactions to COVID-19 relaxed certain compliance obligations, the forbearance requirements imposed on mortgage servicers in the recently passed CARES Act added new regulatory responsibilities. The GSEs and the Federal Housing Finance Agency, or the FHFA, Ginnie Mae, the U.S. Department of Housing and Urban Development, or HUD, state and local governments, various investors and others have also issued guidance relating to COVID-19. Future regulatory scrutiny and enforcement resulting from COVID-19 is unknown.
Our failure to comply with applicable federal, state and local consumer protection and data privacy laws could lead to:
loss of our licenses and approvals to engage in our servicing and lending/loan purchasing businesses;
damage to our reputation in the industry;
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governmental investigations and enforcement actions;
administrative fines and penalties and litigation;
civil and criminal liability, including class action lawsuits;
diminished ability to sell loans that we originate or purchase, requirements to sell such loans at a discount compared to other loans or repurchase or address indemnification claims from purchasers of such loans, including the GSEs;
inability to raise capital; and
inability to execute on our business strategy, including our growth plans.
Furthermore, situations involving a potential violation of law or regulation, even if limited in scope, may give rise to numerous and overlapping investigations and proceedings, either by multiple federal and state agencies and officials in the United States. In addition, our failure, or the failure of our Broker Partners and Correspondent Partners to comply with these laws and regulations may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, rescission of mortgages and return of interest payments, permanent forgiveness of debt, delays in the foreclosure process, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations, which could affect our investor approval status and our ability to sell or service loans. Our failure to adequately supervise vendors and service providers may lead to significant liabilities, inclusive of assignee liabilities, as a result of the errors and omissions of those vendors and service providers.
As regulatory guidance and enforcement and the views of the CFPB, state attorneys general, the GSEs and other market participants evolve, we may need to modify further our loan origination processes and systems in order to adjust to evolution in the regulatory landscape and successfully operate our lending business. In such circumstances, if we are unable to make the necessary adjustments, our business and operations could be adversely affected.
Our failure to comply with the laws and regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, and also trigger defaults under our financing arrangements, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
We may be subject to liability for potential violations of anti-predatory lending laws, which could adversely impact our results of operations, financial condition and business.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending and servicing practices. The Home Ownership and Equity Protection Act of 1994, or HOEPA, prohibits inclusion of certain provisions in residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a residential loan, for example, does not meet the test even if the related originator reasonably believed that the test was satisfied. The VA has also adopted rules to protect veterans from predatory lending in connection with certain home loans.
Failure of residential loan originators or servicers to comply with these laws, to the extent any of their residential loans are or become part of our mortgage-related assets, could subject us, as a servicer or, in the case of acquired loans, as an assignee or purchaser, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers, assignees and purchasers of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If our loans are found to have been originated in violation of predatory or abusive lending laws, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses.
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The CFPB is active in its monitoring of the residential mortgage origination and servicing sectors. New or revised rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB could result in increased compliance costs, enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.
The CFPB has oversight of non-depository mortgage lending and servicing institutions and is empowered with broad supervision, rulemaking and examination authority to enforce laws involving consumer financial products and services and to ensure, among other things, that consumers receive clear and accurate disclosures regarding financial products and are protected from hidden fees and unfair, deceptive or abusive acts or practices. The CFPB has adopted a number of regulations under long-standing consumer financial protection laws and the Dodd-Frank Act, including rules regarding truth in lending, assessments of a borrower’s ability to repay, home mortgage loan disclosure, home mortgage loan origination, fair credit reporting, fair debt collection practices, foreclosure protections and mortgage servicing rules, including provisions regarding loss mitigation, prompt crediting of borrowers’ accounts for payments received, delinquency and early intervention, prompt investigation of complaints by borrowers, periodic statement requirements, lender-placed insurance, requests for information and successors-in-interest to borrowers. The CFPB also periodically issues guidance documents, such as bulletins, setting forth informal guidance regarding compliance with these and other laws under its jurisdiction, and issues public enforcement actions, which provide additional guidance on its interpretation of these legal requirements.
The CFPB also has enforcement authority and can order, among other things, rescission or reformation of contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust enrichment, the payment of damages or other monetary relief, public notifications regarding violations, limits on activities or functions, remediation of practices, external compliance monitoring and civil money penalties. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review vendors’ policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations. Through enforcement actions and guidance, the CFPB is also applying scrutiny to compensation payments to third-party providers for marketing services and may issue guidance that narrows the range of acceptable payments to third-party providers as part of marketing services agreements, lead generation agreements and other third-party marketer relationships.
In addition to its supervision and examination authority, the CFPB is authorized to conduct investigations to determine whether any person is engaging in, or has engaged in, conduct that violates federal consumer financial protection laws, and to initiate enforcement actions for such violations, regardless of its direct supervisory authority. Investigations may be conducted jointly with other regulators. The CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws, require remediation of practices and pursue administrative proceedings or litigation for violations of applicable federal consumer financial laws. The CFPB also has the authority to obtain cease and desist orders, orders for restitution or rescission of contracts and other kinds of affirmative relief and monetary penalties ranging from up to approximately $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1,000,000 per day for knowing violations.
The mortgage lending sector is currently relying for a significant portion of the mortgages originated on a temporary CFPB regulation, commonly called the “QM Patch,” which permits mortgage lenders to comply with the CFPB’s ability to repay requirements by relying on the fact that the mortgage is eligible for sale to Fannie Mae or Freddie Mac. Reliance on the QM Patch has become widespread due to the operational complexity and practical inability for many mortgage lenders to rely on other ways to show compliance with the ability to repay regulations. On June 22, 2020, the CFPB issued a notice of proposed rulemaking to, among other things, revise the definition of a qualified mortgage. On October 20, 2020, the CFPB finalized a rule extending the temporary “GSE patch,” which grants QM status to loans eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, until the QM rule changes are finalized and take effect. Meanwhile, the CFPB will continue developing final rules on the general QM loan definition and its proposal for a new category of “seasoned” QMs. We cannot predict what final actions the CFPB will take and how it might affect us as well as other mortgage lenders.
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Consistent with its active monitoring of residential mortgage origination and servicing, the CFPB may impose new regulations under existing statutes or revise its existing regulations to more stringently limit our business activities. In addition, uncertainty regarding changes in leadership or authority levels within the CFPB and changes in supervisory and enforcement priorities, including potentially more stringent enforcement actions, could result in heightened regulation and oversight of our business activities, materially and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our business activities. Our failure to comply with the laws and regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, and also trigger defaults under our financing arrangements, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The state regulatory agencies continue to be active in their supervision of the loan origination and servicing sectors and the results of these examinations may be detrimental to our business. New or revised rules and regulations and more stringent enforcement of existing rules and regulations by state regulatory agencies could result in increased compliance costs, enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.
We are also supervised by regulatory agencies under state law. State attorneys general, state licensing regulators, and state and local consumer protection offices have authority to investigate consumer complaints and to commence investigations and other formal and informal proceedings regarding our operations and activities. In addition, the GSEs and the FHFA, Ginnie Mae, the FTC, HUD, various investors, non-agency securitization trustees and others subject us to periodic reviews and audits.
State regulatory agencies have been and continue to be active in their supervision of loan origination and servicing companies, including us. If a state regulatory agency imposes new rules or revises its rules or otherwise engages in more stringent supervisory and enforcement activities with respect to existing or new rules, we could be subject to enforcement actions, fines or penalties, as well as reputational harm as a result of these actions. We also may face increased compliance costs as a direct result of new or revised rules or in response to any such stringent enforcement or supervisory activities. A determination of our failure to comply with applicable law could lead to enforcement action, administrative fines and penalties, or other administrative action.
Government responses to COVID-19, including the passage of the CARES Act, pose new and evolving compliance obligations on our business, and we may experience unfavorable changes in or failure to comply with existing or future regulations and laws adopted in response to COVID-19.
Due to the unprecedented impact on major sectors of the U.S. economy from COVID-19, numerous states and the federal government have adopted measures requiring mortgage servicers to work with consumers negatively impacted by COVID-19. The CARES Act imposes several new compliance obligations on our mortgage servicing activities, including, but not limited to mandatory forbearance offerings, altered credit reporting obligations, and moratoriums on foreclosure actions and late fee assessments. Many states have taken similar measures to provide mortgage payment and other relief to consumers, which create additional complexity around our mortgage servicing compliance activities. We cannot predict when or on what terms and conditions these measures will be lifted, which will depend on future legislative and regulatory developments in response to the COVID-19 pandemic.
The swift passage of the CARES Act increases the likelihood of unintended consequences from the legislation. An example of such unintended consequences is the liquidity pressure placed on mortgage servicers given our contractual obligation to continue to advance payments to investors on loans in forbearance where consumers are not making their typical monthly mortgage payments. Moreover, certain provisions of the CARES Act are subject to interpretation given the existing ambiguities in the legislation, which creates class action and other litigation risk.
Although much of the executive, legislative and regulatory action stemming from COVID-19 is focused on mortgage servicing, regulators are adjusting compliance obligations impacting our mortgage origination activities. Many states have adopted temporary measures allowing for otherwise prohibited remote mortgage loan origination activities. While these temporary measures allow us to continue to do business remotely, they impose notice, procedural, and other compliance obligations on our origination activity.
Federal, state and local executive, legislative and regulatory responses to COVID-19 are rapidly evolving, not consistent in scope or application, and subject to change without advance notice. Such efforts may impose additional compliance obligations, which may negatively impact our mortgage origination and servicing business. Any
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additional legal or regulatory responses to COVID-19 may unfavorably restrict our business operations, alter our established business practices, and otherwise raise our compliance costs.
Failure to comply with the GSEs, FHA, VA and USDA guidelines and changes in these guidelines or GSE and Ginnie Mae guarantees could adversely affect our business.
We are required to follow specific guidelines and eligibility standards that impact the way we service and originate GSE and U.S. government agency loans, including guidelines and standards with respect to:
underwriting standards and credit standards for mortgage loans;
our staffing levels and other servicing practices;
the servicing and ancillary fees that we may charge;
our modification standards and procedures;
the amount of reimbursable and non-reimbursable advances that we may make; and
the types of loan products that are eligible for sale or securitization.
These guidelines provide the GSEs and other government agencies with the ability to provide monetary incentives for loan servicers that perform well and to assess penalties for those that do not. In addition, these guidelines directly limit the types of loan products that we may offer in general and the mortgage loans that we may underwrite for specific borrowers to the extent that we those products to be supported by the GSEs and other government agencies. As a result, failure to comply with these guidelines could adversely impact our ability to benefit from GSE and other government agency support and could therefore impact our business.
At the direction of the FHFA, Fannie Mae and Freddie Mac have aligned their guidelines for servicing delinquent mortgages, which could result in monetary incentives for servicers that perform well and to assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. We generally cannot negotiate these terms with the Agencies and they are subject to change at any time without our specific consent. A significant change in these guidelines, that decreases the fees we charge or requires us to expend additional resources to provide mortgage services, could decrease our revenues or increase our costs.
In addition, changes in the nature or extent of the guarantees provided by Fannie Mae, Freddie Mac, Ginnie Mae, the USDA or the VA, or the insurance provided by the FHA, or coverage provided by private mortgage insurers, could also have broad adverse market implications. Any future increases in guarantee fees or changes to their structure or increases in the premiums we are required to pay to the FHA or private mortgage insurers for insurance or to the VA or the USDA for guarantees could increase mortgage origination costs and insurance premiums for our customers. These industry changes could negatively affect demand for our mortgage services and consequently our origination volume, which could be detrimental to our business. We cannot predict whether the impact of any proposals to move Fannie Mae and Freddie Mac out of conservatorship would require them to increase their fees. For further discussion, see “Risk Factors—We are highly dependent on the GSEs and Ginnie Mae and the FHFA, as the conservator of the GSEs, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial condition and results of operations.”
We are highly dependent on the GSEs and Ginnie Mae and the FHFA, as the conservator of the GSEs, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial condition and results of operations.
Our ability to generate revenues through mortgage loan sales depends to a significant degree on programs administered by the GSEs and Ginnie Mae and others that facilitate the issuance of MBS in the secondary market. The GSEs, Ginnie Mae and FHFA play a critical role in the mortgage industry and we have significant business relationships with them. Presently, almost all of the newly originated conventional conforming loans that we acquire from mortgage lenders through our correspondent production activities or our Direct channel activities qualify under existing standards for inclusion in mortgage securities backed by the GSEs and Ginnie Mae or for purchase by a GSE directly through its cash window. We also derive other material financial benefits from these relationships, including the assumption of credit risk by the GSEs and Ginnie Mae on loans included in such mortgage securities in exchange for our payment of guarantee fees, our retention of such credit risk through structured transactions that lower our
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guarantee fees, and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures to the Agencies and other third-party purchasers.
The disposition of the FHFA conservatorship of the GSEs continues to be debated between the U.S. Congress and the executive branch of the U.S. federal government and could also be impacted by a forthcoming U.S. Supreme Court case regarding whether FHFA’s structure is constitutional. In June 2018, the Trump Administration brought forth a new proposal to end government conservatorship, which would result in full privatization of the GSEs. In September 2019, the U.S. Department of the Treasury, or the U.S. Treasury, the FHFA and HUD released plans to reform the housing finance system. These Agencies developed these plans in conjunction with one another and other government agencies, and include legislative and administrative reforms to achieve the following reform goals: (i) ending the conservatorships of the GSEs upon the completion of specified reforms; (ii) facilitating competition in the housing finance market; (iii) establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and (iv) providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. At this point, it remains unclear whether any of these legislative or regulatory reforms will be enacted or implemented. Any changes in laws and regulations affecting the relationship between the GSEs and the U.S. federal government could adversely affect our business and prospects. Although the U.S. Treasury has committed capital to the GSEs, these actions may not be adequate for their needs. If the GSEs are adversely affected by events such as ratings downgrades, inability to obtain necessary government funding, lack of success in resolving repurchase demands to lenders, foreclosure problems and delays and problems with mortgage insurers, they could suffer losses and fail to honor their guarantees and other obligations. Any discontinuation of, or significant reduction in, the operation of the GSEs or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or underwriting criteria could materially and adversely affect our business, liquidity, financial condition and results of operations. The roles of the GSEs could be significantly restructured, reduced or eliminated and the nature of the guarantees could be considerably limited relative to historical measurements. Elimination of the traditional roles of the GSEs, or any changes to the nature or extent of the guarantees provided by the GSEs or the fees, terms and guidelines that govern our selling and servicing relationships with them, such as increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase demands and/or the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other sellers/servicers, could also materially and adversely affect our business, including our ability to sell and securitize loans that we acquire through our correspondent production activities or our Direct channel activities, and the performance, liquidity and market value of our assets. Moreover, any changes to the nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity and results of operations.
Our ability to generate revenues from newly originated loans that we acquire through our correspondent production activities and originated by our Direct channel is also dependent on the fact that the Agencies have not historically focused on acquiring such loans directly from the smaller mortgage lenders with whom we have relationships, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell loans from such lenders to investors in the secondary market. Certain of the Agencies have approved more of the smaller lenders that traditionally might not have qualified for such approvals, and more importantly are discussing programs where they would facilitate new or expanded options for a broad range of lenders to sell their servicing through executions other than whole loan sales to correspondent aggregators. In the future, the Agencies may continue to create initiatives, programs and technology that serve to discourage correspondent aggregators. To the extent that lenders choose to sell directly to the Agencies rather than through correspondent aggregators like us, this reduces the number of loans available for purchase in the correspondent business channel and could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to maintain those Agency approvals or state licenses or that changes in Agency guidelines will not materially and adversely affect our business, financial condition and results of operations.
We are subject to state mortgage lending, purchase and sale, loan servicing or debt collection licensing and regulatory requirements. Our failure to obtain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our Direct channel activities or loan
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purchase and sale or servicing activities, result in litigation, or civil and other monetary penalties, or criminal penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity and results of operations.
We are required to hold Agency approvals in order to sell mortgage loans to a particular Agency and/or service such mortgage loans on their behalf. Our failure to satisfy the various requirements necessary to maintain such Agency approvals over time would also substantially restrict our business activities and could adversely impact our results of operations and financial condition including defaults under our financing agreements.
We are also required to follow specific guidelines that impact the way that we originate and service Agency loans. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which could also adversely affect our business, financial condition and results of operations.
In addition, we are subject to periodic examinations by federal and state regulators, our lenders and the Agencies, which can result in increases in our administrative costs, the requirement to pay substantial penalties due to compliance errors or the loss of our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.
In addition, because we are not a state or federally chartered depository institution, we do not benefit from exemptions from state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all states in which we operate and the District of Columbia, and regulatory changes may increase our costs through stricter licensing laws, disclosure laws or increased fees or may impose conditions to licensing that we or our personnel are unable to meet.
In most states in which we operate, a regulatory agency or agencies regulate and enforce laws relating to mortgage servicers and mortgage originators. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary income we are entitled to collect from borrowers or otherwise. This could make our business cost-prohibitive in the affected state or states and could materially affect our business, financial condition and results of operations.
Failure to obtain a notice of non-objection from Fannie Mae to this offering could have a material adverse effect on our business, financial condition and results of operations.
The consummation of this offering requires certain state regulatory and Agency approvals or non-objections. We anticipate that Fannie Mae will provide us with a notice of non-objection to this offering, but as of the date of this prospectus, we have not yet obtained such notice from Fannie Mae. We cannot be certain that it will provide the notice of non-objection or that it will not take other actions to restrict our business involving Fannie Mae that may have a material adverse effect on our business, financial condition and results of operations. In this regard, Fannie Mae could impose a number of remedies or certain other requirements, including but not limited to compensatory fees, restricting our ability to sell originated loans to Fannie Mae, service Fannie Mae loans or hold Fannie Mae related servicing rights, or impose other requirements that may have the effect of limiting our business. While we believe it to be unlikely, it is also possible that Fannie Mae could suspend or terminate our Fannie Mae seller/servicer approval. Any such business restrictions or suspension or termination of our Fannie Mae seller/servicer approval may need to be reported to regulators, Agencies, or other counterparties and could adversely impact our business. In addition, as of the date of this prospectus, we have not yet received a limited number of approvals from certain state regulators and Ginnie Mae. While we expect to obtain all such approvals that are required to be obtained prior to consummation of this offering, we cannot be certain that such approvals will be obtained prior to consummation of this offering or at all.
Our failure to comply with the significant amount of regulation applicable to our investment management subsidiary could materially adversely affect our business plans.
We anticipate registering Home Point Asset Management LLC, our wholly owned subsidiary, as an investment adviser under the Investment Advisers Act of 1940, or the Investment Advisers Act. Such investment management subsidiary would be subject to significant regulation in the United States, primarily at the federal level, including regulation by the SEC under the Investment Advisers Act. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors whose assets are being managed and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities.
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These requirements relate to, among other things, fiduciary duties to customers, maintaining an effective compliance program, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and advisory clients and general anti-fraud prohibitions. Registered investment advisers are also subject to routine periodic examinations by the staff of the SEC.
We also regularly rely on exemptions from various requirements of the Securities Act of 1933, as amended, or the Securities Act, the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Investment Company Act of 1940 and ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties and service providers whom we do not control. If for any reason these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third-party claims, and our business could be materially and adversely affected. Regulations that would become applicable to our investment management subsidiary that are easily applied to traditional investments, such as stocks and bonds, may be more difficult to apply to a portfolio of loans, and can require procedures that are uncommon, impractical or difficult in our loan production and servicing business.
The failure by us to comply with applicable laws or regulations could result in fines, suspensions of individual associates or other sanctions, which could materially adversely affect our business, financial condition and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction imposed against us or our associates by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation and cause us to lose existing customers.
If we are unable to comply with TRID rules, our business and operations could be materially and adversely affected.
The CFPB’s TILA-RESPA Integrated Disclosure, or TRID, rules impose requirements on consumer facing disclosure rules and impose certain waiting periods to allow consumers time to shop for and consider the loan terms after receiving the required disclosures. If we fail to comply with the TRID rules, we may be unable to sell loans that we originate or purchase, or we may be required to sell such loans at a discount compared to other loans. We could also be subject to repurchase or indemnification claims from purchasers of such loans, including the GSEs.
The conduct of our correspondents and/or independent mortgage brokers with whom we produce our wholesale mortgage loans could subject us to lawsuits, regulatory action, fines or penalties.
The failure to comply with any applicable laws, regulations and rules by the mortgage lenders from whom loans were acquired through our wholesale and correspondent production activities may subject us to lawsuits, regulatory actions, fines or penalties. We have in place a due diligence program designed to assess areas of risk with respect to these acquired loans, including, without limitation, compliance with underwriting guidelines and applicable law. However, we may not detect every violation of law by these mortgage lenders. Further, to the extent any other third-party originators with whom we do business fail to comply with applicable law, and subsequently any of their mortgage loans become part of our assets, or prior servicers from whom we acquire MSR fail to comply with applicable law, it could subject us, as an assignee or purchaser of the related mortgage loans or MSR, respectively, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, serviced or owned by us or a third party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses.
The independent third-party mortgage brokers through whom we produce wholesale mortgage loans have parallel and separate legal obligations to which they are subject. These independent mortgage brokers are not considered our employees and are treated as independent third parties. While the applicable laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, federal and state agencies increasingly have sought to impose such liability. The U.S. Department of Justice, through its use of a disparate impact theory under the Fair Housing Act, is actively holding home loan lenders responsible for the pricing practices of brokers, alleging that the lender is directly responsible for the total fees and charges paid by the borrower even if the lender neither dictated what the broker could charge nor kept the money for its own account. In addition, under the TRID rule, we may be held responsible for improper disclosures made to customers by brokers. We may be subject to claims for fines or other penalties based upon the conduct of the independent home loan brokers with which we do business.
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Mortgage loan modification and refinance programs, future legislative action and other actions and changes may materially and adversely affect the value of, and the returns on, the assets in which we invest.
The U.S. government, primarily through the Agencies, has established loan modification and refinance programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. We can provide no assurance that we will be eligible to use any government programs or, if eligible, that we will be able to utilize them successfully. These programs, future U.S. federal, state or local legislative or regulatory actions that result in the modification of outstanding mortgage loans, as well as changes in the requirements necessary to qualify for modifications or refinancing mortgage loans with the GSEs or Ginnie Mae, may adversely affect the value of, and the returns on MSRs, residential mortgage loans, residential MBS, real estate-related securities and various other asset classes in which we invest, all of which could require us to repurchase loans, generally, and specifically from Ginnie Mae and the GSEs, which may result in a material adverse effect on our business and liquidity.
Private legal proceedings alleging failures to comply with applicable laws or regulatory requirements, and related costs, could adversely affect our financial condition and results of operations.
We are subject to various pending private legal proceedings challenging, among other things, whether certain of our loan origination and servicing practices and other aspects of our business comply with applicable laws and regulatory requirements. The outcome of any legal matter is never certain. In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business.
With respect to legal actions for impending or expected foreclosures, we may incur costs if we are required to, or if we elect to, execute or re-file documents or take other actions in our capacity as a servicer. We may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower or a class of borrowers. In addition, if a court rules that the lien of a homeowners association takes priority over the lien we service, we may incur legal liabilities and costs to defend such actions. If a court dismisses or overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability in our capacity as seller, servicer or otherwise to the loan owner, a borrower, title insurer or the purchaser of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans or loans that we sell to the GSEs or other third parties. A significant increase in litigation costs and losses occurring from lawsuits could trigger a default or cross-defaults under our financing arrangements, which could have a material adverse effect on our liquidity, business, financial condition and results of operations.
Residential mortgage foreclosure proceedings in certain states have been delayed due to lack of judicial resources and legislation.
Several states, including California and Nevada, have enacted Homeowner’s Bill of Rights legislation to establish mandatory loss mitigation practices for homeowners which cause delays in foreclosure proceedings. It is possible that additional states could enact similar laws in the future. Delays in foreclosure proceedings could require us to delay the recovery of advances, which could materially affect our business, results of operations and liquidity and increase our need for capital.
When a mortgage loan we service is in foreclosure, we are generally required to continue to advance delinquent principal and interest to the securitization trust and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved. Regulatory actions that lengthen the foreclosure process will increase the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred during the foreclosure process.
The CARES Act temporarily paused all foreclosures, and the Agencies have further extended the pause on foreclosures. Many state governors also issued orders, directives, guidance or recommendations halting foreclosure activity including evictions. These measures will increase our operating costs, extend the time we advance for delinquent taxes and insurance and could delay our ability to seek reimbursement from the investor to recoup some or all of the advances. We cannot predict when or on what terms and conditions these measures will be lifted, which will depend on future legislative and regulatory developments in response to the COVID-19 pandemic.
Increased regulatory scrutiny and new laws and procedures could cause us to adopt additional compliance measures and incur additional compliance costs in connection with our foreclosure processes. We may incur legal and
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other costs responding to regulatory inquiries or any allegation that we improperly foreclosed on a borrower. We could also suffer reputational damage and could be fined or otherwise penalized if we are found to have breached regulatory requirements.
We may incur increased costs and related losses if a customer challenges the validity of a foreclosure action, if a court overturns a foreclosure or if a foreclosure subjects us to environmental liabilities.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. In addition, if certain documents required for a foreclosure action are missing or defective or if a court overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer or the purchaser of the property sold in foreclosure or could be obligated to cure the defect or repurchase the loan. We may also incur litigation costs, timeline delays and other protective advance expenses if the validity of a foreclosure action is challenged by a customer. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. A significant increase in such costs and liabilities could adversely affect our liquidity and our inability to be reimbursed for advances could adversely affect our business, financial condition and results of operations.
Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting claims that the practices of lenders and loan servicers result in a disparate impact on protected classes.
Antidiscrimination statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, sex, religion and national origin. The Fair Housing Act also expressly prohibits discrimination with respect to the purchase of mortgage loans. Various federal regulatory agencies and departments, including the U.S. Department of Justice and CFPB, take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionate negative affect on a protected class of individuals).
These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims. The U.S. Supreme Court recently confirmed that the “disparate impact” theory applies to cases brought under the FHA, while emphasizing that a causal relationship must be shown between a specific policy of the defendant and a discriminatory result that is not justified by a legitimate objective of the defendant. Although it is still unclear whether the theory applies under the Equal Credit Opportunity Act, regulatory agencies and private plaintiffs can be expected to continue to apply it to both the Fair Housing Act and the Equal Credit Opportunity Act in the context of home loan lending and servicing. To extent that the “disparate impact” theory continues to apply, we may be faced with significant administrative burdens in attempting to comply and potential liability for failures to comply.
Furthermore, many industry observers believe that the “ability to repay” rule issued by the CFPB, discussed above may have the unintended consequence of having a disparate impact on protected classes. Specifically, it is possible that lenders that make only qualified mortgages may be exposed to discrimination claims under a disparate impact theory.
In addition to reputational harm, violations of the Equal Credit Opportunity Act and the Fair Housing Act can result in actual damages, punitive damages, injunctive or equitable relief, attorneys’ fees and civil money penalties.
Risks Related to Our Mortgage Assets
Our acquisition of MSRs exposes us to significant risks.
MSRs arise from contractual agreements between us and the investors (or their agents) in mortgage securities and mortgage loans that we service on their behalf. We generally create MSRs in connection with our sale of mortgage loans to the Agencies or others where we assume the obligation to service such loans on their behalf. We may also purchase MSRs from third-party sellers. All MSR capitalizations are recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and
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foreclosure rates of the underlying serviced mortgage loans. The ultimate realization of future cash flows from the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Accordingly, there may be material uncertainty about the fair value of any MSRs we acquire or hold.
Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the value of MSRs on, among other things, our projection of the cash flows from the related mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from MSRs, and we could ultimately receive substantially less than what we estimated when initially capitalizing such assets.
Moreover, delinquency rates also have a significant impact on the valuation of any MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners for performing loans. Our expectation of delinquencies is also a significant assumption underlying our cash flow projections. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. Increased delinquencies also typically translate into increased defaults and liquidations, and as an MSR owner we are also responsible for certain expenses and losses associated with the loans we service, particularly on loans sold to Ginnie Mae. A reduction in the fair value of the MSR or an increase in defaults and liquidations would adversely impact our business, financial condition, liquidity and results of operations.
Changes in interest rates are a key driver of the performance of MSRs. Historically, in periods of rising interest rates, the fair value of the MSRs generally increases as prepayments decrease, and therefore the estimated life of the MSRs and related expected cash flows increase. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore the estimated life of the MSRs, and related cash flows, decrease.
There has been a long-term trend of falling interest rates, with intermittent periods of rate increases. More recently, there was a rising interest rate environment for the majority of 2018 and a falling interest rate environment in 2019 and during the first three quarters of 2020. Because origination volumes tend to increase in declining interest rate environments and decrease in increasing rate environments, we believe that our two principal sources of revenue, mortgage origination and mortgage loan servicing, contribute to a stable business profile by creating a natural hedge against changes in the interest rate environment.
In addition, we may pursue various hedging strategies to seek to further reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to fully hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity and results of operations would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change.
Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. Our failure to comply with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our counterparties may terminate our servicing rights under which we conduct servicing activities.
The majority of the mortgage loans we service are serviced on behalf of the GSEs and Ginnie Mae. These entities establish the base service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards.
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As is standard in the industry, under the terms of our master servicing agreements with the GSEs, the GSEs have the right to terminate us as servicer of the loans we service on their behalf at any time and also have the right to cause us to sell the MSRs to a third party. In addition, failure to comply with servicing standards could result in termination of our agreements with the GSEs with little or no notice and without any compensation. If any of Fannie Mae, Freddie Mac or Ginnie Mae were to terminate us as a servicer, or increase our costs related to such servicing by way of additional fees, fines or penalties, such changes could have a material adverse effect on the revenue we derive from servicing activity, as well as the value of the related MSRs. These agreements, and other servicing agreements under which we service mortgage loans for non-GSE loan purchasers, also require that we service in accordance with GSE servicing guidelines and contain financial covenants. If we were to have our servicing rights terminated on a material portion of our servicing portfolio, this could adversely affect our business.
A significant increase in delinquencies for the loans we service could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.
An increase in delinquencies will result in lower revenue for loans we service for the GSEs and Ginnie Mae because we only collect servicing fees from the GSEs and Ginnie Mae from payments made on the mortgage loans. Additionally, while increased delinquencies generate higher ancillary revenues, including late fees, these fees may not be collected until the related loan reinstates or in the event that the related loan is liquidated. In addition, an increase in delinquencies may result in certain other advances being made on behalf of delinquent loans, which may not be entirely reversible and would decrease the interest income we receive on cash held in collection and other accounts to the extent permitted under applicable requirements.
We base the price we pay for MSRs on, among other things, our projections of the cash flows from the related mortgage loans. Our expectation of delinquencies is a significant assumption underlying those cash flow projections. If delinquencies were significantly greater than expected, the estimated fair value of our MSRs could be diminished. If the estimated fair value of MSRs is reduced, we may not be able to satisfy minimum net worth covenants and borrowing conditions in our debt agreements and we could suffer a loss, which could trigger a default and cross-defaults under our other financing arrangements and trading agreements (impacting our ability to enter into hedging transactions) and the possible loss of our eligibility to sell loans to the Agencies or issue an Agency MBS, all of which would likely have a material adverse effect on our business, financial condition and results of operations.
We are also subject to risks of borrower defaults and bankruptcies in cases where we might be required to repurchase loans sold with recourse or under representations and warranties. A borrower filing for bankruptcy during foreclosure would have the effect of staying the foreclosure and thereby delaying the foreclosure process, which may potentially result in a reduction or discharge of a borrower’s mortgage debt. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. For example, foreclosure may create a negative public perception of the related mortgaged property, resulting in a diminution of its value. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss. If these risks materialize, they could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event of a default under any mortgage loan we have not sold, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and of the mortgage loan.
Our inability to promptly foreclose upon defaulted mortgage loans could increase our cost of doing business and/or diminish our expected cash flows.
Our ability to promptly foreclose upon defaulted mortgage loans and liquidate the underlying real property plays a critical role in our valuation of the assets which we acquire and our expected cash flows on such assets. There are a variety of factors that may inhibit our ability to foreclose upon a mortgage loan and liquidate the real property within the time frames we model as part of our valuation process or within the statutes of limitation under applicable state law. These factors include, without limitation: extended foreclosure timelines in states that require judicial foreclosure, including states where we hold high concentrations of mortgage loans, significant collateral documentation deficiencies, federal, state or local laws that are borrower friendly, including legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and that serve to delay the foreclosure process and programs that may require specific procedures to be followed to explore the refinancing of a mortgage loan prior to the commencement of a foreclosure proceeding and declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the judicial and administrative systems.
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A decline in the fair value of the real estate that we acquire, or that underlies the mortgage loans we own or service, may result in reduced risk-adjusted returns or losses.
A substantial portion of our assets are measured at fair value. The fair value of the real estate that we own or that underlies mortgage loans that we own or service is subject to market conditions and requires the use of assumptions and complex analyses. Changes in the real estate market may adversely affect the fair value of the collateral and thereby lower the cash to be received from its liquidation. Depending on the investor and/or insurer or guarantor, we may suffer financial losses that increase when we or they receive less cash upon liquidation of the collateral for defaulted loans that we service. The same would apply to loans that we own. In addition, adverse changes in the real estate market increase the probability of default of the loans we own or service.
We may be adversely affected by concentration risks of various kinds that apply to our mortgage or MSR assets at any given time, as well as from unfavorable changes in the related geographic regions containing the properties that secure such assets.
Our mortgage and MSR assets are not subject to any geographic, diversification or concentration limitations except that we will be concentrated in mortgage-related assets. Accordingly, our mortgage and MSR assets may be concentrated by geography, investor, originator, insurer, loan program, property type and/or borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing adverse developments. We may be disproportionately affected by general risks such as natural disasters, including major hurricanes, tornadoes, wildfires, floods, earthquakes and severe or inclement weather should such developments occur in or near the markets in California or the Gulf Coast region in which such properties are located. For example, as of September 30, 2020, approximately 21.5% of our mortgage and MSR assets had underlying properties in California. In addition, adverse conditions in the areas where the properties securing or otherwise underlying our mortgage and MSR assets are located (including business layoffs or downsizing, industry slowdowns, changing demographics, natural disasters and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of those assets. A material decline in the demand for real estate in these areas, regardless of the underlying cause, may materially and adversely affect us. Concentration or a lack of diversification can increase the correlation of non-performance and foreclosure risks among subsets of our mortgage and MSR assets, which could have a material adverse effect on our business, financial condition and results of operations.
Many of our mortgage assets may be illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
Our MSRs, securities and mortgage loans that we acquire may be or become illiquid. It may also be difficult or impossible to obtain or validate third-party pricing on the assets that we purchase. Illiquid investments typically experience greater price volatility, as a ready market does not exist, or may cease to exist, and such investments can be more difficult to value. Contractual restrictions on transfer or the illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, which could impair our ability to satisfy margin calls or access capital for other purposes when needed. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the recorded value, or may not be able to obtain any liquidation proceeds at all, thus exposing us to a material or total loss.
Fair values of our MSRs are estimates and the realization of reduced values from our recorded estimates may materially and adversely affect our financial results and credit availability.
The fair values of our MSRs are not readily determinable and the fair value at which our MSRs are recorded may differ from the values we ultimately realize. Ultimate realization of the fair value of our MSRs depends to a great extent on economic and other conditions that change during the time period over which it is held and are beyond our control. Further, fair value is only an estimate based on good faith judgment of the price at which an asset can be sold since transacted prices of MSRs can only be determined by negotiation between a willing buyer and seller. In certain cases, our estimation of the fair value of our MSRs includes inputs provided by third-party dealers and pricing services, and valuations of certain securities or other assets in which we invest are often difficult to obtain and are subject to judgments that may vary among market participants. Changes in the estimated fair values of those assets are directly charged or credited to earnings for the period. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset was recorded. Accordingly, in either event, our financial condition could be materially and adversely affected by our determinations regarding the fair value of our MSRs, and such valuations may fluctuate over short periods of time.
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We utilize analytical models and data in connection with the valuation of our assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.
We rely heavily on models and data to value our assets, including analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by third parties. Models and data are also used in connection with our potential acquisition of assets and the hedging of those acquisitions. Models are inherently imperfect predictors of actual results because they are based on historical data available to us and our assumptions about factors such as future mortgage loan demand, default rates, severity rates, home price trends and other factors that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience.
In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, we may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.
We rely on internal models to manage risk and to make business decisions. Our business could be adversely affected if those models fail to produce reliable and/or valid results.
We make significant use of business and financial models in connection with our proprietary technology to measure and monitor our risk exposures and to manage our business. For example, we use models to measure and monitor our exposures to interest rate, credit and other market risks. The information provided by these models is used in making business decisions relating to strategies, initiatives, transactions, pricing and products. If these models are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected.
We build these models using historical data and our assumptions about factors such as future mortgage loan demand, default rates, home price trends and other factors that may overstate or understate future experience. Our assumptions may be inaccurate and our models may not be as predictive as expected for many reasons, including the fact that they often involve matters that are inherently beyond our control and difficult to predict, such as macroeconomic conditions, and that they often involve complex interactions between a number of variables and factors.
Our models could produce unreliable results for a variety of reasons, including, but not limited to, the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models, or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience, as was the case from 2008 to 2010 or during the present COVID-19 pandemic.
We continue to monitor the markets and make necessary adjustments to our models and apply appropriate management judgment in the interpretation and adjustment of the results produced by our models. As a result of the time and resources, including technical and staffing resources, that are required to perform these processes effectively, it may not be possible to replace existing models quickly enough to ensure that they will always properly account for the impacts of recent information and actions.
We depend on the accuracy and completeness of information from and about borrowers, mortgage loans and the properties securing them, and any misrepresented information could adversely affect our business, financial condition and results of operations.
In connection with our Wholesale, Correspondent and Direct channel activities, we may rely on information furnished by or on behalf of borrowers and/or our business counterparties including Broker Partners and Correspondent Partners. We also may rely on representations of borrowers and business counterparties as to the accuracy and completeness of that information, and upon the information and work product produced by appraisers,
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credit repositories, depository institutions and others, as well as the output of automated underwriting systems created by the GSEs and others. If any of this information or work product is intentionally or negligently misrepresented in connection with a mortgage loan and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our associates, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions, or from our business counterparties. Any such misrepresented information could materially and adversely affect our business, financial condition and results of operations.
We expect the economic changes resulting from the COVID-19 pandemic coupled with the high refinance and purchase volumes that we are observing to increase the potential for customer fraud. During periods of high unemployment, we observe an increase in customers failing to disclose that their income and employment has been negatively impacted. We have also observed an increase in cyber fraud and phishing schemes affecting our business due to COVID-19. Fraudulent emails have been sent on behalf of the Company which introduce malware, including spyware, through malicious links in order to redirect funds to the fraudster’s account.
The technology and other controls and processes we have created to help us identify misrepresented information in our mortgage loan production operations were designed to obtain reasonable, not absolute, assurance that such information is identified and addressed appropriately. Accordingly, such controls may not have detected, and may fail in the future to detect, all misrepresented information in our mortgage loan production operations. In the future, we may experience financial losses and reputational damage as a result of mortgage loan fraud.
General Risk Factors
We will be a “controlled company” within the meaning of the rules of NASDAQ and the rules of the SEC and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of other companies that are subject to such requirements.
Immediately following this offering, our Sponsor will collectively beneficially own approximately 92.0% of the voting power of common stock (or 91.2% if the underwriters exercise their option to purchase additional shares in full). As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that:
a majority of our board of directors consist of “independent directors” as defined under the rules of NASDAQ;
our director nominees be selected, or recommended for our board of directors’ selection by a nominating/governance committee comprised solely of independent directors; and
the compensation of our executive officers be determined, or recommended to our board of directors for determination, by a compensation committee comprised solely of independent directors.
Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors and our compensation committee and Nominating and Corporate Governance Committee may not consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.
Our Sponsor controls us and their interests may conflict with yours in the future.
Immediately following this offering, our Sponsor will collectively beneficially own approximately 92.0% of the voting power of our common stock (or 91.2% if the underwriters exercise their option to purchase additional shares in full). Our Sponsor will be able to control the election and removal of our directors and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our amended and restated certificate of incorporation or amended and restated bylaws and other significant corporate transactions for so long as our Sponsor and its affiliates retain significant ownership of us. Our Sponsor and its affiliates may also direct us to make significant changes to our business operations and strategy, including with respect to, among other things, new product and service offerings, team member headcount levels and
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initiatives to reduce costs and expenses. This concentration of our ownership may delay or deter possible changes in control of the Company, which may reduce the value of an investment in our common stock. So long as our Sponsor continues to own a significant amount of our voting power, even if such amount is less than 50%, our Sponsor will continue to be able to strongly influence or effectively control our decisions and, so long as our Sponsor and its affiliates collectively own at least 5% of all outstanding shares of our stock entitled to vote generally in the election of directors, our Sponsor will be able to appoint individuals to our board of directors under the stockholders’ agreement that we expect to enter into in connection with this offering. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” The interests of our Sponsor may not coincide with the interests of other holders of our common stock.
In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that our Sponsor, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor and its affiliates also may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you.
In addition, our Sponsor and its affiliates will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of the Company or a change in the composition of our board of directors and could preclude any acquisition of the Company. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of the Company and ultimately might affect the market price of our common stock.
We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.
As a public company, we will incur significant legal, regulatory, finance, accounting, investor relations, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and the Dodd-Frank Act and related rules implemented by the SEC and NASDAQ. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements, diverting the attention of management away from revenue-producing activities. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company,” among other exemptions:
we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act,
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we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and
we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.
We may remain an “emerging growth company” until the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an “emerging growth company” earlier under certain circumstances, including (1) if our gross revenue exceeds $1.07 billion in any fiscal year, (2) if we become a large accelerated filer, with at least $700.0 million of equity securities held by non-affiliates, or (3) if we issue more than $1.0 billion in non-convertible notes in any three-year period.
We cannot predict if investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.
Failure to comply with requirements to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.
As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes-Oxley Act, or Section 404.
As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business.
In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report. Our testing, or the subsequent testing (if required) by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected.
We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.
There has been no prior public market for our common stock and there may not develop or continue an active, liquid trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.
Prior to this offering, there has not been a public trading market for shares of our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how active and
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liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling your shares of our common stock at an attractive price or at all. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Instead, the initial public offering price per share of common stock will be determined by agreement among us, the selling stockholders and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. The market price of our common stock may decline below the initial offering price and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Furthermore, an inactive market may also impair our ability to raise capital by selling shares of our common stock.
Our stock price may change significantly following this offering, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.
Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “—Risks Related to Our Business” and the following:
results of operations that vary from the expectations of securities analysts and investors;
results of operations that vary from those of our competitors;
changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
changes in economic conditions for companies in our industry;
changes in market valuations of, or earnings and other announcements by, companies in our industry;
declines in the market prices of stocks generally, particularly those of companies in our industry;
additions or departures of key management personnel;
strategic actions by us or our competitors;
announcements by us, our competitors, our suppliers of significant contracts, price reductions, new products or technologies, acquisitions, dispositions, joint marketing relationships, joint ventures, other strategic relationships or capital commitments;
changes in preference of our customers and our market share;
changes in general economic or market conditions or trends in our industry or the economy as a whole;
changes in business or regulatory conditions;
future sales of our common stock or other securities;
investor perceptions of or the investment opportunity associated with our common stock relative to other investment alternatives;
changes in the way we are perceived in the marketplace, including due to negative publicity or campaigns on social media to boycott certain of our products, our business or our industry;
the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;
announcements relating to litigation or governmental investigations;
guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
the development and sustainability of an active trading market for our common stock;
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exchange rate fluctuations;
tax developments;
changes in accounting princ