SEC Filing | Home Point Capital

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hmpt-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-39964

Home Point Capital Inc.

(Exact name of registrant as specified in its charter)

Delaware

90-1116426

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

2211 Old Earhart Road, Suite 250

Ann Arbor, Michigan

48105

(Address of Principal Executive Offices)

(Zip Code)

(888) 616-6866

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which
registered

Common Stock, par value

$0.0000000072 per share

HMPT

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 3, 2021, the registrant had 139,527,512 shares of common stock, par value $0.0000000072 per share, outstanding.

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TABLE OF CONTENTS


			Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020			1
Condensed Consolidated Statements of Operations for the three and nin e months ended September 30, 2021 and 2020			2
Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and September 30, 2020			3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020			4
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			40
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. Mine Safety Disclosures			41
Item 5. Other Information			41
Item 6. Exhibits			42
Signatures			43

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Cautionary Note on Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains certain “forward-looking statements,” as that term is defined in the U.S. federal securities laws, including the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements other than statements of historical facts contained in this Report, including among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs, the industry in which we operate and other similar matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should” and the negative of these terms or other comparable terminology often identify forward-looking statements. These forward-looking statements, which are based on currently available information, operating plans, and projections about future events and trends, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed on March 12, 2021 (our “2020 Annual Report”). Factors, risks, and uncertainties that could cause actual outcomes and results to be materially different from those contemplated by forward-looking statements include, among others:

•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 success and growth of our production and servicing activities and the dependence upon our ability to adapt to and implement technological changes;

•the effectiveness of our risk management efforts;

•our ability to detect misconduct and fraud;

•any failure to attract and retain a highly skilled workforce, including our senior executives;

•our ability to obtain, maintain, protect and enforce our intellectual property;

•any cybersecurity risks, cyber incidents and technology failures;

•material changes to the laws, regulations or practices applicable to reverse mortgage programs operated by the Federal Housing Administration (“FHA”) and the U.S. Department of Housing and Urban Development;

•our vendor relationships;

•our failure to deal appropriately with various issues that may give rise to reputational risk, including legal and regulatory requirements;

•risks and uncertainties associated with litigation, including any employment, intellectual property, consumer protection, class action and other litigation matters, and related unfavorable publicity;

•exposure to new risks and increased costs as a result of initiating new business activities or strategies or significantly expanding existing business activities or strategies;

•any failure to comply with the significant amount of regulation applicable to our investment management subsidiary;

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•the impact of changes in political or economic stability or in government policies on our material vendors with operations in India;

•our ability to fully utilize our net operating loss (“NOL”) and other tax carryforwards;

•any challenge by the Internal Revenue Service of the amount, timing and/or use of our NOL carryforwards;

•possible changes in legislation and the effect on our ability to use the tax benefits associated with our NOL carryforwards;

•the impact of other changes in tax laws;

•the impact of interest rate fluctuations;

•risks associated with hedging against interest rate exposure;

•the impact of any prolonged economic slowdown, recession or declining real estate values;

•risks associated with financing our assets with borrowings;

•risks associated with a decrease in value of our collateral;

•the dependence of our operations on access to our financing arrangements, which are mostly uncommitted;

•risks associated with the financial and restrictive covenants included in our financing agreements;

•our exposure to volatility in the London Inter-Bank Offered Rate;

•our ability to raise the debt or equity capital required to finance our assets and grow our business;

•risks associated with higher risk loans that we service;

•risks associated with derivative financial instruments;

•our ability to foreclose on our mortgage assets in a timely manner or at all;

•our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

•the impact of revised rules and regulations and enforcement of existing rules and regulations by the Consumer Financial Protection Bureau (the “CFPB”);

•legislative and regulatory changes that impact the mortgage loan industry or housing market;

•changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association, the Federal Housing Administration or the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, or Government-Sponsored Enterprises such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or such changes that increase the cost of doing business with such entities;

•the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders;

•the CFPB, and its issued and future rules and the enforcement thereof;

•changes in government support of homeownership;

•changes in government or government sponsored home affordability programs;

•changes in governmental regulations, accounting treatment, tax rates and similar matters;

•risks associated with our acquisition of mortgage servicing rights;

•the impact of our counterparties terminating our servicing rights under which we conduct servicing activities;

•our failure to deal appropriately with issues that may give rise to reputational risk; and

iii

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•the spread of the COVID-19 outbreak and severe disruptions in the U.S. and global economy and financial markets it has caused.

Many of the important factors that will determine these results are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Report. Except as otherwise required by law, we do not assume any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. You should refer to the risks and uncertainties listed under the heading “Risk Factors” in our 2020 Annual Report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (“SEC”), for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Unless the context otherwise indicates, any reference in this Report to “Home Point,” “our Company,” “the Company,” “us,” “we” and “our” refers to Home Point Capital Inc. and its subsidiaries.

Website and Social Media Disclosure

We use our website (www.investors.homepoint.com) and our corporate Facebook, LinkedIn, and Twitter accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this Report.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2021 (unaudited)		December 31, 2020
Assets:
Cash and cash equivalents	$	160,636	$	165,230
Restricted cash	42,491		31,663
Cash and cash equivalents and Restricted cash	203,127		196,893
Mortgage loans held for sale (at fair value)	6,680,196		3,301,694
Mortgage servicing rights (at fair value)	1,402,140		748,457
Property and equipment, net	22,945		21,710
Accounts receivable, net	117,538		152,845
Derivative assets	164,602		334,323
Goodwill and intangibles	10,789		10,789
GNMA loans eligible for repurchase	265,132		2,524,240
Other assets	111,640		87,622
Total assets	$	8,978,109	$	7,378,573
Liabilities and Shareholders’ Equity:
Liabilities:
Warehouse lines of credit	$	6,308,477	$	3,005,415
Term debt and other borrowings, net	1,065,762		454,022
Accounts payable and accrued expenses	127,793		167,532
GNMA loans eligible for repurchase	265,132		2,524,240
Deferred tax liabilities	224,303		174,002
Other liabilities	225,440		125,888
Total liabilities	8,216,907		6,451,099
Commitments and Contingencies (Note 9)

Shareholders’ Equity:
Preferred stock (Authorized shares: 250,000,000; none issued and outstanding, par value $0.0000000072 per share)	—		—
Common stock (Authorized shares: 1,000,000,000; 139,527,024 shares issued and outstanding, par value $0.0000000072 per share)	—		—
Additional paid-in capital	522,080		519,510
Retained earnings	239,122		407,964
Total shareholders' equity	761,202		927,474
Total liabilities and shareholders' equity	$	8,978,109	$	7,378,573

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Gain on loans, net	$	145,471	$	503,344	$	521,727	$	962,778
Loan fee income	34,484		28,205		118,099		60,630

Interest income	36,719		14,709		96,944		42,370
Interest expense	(45,532)		(17,559)		(122,603)		(47,845)
Interest expense, net	(8,813)		(2,850)		(25,659)		(5,475)
Loan servicing fees	91,831		48,350		247,753		133,904
Change in fair value of mortgage servicing rights, net	3,544		(66,749)		(90,513)		(230,524)
Other income	8,084		498		9,537		2,138
Total revenue, net	274,601		510,798		780,944		923,451
Expenses:
Compensation and benefits	114,612		117,177		395,550		251,462
Loan expense	16,618		8,733		51,796		21,686
Loan servicing expense	6,681		6,481		22,282		22,742
Production technology	7,583		6,378		25,038		14,540
General and administrative	21,741		16,213		74,527		38,981
Depreciation and amortization	2,440		1,236		7,551		4,162
Other expenses	5,649		7,094		23,620		12,087
Total expenses	175,324		163,312		600,364		365,660
Income before income tax	99,277		347,486		180,580		557,791
Income tax expense	27,341		93,294		50,250		149,306
(Loss) income from equity method investments	(713)		9,870		16,649		14,050
Total net income	$	71,223	$	264,062	$	146,979	$	422,535

Earnings per share:
Basic	$	0.51	$	1.90	$	1.06	$	3.13
Diluted	$	0.51	$	1.90	$	1.05	$	3.12

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


	Common Stock		Additional Paid in Capital		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, June 30, 2020	138,860,103	—	$	519,033	$	113,924	$	632,957

Distributions to parent	—	—	—		(154,492)		(154,492)
Stock based compensation	—	—	144		—		144
Net income	—	—	—		264,062		264,062
Ending balance, September 30, 2020	138,860,103	—	$	519,177	$	223,494	$	742,671

	Common Stock		Additional Paid in Capital		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, June 30, 2021	139,487,097	—	$	520,505	$	188,823	$	709,328
Contributed capital	—	—	—		—		—
Dividend to shareholders	—	—	—		(20,924)		(20,924)
EE stock purchase (option exercise)	39,927	—	(105)		—		(105)
Stock based compensation	—	—	1,680		—		1,680
Net income	—	—	—		71,223		71,223
Ending balance, September 30, 2021	139,527,024	—	$	522,080	$	239,122	$	761,202

	Common Stock		Additional Paid in Capital		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, December 31, 2019	138,860,103	—	$	454,861	$	(44,549)	$	410,312
Contributed capital	—	—	63,774		—		63,774
Distributions to parent	—	—	—		(154,492)		(154,492)
Stock based compensation	—	—	542		—		542
Net income	—	—	—		422,535		422,535
Ending balance, September 30, 2020	138,860,103	—	$	519,177	$	223,494	$	742,671

	Common Stock		Additional Paid in Capital		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, December 31, 2020	138,860,103	—	$	519,510	$	407,964	$	927,474
Contributed capital	—	—	—		192		192
Dividend to shareholders	—	—	—		(20,924)		(20,924)
Distribution to parent	—	—	—		(295,089)		(295,089)
EE stock purchase (option exercise)	666,921	—	(2,636)		—		(2,636)
Stock based compensation	—	—	5,206		—		$	5,206
Net income	—	—	—		146,979		146,979
Ending balance, September 30, 2021	139,527,024	—	$	522,080	$	239,122	$	761,202

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net income	$	146,979	$	422,535
Adjustments to reconcile net income to cash used in operating activities:
Depreciation	7,551		3,370
Amortization of intangible assets	—		792
Amortization of debt issuance costs	2,444		531
Gain on sale of mortgage servicing rights	(7,426)		—
Gain on loans, net	(521,727)		(962,778)
Provision for representation and warranty reserve	9,358		10,025
Stock based compensation expense	5,206		542
Deferred income tax	50,301		133,645
Income from equity method investment	(16,649)		(14,050)
Origination of mortgage loans held for sale	(79,464,436)		(38,534,747)
Proceeds on sale and payments from mortgage loans held for sale	75,786,570		38,585,878
Change in fair value of mortgage servicing rights, net	90,512		230,524
Change in fair value of mortgage loans held for sale	6,906		(54,709)
Non-cash lease expense	—		108
Change in fair value of derivative assets	169,721		(274,250)
Changes in operating assets and liabilities:
Accounts receivable, net	35,360		(21,448)
Other assets	(7,369)		3,671
Accounts payable and accrued expenses	(40,959)		74,787
Other liabilities	90,194		10,479
Net cash used in operating activities	(3,657,464)		(385,095)

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


Investing activities:
Purchases of property and equipment, net of disposals	(8,786)		(9,914)
Purchases of mortgage servicing rights	(33,027)		—
Proceeds from sale of mortgage servicing rights	111,609		—
Net cash provided (used) in investing activities	69,796		(9,914)

Financing activities:
Proceeds from warehouse borrowings	81,365,921		38,381,219
Payments on warehouse borrowings	(78,062,859)		(37,766,925)
Proceeds from term debt borrowings	1,213,400		47,600
Payments on term debt borrowings	(550,000)		(60,000)
Proceeds from other borrowings	75,000		64,500
Payments on other borrowings	(115,000)		(103,500)
Payments of debt issuance costs	(14,103)		—
Employee stock purchases (option expense)	(2,636)		—
Capital contributions from parent	192		63,774
Dividends to shareholders	(20,924)		—
Distribution to parent	(295,089)		—
Net cash provided by financing activities	3,593,902		626,668
Net increase in cash, cash equivalents and restricted cash	6,234		231,659
Cash, cash equivalents and restricted cash at beginning of period	196,893		81,731
Cash, cash equivalents and restricted cash at end of period	$	203,127	$	313,390
Supplemental disclosure:
Cash paid for interest	$	104,119	$	46,715
Cash (refunded) paid for taxes	$	(33,740)	$	22,034

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Amounts)

(unaudited)

Note 1 – Organization and Operations

Nature of Business

Home Point Capital Inc., a Delaware corporation (“HPC” or the “Company”), through its subsidiaries, is a residential mortgage originator and servicer with a business model focused on growing originations by leveraging a network of partner relationships. The Company manages the customer experience through its in-house servicing operation and proprietary Home Ownership Platform. The Company’s business operations are organized into the following two segments: (1) Origination and (2) Servicing. Home Point Financial Corporation, a New Jersey corporation (“HPF”), a wholly owned subsidiary of the Company, originates, sells, and services residential real estate mortgage loans throughout the United States. Home Point Asset Management LLC, a Delaware limited liability company (“HPAM”), is a wholly owned subsidiary of the Company and manages certain servicing assets. HPAM’s wholly owned subsidiary, Home Point Mortgage Acceptance Corporation, an Alabama Corporation (“HPMAC”), services residential real estate mortgage loans. Home Point Corporation Insurance Agency LLC, a Michigan limited liability company (“HPCIA” and together with HPF, HPAM, and HPMAC, the “wholly owned subsidiaries”), is a wholly owned subsidiary of the Company that brokers home owner insurance policies.

HPF and HPMAC are each an approved seller and servicer of one-to-four family first mortgages by the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and are each an approved issuer by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) (collectively, the “Agencies”), and as such, HPF and HPMAC must meet certain Agency eligibility requirements.

Note 2 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The condensed consolidated financial statements include the financial statements of HPC and its wholly owned subsidiaries. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with Article 10 of Regulation S-X promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The consolidated balance sheet as of December 31, 2020 and related notes were derived from the audited consolidated financial statements but do not include all disclosures required by U.S. GAAP for complete financial statements. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments) necessary to fairly state, in all material respects, the Company’s financial position as of September 30, 2021 and its results of operations for the three and nine months ended September 30, 2021 and 2020 and its cash flows for the nine months ended September 30, 2021 and 2020. The unaudited condensed consolidated financial information should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020.

All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires HPC to make estimates and assumptions about future events that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.

Examples of reported amounts that rely on significant estimates include mortgage loans held for sale, mortgage servicing rights (“MSRs”), servicing advances reserve, derivative assets, derivative liabilities, assets acquired and liabilities assumed in business combinations, reserves for mortgage repurchases and indemnifications, and deferred tax valuation allowance considerations. Significant estimates are also used in determining the recoverability and fair value of property and equipment, goodwill, and intangible assets.

Stock Split

On January 21, 2021, the Company effected a stock split of its outstanding common stock pursuant to which the 100 outstanding shares were split into 1,380,601.11 shares each, for a total of 138,860,103 shares of outstanding common stock. As a result, all amounts relating to share and per share amounts have been retroactively adjusted to reflect this stock split.

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Initial Public Offering

On February 2, 2021, the Company completed its initial public offering (“IPO”) in which the Company’s stockholders sold 7,250,000 shares of its common stock at a public offering price of $13 per share. In conjunction with the IPO, the Company’s board of directors also approved a reorganization of the Company through merging Home Point Capital LP (“HPLP”) with and into the Company, with the Company as the surviving entity. As a secondary offering, there were no proceeds to the Company from the sale of the shares being sold by the selling stockholders and all related expenses for the IPO were recorded in General and administrative expenses. Upon the completion of the IPO, investment entities directly or indirectly managed by Stone Point Capital LLC, which are referred to as the Trident Stockholders, beneficially owned approximately 92% of the voting power of the Company’s common stock.

Summary of Significant Accounting Policies

Mortgage loans held for sale are accounted for using the fair value option. Therefore, mortgage loans originated and intended for sale in the secondary market are reflected at fair value. Changes in the fair value are recognized in current period earnings in Gain on loans, net, within the unaudited condensed consolidated statements of operations. Refer to Note 3 – Mortgage Loans Held for Sale.

Mortgage servicing rights are recognized as assets on the condensed consolidated balance sheets when loans are sold and the associated servicing rights are retained. The Company maintains one class of MSR asset and has elected the fair value option. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The Company obtains valuations from an independent third party on a quarterly basis and records an adjustment based on this third-party valuation. Changes in the fair value are recognized in Change in fair value of mortgage servicing rights, net on the Company's unaudited condensed consolidated statements of operations. Purchased mortgage servicing rights are recorded at the fair value which often is the purchase price at the date of purchase. Refer to Note 4 – Mortgage Servicing Rights.

Derivative financial instruments, including economic hedging activities, are recorded at fair value as either Derivative assets or in Other liabilities on the condensed consolidated balance sheets on a gross basis. The Company has accounted for its derivative instruments as non-designated hedge instruments and uses the derivative instruments to manage risk. The Company’s derivative instruments include, but are not limited to, forward mortgage-backed securities sales commitments, interest rate lock commitments, and other derivative instruments entered into to economically hedge fluctuations in MSRs’ fair value. The impact of the Company’s Derivative assets is reported in Change in fair value of derivative assets on the unaudited condensed consolidated statements of cash flows and the impact of the Company’s derivative liabilities is reported in Increase in other liabilities on the unaudited condensed consolidated statements of cash flows. The Company records derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty. Refer to Note 5 – Derivative Financial Instruments.

Forward mortgage-backed securities (“MBS”) sale commitments that have not settled are considered derivative financial instruments and are recognized at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized, new originations, and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. These derivatives are not designated as hedging instruments. Gain or loss on derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.

Interest rate lock commitments (“IRLCs”) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Forward MBS sale commitments or whole loans and options on forward contracts are used to manage the interest rate and price risk. These derivatives are not designated as hedging instruments. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. Change in fair value of IRLC derivatives is recorded in Gain on loans, net in the unaudited condensed consolidated statements of operations.

Mortgage servicing rights hedges are accounted for at fair value. MSRs are subject to substantial interest rate risk as the mortgage notes underlying the servicing rights permit the borrowers to prepay the loans. Therefore, the value of MSRs generally tend to diminish in periods of declining interest rates as prepayments increase and increase in periods of rising interest rates as prepayments decrease. Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, and product characteristics.

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The Company manages the impact that the volatility associated with changes in fair value of its MSRs has on its earnings with a variety of derivative instruments. The amount and composition of derivatives used to economically hedge the value of MSRs will depend on the Company's exposure to loss of value on the MSRs, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. This serves as a business hedge of the MSRs, providing a benefit when increased borrower refinancing activity results in higher loan origination volumes, which would partially offset declines in the value of the MSRs thereby reducing the need to use derivatives. The benefit of this business hedge depends on the decline in interest rates required to create an incentive for borrowers to refinance their mortgage loans and lower their interest rates; however, this benefit may not be realized under certain circumstances regardless of the change in interest rates. The change in fair value of MSR hedges is recorded in Change in fair value of mortgage servicing rights, net in the unaudited condensed consolidated statements of operations.

Equity Method Investments are business entities, which the Company does not have control of, but has the ability to exercise significant influence over operating and financial policies and are accounted for using the equity method. The Company evaluates its equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other-than-temporary, an impairment loss is recorded. The Company recognizes investments in equity method investments initially at cost and are adjusted for HPC’s share of earnings or losses, contributions or distributions. Equity method investments are reported on the consolidated balance sheets in Other assets. As of September 30, 2021, Longbridge Financial, LLC (“Longbridge”) was the Company’s only significant equity method investment, of which the Company owned 49.7 percent of the outstanding equity securities. The following presents condensed financial information of Longbridge (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Total revenue	$	20,134	$	114,064	$	210,752	$	240,739
Net (loss) income	(1,435)		15,962		33,499		28,901
Net (loss) income attributable to the Company	(713)		7,933		16,649		14,364

Earnings per share (“EPS”) is calculated and presented in the unaudited condensed consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is based on the weighted average number of common shares outstanding during the period. There were 139.1 million and 138.8 million weighted average shares outstanding for the three months ended September 30, 2021 and 2020, respectively, and 139.2 million and 135.1 million weighted average shares outstanding for the nine months ended September 30, 2021 and 2020, respectively. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if the Company’s dilutive outstanding stock options and stock awards were issued. For the three months ended September 30, 2021 and 2020, 140.0 million and 139.2 million weighted average shares were outstanding on a fully diluted basis. For the nine months ended September 30, 2021 and 2020, 139.7 million and 135.5 million shares were outstanding on a fully-diluted basis.

Accounting Standards Issued but Not Yet Adopted

ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, eliminates particular exceptions related to the method for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects on the accounting for income taxes. This amendment is effective for annual periods beginning after December 15, 2021. This will be effective for the Company beginning January 1, 2022. The Company does not anticipate a material impact as a result of the adoption of this standard on its condensed consolidated financial statements.

ASU 2021-01, Reference Rate Reform (Topic 848) Scope, clarifies some of the guidance of the Financial Accounting Standards Board (“FASB” or “the Board”) as part of the Board’s monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The Company is in the process of reviewing its derivative and hedging instruments that utilize LIBOR (as defined below) as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.

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ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. This guidance is effective upon issuance and allows application to contract changes as early as January 1, 2020. The Company is in the process of reviewing its funding facilities and financing facilities that utilize LIBOR as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

Note 3 – Mortgage Loans Held for Sale

The Company sells its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. The following presents mortgage loans held for sale at fair value, by type, as of September 30, 2021 (in thousands):


	September 30, 2021
	Unpaid Principal		Fair Value Adjustment		Total Fair Value
Conventional(1)	$	5,646,674	$	111,266	$	5,757,940
Government(2)	897,033		24,942		921,975
Other(3)	364		(83)		281
Total	$	6,544,071	$	136,125	$	6,680,196

(1)Conventional is comprised of FNMA and FHLMC mortgage loans.

(2)Government is comprised of GNMA mortgage loans (including Federal Housing Administration, Department of Veterans Affairs, and United States Department of Agriculture).

(3)Other is comprised of home equity lines of credit (“HELOCs”) and Reverse loans.

The Company had $26.8 million of unpaid principal balances, which had a fair value of $22.9 million, of mortgage loans held for sale on nonaccrual status at September 30, 2021.

The following presents mortgage loans held for sale at fair value, by type, as of December 31, 2020 (in thousands):


	December 31, 2020
	Unpaid Principal		Fair Value Adjustment		Total Fair Value
Conventional(1)	$	2,183,480	$	91,939	$	2,275,419
Government(2)	974,908		51,175		1,026,083
Other(3)	275		(83)		192
Total	$	3,158,663	$	143,031	$	3,301,694

(1)Conventional is comprised of FNMA and FHLMC mortgage loans.

(2)Government is comprised of GNMA mortgage loans (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agriculture).

(3)Other is comprised of HELOCs and Reverse loans.

The Company had $26.3 million of unpaid principal balances, which had a fair value of $23.5 million, of mortgage loans held for sale on nonaccrual status at December 31, 2020.

The following presents a reconciliation of the changes in mortgage loans held for sale to the amounts presented on the unaudited condensed consolidated statements of cash flows as of September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Fair value at beginning of period	$	5,412,452	$	1,904,174	$	3,301,694	$	1,554,230
Mortgage loans originated and purchased	21,546,957		18,289,697		79,464,436		38,534,747
Proceeds on sales and payments received	(20,208,378)		(17,565,561)		(75,786,570)		(37,869,214)
Change in fair value	3,727		17,074		(6,906)		54,709
(Loss) gain on loans(1)	(74,562)		(363,549)		(292,458)		7,363
Fair value at end of period	$	6,680,196	$	2,281,835	$	6,680,196	$	2,281,835

(1)This line as presented on the condensed consolidated statements of cash flows excludes originated mortgage servicing rights and MSR hedging.

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Note 4 – Mortgage Servicing Rights

The Company sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold.

The MSRs give the Company the contractual right to receive service fees and other remuneration in exchange for performing loan servicing functions on behalf of investors in mortgage loans and securities. Upon sale, an MSR asset is capitalized, which represents the current fair value of the future net cash flows that are expected to be realized for performing servicing activities.

The following presents an analysis of the changes in capitalized mortgage servicing rights for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance at beginning of period	$	1,267,253	$	499,782	$	748,457	$	575,035
MSRs originated	212,368		155,623		776,174		352,118
MSRs purchased	14,326		—		33,027		—
MSRs sold	(103,017)		—		(103,017)		—
Changes in valuation model inputs	85,150		(17,210)		188,334		(211,668)
Change due to cash payoffs and principal amortization	(73,940)		(54,932)		(240,835)		(132,222)
Balance at end of period	$	1,402,140	$	583,263	$	1,402,140	$	583,263

The following presents the Company’s total capitalized mortgage servicing portfolio (based on the UPB of the underlying mortgage loans) as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021			December 31, 2020
Ginnie Mae	$	17,019,501		$	26,206,612
Fannie Mae	63,688,774			36,395,373
Freddie Mac	45,085,793			25,621,697
Other	38,218			53,567
Total mortgage servicing portfolio	$	125,832,286		$	88,277,249

MSR balance	$	1,402,140		$	748,457
MSR balance as % of unpaid mortgage principal balance	1.11		%	0.85		%

The following presents the key weighted average assumptions used in determining the fair value of the Company’s MSRs as of September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020
Discount rate	8.89	%	9.47	%
Prepayment speeds	9.54	%	14.43	%

The key assumptions used to estimate the fair value of the MSRs are discount rate and the Conditional Prepayment Rate (“CPR”). Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase. Decreases in prepayment speeds generally have a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value.

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The following table illustrates the hypothetical effect on the fair value of the Company’s MSR portfolio when applying unfavorable discount rate and prepayment speeds at two different data points as of September 30, 2021 and December 31, 2020 (in thousands):


	Discount Rate				Prepayment Speeds
	100 BPS Adverse Change		200 BPS Adverse Change		10% Adverse Change		20% Adverse Change
September 30, 2021	$	(59,159)	$	(113,493)	$	(56,936)	$	(109,450)
December 31, 2020	$	(26,354)	$	(50,754)	$	(45,014)	$	(85,484)

MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties. Refer to Note 12 – Fair Value Measurements, for further discussions on the key assumptions used to estimate the fair value of the MSRs.

The following presents information related to loans serviced as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Total unpaid principal balance	$	131,405,675	$	91,590,114
Loans 30-89 days delinquent	816,670		1,353,029
Loans delinquent 90 or more days or in foreclosure	1,084,419		3,641,183

The following presents components of Loan servicing fees as reported in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Contractual servicing fees	$	84,271	$	49,387	$	229,369	$	135,813
Late fees	1,458		1,313		3,923		4,564
Other	6,102		(2,350)		14,461		(6,473)
Loan servicing fees	$	91,831	$	48,350	$	247,753	$	133,904

The Company held $25.5 million and $20.6 million of escrow funds within Other liabilities in the condensed consolidated balance sheets for its customers for which it services mortgage loans as of September 30, 2021 and December 31, 2020, respectively.

On September 2, 2021, HPF completed the sale of MSRs relating to certain single family mortgage loans serviced for Ginnie Mae with an aggregate unpaid principal balance of approximately $10.7 billion. The total net proceed for the sale of MSRs was approximately $121.6 million with certain customary holdbacks and adjustments and resulted in a gain of $7.4 million. The sale represented approximately 8.6% of HPF’s total mortgage servicing portfolio as of June 30, 2021 and approximately 40.6% percent of HPF’s total Ginnie Mae mortgage servicing portfolio as of June 30, 2021. Ginnie Mae consented to the transfer of the MSRs.

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Note 5 – Derivative Financial Instruments

The following presents the outstanding notional balances for derivative instruments not designated as hedging instruments as of September 30, 2021 and 2020 (in thousands):


	September 30, 2021
	Notional Value		Derivative Asset		Derivative Liability		Recorded Gain/(Loss)
Mortgage-backed securities forward trades	$	11,113,975	$	54,504	$	3,304	$	51,725
Interest rate lock commitments	10,002,894		38,315		17,748		(36,404)
Hedging mortgage servicing rights	7,497,000		254		42,145		(49,323)
Margin			71,529		79,220
Total			$	164,602	$	142,417
Cash placed with counterparties, net					$	7,691


	September 30, 2020
	Notional Value		Derivative Asset		Derivative Liability		Recorded Gain/(Loss)
Mortgage-backed securities forward trades	$	9,637,702	$	2,793	$	23,586	$	(8,444)
Interest rate lock commitments	15,103,027		272,837		—		26,082
Hedging mortgage servicing rights	4,306,000		8,730		—		2,161
Margin			30,642		208
Total			$	315,002	$	23,794
Cash held from counterparties, net			$	30,434

The following presents a summary of derivative assets and liabilities and related netting amounts as of September 30, 2021 (in thousands):


	September 30, 2021
	Gross Amount of Recognized Assets (liabilities)		Gross Offset		Net Assets (Liabilities)
Balance at September 30, 2021
Derivatives subject to master netting agreements:
Assets:
Mortgage-backed securities forward trades	$	54,504	$	(53,680)	$	824
Hedging mortgage servicing rights	254		—		254
Margin (cash placed with counterparties)	71,529		(34,776)		36,753
Liabilities:
Mortgage-backed securities forward trades	(3,304)		3,665		361
Hedging mortgage servicing rights	(42,145)		34,776		(7,369)
Margin (cash held from counterparties)	(79,220)		50,015		(29,205)

Derivatives not subject to master netting agreements:
Assets:
Interest rate lock commitments	38,315		—		38,315

Liabilities:
Interest rate lock commitments	(17,748)		—		(17,748)

Total derivatives
Assets	$	164,602	$	(88,456)	$	76,146
Liabilities	$	(142,417)	$	88,456	$	(53,961)

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The following presents a summary of derivative assets and liabilities and related netting amounts as of December 31, 2020 (in thousands):


	December 31, 2020
	Gross Amount of Recognized Assets (liabilities)		Gross Offset		Net Assets (Liabilities)
Balance at December 31, 2020
Derivatives subject to master netting agreements:
Assets:
Mortgage-backed securities forward trades	$	1,320	$	—	$	1,320
Hedging mortgage servicing rights	4,419		—		4,419
Margin (cash placed with counterparties)	58,290		(45,427)		12,863
Liabilities: