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.
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.
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 | % |
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.
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 | |
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 | | Financial Instruments | | Cash Collateral | | Net Amount |
| (dollars in thousands) |
Derivatives subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Forward sale contracts | $ | 59,714 | | | $ | (600) | | | $ | (42,100) | | | $ | 17,014 | |
Forward purchase contracts | — | | | — | | | — | | | — | |
Interest rate swap futures contracts | 1,478 | | | (1,478) | | | — | | | — | |
Liabilities: | | | | | | | |
Forward sale contracts | (600) | | | 600 | | | — | | | — | |
Forward purchase contracts | (3,399) | | | — | | | 3,134 | | | (265) | |
Treasury futures purchase contracts | — | | | 1,478 | | | (1,478) | | | — | |
Derivatives not subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Interest rate lock commitments | 2,199 | | | — | | | — | | | 2,199 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | (29,176) | | | — | | | — | | | (29,176) | |
Total derivatives | | | | | | | |
Assets | $ | 63,391 | | | $ | (2,078) | | | $ | (42,100) | | | $ | 19,213 | |
Liabilities | $ | (33,175) | | | $ | 2,078 | | | $ | 1,656 | | | $ | (29,441) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Gross Amounts Not Offset in the Statement of Financial Position(1) | | |
| Gross Amount of Assets (Liabilities) Recognized | | Financial Instruments | | Cash Collateral | | Net Amount |
| (dollars in thousands) |
Derivatives subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Forward sale contracts | $ | 6,969 | | | $ | (4,886) | | | $ | (1,272) | | | $ | 811 | |
Forward purchase contracts | 3,031 | | | (258) | | | (2,627) | | | 146 | |
Interest rate swap futures contracts | 111 | | | (111) | | | — | | | — | |
Liabilities: | | | | | | | |
Forward sale contracts | (8,242) | | | 4,886 | | | 1,252 | | | (2,104) | |
Forward purchase contracts | (281) | | | 258 | | | — | | | (23) | |
Interest rate swap futures contracts | (5,662) | | | 111 | | | — | | | (5,551) | |
Derivatives not subject to master netting agreements: | | | | | | | |
Assets: | | | | | | | |
Interest rate lock commitments | 29,887 | | | — | | | — | | | 29,887 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | (2,843) | | | — | | | — | | | (2,843) | |
Total derivatives | | | | | | | |
Assets | $ | 39,998 | | | $ | (5,255) | | | $ | (3,899) | | | $ | 30,844 | |
Liabilities | $ | (17,028) | | | $ | 5,255 | | | $ | 1,252 | | | $ | (10,521) | |
(1) Amounts disclosed for collateral received from or posted to the same counterparty includes cash up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received from or posted to the same counterparty may exceed the amounts presented. The amounts of collateral received from or posted to counterparty are presented as margin and included as a component of either Derivative assets or Other liabilities in the Balance Sheet.
For information on the determination of fair value, refer to Note 12 – Fair Value Measurements.
Note 6 – Accounts Receivable, net
The following presents principal categories of Accounts receivable, net:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) |
Servicing receivable-general | $ | 23,097 | | | $ | 359 | |
Pair off receivable | 32,169 | | | 3,738 | |
Servicing sale receivable | 63,734 | | | 14,364 | |
Servicing advance receivable | 36,023 | | | 71,884 | |
Servicing advance reserve | (2,308) | | | (4,207) | |
Agency receivable | 3,003 | | | 20,184 | |
Income tax receivable | 7,287 | | | 11,181 | |
Warehouse receivable | 2,027 | | | 1,934 | |
Interest on servicing deposits | 157 | | | 464 | |
Other | 2,555 | | | 9,191 | |
Total | $ | 167,744 | | | $ | 129,092 | |
As part of managing the Company’s servicing advances, servicing advance reserve is recognized with management’s estimate of current expected losses and maintained at a level that management considers adequate based upon continuing assessments of collectability, historical loss experience, current trends, and reasonable and supportable forecasts.
The following presents changes to the servicing advance reserve:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Servicing advance reserve at beginning of period | $ | (1,769) | | | $ | (9,098) | | | $ | (4,207) | | | $ | (8,380) | |
Additions | (1,157) | | | 1,500 | | | (1,259) | | | (724) | |
Charge-offs | 618 | | | 869 | | | 3,158 | | | 2,375 | |
Servicing advance reserve at end of period | $ | (2,308) | | | $ | (6,729) | | | $ | (2,308) | | | $ | (6,729) | |
Note 7 – Warehouse Lines of Credit
The Company maintains mortgage warehouse lines of credit arrangements with various financial institutions, primarily to fund the origination of mortgage loans. The Company held mortgage funding arrangements with 9 separate financial institutions with a total maximum borrowing capacity of $3.2 billion and $7.5 billion as of September 30, 2022 and December 31, 2021, respectively, which is primarily uncommitted. The Company had $2.3 billion and $2.8 billion of unused capacity under its warehouse lines of credit as of September 30, 2022 and December 31, 2021, respectively.
The following presents the amounts outstanding and maturity dates under the Company’s various mortgage funding arrangements:
| | | | | | | | | | | |
| Maturity Date | | September 30, 2022 |
| | (dollars in thousands) |
$450 million Warehouse Facility1 | August 2023 | | 284,797 | |
$200 million Warehouse Facility2 | September 2023 | | 23,366 | |
$200 million Warehouse Facility3 | September 2023 | | 34,984 | |
$300 million Warehouse Facility4 | October 2023 | | 140,651 | |
$200 million Warehouse Facility5 | March 2023 | | 24,727 | |
$50 million Warehouse Facility6 | March 2023 | | 1,658 | |
$1,200 million Warehouse Facility7 | May 2024 | | 145,293 | |
$88.5 million Warehouse Facility | Evergreen | | 8,289 | |
$400 million Warehouse Facility8 | Evergreen | | 144,599 | |
Gestation Warehouse Facility | Evergreen | | 62,276 | |
Total | | | $ | 870,640 | |
(1)The maturity of this Warehouse Facility has been extended from September 2022 to August 2023.
(2)The capacity of this Warehouse Facility has been reduced from $500 million to $200 million. The maturity of this Warehouse Facility has been extended from September 2022 to September 2023.
(3)The capacity of this Warehouse Facility has been reduced from $500 million to $200 million. The maturity of this Warehouse Facility has been extended from September 2022 to September 2023.
(4)The capacity of this Warehouse Facility has been reduced from $1,200 million to $300 million. The warehouse facility was terminated on October 7, 2022. Refer to Note 22 – Subsequent Events.
(5)The capacity of this Warehouse Facility has been reduced from $400 million to $200 million.
(6)The capacity of this Warehouse Facility has been reduced from $500 million to $250 million as of June 30, 2022 and $50 million as of September 30, 2022.
(7)The maturity of this Warehouse Facility has been extended from May 2023 to May 2024.
(8)The capacity of this Warehouse Facility has been reduced from $550 million to $400 million.
| | | | | | | | | | | |
| Maturity Date9 | | December 31, 2021 |
| | (dollars in thousands) |
$1,200 million Warehouse Facility | February 2022 | | $ | 604,421 | |
$500 million Warehouse Facility10 | March 2022 | | 335,509 | |
$500 million Warehouse Facility | March 2022 | | 381,087 | |
$1,000 million Warehouse Facility11 | August 2022 | | 716,802 | |
$450 million Warehouse Facility | September 2022 | | 277,060 | |
$500 million Warehouse Facility | September 2022 | | 339,521 | |
$500 million Warehouse Facility | September 2022 | | 375,381 | |
$500 million Warehouse Facility | March 2023 | | 309,898 | |
$1,500 million Warehouse Facility | May 2023 | | 731,132 | |
$88.5 million Warehouse Facility | Evergreen | | 11,409 | |
$550 million Warehouse Facility | Evergreen | | 363,959 | |
Gestation Warehouse Facility | Evergreen | | 179,360 | |
Early Funding12 | | | 93,119 | |
Total | | | $ | 4,718,658 | |
(9)Maturity Dates in this table are as of December 31, 2021. The Maturity Dates as of September 30, 2022 are reflected in the table above.
(10)The warehouse facility was terminated on September 23, 2022.
(11)The Warehouse Facility expired in August 2022.
(12)In addition to warehouse facilities, the Company is an approved lender for early funding facilities with Fannie Mae through its As Soon As Pooled (“ASAP”) program and Freddie Mac through its Early Funding (“EF”) program. From time to time, the Company enters into agreements to deliver certified pools of mortgage loans and receive funding in exchange for such pools. All mortgage loans delivered under these programs must adhere to a set of eligibility criteria. Early funding programs with Fannie Mae and Freddie Mac do not have stated expiration dates or maximum capacities.
The Company’s warehouse facilities’ variable interest rates are calculated using an index rate generally tied to a Secured Overnight Financing Rate (“SOFR”); plus applicable interest rate margins, with varying index interest and interest rate margin floors. The weighted average interest rate for the Company’s warehouse facilities was 2.70% and 2.36% for the nine months ended September 30, 2022 and twelve months ended December 31, 2021, respectively. The Company’s borrowings are secured by MLHS at fair value.
The Company’s warehouse facilities require the maintenance of certain financial covenants relating to net worth, profitability, liquidity, and ratio of indebtedness to net worth among others. The Company’s warehouse lines that contain profitability covenants were amended to allow for a net loss for the three months ended September 30, 2022. The Company was in compliance with all warehouse facility covenants as of September 30, 2022.
Note 8 – Term Debt and Other Borrowings, net
The following presents the Company’s term debt and other borrowings, net:
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Collateral | | September 30, 2022 | | December 31, 2021 |
| | | | | (dollars in thousands) |
$1.0 billion MSR Facility | May 2025 | | MSRs | | $ | 450,000 | | | $ | 685,000 | |
$550 million Senior Notes1 | February 2026 | | Unsecured | | 500,000 | | | 550,000 | |
$85 million Servicing Advance Facility2 | May 2023 | | Servicing Advances | | — | | | 3,250 | |
$35 million Operating Line of Credit | May 2023 | | Mortgage loans | | 1,000 | | | 1,000 | |
Gross | | | | | 951,000 | | | 1,239,250 | |
Debt issuance costs | | | | | (9,703) | | | (12,726) | |
Total | | | | | $ | 941,297 | | | $ | 1,226,524 | |
(1)The Company repurchased and retired $50 million Senior Notes during the nine months ended September 30, 2022.
(2)Effective June 9, 2022, the capacity of the Servicing Advance Facility has been reduced from $90 million to $85 million.
The Company maintains a $1.0 billion MSR financing facility (the “MSR Facility”). On April 29, 2022, the Company entered into an amendment to the MSR facility that, among other things, reduced the committed capacity from $650.0 million to $500.0 million. The amendment also replaced the LIBOR based interest rate with SOFR, plus the applicable interest rate margin, with advance rates generally ranging from 62.5% to 72.5% of the value of the underlying MSRs. The MSR Facility is collateralized by the Company’s FNMA, FHLMC, and GNMA MSRs. The MSR Facility has a three-year revolving period ending on May 4, 2024 followed by a one-year period during which the balance drawn must be repaid and no further amounts may be drawn down, which ends on May 20, 2025. The MSR Facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of September 30, 2022, the Company was in compliance with all covenants under the MSR Facility.
In January 2021, the Company issued $550.0 million aggregate principal amount of its 5.0% Senior Notes due 2026 (the “Senior Notes”) in a private placement transaction. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly owned subsidiaries existing on the date of issuance, other than HPAM and HPMAC. The Senior Notes bear interest at a rate of 5.0% per annum, payable semi-annually in arrears. The Senior Notes will mature on February 1, 2026. The Company repurchased and retired $50 million Senior Notes during the second quarter of 2022.
The Indenture governing the Senior Notes contains covenants and restrictions that, among other things and subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries to (i) incur additional debt or issue certain preferred shares; (ii) incur liens; (iii) make certain distributions, investments, and other restricted payments; (iv) engage in certain transactions with affiliates; and (v) merge or consolidate or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets.
The Company has a $85.0 million servicing advance facility, which is collateralized by all of the Company’s servicing advances. The facility carries an interest rate of Term SOFR plus a margin and an advance rate ranging from 85.0-95.0%. The servicing advance facility requires the maintenance of certain financial covenants relating to net worth, liquidity, and indebtedness of the Company. As of September 30, 2022, the Company was in compliance with all covenants under the servicing advance facility.
The Company also has a $35.0 million operating line, with an interest rate based on the Prime Rate.
The Company had total available capacity of $399.0 million and $29.6 million for its MSR Facility and servicing advance facility, respectively as of September 30, 2022. The Company has no available capacity for its operating line of credit as of September 30, 2022.
Note 9 – Commitments and Contingencies
Commitments to Extend Credit
The Company’s Interest rate lock commitments (“IRLCs”) expose the Company to market risk if interest rates change and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the customer does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans were $1.5 billion and $6.1 billion as of September 30, 2022 and December 31, 2021, respectively.
Litigation
The Company is subject to various legal proceedings arising out of the ordinary course of business. There were no current or pending claims against the Company which are expected to have a material impact on the Company's condensed consolidated balance sheets, statements of operations, or cash flows.
Regulatory Contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those conducted as part of regulatory oversight of our mortgage origination, servicing, and financing activities. Such audits and examinations could result in additional actions, penalties, or fines by state or federal governmental bodies, regulators, or the courts with respect to our mortgage origination, servicing, and financing activities, which may be applicable generally to the mortgage industry or to the Company in particular. The Company did not pay any material penalties or fines during the nine months ended September 30, 2022 and 2021 and is not currently required to pay any such penalties or fines.
Note 10 – Regulatory Net Worth Requirements
The Company is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development (“HUD”), which govern non-supervised, direct endorsement mortgagees. The Company is also subject to regulatory capital requirements administered by Ginnie Mae, Fannie Mae, and Freddie Mac, which govern issuers of Ginnie Mae, Fannie Mae, and Freddie Mac securities. Additionally, the Company is required to maintain minimum net worth requirements; these range from $0 to $1.0 million depending on the state.
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could (i) remove the Company’s ability to sell and service loans to, or on behalf of, the Agencies and (ii) have a direct material effect on the Company’s condensed consolidated financial statements. In accordance with the regulatory capital guidelines, the Company must meet specific quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Changes in regulatory and accounting standards, as well as the impact of future events on the Company’s results, may significantly affect the Company’s net worth adequacy.
The Company is subject to the following minimum net worth, minimum capital ratio, and minimum liquidity requirements established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers:
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 25 basis points of outstanding UPB for total loans serviced.
•Adjusted/Tangible Net Worth, as defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
•Base Adjusted/Tangible Net Worth (as defined by HUD) of $2.5 million plus 35 basis points of the issuer’s total single-family effective outstanding obligations.
•Adjusted/Tangible Net Worth, as defined by HUD, is comprised of total equity less goodwill, intangible assets, affiliate receivables, deferred tax assets, prepaid expenses, and certain pledged assets.
Minimum Capital Ratio
For Fannie Mae, Freddie Mac, and Ginnie Mae, the Company is also required to hold a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6.0%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
•3.5 basis points of total Agency servicing.
•Incremental 200 basis points of total nonperforming Agency servicing, measured as 90 plus day delinquencies, in excess of 6.0% of the total Agency servicing UPB.
•Allowable assets for liquidity may include: cash and cash equivalents (unrestricted); available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.
The minimum liquidity requirement for Ginnie Mae is defined as follows:
•Maintain liquid assets equal to the greater of $1.0 million or 10 basis points of the Company’s outstanding single-family MBS.
The most restrictive of the minimum net worth and capital requirements require the Company to maintain a minimum adjusted net worth balance of $224.6 million and $326.3 million as of September 30, 2022 and December 31, 2021, respectively.
The Company is in compliance with all minimum requirements to which it was subject as of September 30, 2022.
Note 11 – Representation and Warranty Reserve
Certain of the Company’s loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. The Company has included considerations that it may receive relief of certain representations and warranty obligations on loans sold to FNMA or FHLMC on or after January 1, 2013 if FNMA or FHLMC satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to FNMA or FHLMC, respectively. The current UPB of loans sold by the Company represents the maximum potential exposure to repurchases related to representations and warranties. Reserve levels are a function of expected losses based on historical experience and loan volume. While the amount of repurchases is uncertain, the Company considers the liability to be appropriate.
The following presents the activity of the outstanding repurchase reserve:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Repurchase reserve at beginning of period | $ | 38,301 | | | $ | 27,901 | | | $ | 24,577 | | | $ | 18,080 | |
Additions | 14,748 | | | 1,258 | | | 57,166 | | | 12,262 | |
Charge-offs | (21,456) | | | (1,721) | | | (50,150) | | | (2,904) | |
Repurchase reserve at end of period | $ | 31,593 | | | $ | 27,438 | | | $ | 31,593 | | | $ | 27,438 | |
Note 12 – Fair Value Measurements
The Company uses fair value measurements to record certain assets and liabilities at fair value on a recurring basis, such as MSRs, derivatives, MLHS and Early buyout loans (“EBOs”). The Company has elected fair value accounting for loans held for sale and MSRs to more closely align the Company’s accounting with its interest rate risk strategies without having to apply the operational complexities of hedge accounting.
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
| | | | | | | | |
Level Input: | | Input Definition: |
| | |
Level 1 | | Unadjusted, quoted prices in active markets for identical assets or liabilities. |
| | |
Level 2 | | Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others. |
| | |
Level 3 | | Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity), unobservable inputs may be used. Unobservable inputs reflect the Company's own assumptions about the factors that market participants would use in pricing the asset or liability and are based on the best information available in the circumstances. |
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the financial statements.
Fair Value of Certain Assets and Liabilities
The following describes the methods used in estimating the fair values of certain assets and liabilities:
Mortgage loans held for sale. The majority of the Company's MLHS at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of the Company's MLHS consist of loans repurchased from the Government-Sponsored Enterprises (“GSEs”) that have subsequently been deemed to be non-saleable to GSEs and Ginnie Mae when certain representations and warranties are breached. These loans, however, are saleable to other entities and are classified on the consolidated balance sheets as Mortgage loans held for sale. These repurchased loans are considered Level 3 and are valued based on recent sales prices of similar loans.
Interest rate lock commitments. The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The average pull-through rate for IRLCs was 81.1% and 86.1% as of September 30, 2022 and December 31, 2021, respectively. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.
Forward sales and purchase commitments. The Company treats forward mortgage-backed securities purchase and sale commitments that have not settled as derivatives and recognizes them at fair value. These forward commitments will be fulfilled with loans not yet sold or securitized and new originations and purchases. The forward commitments allow the Company to reduce the risk related to market price volatility. The Company estimates the fair value of forward commitments based on quoted MBS prices. These derivatives are classified as Level 2.
Interest rate swap futures contracts. The Company uses options on swap contracts to offset changes in the fair value of MSRs. The Company estimates the fair value of these MSR-related derivatives using quoted prices for similar instruments. These derivatives are classified as Level 2.
Treasury futures purchase contracts. The Company uses Treasury futures contracts to offset changes in the fair value of MSRs. The Company estimates fair value of these MSR-related derivatives using quoted market prices. These derivatives are classified as Level 1.
Mortgage Servicing Rights: The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The Company obtains valuations from an independent third party on a quarterly basis to support the reasonableness of the fair value estimate. Key assumptions used in measuring the fair value of MSRs include, but are not limited to, discount rates and prepayment speeds. Other assumptions such as delinquencies, and cost to service are also considered resulting in a Level 3 classification.
The following presents the major categories of assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | — | | | $ | 904,354 | | | $ | 13,398 | | | $ | 917,752 | |
Interest rate lock commitments | — | | | — | | | 2,199 | | | 2,199 | |
Forward sale contracts | — | | | 59,714 | | | — | | | 59,714 | |
Interest rate swap futures contracts | — | | | 1,478 | | | — | | | 1,478 | |
Mortgage servicing rights | — | | | — | | | 1,492,547 | | | 1,492,547 | |
Total | $ | — | | | $ | 965,546 | | | $ | 1,508,144 | | | $ | 2,473,690 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | $ | — | | | $ | — | | | $ | 29,176 | | | $ | 29,176 | |
Forward sale contracts | — | | | 600 | | | — | | | 600 | |
Forward purchase contracts | — | | | 3,399 | | | — | | | 3,399 | |
Total | $ | — | | | $ | 3,999 | | | $ | 29,176 | | | $ | 33,175 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Assets: | | | | | | | |
Mortgage loans held for sale | $ | — | | | $ | 5,086,943 | | | $ | 20,218 | | | $ | 5,107,161 | |
Interest rate lock commitments | — | | | — | | | 29,887 | | | 29,887 | |
Forward sale contracts | — | | | 6,969 | | | — | | | 6,969 | |
Forward purchase contracts | — | | | 3,031 | | | — | | | 3,031 | |
Interest rate swap futures contracts | — | | | 111 | | | — | | | 111 | |
Mortgage servicing rights | — | | | — | | | 1,525,103 | | | 1,525,103 | |
Total | $ | — | | | $ | 5,097,054 | | | $ | 1,575,208 | | | $ | 6,672,262 | |
Liabilities: | | | | | | | |
Interest rate lock commitments | $ | — | | | $ | — | | | $ | 2,843 | | | $ | 2,843 | |
Forward sale contracts | — | | | 8,242 | | | — | | | 8,242 | |
Forward purchase contracts | — | | | 281 | | | — | | | 281 | |
Interest rate swap futures contracts | — | | | 5,662 | | | — | | | 5,662 | |
Total | $ | — | | | $ | 14,185 | | | $ | 2,843 | | | $ | 17,028 | |
The following presents a reconciliation of Level 3 assets measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | |
| MSRs | | IRLC | | MLHS |
| (dollars in thousands) |
Balance at January 1, 2022 | $ | 1,525,103 | | | $ | 29,887 | | | $ | 20,218 | |
Purchases, sales, issuances, contributions, and settlements | (262,915) | | | — | | | (1,564) | |
Change in fair value | 228,036 | | | (17,746) | | | (52) | |
Transfers out(1) | — | | | — | | | (826) | |
Balance at March 31, 2022 | $ | 1,490,224 | | | $ | 12,141 | | | $ | 17,776 | |
Purchases, sales, issuances, contributions, and settlements | (110,125) | | | — | | | (1,147) | |
Change in fair value | 39,006 | | | 10,481 | | | (1,261) | |
Transfers out(1) | — | | | — | | | (1,442) | |
Balance at June 30, 2022 | $ | 1,419,105 | | | $ | 22,622 | | | $ | 13,926 | |
Purchases, sales, issuances, contributions, and settlements | 83,865 | | | — | | | (1,820) | |
Change in fair value | (10,423) | | | (20,423) | | | (126) | |
Transfers out(1) | — | | | — | | | 1,418 | |
Balance at September 30, 2022 | $ | 1,492,547 | | | $ | 2,199 | | | $ | 13,398 | |
| | | | | | | | | | | | | | | | | |
| MSRs | | IRLC | | MLHS |
| (dollars in thousands) |
Balance at January 1, 2021 | $ | 748,457 | | | $ | 257,785 | | | $ | 44,374 | |
Purchases, sales, issuances, contributions, and settlements | 299,174 | | | — | | | 41 | |
Change in fair value | 108,726 | | | (237,592) | | | (247) | |
Transfers out(1) | — | | | — | | | 1,410 | |
Balance at March 31, 2021 | $ | 1,156,357 | | | $ | 20,193 | | | $ | 45,578 | |
Purchases, sales, issuances, contributions, and settlements | 283,333 | | | — | | | 415 | |
Change in fair value | (172,437) | | | 36,271 | | | (517) | |
Transfers out(1) | — | | | — | | | — | |
Balance at June 30, 2021 | $ | 1,267,253 | | | $ | 56,464 | | | $ | 45,476 | |
Purchases, sales, issuances, contributions, and settlements | 123,678 | | | — | | | (24,748) | |
Change in fair value | 11,209 | | | (18,149) | | | (947) | |
Transfers out(1) | — | | | — | | | 31 | |
Balance at September 30, 2021 | $ | 1,402,140 | | | $ | 38,315 | | | $ | 19,812 | |
(1)Transfers in (out) represents transfers between Levels 2 and 3, and reclassifications to Real estate owned (“REO”), foreclosure or claims.
The following presents the fair value and UPB of MLHS that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for MLHS as the Company believes fair value best reflects its expected future economic performance:
| | | | | | | | | | | | | | | | | |
| Fair Value | | Principal Amount Due Upon Maturity | | Difference(1) |
| (dollars in thousands) |
September 30, 2022 | $ | 917,752 | | | $ | 971,772 | | | $ | (54,020) | |
December 31, 2021 | $ | 5,107,161 | | | $ | 5,005,069 | | | $ | 102,092 | |
(1)Represents the amount of (losses) gains related to changes in fair value of items accounted for using the fair value option included in Gain on loans, net within the condensed consolidated statements of operations.
The Company had no significant assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021, respectively.
The following is a summary of the key unobservable inputs used in the valuation of the Level 3 assets:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
Assets: | Key Input | | Range | | Weighted Average |
Mortgage servicing rights | Discount rate | | 8.6% - 16.4% | | 9.4% |
| Prepayment speeds | | 4.4% - 8.1% | | 6.3% |
Interest rate lock commitments | Pull-through rate | | 48.3% - 100.0% | | 81.1% |
Mortgage loans held for sale | Investor pricing | | 72.5% - 101.1% | | 79.7% |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Assets: | Key Input | | Range | | Weighted Average |
Mortgage servicing rights | Discount rate | | 8.6% - 12.2% | | 8.7% |
| Prepayment speeds | | 6.9% - 11.6% | | 8.3% |
Interest rate lock commitments | Pull-through rate | | 49.8% - 100.0% | | 86.1% |
Mortgage loans held for sale | Investor pricing | | 70.0% - 104.1% | | 91.3% |
Fair Value of Other Financial Instruments: All financial instruments were either recorded at fair value or the carrying value approximated fair value as of September 30, 2022 and December 31, 2021. For financial instruments that were not recorded at fair value, such as cash and cash equivalents, restricted cash, servicing advances, warehouse and operating lines of credit, accounts payable, and accrued expenses, their carrying values approximated fair value due to the short-term nature of such instruments. The Senior Notes had a carrying value of $500.0 million and $550.0 million and an estimated fair value of $313.9 million and $506.4 million as of September 30, 2022 and December 31, 2021, respectively. For the Company’s other long-term secured
borrowings not recorded at fair value, the carrying value approximated fair value due to the variable interest rate on the borrowings and the re-repricing of collateral.
Note 13 – Restructuring
Given the current market factors and industry trends, including the rapidly rising interest rates and increased competition in the industry, the Company took restructuring actions to enhance liquidity and align the Company’s cost structure with the decrease in the Origination volume.
In August 2022, the Company’s board of directors (the “Board”) approved the restructuring actions, which resulted in $13.4 million expense for cash severance and related benefits, retention, and termination costs in Compensation and benefits in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022.
The restructuring actions also included charges related to the write-down and write-off of office equipment totaling $2.3 million in Other expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022.
Restructuring reserve balance of $8.0 million as of September 30, 2022 is classified as Accrued payroll and accrued expenses. The Company anticipates that the activities associated with the current restructuring actions will be substantially complete by the end of 2022.
The following is a summary of the Company’s restructuring reserve:
| | | | | |
| (dollars in thousands) |
Balance at June 30, 2022 | $ | — | |
Restructuring charges | 13,407 | |
Payments | (5,361) | |
Balance at September 30, 2022 | $ | 8,046 | |
Note 14 – Goodwill
The Company performs its annual goodwill impairment analysis as of October 1 or more frequently if events and circumstances indicate that goodwill may be impaired. The Company compares the fair value of each reporting unit with its carrying amount, including goodwill. If the quantitative assessment indicates that the reporting unit’s carrying amount exceeds its fair value, the Company recognizes an impairment charge up to this amount but not to exceed the total carrying value of the reporting unit’s goodwill.
The Company performed an interim impairment test during the three months ended September 30, 2022, due to the impact of rising interest rates on the mortgage industry and the Company’s recent stock performance. The Company used the market-based valuation approach to determine fair value of its reporting units and compare against the carrying value of the reporting units. Based upon the results of this evaluation, the Company recorded $10.8 million goodwill impairment charges in Corporate Impairment of goodwill, driven predominantly by a significant decline in our market capitalization. The Company wrote off the $7.0 million and $3.8 million goodwill asset for the Origination and Servicing segments, respectively, and has no remaining goodwill balance as of September 30, 2022.
Note 15 – Equity-based Compensation
On January 21, 2021, the Board approved the adoption of the Company’s 2021 Incentive Plan (“2021 Plan”) and designated 6.9 million shares of the Company’s authorized common stock available for equity-based awards thereunder. The 2021 Plan allows for the assumption and substitution of outstanding options to purchase common units of HPLP granted under the Home Point Capital LP (“HPLP”) 2015 Option Plan (the “2015 Option Plan”), which was in place prior to the Company’s IPO. The expiration date of the 2021 Plan is the tenth (10th) anniversary of the effective date of the 2021 Plan, which is January 21, 2031. The 2021 Plan contains both time-vesting service criteria and performance based vesting terms, which are based on the achievement of specified performance criteria outlined in the underlying award agreement.
Prior to the consummation of the merger in connection with the IPO, the 2015 Option Plan governed awards of stock options to key persons conducting business for HPLP and its direct and indirect subsidiaries, including the Company. The 2015 Option Plan allowed awards in the form of options that are exercisable into common units of HPLP. In connection with the IPO, all outstanding options under the 2015 Option Plan were canceled and “substitute options” were granted under the 2021 Plan. The exercise price and number of shares of common stock of the substitute options result in the same (subject to rounding) intrinsic value as the outstanding options granted under the 2015 Option Plan.
Restricted Stock Units
Restricted stock units (“RSUs”) are awards that represent the potential to receive shares of the Company’s common stock at the end of the applicable vesting period, subject to the terms and conditions of the 2021 Plan and the applicable award documents. RSUs awarded under the 2021 Plan are fair valued based upon the fair market value of the Company’s common stock on the grant date. Any person who holds RSUs has no ownership interest in the shares of the Company’s common stock to which such RSUs relate until and unless shares of common stock are delivered to the holder. The RSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following presents the summary of the Company’s RSU activity:
| | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 367,991 | | | $ | 10.18 | |
Granted | 233,550 | | | 3.85 | |
Vested | (209,093) | | | 10.75 | |
Outstanding at end of period | 392,448 | | | $ | 6.12 | |
The RSUs granted to the Company’s management team will vest in equal annual installments over a three-year period subject to the participants’ continued employment with the Company. The RSUs granted to the non-management members of the Company’s Board who are not affiliated with Stone Point Capital LLC vest at the next annual meeting of stockholders following the grant date. The Company recognized $0.2 million and $1.3 million of compensation expense related to RSUs within Compensation and benefits expense on the consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. The Company recognized $0.5 million and $1.1 million of compensation expense related to RSUs for the three and nine months ended September 30, 2021, respectively.
Performance Stock Units
Performance stock units (“PSUs”) are fair valued on the date of grant and expensed over the service period using a straight-line method as the awards cliff vest at the end of a three-year performance period. The Company also estimates the number of shares expected to vest, which is based on management’s determination of the probable outcome of the Performance Condition (as defined below), which requires considerable judgment. The Company records a cumulative adjustment in periods in which the Company’s estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the Performance Condition. The PSUs will become earned based on the level of achievement of the Company’s average return on equity over a three-year performance period (the “Performance Condition”). The number of earned PSUs can range from 0% to 150% of the number of PSUs granted, depending on continued service with the Company and the extent to which the Performance Condition has been achieved at the end of the performance period. The PSUs will be credited with dividend equivalent payments, as provided in Section 13(c)(iii) of the 2021 Plan.
The following table presents the summary of the Company’s PSU activity:
| | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Units | | Weighted-Average Grant Date Fair Value |
Outstanding at beginning of period | 238,347 | | | $ | 9.44 | |
Granted | 131,924 | | | 3.79 | |
Outstanding at end of period | 370,271 | | | $ | 7.43 | |
The Company did not recognize any compensation expense related to PSUs for the three and nine months ended September 30, 2022 and 2021.
Stock Option Awards
The Company recognizes compensation expense associated with the stock option grants using the straight-line method over the requisite service period. The Company recognized $0.7 million and $2.8 million of compensation expense related to stock options within Compensation and benefits expense on the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively, and $1.2 million and $4.1 million for the three and nine months ended September 30, 2021, respectively. The unrecognized compensation expense related to outstanding and unvested stock options was $61.2 million as of September 30, 2022, which is expected to vest and get recognized over a weighted-average period of 5.79 years. The number of options vested and exercisable was 2,262,385 and the weighted-average exercise price of the options exercisable was $3.85 as of September 30, 2022.
The following presents the summary of the Company’s stock option activity under the 2021 Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Life (Years) | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 11,751,031 | | | $ | 4.45 | | | 6.87 | | $ | 8.38 | |
Granted | 337,043 | | | 1.81 | | | 4.09 | | 9.79 | |
Exercised | (294,068) | | | 1.86 | | | 2.01 | | 9.77 | |
Forfeited | (551,929) | | | 1.85 | | | 0.17 | | 9.77 | |
Expired | (51,768) | | | 1.75 | | | 1.00 | | 9.50 | |
Outstanding at end of period | 11,190,309 | | | $ | 4.58 | | | 5.88 | | $ | 8.30 | |
The following presents the summary of the Company’s non-vested activity under the 2021 Plan:
| | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested at beginning of period | 9,627,033 | | | $ | 8.19 | |
Granted | 337,043 | | | 9.79 | |
Vested | (138,387) | | | 9.16 | |
Exercised | (294,068) | | | 9.77 | |
Forfeited | (551,929) | | | 9.77 | |
Expired | (51,768) | | | 9.50 | |
Non-vested at end of period | 8,927,924 | | | $ | 8.18 | |
The following presents assumptions used in the Black-Scholes option valuation model to determine the weighted-average fair value per stock option granted:
| | | | | |
| September 30, 2022 |
Expected life (in years) | 8.25 |
Risk-free interest rate | 0 - 3.0% |
Expected volatility | 24.9% |
Dividend yield | —% |
The expected life of each stock option is estimated based on its vesting and contractual terms. The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was based on an analysis of the historical volatilities of peer companies, adjusted for certain characteristics specific to the Company. The Company applied an estimated forfeiture rate of 0%-10.4% as of September 30, 2022 and December 31, 2021.
Note 16 – Earnings Per Share
(Loss) earnings per share (“EPS”) is calculated and presented in the consolidated financial statements for both basic and diluted earnings per share. Basic EPS excludes all dilutive common stock equivalents and is calculated by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. 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 and exercised.
The following presents the calculation of the basic and diluted (loss) earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands, except per share amounts ) |
Net (loss) income | $ | (94,130) | | | $ | 71,223 | | | $ | (126,683) | | | $ | 146,979 | |
| | | | | | | |
Numerator: | | | | | | | |
Net (loss) income attributable to common shareholders | $ | (94,130) | | | $ | 71,223 | | | $ | (126,683) | | | $ | 146,979 | |
Net (loss) income attributable to Home Point - diluted | $ | (94,130) | | | $ | 71,223 | | | $ | (126,683) | | | $ | 146,979 | |
| | | | | | | |
Denominator (in thousands): | | | | | | | |
Weighted average shares of common stock outstanding - basic | 138,393 | | | 139,057 | | | 138,718 | | | 139,167 | |
Dilutive effect of common stock equivalents | — | | | 899 | | | — | | | 517 | |
Weighted average shares of common stock outstanding - diluted | 138,393 | | | 139,957 | | | 138,718 | | | 139,685 | |
| | | | | | | |
(Loss) earnings per share of common stock outstanding - basic | $ | (0.68) | | | $ | 0.51 | | | $ | (0.91) | | | $ | 1.06 | |
(Loss) earnings per share of common stock outstanding - diluted | $ | (0.68) | | | $ | 0.51 | | | $ | (0.91) | | | $ | 1.05 | |
| | | | | | | |
As a result of the net loss from continuing operations for the three and nine months ended September 30, 2022 and three months ended September 30, 2021, the effect of certain dilutive securities was excluded from the computation of weighted average diluted shares outstanding, as inclusion would have resulted in antidilution.
Note 17 – Shareholders’ Equity and Equity Method Investment
Common Stock Repurchases
On February 24, 2022, the Company’s Board approved the repurchase of shares of the Company’s common stock, par value $0.0000000072 per share (the “Common Stock”), in an aggregate amount not to exceed $8.0 million, from time to time through and including December 31, 2022 (the “Stock Repurchase Program”). Repurchases under the Stock Repurchase Program may be made from time to time pursuant to one or more plans adopted under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. No repurchases were made during the three months ended September 30, 2022. The Company repurchased 1,179,796 shares of Common Stock at an aggregate price of $3.8 million, including commissions and fees, through market purchase transactions under the Stock Repurchase Program during the nine months ended September 30, 2022. Shares repurchased under the program have been subsequently retired.
Equity Method Investment
The Company holds an equity method investment in Longbridge Financial, LLC (“Longbridge”) through a 49.6% voting ownership interest, which is the only equity method investment held by the Company. The investment was initially recognized at cost and is adjusted for HPC’s share of Longbridge’s earnings or losses, contributions or distributions. The Company’s investment in Longbridge is classified as Assets Held for Sale as of September 30, 2022 and December 31, 2021.
HPC had a net investment of $38.9 million and $63.7 million in Longbridge as of September 30, 2022 and December 31, 2021, respectively. The Company entered into a definitive agreement in February of 2022 to sell its investment in Longbridge, and the transaction closed on October 3, 2022 for a purchase price of approximately $38.9 million. Refer to Note 22 – Subsequent Events. An impairment charge of $8.8 million was recognized for the held for sale balance of the equity method investment in Loss from equity method investment in the condensed consolidated statements of operations during the three and nine months ended September 30, 2022.
The following presents condensed financial information of Longbridge:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) |
Total assets | $ | 7,856,706 | | | $ | 6,727,807 | |
Total liabilities | 7,760,531 | | | 6,604,351 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Revenue | $ | 52,301 | | | $ | (67,084) | | | $ | (79,206) | | | $ | 33,152 | |
Net (loss) income | 4,416 | | | (8,243) | | | (30,249) | | | 23,469 | |
Net (loss) income attributable to the Company | (11,862) | | | (713) | | | (26,278) | | | 16,649 | |
Note 18 – Income Taxes
The Company’s effective income tax rate was 23.3% and 25.8% for the three and nine months ended September 30, 2022, respectively and 27.5% and 27.8% for the three and nine months ended September 30, 2021, respectively, compared to the statutory rate of 21.0%. The Company calculated the provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income and adjusted for discrete items that occurred during the period. Several factors influence the effective tax rate, including the impact of equity investment, state taxes, and permanent disallowed deductions for tax such as officer's compensation limitations applicable to a public entity, equity-based compensation, goodwill impairment, and non-deductible transaction costs.
Note 19 – Segments
Management has organized the Company into two reportable segments based primarily on its services as follows: (1) Origination and (2) Servicing. Each reportable segment has discrete financial information evaluated regularly by the chief operating decision maker (“CODM”) in monitoring performance, allocating capital and making strategic and operational decisions that align with the Company and its internal operations. The Origination segment consists of a combination of retail and third-party loan production options. The Servicing segment performs loan servicing for both newly originated loans the Company is holding for sale and loans the Company services for others.
Origination
In the Origination segment, the Company originates residential real estate mortgage loans in the U.S. through the consumer direct third party originations, and prior to its sale, which was completed on June 1, 2022, the correspondent channel. The Company’s origination channels offer a variety of loan programs that support the financial needs of the borrowers. In each of the channels, the Company’s primary source of revenue is the difference between the cost of originating or purchasing the loan and the price at which the loan is sold to investors as well as the fair value of originated MSRs and hedging gains and losses. Loan origination fees and interest income earned on loans held for sale or securitization are also included in the revenue for this segment.
Servicing
In the Servicing segment, the Company generates revenue through contractual fees earned by performing daily administrative and management activities for mortgage loans. These activities include collecting loan payments, remitting payments to investors, sending monthly statements, managing escrow accounts, servicing delinquent loan work-outs, and managing and disposing of foreclosed properties. In February 2022, the Company entered into an agreement with ServiceMac, LLC (“ServiceMac”), a wholly owned subsidiary of First American Financial Corporation, pursuant to which ServiceMac subservices all mortgage loans underlying the Company’s MSRs. These services include maintaining borrower contact, facilitating borrower advances, generating borrower statements, collecting and processing payments of interest and principal, and facilitating loss-mitigation strategies in an attempt to keep defaulted borrowers in their homes. ServiceMac began subservicing loans for the Company in the second quarter of 2022.
Other Information About the Company’s Segments
The Company's CODM evaluates performance, makes operating decisions, and allocates resources based on the Company's contribution margin. Contribution margin is the Company’s measure of profitability for its two reportable segments. Contribution margin is defined as revenue from Gain on loans, net, Loan fee income, Loan servicing fees, Change in fair value of MSRs, Interest income, and Other income (which includes Income from equity method investment) adjusted for the change in fair value attributable to valuation assumptions of MSRs and less directly attributable expenses. Directly attributable expenses include salaries, commissions and associate benefits, general and administrative expenses, and other expenses, such as servicing and origination costs. Direct operating expenses driven by the activities of the segments are included in the respective segments.
The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting. Additionally, the Company does not enter into transactions between its reportable segments.
The Company also reports an “All Other” category that includes unallocated corporate expenses, such as IT, finance, and human resources. These operations are neither significant individually or in aggregate and therefore do not constitute a reportable segment.
The following presents the key operating data for our business segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Loss on loans, net | $ | (10,278) | | | $ | — | | | $ | (10,278) | | | $ | — | | | $ | (10,278) | | | $ | — | | | $ | (10,278) | |
Loan fee income | 7,606 | | | — | | | 7,606 | | | — | | | 7,606 | | | — | | | 7,606 | |
Loan servicing fees | — | | | 60,140 | | | 60,140 | | | — | | | 60,140 | | | — | | | 60,140 | |
Change in fair value of mortgage servicing rights | — | | | (46,187) | | | (46,187) | | | — | | | (46,187) | | | — | | | (46,187) | |
Interest income (expense), net | 4,254 | | | 4,129 | | | 8,383 | | | (13,272) | | | (4,889) | | | — | | | (4,889) | |
Other (expense) income | 46 | | | — | | | 46 | | | (9,983) | | | (9,937) | | | 11,862 | | | 1,925 | |
Total | $ | 1,628 | | | $ | 18,082 | | | $ | 19,710 | | | $ | (23,255) | | | $ | (3,545) | | | $ | 11,862 | | | $ | 8,317 | |
Contribution margin | $ | (44,404) | | | $ | 3,180 | | | $ | (41,224) | | | $ | (77,945) | | | $ | (119,169) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 48,360 | | | $ | — | | | $ | 48,360 | | | $ | — | | | $ | 48,360 | | | $ | — | | | $ | 48,360 | |
Loan fee income | 42,765 | | | — | | | 42,765 | | | — | | | 42,765 | | | — | | | 42,765 | |
Loan servicing fees | — | | | 204,076 | | | 204,076 | | | — | | | 204,076 | | | — | | | 204,076 | |
Change in fair value of mortgage servicing rights | — | | | (58,891) | | | (58,891) | | | — | | | (58,891) | | | — | | | (58,891) | |
Interest income (expense), net | 20,351 | | | 6,264 | | | 26,615 | | | (38,909) | | | (12,294) | | | — | | | (12,294) | |
Other income (expense) | 101 | | | — | | | 101 | | | (13,899) | | | (13,798) | | | 26,278 | | | 12,480 | |
Total | $ | 111,577 | | | $ | 151,449 | | | $ | 263,026 | | | $ | (52,808) | | | $ | 210,218 | | | $ | 26,278 | | | $ | 236,496 | |
Contribution margin | $ | (82,651) | | | $ | 106,437 | | | $ | 23,786 | | | $ | (185,306) | | | $ | (161,520) | | | | | |
(1)The Company includes the (income) loss from its equity method investment in the All Other segment. Therefore, it must be removed to reconcile to Total revenue, net on the condensed consolidated statements of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 145,298 | | | $ | 173 | | | $ | 145,471 | | | $ | — | | | $ | 145,471 | | | $ | — | | | $ | 145,471 | |
Loan fee income | 34,484 | | | — | | | 34,484 | | | — | | | 34,484 | | | — | | | 34,484 | |
Loan servicing fees | 28 | | | 91,803 | | | 91,831 | | | — | | | 91,831 | | | — | | | 91,831 | |
Change in fair value of mortgage servicing rights | — | | | 10,970 | | | 10,970 | | | — | | | 10,970 | | | — | | | 10,970 | |
Interest income (expense), net | 4,035 | | | 623 | | | 4,658 | | | (13,471) | | | (8,813) | | | — | | | (8,813) | |
Other income (expense) | — | | | 50 | | | 50 | | | (105) | | | (55) | | | 713 | | | 658 | |
Total | $ | 183,845 | | | $ | 103,619 | | | $ | 287,464 | | | $ | (13,576) | | | $ | 273,888 | | | $ | 713 | | | $ | 274,601 | |
Contribution margin | $ | 67,196 | | | $ | 86,179 | | | $ | 153,375 | | | $ | (54,811) | | | $ | 98,564 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Origination | | Servicing | | Segments Total | | All Other | | Total | | Reconciling Item(1) | | Total Consolidated |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | |
Gain on loans, net | $ | 521,537 | | | $ | 190 | | | $ | 521,727 | | | $ | — | | | $ | 521,727 | | | $ | — | | | $ | 521,727 | |
Loan fee income | 118,099 | | | — | | | 118,099 | | | — | | | 118,099 | | | — | | | 118,099 | |
Loan servicing fees | 28 | | | 247,725 | | | 247,753 | | | — | | | 247,753 | | | — | | | 247,753 | |
Change in fair value of mortgage servicing rights | — | | | (83,087) | | | (83,087) | | | — | | | (83,087) | | | — | | | (83,087) | |
Interest income (expense), net | 8,021 | | | 1,291 | | | 9,312 | | | (34,971) | | | (25,659) | | | — | | | (25,659) | |
Other income (expense) | — | | | 227 | | | 227 | | | 18,533 | | | 18,760 | | | (16,649) | | | 2,111 | |
Total | $ | 647,685 | | | $ | 166,346 | | | $ | 814,031 | | | $ | (16,438) | | | $ | 797,593 | | | $ | (16,649) | | | $ | 780,944 | |
Contribution margin | $ | 233,609 | | | $ | 111,427 | | | $ | 345,036 | | | $ | (147,807) | | | $ | 197,229 | | | | | |
(1)The Company includes the (income) loss from its equity method investments in the All Other segment. In order to reconcile to Total revenue, net on the condensed consolidated statements of operations, it must be removed as is presented above.
The following presents a reconciliation of contribution margin to consolidated U.S. GAAP Loss (income) before income tax:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
(Loss) income before income tax | $ | (107,307) | | | $ | 99,277 | | | $ | (135,242) | | | $ | 180,580 | |
(Loss) income from equity method investment | (11,862) | | | (713) | | | (26,278) | | | 16,649 | |
Contribution margin | $ | (119,169) | | | $ | 98,564 | | | $ | (161,520) | | | $ | 197,229 | |
Note 20 – Related Parties
The Company entered into transactions and agreements to purchase various services and products from certain affiliates of our sponsor, Stone Point Capital LLC. The services include valuation of MSRs, insurance brokerage services, loan review and tax payment services for certain loan originations. The Company recorded $2.7 million and $23.5 million for the three and nine months ended September 30, 2022, respectively, and $6.0 million and $16.1 million for the three and nine months ended September 30, 2021, respectively, for products, services, and other transactions in Loan expense, Loan servicing expense, Production technology, General and administrative and Other expenses in the condensed consolidated statements of operations.
Note 21 – Sale of The Correspondent Channel
On June 1, 2022 (the “Closing Date”), HPF completed the previously announced sale of certain assets of HPF’s delegated Correspondent channel to Planet Home Lending, LLC (“Planet”). The sale of the correspondent channel reduces the Company’s expenses and enables reallocation of resources to our Wholesale channel.
The purchase price for such assets was $2.5 million in cash, plus an earnout payment based on certain of Planet’s correspondent origination volume during the two-year period commencing on the Closing Date. The Company records the earnout payment when the consideration is determined to be realizable. The sale resulted in a $0.4 million loss in Other expenses in the condensed consolidated statements of operations.
Note 22 – Subsequent Events
Credit Suisse Warehouse Facility Termination
On October 7, 2022, HPF terminated its $300 million warehouse facility with Credit Suisse First Boston Mortgage Capital LLC. The parties mutually agreed to terminate the warehouse facility prior to its scheduled maturity date of February 23, 2023. HPF did not incur any early termination penalties.
Longbridge
On October 3, 2022, the Company completed the previously announced sale of its 49.6% investment in Longbridge to EF Holdco RER Assets, LLC, an indirect subsidiary of Ellington Financial Inc., for a purchase price of approximately $38.9 million in cash.
HPMAC
On August 9, 2022, HPC entered into a definitive agreement with MS Investorco, LLC to sell its equity interests in HPAM for the estimated tangible book value of HPAM and HPMAC (“Acquired Companies”) plus an immaterial cash amount (the “HPAM Transaction”). The Acquired Companies will have an immaterial amount of net equity at the time of closing, since their MSRs were transferred to HPC during the first week of November, 2022. The HPAM Transaction is expected to close in the fourth quarter of 2022, subject to customary closing conditions, including regulatory approvals and notices.
Repurchase Obligation Relief
As noted above, certain of the Company’s loan sale contracts include provisions requiring the Company to repurchase a loan if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet customary representations and warranties. Historically, the Company received relief of certain repurchase obligations on loans sold to FNMA or FHLMC by taking advantage of their repurchase alternative program. This program provided the Company with the ability, in certain instances, to pay a fee to FNMA or FHLMC, in lieu of being obligated to repurchase the loan. During September and October 2022, FNMA and FHMC notified the Company that they will not provide repurchase obligation relief through the repurchase alternative program beginning in the fourth quarter of 2022 until further notice.