SEC Filing | Home Point Capital

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hmpt-20220930

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, 2022


☐			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 4, 2022, the registrant had 138,398,707 shares of common stock, par value $0.0000000072 per share, outstanding.

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			Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021			1
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)			2
Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4. Controls and Procedures			48
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4. Mine Safety Disclosures			49
Item 5. Other Information			49
Item 6. Exhibits			50
Signatures			51

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Cautionary Note on Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains certain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to, 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. Forward-looking statements are not guarantees of future performance, are based upon assumptions, 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, 2021, which was filed on March 17, 2022 (our “2021 Annual Report”). Factors, risks, and uncertainties that could cause actual outcomes and results to be materially different from those contemplated 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;

•risks related to any subservicer;

•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;

•difficult conditions or disruptions in the mortgage-backed securities (“MBS”), mortgage, real estate and financial markets;

•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 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;

•any employment litigation 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;

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•the impact of changes in political or economic stability or by 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;

•risks associated with changes in the London Inter-Bank Offered Rate reporting practices and the use of alternative reference rates;

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

•risks associated with derivative financial instruments;

•our ability to comply with continually changing federal, state and local laws and regulations;

•the impact of revised rules and regulations and enforcement of existing rules and regulations by the Consumer Financial Protection Bureau;

•the impact of revised rules and regulations and enforcement of existing rules and regulations by state regulatory agencies;

•our ability to comply with the Government-Sponsored Enterprises (“GSE”), FHA, U.S. Department of Veterans Affairs (“VA”) and U.S. Department of Agriculture (“USDA”) guidelines and changes in these guidelines or GSE and Government National Mortgage Association (“Ginnie Mae”) guarantees;

•changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as Ginnie Mae, the FHA or the VA, the USDA, or GSEs 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;

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

•our ability to comply with the regulations applicable to our investment management subsidiary;

•the impact of private legal proceedings;

•risks associated with our acquisition of mortgage servicing rights;

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

•risks associated with higher risk loans that we service;

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

•the effects of the COVID-19 pandemic on our business.

iii

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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 2021 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

(dollars in thousands, except share and per share amounts)


	(Unaudited)
	September 30, 2022		December 31, 2021
Assets:
Cash and cash equivalents	$	130,338	$	170,987
Restricted cash	18,083		36,803
Cash and cash equivalents and Restricted cash	148,421		207,790
Mortgage loans held for sale (at fair value)	917,752		5,107,161
Mortgage servicing rights (at fair value)	1,492,547		1,525,103
Property and equipment, net	13,356		21,892
Accounts receivable, net	167,744		129,092
Derivative assets	72,160		84,385
Goodwill	—		10,789
Government National Mortgage Association loans eligible for repurchase	194,473		65,237
Assets held for sale	38,886		63,664
Other assets	36,947		43,228
Total assets	$	3,082,286	$	7,258,341
Liabilities and Shareholders’ Equity:
Liabilities:
Warehouse lines of credit	$	870,640	$	4,718,658
Term debt and other borrowings, net	941,297		1,226,524
Accounts payable and accrued expenses	82,896		138,193
Government National Mortgage Association loans eligible for repurchase	194,473		65,237
Deferred tax liabilities	193,919		229,752
Derivative liabilities	92,825		26,736
Other liabilities	67,019		76,588
Total liabilities	2,443,069		6,481,688
Note 9 – Commitments and Contingencies

Shareholders’ Equity:
Preferred stock (250,000,000 authorized shares, none issued and outstanding, $0.0000000072 par value per share)	—		—
Common stock (1,000,000,000 authorized shares, 138,399,748 and 139,326,953 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively, $0.0000000072 par value per share)	—		—
Additional paid-in capital	512,620		523,811
Retained earnings	126,597		252,842
Total shareholders’ equity	639,217		776,653
Total liabilities and shareholders’ equity	$	3,082,286	$	7,258,341

See accompanying notes to the unaudited condensed consolidated financial statements.

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HOME POINT CAPITAL INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited – dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
(Loss) gain on loans, net	$	(10,278)	$	145,471	$	48,360	$	521,727
Loan fee income	7,606		34,484		42,765		118,099

Interest income	21,452		36,719		76,062		96,944
Interest expense	(26,341)		(45,532)		(88,356)		(122,603)
Interest expense, net	(4,889)		(8,813)		(12,294)		(25,659)
Loan servicing fees	60,140		91,831		204,076		247,753
Change in fair value of mortgage servicing rights	(46,187)		10,970		(58,891)		(83,087)
Other income	1,925		658		12,480		2,111
Total revenue, net	8,317		274,601		236,496		780,944
Expenses:
Compensation and benefits	62,765		114,612		227,798		395,550
Loan expense	3,977		16,618		19,961		51,796
Loan servicing expense	11,221		6,681		24,088		22,282
Production technology	3,676		7,583		12,884		25,038
General and administrative	12,479		21,741		49,119		74,527
Depreciation and amortization	2,599		2,440		7,913		7,551
Impairment of goodwill	10,789		—		10,789		—
Other expenses	8,118		5,649		19,186		23,620
Total expenses	115,624		175,324		371,738		600,364
(Loss) income before income tax	(107,307)		99,277		(135,242)		180,580
Income tax benefit (expense)	25,039		(27,341)		34,837		(50,250)
(Loss) income from equity method investment	(11,862)		(713)		(26,278)		16,649
Net (loss) income	$	(94,130)	$	71,223	$	(126,683)	$	146,979

(Loss) earnings per share:
Basic	$	(0.68)	$	0.51	$	(0.91)	$	1.06
Diluted	$	(0.68)	$	0.51	$	(0.91)	$	1.05

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

(unaudited – dollars in thousands, except share amounts)



	Common Stock			Additional Paid in Capital		Treasury Stock		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, January 1, 2022	139,326,953	$	—	$	523,811	$	—	$	252,842	$	776,653
Stock repurchase	(461,690)	—		—		(1,513)		—		(1,513)
Dividends to shareholders	—	—		—		—		(5,575)		(5,575)
Employee stock purchases (option exercise)	97,223	—		122		—		—		122
Equity-based compensation	—	—		1,706		—		—		1,706
Net income	—	—		—		—		11,864		11,864
Balance at March 31, 2022	138,962,486	$	—	$	525,639	$	(1,513)	$	259,131	$	783,257
Stock repurchase	(718,106)	—		—		(2,261)		—		(2,261)
Retirement of treasury stock	—	—		(15,338)		3,774		11,564		—
Dividends to shareholders	—	—		—		—		(5,551)		(5,551)
Employee stock purchases (option exercise)	11,114	—		(33)		—		—		(33)
Equity-based compensation (restricted stock units vesting)	124,778	—		1,407		—		—		1,407
Net loss	—	—		—		—		(44,417)		(44,417)
Balance at June 30, 2022	138,380,272	$	—	$	511,675	$	—	$	220,727	$	732,402
Employee stock purchases (option exercise)	19,476	—		(29)		—		—		(29)
Equity-based compensation (restricted stock units vesting)	—	—		974		—		—		974
Net loss	—	—		—		—		(94,130)		(94,130)
Ending balance, September 30, 2022	138,399,748	$	—	$	512,620	$	—	$	126,597	$	639,217


	Common Stock			Additional Paid in Capital		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount
Beginning balance, January 1, 2021	138,860,103	$	—	$	519,510	$	407,964	$	927,474
Contributed capital	—	—		—		192		192
Distributions to parent	—	—		—		(295,089)		(295,089)
Employee stock purchases (option exercise)	185,073	—		(1,028)		—		(1,028)
Equity-based compensation	—	—		1,779		—		1,779
Net income	—	—		—		148,969		148,969
Balance at March 31, 2021	139,045,176	$	—	$	520,261	$	262,036	$	782,297
Employee stock purchases (option exercise)	441,921	—		(1,503)		—		(1,503)
Equity-based compensation	—	—		1,747		—		1,747
Net loss	—	—		—		(73,213)		(73,213)
Balance at June 30, 2021	139,487,097	$	—	$	520,505	$	188,823	$	709,328
Dividend to shareholders	—	—		—		(20,924)		(20,924)
Employee stock purchases (option exercise)	39,927	—		(105)		—		(105)
Equity-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

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

(unaudited – dollars in thousands)


	Nine Months Ended September 30,
	2022		2021
Operating activities:
Net (loss) income	$	(126,683)	$	146,979
Adjustments to reconcile net (loss) income to cash used in operating activities:
Depreciation	7,913		7,551
Amortization of debt issuance costs	2,451		2,444
Impairment of goodwill	10,789		—
Impairment of equity method investment	8,795		—
Gain on loans, net	(48,360)		(521,727)
Provision for representation and warranty reserve	7,016		9,358
Equity-based compensation expense	4,067		5,206
Deferred income tax (benefit) expense	(35,833)		50,301
Loss (income) from equity method investment	17,483		(16,649)
Originations and purchases of mortgage loans held for sale	(26,835,939)		(79,464,436)
Proceeds from sale and payments of mortgage loans held for sale	30,233,888		75,786,570
Decrease in fair value of mortgage servicing rights	58,891		83,087
Decrease in fair value of mortgage loans held for sale	155,228		6,906
(Increase) decrease in fair value of derivative assets	12,226		169,721
Changes in operating assets and liabilities:
Decrease in accounts receivable, net	10,756		35,360
Decrease (increase) in other assets	6,281		(7,369)
Decrease in accounts payable and accrued expenses	(59,402)		(40,959)
Increase in other liabilities	49,498		90,193
Net cash provided by (used for) operating activities	3,479,065		(3,657,464)
Investing activities:
Purchases of property and equipment, net of disposals	623		(8,786)
Purchase of mortgage servicing rights	(23,033)		(33,027)
Proceeds from sale of mortgage servicing rights	635,992		111,609
Equity method investment	(1,500)		—
Net cash provided by investing activities	612,082		69,796

See accompanying notes to the unaudited condensed consolidated financial statements.

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Financing activities:
Proceeds from warehouse borrowings	28,584,681		81,365,921
Payments on warehouse borrowings	(32,432,698)		(78,062,859)
Proceeds from term debt borrowings	595,000		1,213,400
Payments on term debt borrowings	(880,000)		(550,000)
Proceeds from other borrowings	70,000		75,000
Payments on other borrowings	(73,250)		(115,000)
Write off (payments of debt issuance costs),net	572		(14,103)
Employee stock purchases (option expense)	60		(2,636)
Common stock repurchases	(3,774)		—
Contributed capital from parent	—		192
Dividends to shareholders	(11,107)		(20,924)
Distributions to parent	—		(295,089)
Net cash (used for) provided by financing activities	(4,150,516)		3,593,902
Net (decrease) increase in cash, cash equivalents and restricted cash	(59,369)		6,234
Cash, cash equivalents and restricted cash at beginning of period	207,790		196,893
Cash, cash equivalents and restricted cash at end of period	$	148,421	$	203,127
Supplemental disclosure:
Cash paid for interest	$	97,667	$	104,119
Cash refunded for income taxes	$	(2,897)	$	(33,740)

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 and its servicing operation. The Company’s business operations are organized into the following two segments: (1) Origination and (2) Servicing. Home Point Financial Corporation (“HPF”), a New Jersey corporation and a wholly owned subsidiary of the Company, originates, sells, and services residential real estate mortgage loans throughout the United States of America (“U.S.”). Home Point Asset Management LLC (“HPAM”), a Delaware limited liability company, is a wholly owned subsidiary of the Company and manages certain servicing assets. HPAM’s wholly owned subsidiary, Home Point Mortgage Acceptance Corporation (“HPMAC”), an Alabama Corporation, services residential real estate mortgage loans. Home Point Corporation Insurance Agency LLC (“HPCIA”), a Michigan limited liability company, is a wholly owned subsidiary of the Company that brokers home owner insurance policies.

Both HPF and HPMAC are approved sellers and servicers 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 approved issuers 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 New Accounting Pronouncements

Basis of Presentation

The accompanying 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 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, 2021 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 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, 2022, its results of operations for the three and nine months ended September 30, 2022 and 2021, and its cash flows for the nine months ended September 30, 2022 and 2021. The condensed consolidated financial information should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021.

All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

The Company reclassified gains and losses on MSR sales from Other income to the Change in fair value of mortgage servicing rights on the condensed consolidated statement of operations. Prior periods have been reclassified to conform to current period presentation.

Use of Estimates

The preparation of the Company’s 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, 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 and goodwill.

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Recently Adopted Accounting Pronouncements

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 of the accounting for income taxes. This amendment is effective for annual periods beginning after December 15, 2021. The Company adopted ASU 2019-12 as of January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, subject to meeting certain criteria, provides optional expedients and exceptions related to applying U.S. GAAP to certain contract modifications and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another rate that is expected to be discontinued. This guidance was effective upon issuance and allows application to contract changes as early as January 1, 2020. Subsequently, in 2021, the FASB issued ASU 2021-01, Reference Rate Reform, to further clarify and expand certain aspects of Topic 848. The Company is in the process of reviewing its derivative and hedging instruments that utilize LIBOR as the reference rate. The Company adopted ASU 2020-04 and ASU 2021-01 in September, 2022. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Pronouncements Issued but Not Yet Adopted

As of September 30, 2022, there have been no new accounting pronouncements recently issued or adopted that have had or are reasonably likely to have a material impact on the Company’s 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 (“MLHS”) at fair value, by type:


	September 30, 2022
	Unpaid Principal		Fair Value Adjustment		Total Fair Value
	(dollars in thousands)
Conventional(1)	$	601,365	$	(36,953)	$	564,412
Government(2)	370,132		(17,004)		353,128
Reverse(3)	275		(63)		212
Total	$	971,772	$	(54,020)	$	917,752


	December 31, 2021
	Unpaid Principal		Fair Value Adjustment		Total Fair Value
	(dollars in thousands)
Conventional(1)	$	4,206,099	$	79,389	$	4,285,488
Government(2)	799,579		21,902		821,481
Reverse(3)	275		(83)		192
Total	$	5,005,953	$	101,208	$	5,107,161

(1)Conventional includes mortgage loans meeting the eligibility requirements to be sold to FNMA or FHLMC.

(2)Government includes mortgage loans meeting the eligibility requirements to be sold to GNMA (including Federal Housing Administration, Department of Veterans Affairs and United States Department of Agricultural mortgage loans).

(3)Reverse loan presented in MLHS on the condensed consolidated balance sheets as a result of a repurchase.

MLHS on nonaccrual status had $35.5 million and $26.1 million of unpaid principal balances and $27.6 million and $21.6 million estimated fair value, as of September 30, 2022 and December 31, 2021, respectively.

The Company had $0.9 billion in unpaid principal balance pledged to secure its mortgage warehouse line of credit as of September 30, 2022.

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The following presents a reconciliation of the changes in MLHS to the amounts presented on the condensed consolidated statements of cash flows:


	Nine Months Ended September 30,
	2022		2021

Fair value at beginning of period	$	5,107,161	$	3,301,694
Mortgage loans originated and purchased	26,835,939		79,464,436
Proceeds on sales and payments received	(30,233,888)		(75,786,570)
Change in fair value	(155,228)		(6,906)
Loss on loans(1)	(636,232)		(292,458)
Fair value at end of period	$	917,752	$	6,680,196

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

Note 4 – Mortgage Servicing Rights

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

Mortgage Servicing Rights (“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 of a mortgage loan for which the Company retains the underlying servicing, 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 MSRs:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(dollars in thousands)
Balance at beginning of period	$	1,419,105	$	1,267,253	$	1,525,103	$	748,457
MSRs originated	78,610		212,368		443,293		776,174
MSRs purchased	5,254		14,326		23,033		33,027
MSRs sold	—		(103,017)		(755,502)		(103,017)
Changes in valuation model inputs	18,256		85,150		367,637		188,334
Change due to cash payoffs and principal amortization	(28,678)		(73,940)		(111,017)		(240,835)
Balance at end of period	$	1,492,547	$	1,402,140	$	1,492,547	$	1,402,140

The following presents the Company’s total capitalized mortgage servicing portfolio (based on the unpaid principal balance (“UPB”) of the underlying mortgage loans):


	September 30, 2022		December 31, 2021
	(dollars in thousands)
Ginnie Mae	$	9,811,192	$	5,602,582
Fannie Mae	47,114,227		70,174,987
Freddie Mac	37,132,116		52,547,588
Other	30,290		34,417
Total	$	94,087,825	$	128,359,574

MSR balance	$	1,492,547	$	1,525,103

The following presents the key weighted average assumptions used in determining the fair value of the Company’s MSRs:


	September 30, 2022		December 31, 2021
Discount rate	9.36	%	8.68	%
Weighted average prepayment speeds	6.27	%	8.30	%

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The key assumptions used to estimate the fair value of the MSRs are discount rate and the Conditional Prepayment Rate (“CPR” or “prepayment speeds”). An increase in prepayment speeds generally has 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. A decrease in prepayment speeds generally has a positive effect on the value of the MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.

The following presents the impact on the fair value of the Company’s MSR portfolio when applying the following hypothetical data points:


	Discount Rate				Prepayment Speeds
	100 BPS Adverse Change		200 BPS Adverse Change		10% Adverse Change		20% Adverse Change
	(dollars in thousands)
September 30, 2022	$	(66,356)	$	(126,825)	$	(39,568)	$	(76,960)
December 31, 2021	$	(66,885)	$	(128,172)	$	(56,278)	$	(108,621)

The following presents information related to loans serviced:


	September 30, 2022		December 31, 2021
	(dollars in thousands)
Total unpaid principal balance	$	95,032,958	$	133,889,085
Loans 30-89 days delinquent	848,812		656,012
Loans delinquent 90 or more days or in foreclosure	719,878		777,650

The following presents components of Loan servicing fees as reported in the Company’s condensed consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(dollars in thousands)
Contractual servicing fees	$	61,522	$	84,271	$	204,903	$	229,369
Late fees	129		1,458		2,145		3,923
Other	(1,511)		6,102		(2,972)		14,461
Total	$	60,140	$	91,831	$	204,076	$	247,753

The Company held for its customers $10.8 million and $19.9 million of escrow funds recorded in Other liabilities in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. The Company reported $0.5 million gain and $74.2 million loss on MSR sales in the Change in fair value of mortgage servicing rights in the condensed consolidated statement of operations for the three and nine months ended September 30, 2022, respectively. The Company reclassified $7.4 million gain on MSR sales from Other income to the Change in fair value of mortgage servicing rights on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

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Note 5 – Derivative Financial Instruments

The following presents the outstanding notional amounts and fair values of derivative instruments not designated as hedging instruments:


	September 30, 2022
	Notional Value		Derivative Asset		Derivative Liability
	(dollars in thousands)
Forward sale contracts	$	1,739,739	$	59,714	$	600
Interest rate lock commitments	1,521,029		2,199		29,176
Forward purchase contracts	67,000		—		3,399
Interest rate swap futures contracts	2,880,000		1,478		—
Treasury futures purchase contracts	940,000		—		—
Margin			8,769		59,650
Total			$	72,160	$	92,825


	December 31, 2021
	Notional Value		Derivative Asset		Derivative Liability
	(dollars in thousands)
Forward sale contracts	$	7,819,802	$	6,969	$	8,242
Interest rate lock commitments	6,068,763		29,887		2,843
Forward purchase contracts	1,521,000		3,031		281
Interest rate swap futures contracts	1,540,000		111		5,662
Treasury futures purchase contracts	4,720,000		—		—
Margin			44,387		9,708
Total			$	84,385	$	26,736

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The following presents the recorded gain (loss) on derivative financial instruments:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(dollars in thousands)
Forward sale contracts	$	61,234	$	67,436	$	58,430	$	111,004
Interest rate lock commitments	(43,814)		(36,175)		(53,584)		(242,466)
Forward purchase contracts	(1,138)		(8,098)		(4,191)		(11,976)
Interest rate swap and Treasury futures purchase contracts	$	(33,018)	$	(7,810)	$	(194,971)	$	(25,859)

Counterparty agreements for forward commitments contain master netting agreements. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. The Company incurred no credit losses due to nonperformance of any of its counterparties for the three and nine months ended September 30, 2022 and 2021.

The following presents a summary of derivative assets and liabilities and related netting amounts:

September 30, 2022

Gross Amounts Not Offset in the Statement of Financial Position(1)

Gross Amount of Assets (Liabilities) Recognized