Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.98M
2: EX-10.21 EX-10.21 Revolving Credit Agreement HTML 549K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 28K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 25K
12: R1 Cover HTML 83K
13: R2 Condensed Consolidated Balance Sheets HTML 126K
14: R3 Condensed Consolidated Balance Sheets HTML 58K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 124K
(Unaudited)
16: R5 Condensed Consolidated Statements of Changes in HTML 116K
Equity (Unaudited)
17: R6 Condensed Consolidated Statements of Cash Flows HTML 125K
(Unaudited)
18: R7 Organization, Basis of Presentation and Summary of HTML 53K
Significant Accounting Policies
19: R8 Mortgage Loans at Fair Value HTML 32K
20: R9 Derivatives HTML 44K
21: R10 Accounts Receivable, Net HTML 39K
22: R11 Mortgage Servicing Rights HTML 103K
23: R12 Warehouse Lines of Credit HTML 66K
24: R13 Senior Notes HTML 46K
25: R14 Commitments and Contingencies HTML 42K
26: R15 Variable Interest Entities HTML 31K
27: R16 Non-controlling Interests HTML 32K
28: R17 Regulatory Net Worth Requirements HTML 31K
29: R18 Fair Value Measurements HTML 113K
30: R19 Related Party Transactions HTML 32K
31: R20 Income Taxes HTML 33K
32: R21 Stock-Based Compensation HTML 49K
33: R22 Earnings Per Share HTML 58K
34: R23 Subsequent Events HTML 29K
35: R24 Organization, Basis of Presentation and Summary of HTML 76K
Significant Accounting Policies (Policies)
36: R25 Mortgage Loans at Fair Value (Tables) HTML 33K
37: R26 Derivatives (Tables) HTML 45K
38: R27 Accounts Receivable, Net (Tables) HTML 38K
39: R28 Mortgage Servicing Rights (Tables) HTML 99K
40: R29 Warehouse Lines of Credit (Tables) HTML 59K
41: R30 Senior Notes (Tables) HTML 40K
42: R31 Commitment and Contingencies (Tables) HTML 38K
43: R32 Non-controlling Interests (Tables) HTML 30K
44: R33 Fair Value Measurements (Tables) HTML 104K
45: R34 Stock-Based Compensation (Tables) HTML 46K
46: R35 Earnings Per Share (Tables) HTML 51K
47: R36 Organization, Basis of Presentation and Summary of HTML 71K
Significant Accounting Policies - Organization
(Details)
48: R37 Organization, Basis of Presentation and Summary of HTML 34K
Significant Accounting Policies - Basis of
Presentation and Consolidation (Details)
49: R38 Organization, Basis of Presentation and Summary of HTML 32K
Significant Accounting Policies - Loans Eligible
for Repurchase (Details)
50: R39 Organization, Basis of Presentation and Summary of HTML 27K
Significant Accounting Policies - Tax Receivable
Agreement (Details)
51: R40 Organization, Basis of Presentation and Summary of HTML 61K
Significant Accounting Policies - Public and
Private Warrants (Details)
52: R41 Mortgage Loans at Fair Value - Summary of HTML 31K
Reconciliation of Changes in Mortgage Loans at
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53: R42 Derivatives - Additional Information (Details) HTML 25K
54: R43 Derivatives - Schedule of Derivative Instruments HTML 41K
(Details)
55: R44 Accounts Receivable, Net (Details) HTML 48K
56: R45 Mortgage Servicing Rights - Additional Information HTML 39K
(Details)
57: R46 Mortgage Servicing Rights - Summary of Mortgage HTML 44K
Servicing Rights Activity (Details)
58: R47 Mortgage Servicing Rights - Summary of Loan HTML 30K
Servicing Income (Details)
59: R48 Mortgage Servicing Rights - Summary of Key HTML 38K
Unobservable Inputs Used in Determining the Fair
Value (Details)
60: R49 Mortgage Servicing Rights - Schedule of Analysis HTML 40K
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61: R50 Warehouse Lines of Credit - Summary of Line of HTML 69K
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62: R51 Warehouse Lines of Credit - Additional Information HTML 37K
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63: R52 Senior Notes - Summary of Senior Unsecured Notes HTML 45K
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64: R53 Senior Notes - Additional Information (Details) HTML 76K
65: R54 Commitments and Contingencies - Additional HTML 27K
Information (Details)
66: R55 Commitments and Contingencies - Activity of HTML 31K
Representation and Warranties Reserve (Details)
67: R56 Variable Interest Entities - Additional HTML 42K
Information (Details)
68: R57 Non-controlling Interests (Details) HTML 39K
69: R58 Regulatory Net Worth Requirements - Additional HTML 31K
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70: R59 Fair Value Measurements - Schedule of Financial HTML 81K
Assets and Liabilities Measured at Fair Value on
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Instruments (Details)
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74: R63 Income Taxes (Details) HTML 35K
75: R64 Stock-Based Compensation - Additional Information HTML 55K
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76: R65 Stock-Based Compensation - Summary of RSU Activity HTML 48K
(Details)
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(Details)
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Diluted Earnings per Share (Details)
79: R68 Subsequent Events - Additional Information HTML 51K
(Details)
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Registrant's telephone number, including area code
N/A
(Former
name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common
Stock, par value $0.0001 per share
iUWMC
iNew York Stock Exchange
iWarrants,
each warrant exercisable for one share of Class A Common Stock
iUWMCWS
iNew York Stock Exchange
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. iYesx No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). iYesx No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging
growth company
i☐
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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes i☐ No x
As of August 5, 2022, the registrant had i92,575,425
shares of Class A common stock outstanding and i1,502,069,787 shares of Class D common stock outstanding.
(includes $i102,454 and $i104,595 with related parties)
i102,533
i104,828
Finance
lease right-of-use asset
(includes $i27,900 and $i28,619
with related parties)
i50,179
i57,024
Other
assets
i82,467
i60,145
Total
assets
$
i11,016,910
$
i22,528,358
Liabilities
and equity
Warehouse lines of credit
$
i4,497,353
$
i15,954,938
Derivative
liabilities
i93,958
i36,741
Borrowings
against investment securities
i118,786
i118,786
Accounts
payable, accrued expenses and other
i780,166
i1,087,411
Accrued
distributions and dividends payable
i159,461
i9,171
Senior
notes
i1,982,103
i1,980,112
Operating
lease liability
(includes $i109,732 and $i111,999 with related parties)
i109,811
i112,231
Finance
lease liability
(includes $i28,633 and $i29,087 with related parties)
i51,370
i57,967
Total
liabilities
i7,793,008
i19,357,357
Equity
Preferred
stock, $ii0.0001/ par value - ii100,000,000/
shares authorized, iiiinone///
issued and outstanding as of June 30, 2022
i—
i—
Class
A common stock, $ii0.0001/ par value - ii4,000,000,000/
shares authorized, iiii92,539,245///
shares issued and outstanding as of June 30, 2022
i9
i9
Class
B common stock, $ii0.0001/ par value - ii1,700,000,000/
shares authorized, iiiinone///
issued and outstanding as of June 30, 2022
i—
i—
Class
C common stock, $ii0.0001/ par value - ii1,700,000,000/
shares authorized, iiiinone///
issued and outstanding as of June 30, 2022
i—
i—
Class
D common stock, $ii0.0001/ par value - ii1,700,000,000/
shares authorized, iiii1,502,069,787///
shares issued and outstanding as of June 30, 2022
i150
i150
Additional
paid-in capital
i669
i437
Retained
earnings
i137,955
i141,805
Non-controlling
interest
i3,085,119
i3,028,600
Total
equity
i3,223,902
i3,171,001
Total
liabilities and equity
$
i11,016,910
$
i22,528,358
See
accompanying Notes to the Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – iORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Organization
UWM Holdings Corporation,
through its consolidated subsidiaries (collectively, the “Company”), engages in the origination, sale and servicing of residential mortgage loans. The Company is organized in Delaware but based in Michigan, and originates and services loans throughout the U.S. The Company is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development (or “HUD”). In addition, the Company is an approved issuer with the Government National Mortgage Association (or “Ginnie Mae”), as well as an approved seller and servicer with the Federal National Mortgage
Association (or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (or “Freddie Mac”).
The Company (f/k/a Gores Holdings IV, Inc.) was incorporated in Delaware on June 12, 2019. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On September 22, 2020, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) by and among the
Company, SFS Holding Corp., a Michigan corporation (“SFS Corp.”), United Wholesale Mortgage, LLC, a Michigan limited liability company (“UWM”), and UWM Holdings, LLC, a newly formed Delaware limited liability company (“Holdings LLC” and, together with UWM, the “UWM Entities”). The business combination with the UWM Entities closed on January 21, 2021.
Prior to the closing of the business combination with the UWM Entities, SFS Corp. was the sole member of UWM, which had iiione//
unit authorized, issued and outstanding. On January 21, 2021, SFS Corp. contributed its equity interest in UWM to Holdings LLC and adopted the Amended and Restated Operating Agreement to admit Holdings LLC as UWM's sole member and its manager. Upon completion of the business combination transaction, (i) Holdings LLC issued approximately i6% of its units (Class A Common Units) to the Company, (ii) SFS Corp. retained
approximately i94% of the units (Class B Common Units) in Holdings LLC and accordingly retained approximately i94% of the economic
ownership interest of the combined company and (iii) Holdings LLC became a consolidated subsidiary of the Company, as the Company is the sole managing member of Holdings LLC. The economic interest in Holdings LLC owned by SFS Corp. is presented as a non-controlling interest in these condensed consolidated financial statements (see Note 10 - Non-Controlling Interests for further information).
Following the consummation of the transactions contemplated by the Business Combination Agreement, the Company is organized in an “Up-C” structure in which UWM (the operating subsidiary) is held directly
by Holdings LLC, and the Company’s only material direct asset consists of Class A Common Units in Holdings LLC. The Company’s current capital structure authorizes Class A common stock, Class B common stock, Class C common stock and Class D common stock. The Class A common stock and Class C common stock each provide holders with iione/
vote on all matters submitted to a vote of stockholders, and the Class B common stock and Class D common stock each provide holders with ii10/
votes on all matters submitted to a vote of stockholders. The holders of Class C common stock and Class D common stock do not have any of the economic rights (including rights to dividends and distributions upon liquidation) provided to holders of Class A common stock and Class B common stock. Immediately following the business combination transaction, there were i103,104,205 shares of Class A common stock outstanding, and i1,502,069,787
shares of non-economic Class D common stock outstanding (all of which were held by SFS Corp.), and iino/
shares of Class B or Class C common stock outstanding. As of June 30, 2022, there were i92,539,245 shares of Class A common stock outstanding and i1,502,069,787
shares of Class D common stock outstanding. Each Holdings LLC Class B Common Unit held by SFS Corp. may be exchanged at the option of the Company, along with its stapled share of Class D common stock, for either, (a) cash or (b) ione share of the Company’s Class B common stock (See Note 10 - Non-Controlling Interests). Each share of
Class B Stock is convertible into ione share of Class A Stock upon the transfer or assignment of such share from SFS Corp. to a non-affiliated third-party. Pursuant to the Business Combination Agreement, SFS Corp. is entitled to receive an aggregate of up to i90,761,687
earn-out shares in the form of Class B Common Units in Holdings LLC and Class D common shares upon attainment of certain stock price targets prior to January 2026. There are ifour different triggering events that affect the number of earn-out shares that will be issued based upon the per share price of Class A common stock ranging from $i13.00
to $i19.00 per share. The Company accounts for the potential earn-out shares as a component of stockholders’ equity in accordance with the applicable guidance in U.S. GAAP. See Note 16 - Earnings Per Share for further information.
The business combination transaction was accounted for as a reverse recapitalization in accordance with U.S. GAAP as UWM was determined to be the accounting
acquirer, primarily due to the fact that SFS Corp. continues to control the Company through its ownership of the Class D common stock. Under this method of accounting, while the Company was the legal acquirer, it was treated as the acquired company for financial reporting purposes. Accordingly, the business combination transaction was treated as the equivalent of UWM issuing stock for the net assets of the Company, accompanied by a recapitalization, with the net assets of the Company stated at historical cost, with no goodwill or other intangible assets recorded. The net proceeds received from Gores Holdings
IV, Inc. in the business combination transaction approximated $i895.1 million, and the Company incurred approximately $i16.0 million
in costs related to the transaction which were charged to stockholders' equity upon the closing of the transaction. As part of the business combination transaction, the Company assumed the liability related to the Public and Private Warrants (described below) of $i45.6 million. The Company’s
financial statement presentation included in these condensed consolidated financial statements include the condensed consolidated financial statements of UWM and its subsidiaries for periods prior to the completion of the business combination transaction with the UWM Entities and of the Company for periods from and after the business combination transaction.
The condensed consolidated financial statements are unaudited and presented in U.S. dollars. They have been prepared in accordance with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In our opinion, these condensed consolidated financial statements include all normal and recurring adjustments considered necessary for a fair statement of our results of operations, financial position and cash flows for the periods presented. However, our results of operations for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.
//
iUse
of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
iLoans Eligible for Repurchase from Ginnie Mae
When
the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the previously sold assets are required to be re-recognized on the condensed consolidated balance sheets, regardless of the Company’s intent to exercise its option to repurchase. The recognition of previously sold loans does not impact the accounting for the previously recognized mortgage servicing rights (or “MSRs”). At June 30, 2022 and December 31, 2021, the Company had recorded Ginnie
Mae pool loans as part of "Mortgage loans at fair value" totaling $i319.0 million and $i563.4
million, respectively, with related purchase liabilities equal to the gross amount of the loan recorded in "Accounts payable, accrued expenses and other" on the condensed consolidated balance sheets. At June 30, 2022 and December 31, 2021, the fair values of the Ginnie Mae pool loans were $i309.6 million and $i555.1
million, reflecting fair value adjustments of $i9.4 million and $i8.3 million, respectively.
i
Income
Taxes
The Company follows the asset and liability method of accounting for income taxes under applicable U.S. GAAP. Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and various state and local jurisdictions. The tax laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, the Company must make assumptions and judgements about how to interpret and apply complex tax laws to numerous transactions and business events, as well as make judgements regarding the timing of when certain items
may affect taxable income.
Deferred income taxes arise from temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If based upon all available positive and negative evidence, it is more likely than not
that the deferred tax assets will not be realized, and a valuation allowance is established. The valuation
allowance may be reversed in a subsequent reporting period if the Company determines that it is more likely than not that all or part of the deferred tax asset will become realizable.
Our interpretations of tax laws are subject to review and examination by various taxing authorities and jurisdictions where the
Company operates, and disputes may occur regarding our view on a tax position. These disputes over interpretations with the various tax authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which the Company operates. We regularly review whether we may be assessed additional income taxes as a result of the resolution of these matters, and the Company records additional reserves as appropriate. In addition, the Company may revise its estimate of income taxes due to changes in income tax laws, legal interpretations, and business strategies. We recognize the financial statement effects of uncertain income tax positions when it is more likely
than not, based on the technical merits, that the position will be sustained upon examination. We record interest and penalties related to uncertain tax positions as a component of the income tax provision. See Note 14 – Income Taxes for further information.
Tax Receivable Agreement
In connection with the Business Combination Agreement, the Company entered into a Tax Receivable Agreement with SFS Corp. that will obligate the Company to make payments to SFS Corp. of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the
Company actually realizes as a result of (i) certain increases in tax basis resulting from exchanges of Holdings LLC Common Units; (ii) imputed interest deemed to be paid by the Company as a result of payments it makes under the tax receivable agreement; (iii) certain increases in tax basis resulting from payments the Company makes under the tax receivable agreement; and (iv) disproportionate allocations (if any) of tax benefits to the Company which arise from, among other things, the sale of certain assets as a result of section 704(c) of the Internal Revenue Code of 1986. The Company will retain the benefit of the remaining
15% of these tax savings. The Company recognized a liability of approximately $i1.9 million for estimated amounts due under the Tax Receivable Agreement in connection with the business combination transaction. Subsequently, the liability is accounted for as a loss contingency, with changes in the liability measured and recorded when estimated amounts due under the Tax Receivable Agreement are probable and can be reasonably estimated, and reported as part of other expense/(income) in the
condensed consolidated statements of operations. During the six months ended June 30, 2022, the Company recorded an additional liability of $i3.2 million, representing 85% of the estimated tax benefits to the Company resulting from sales of MSRs during the first half of 2022. As of June 30, 2022, the total
liability recorded for the Tax Receivable Agreement was approximately $i17.1 million.
i
Related Party Transactions
The
Company enters into various transactions with related parties. See Note 13 – Related Party Transactions for further information.
i
Public and Private Warrants
As part of Gores Holdings IV, Inc.'s initial public offering ("IPO") in January 2020, Gores Holdings IV, Inc. issued to third party investors i42.5 million
units, consisting of ione share of Class A common stock of Gores Holdings IV, Inc. and one-fourth of one warrant, at a price of $i10.00 per unit. Each whole warrant entitles the holder to purchase ione
share of Class A common stock at an exercise price of $i11.50 per share (the “Public Warrants”). Simultaneously with the closing of the IPO, Gores Holdings IV, Inc. completed the private sale of i5.25 million
warrants to Gores Holdings IV, Inc.'s sponsor at a purchase price of $i2.00 per warrant (the “Private Warrants”). Each Private Warrant allows the sponsor to purchase one share of Class A common stock at $i11.50
per share. Upon the closing of the business combination transaction, the Company had i10,624,987 Public Warrants and i5,250,000
Private Warrants outstanding.
The Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants were not transferable, assignable or salable until after the completion of the business combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The
Company evaluated the Public and Private Warrants under applicable U.S. GAAP and concluded that they do not meet the criteria to be classified in stockholders’ equity due to certain terms of the warrants. Since the Public and Private Warrants meet the definition of derivatives, the Company recorded these warrants as liabilities on the balance sheet at fair value upon the closing of the business combination transaction and subsequently (recorded within "Accounts payable, accrued expenses and other"), with the change in their respective fair values recognized in the condensed consolidated statement of operations (recorded within "Other (income)/expense"). During the three months ended June 30, 2022 and 2021, the
Company recognized $i2.8 million and $i1.5 million, respectively, of other income related to the change in fair value of warrants. During
the six months ended June 30, 2022 and 2021, the Company recognized $i7.0 million and $i18.8 million,
respectively, of other income related to the change in fair value of warrants.
iStock-Based Compensation
Effective upon the closing of the business combination transaction, the Company adopted the UWM Holdings Corporation 2020 Omnibus Incentive Plan (the “2020 Plan”) which was approved by stockholders on January
20, 2021. The 2020 Plan allows for the grant of stock options, restricted stock, restricted stock units (“RSUs”), and stock appreciation rights. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period based on the fair value of the award on the date of grant and is included in "Salaries, commissions and benefits" on the condensed consolidated statements of operations. The Company made a policy election to recognize the effects of forfeitures as they occur. See Note 15 – Stock-based Compensation for further information.
iRecently
Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which was subsequently amended by ASU No. 2021-1, Reference Rate Reform (Topic 848): Scope, which was issued in January 2021 and will remain effective through December 31, 2022. This guidance provides practical expedients to address existing guidance on contract modifications due to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured
Overnight Financing Rate ("SOFR"). The ASU was effective upon issuance on a prospective basis beginning January 1, 2020 and the Company may elect certain practical expedients as reference rate activities occur. The Company will evaluate its debt and other applicable contracts that are modified in the future to ensure they are eligible for modification relief and apply the practical expedients as needed. The Company does not anticipate this will have a material impact on its condensed consolidated financial statements and related disclosures.
NOTE
2 – iMORTGAGE LOANS AT FAIR VALUE
i
The table below includes the estimated fair value and unpaid principal balance (“UPB”) of mortgage
loans that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option has been elected for mortgage loans, as this accounting treatment best reflects the economic consequences of the Company’s mortgage origination and related hedging and risk management activities. The difference between the UPB and estimated fair value is made up of the premiums paid on mortgage loans, as well as the fair value adjustment as of the balance sheet date. The change in fair value adjustment is recorded in the “Loan production income” line item of the condensed consolidated statements of operations.
The Company enters into interest rate lock commitments (“IRLCs”) to originate residential mortgage loans at specified interest rates and terms within a specified period of time with customers who have applied for a loan and may meet certain credit and underwriting criteria. To determine the fair value of the IRLCs, each contract
is evaluated based upon its stage in the application, approval and origination process for its likelihood of consummating the transaction (or “pullthrough”). Pullthrough is estimated based on changes in market conditions, loan stage, and actual borrower behavior using a historical analysis of IRLC closing rates. Generally, the further into the process the more likely that the IRLC will convert to a loan. The blended average pullthrough rate was i75% and i86%,
as of June 30, 2022 and December 31, 2021, respectively. The Company primarily uses forward loan sale commitments (“FLSCs”) to economically hedge the IRLCs.
iThe notional amounts and fair values of derivative financial instruments not designated as hedging instruments were as follows (in thousands):
The
Company periodically evaluates the carrying value of accounts receivable balances with delinquent receivables being written-off based on specific credit evaluations and circumstances of the debtor.
NOTE 5 – iMORTGAGE SERVICING RIGHTS
Mortgage servicing rights are recognized on the condensed consolidated balance sheets
when loans are sold and the associated servicing rights are retained. The Company has elected the fair value option for all current classes of its MSRs. The Company determined its classes of MSRs based on how the Company manages risk. The Company's MSRs are measured at fair value, which is determined using a valuation model that calculates the present value of estimated future net servicing cash flows. The model includes estimates of prepayment speeds, discount rate, cost to service, float earnings, contractual servicing fee income, and ancillary income and late fees, among others. These estimates are
supported by market and economic data collected from various outside sources.
The unpaid principal balance of mortgage loans serviced for others approximated $i308.1 billion and $i319.8 billion
at June 30, 2022 and December 31, 2021, respectively. Conforming conventional loans serviced by the Company have previously been sold to Fannie Mae and Freddie Mac on a non-recourse basis, whereby credit losses are generally the responsibility of Fannie Mae and Freddie Mac, and not the Company. Loans serviced for Ginnie Mae are insured by the FHA, guaranteed by the VA, or insured by other applicable government programs. While the above guarantees and insurance are the responsibility of those parties, the Company is still subject to potential losses related to its servicing of these loans. Those estimated losses are
incorporated into the valuation of MSRs.
iThe following table summarizes changes in the MSR assets for the three and six months ended June 30, 2022 and 2021 (in thousands):
The
following is a summary of the components of change in fair value of servicing rights as reported in the condensed consolidated statements of operations (in thousands):
Due to changes in valuation inputs and assumptions
$
i176,456
$
(i38,035)
$
i567,436
$
i159,767
Due
to collection/realization of cash flows and other
(i150,751)
(i181,069)
(i331,348)
(i438,130)
Reserves
and transaction costs on sales of servicing rights
i464
i—
(i37,956)
i—
Changes
in fair value of mortgage servicing rights
$
i26,169
$
(i219,104)
$
i198,132
$
(i278,363)
During
the six months ended June 30, 2022, the Company sold MSRs on loans with an aggregate UPB of approximately $i72.7 billion for proceeds of approximately $i871.7
million. In connection with the sales of these MSRs, the Company recorded $i38.0 million for its estimated obligation for protection provisions granted to the buyer and transaction costs, which is reflected as part of the change in fair value of MSRs in the condensed consolidated statements of operations.
iThe
following table summarizes the loan servicing income recognized during the three and six months ended June 30, 2022 and 2021, respectively (in thousands):
iThe
hypothetical effect of adverse changes in these key assumptions would result in a decrease in fair values as follows at June 30, 2022 and December 31, 2021, respectively, (in thousands):
These
sensitivities are hypothetical and should be used with caution. As the table demonstrates, the Company’s methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, actual prepayment experience may differ, and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption of the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may indicate higher prepayments; however, this may be partially offset by lower prepayments due to
other factors such as a borrower’s diminished opportunity to refinance), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
All
interest rates are variable based on a spread to the one-month LIBOR rate.
1 An aggregate of $i401.0 million of these line amounts is committed as of June 30, 2022.
/
We
are an approved lender for loan early funding facilities with Fannie Mae through its As Soon As Pooled Plus (“ASAP+”) program and Freddie Mac through its Early Funding (“EF”) program. As an approved lender for these early funding programs, we enter into an agreement to deliver closed and funded one-to-four family residential mortgage loans, each secured by related mortgages and deeds of trust, and receive funding in exchange for such mortgage loans in some cases before the lender has grouped them into pools to be securitized by Fannie Mae or Freddie Mac. All such mortgage loans must adhere to a set of eligibility criteria to be acceptable. As of June 30, 2022, the amount outstanding through the ASAP+ program was approximately $i120.5
million and $i131.9 million was outstanding under the EF program.
In addition to the arrangements with Fannie Mae and Freddie Mac, we are also party to one early funding (or “gestation”) line with a financial institution. Through this arrangement, we enter into agreements to deliver certified pools consisting of mortgage loans securitized by Ginnie Mae, Fannie Mae, and/or Freddie Mac, as applicable, for the gestation line. As with the ASAP+ and EF programs, all mortgage loans under this gestation line must adhere to a set of eligibility criteria.
The
gestation line has a transaction limit of $i150.0 million, and it is an evergreen agreement with no stated termination or expiration date but can be terminated by either party upon written notice. As of June 30, 2022, ino
amount was outstanding under this line.
As of June 30, 2022, the Company had pledged mortgage loans at fair value as collateral under the above warehouse lines of credit. The above agreements also contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquidity, maximum debt to net worth ratio, and net income, as defined in the agreements. The Company was in compliance with all debt covenants as of June 30, 2022.
NOTE 7 – iSENIOR
NOTES
iThe following is a summary of the senior unsecured notes issued by the Company (in thousands):
(1)
Unamortized debt issuance costs and discounts are presented net against the 2025 Senior Notes reducing the amount reported on the condensed consolidated balance sheets by $i7.4 million and $i8.5
million as of June 30, 2022 and December 31, 2021, respectively.
(2) Unamortized debt issuance costs and discounts are presented net against the 2029 Senior Notes reducing the amount reported on the condensed consolidated balance sheets by $i5.9 million and $i6.4
million as of June 30, 2022 and December 31, 2021, respectively.
(3) Unamortized debt issuance costs and discounts are presented net against the 2027 Senior Notes reducing the amount reported on the condensed consolidated balance sheets by $i4.6 million and $i5.0
million as of June 30, 2022 and December 31, 2021, respectively.
On November 3, 2020, the Company's consolidated subsidiary, UWM, issued $i800.0 million in aggregate principal amount of senior unsecured notes due November 15, 2025 (the “2025 Senior Notes”). The 2025 Senior Notes accrue
interest at a rate of i5.500% per annum. Interest on the 2025 Senior Notes is due semi-annually on May 15 and November 15 of each year, beginning on May 15, 2021.
On or after November 15, 2022, the Company may, at its option, redeem the 2025 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following
redemption prices: November 15, 2022 at i102.750%; November 15, 2023 at i101.375%;
or November 15, 2024 until maturity at i100%, of the principal amount of the 2025 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to November 15, 2022, the Company may, at its option, redeem up to i40%
of the aggregate principal amount of the 2025 Senior Notes originally issued at a redemption price of i105.500% of the principal amount of the 2025 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, the Company may, at its option, redeem the 2025 Senior Notes prior to November 15, 2022 at
a price equal to i100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest.
On April 7, 2021, the Company's consolidated subsidiary, UWM, issued $i700.0
million in aggregate principal amount of senior unsecured notes due April 15, 2029 (the “2029 Senior Notes”). The 2029 Senior Notes accrue interest at a rate of i5.500% per annum. Interest on the 2029 Senior Notes is due semi-annually on April 15 and October 15 of each year, beginning on October 15, 2021.
On or after April 15, 2024, the
Company may, at its option, redeem the 2029 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: April 15, 2024 at i102.750%; April 15, 2025 at i101.375%;
or April 15, 2026 until maturity at i100%, of the principal amount of the 2029 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to April 15, 2024, the Company may, at its option, redeem up to i40%
of the aggregate principal amount of the 2029 Senior Notes originally issued at a redemption price of i105.500% of the principal amount of the 2029 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, the Company may, at its option, redeem the 2029 Senior Notes prior to April 15, 2024 at a
price equal to i100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest.
On November 22, 2021, the Company's consolidated subsidiary, UWM, issued $i500.0
million in aggregate principal amount of senior unsecured notes due June 15, 2027 (the "2027 Senior Notes"). The 2027 Senior Notes accrue interest at a rate of i5.750% per annum. Interest on the 2027 Senior Notes is due semi-annually on June 15 and December 15 of each year, beginning on June 15, 2022.
On or after June 15, 2024, the
Company may, at its option, redeem the 2027 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: June 15, 2024 at i102.875%; June
15, 2025 at i101.438%; or June 15, 2026 until maturity at i100.000%,
of the principal amount of the 2027 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to June 15, 2024, the Company may, at its option, redeem up to i40% of the aggregate principal amount of the 2027 Senior Notes originally issued at a redemption price of i105.75%
of the principal amount of the 2027 Senior Notes redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, the Company may, at its option, redeem the 2027 Senior Notes prior to June 15, 2024 at a price equal to i100% of the principal amount redeemed plus a "make-whole" premium, plus accrued and unpaid interest.
The
indentures governing the 2025, 2029 and 2027 Senior Notes contain operating covenants and restrictions, subject to a number of exceptions and qualifications. The Company was in compliance with the terms of the indentures as of June 30, 2022.
NOTE 8 – iCOMMITMENTS
AND CONTINGENCIES
Representations and Warranties Reserve
Loans sold to investors which the Company believes met investor and agency underwriting guidelines at the time of sale may be subject to repurchase by the Company in the event of specific default by the borrower or upon subsequent discovery that underwriting or documentation standards were not explicitly satisfied. The Company may, upon mutual agreement, indemnify the investor against future losses on such loans or be subject to other guaranty requirements and subject to loss. The
Company initially records its exposure under such guarantees at estimated fair value upon the sale of the related loan, within "Accounts payable, accrued expenses, and other" as well as within loan production income, and continues to evaluate its on-going exposures in subsequent periods. The reserve is estimated based on the Company’s assessment of its contingent and non-contingent obligations, including expected losses, expected frequency, the overall potential remaining exposure, as well as an estimate for a market participant’s potential readiness to stand by to perform on such obligations. The Company repurchased $i100.4 million
and $i25.4 million in UPB of loans during the three months ended June 30, 2022 and 2021, respectively, and $i188.6 million
and $i66.9 million in UPB of loans during the six months ended June 30, 2022 and 2021, respectively, related to its representations and warranties obligations.
i
The
activity of the representations and warranties reserve was as follows (in thousands):
As of June 30, 2022, the Company had agreed to extend credit to potential borrowers for approximately $i25.3 billion. These contracts represent off balance sheet credit risk where the
Company may be required to extend credit to these borrowers based on the prevailing interest rates and prices at the time of execution.
NOTE 9 – iVARIABLE INTEREST ENTITIES
Upon completion of the business combination transaction described in Note 1, the
Company became the managing member of Holdings LLC with i100% of the management and voting power in Holdings LLC. In its capacity as managing member, the Company has the sole authority to make decisions on behalf of Holdings LLC and bind Holdings LLC to signed agreements. Further, Holdings LLC maintains separate capital accounts for its investors as a mechanism for tracking earnings and subsequent distribution rights.
Management concluded
that the Company is Holdings LLC’s primary beneficiary. As the primary beneficiary, the Company consolidates the results and operations of Holdings LLC for financial reporting purposes under the variable interest entity (“VIE”) consolidation model.
The Company's relationship with Holdings LLC results in no recourse to the general credit of the Company. Holdings LLC and its consolidated subsidiaries
represent the Company's sole investment. The Company shares in the income and losses of Holdings LLC in direct proportion to the Company's ownership interest. Further, the Company has no contractual requirement to provide financial support to Holdings LLC.
The
Company's financial position, performance and cash flows effectively represent those of Holdings LLC and its consolidated subsidiaries as of and for the three and six months ended June 30, 2022.
In 2021, UWM began selling some of the mortgage loans that it originates through private label securitization transactions. In executing these transactions, the Company sells mortgage loans to a securitization trust for cash and, in some cases, retained interests in the trust. The securitization entities are funded through the issuance of beneficial interests in the securitized assets. The beneficial interests take the form of trust certificates, some of which are sold to investors and some of which may
be retained by the Company due to regulatory requirements. Retained beneficial interests consist of a i5% vertical interest in the assets of the securitization trusts, in order to comply with the risk retention requirements applicable to certain of the Company's securitization transactions. The Company
has elected the fair value option for subsequently measuring the retained beneficial interests in the securitization trusts, and these investments are presented as “Investment securities at fair value, pledged” in the condensed consolidated balance sheet as of June 30, 2022 and December 31, 2021. Changes in the fair value of these retained beneficial interests are reported as part of "Other (income)/expense" in the condensed consolidated statements of operations. The Company also retains the servicing rights on the securitized mortgage loans. The Company has accounted for these transactions as sales of financial assets.
The
securitization trusts that purchase the mortgage loans from the Company and securitize those mortgage loans are VIEs, and the Company holds variable interests in certain of these entities. Because the Company does not have the obligation to absorb the VIEs’ losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs, the Company is not the primary beneficiary of these securitization trusts and is not required to consolidate these VIEs. The Company separately entered into sale and repurchase agreements
for a portion of the retained beneficial interests in the securitization trusts, which have been accounted for as borrowings against investment securities. As of June 30, 2022, $i123.1 million of the $i125.2 million
of investment securities at fair value have been pledged as collateral for these borrowings against investment securities. The outstanding principal balance of these borrowings was approximately $i118.8 million with remaining maturities ranging from approximately one to ifive
months as of June 30, 2022, and interest rates based on twelve-month LIBOR plus a spread. The Company's maximum exposure to loss in these non-consolidated VIEs is limited to the retained beneficial interests in the securitization trusts.
NOTE 10 – iNON-CONTROLLING
INTERESTS
The non-controlling interest balance represents the economic interest in Holdings LLC held by SFS Corp. iThe following table summarizes the ownership of units in Holdings LLC as of June 30, 2022:
Common
Units
Ownership Percentage
UWM Holdings Corporation ownership of Class A Common Units
i92,539,245
i5.8
%
SFS
Corp. ownership of Class B Common Units
i1,502,069,787
i94.2
%
Balance
at end of period
i1,594,609,032
i100.0
%
The
non-controlling interest holders have the right to exchange Class B Common Units, together with a corresponding number of shares of our Class D common stock or Class C common stock (together referred to as “Stapled Interests”), for, at the Company's option, (i) shares of the Company's Class B common stock or Class A common stock or (ii) cash from a substantially concurrent public offering or private sale (based on the price of the Company's Class A common stock). As such, future exchanges of Stapled Interests by non-controlling interest holders will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in-capital or
retained earnings when Holdings LLC has positive or negative net assets, respectively. As of June 30, 2022, SFS Corp. has not exchanged any Stapled Interests.
During the six months ended June 30, 2022, the Company issued i926,940
shares of Class A common stock which primarily related to the vesting of RSUs under its stock-based compensation plan and grants to the Company's non-employee directors. This resulted in an equivalent increase in the number of Class A Common Units of Holdings LLC held by the Company, and a re-measurement of the non-controlling interest in Holdings LLC due to the change in relative ownership of Holdings LLC with no change in control. The impact of the re-measurement of the non-controlling interest is reflected in the condensed consolidated statement of changes in equity.
NOTE 11 – iREGULATORY
NET WORTH REQUIREMENTS
Certain secondary market agencies and state regulators require UWM to maintain minimum net worth and capital requirements to remain in good standing with the agencies. Noncompliance with an agency’s requirements can result in such agency taking various remedial actions up to and including terminating UWM’s ability to sell loans to and service loans on behalf of the respective agency.
UWM is required to maintain a minimum net worth, minimum capital ratio and minimum liquidity requirements established by HUD, Ginnie Mae, Freddie Mac and Fannie
Mae. As of June 30, 2022, the most restrictive of these requirements require UWM to maintain a minimum net worth of $i772.7 million, liquidity of $i100.1
million and a minimum capital ratio of i6%. At June 30, 2022, UWM was in compliance with these requirements.
NOTE 12 – iFAIR
VALUE MEASUREMENTS
Fair value is defined under U.S. GAAP as the price that would be received if an asset were sold or the price that would be paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. Required disclosures include classification of fair value measurements within a three-level hierarchy (Level 1, Level 2 and Level 3). Classification of a fair value measurement within the hierarchy is dependent on the classification and significance of the inputs used to determine the fair value measurement. Observable inputs are those that are observed, implied from, or corroborated with externally available market information. Unobservable inputs represent the Company’s estimates of market participants’ assumptions.
Fair value measurements
are classified in the following manner:
Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Valuation is based on either observable prices for identical assets or liabilities in inactive markets, observable prices for similar assets or liabilities, or other inputs that are derived directly from, or through correlation to, observable market data at the measurement date.
Level 3—Valuation is based on the Company’s or others’ models using significant unobservable assumptions at the measurement date that a market participant would use.
In determining fair value
measurements, the Company uses observable inputs whenever possible. The level of a fair value measurement within the hierarchy is dependent on the lowest level of input that has a significant impact on the measurement as a whole. If quoted market prices are available at the measurement date or are available for similar instruments, such prices are used in the measurements. If observable market data is not available at the measurement date, judgment is required to measure fair value.
The following is a description of measurement techniques for items recorded at fair value on a recurring basis. There were no material items recorded at fair value on a nonrecurring basis as of June 30, 2022 or December 31, 2021.
Mortgage
loans at fair value: The Company has elected the fair value option for mortgage loans. Accordingly, the fair values of mortgage loans are based on valuation models that use the market price for similar loans sold in the secondary market. As these prices are derived from market observable inputs, they are categorized as Level 2.
IRLCs: The Company's interest rate lock commitments are derivative instruments that are recorded at fair
value based on valuation models that use the market price for similar loans sold in the secondary market. The interest rate lock
commitments are then subject to an estimated loan funding
probability, or “pullthrough rate.” Given the significant and unobservable nature of the pullthrough rate assumption, IRLC fair value measurements are classified as Level 3.
MSRs: The fair value of MSRs is determined using a valuation model that calculates the present value of estimated future net servicing cash flows. The model includes estimates of prepayment speeds, discount rate, cost to service, float earnings, contractual servicing fee income, and ancillary income and late fees, among others. These estimates are supported by market and economic data collected from various outside sources. These fair value measurements are classified as Level 3.
FLSCs: The
Company enters into forward loan sales commitments to sell certain mortgage loans which are recorded at fair value based on valuation models. The Company’s expectation of the amount of its interest rate lock commitments that will ultimately close is a factor in determining the position. The valuation models utilize the fair value of related mortgage loans determined using observable market data, and therefore, the fair value measurements of these commitments are categorized as Level 2.
Investment securities at fair value, pledged: The Company occasionally sells mortgage loans that it originates through private label securitization transactions. In executing these securitizations, the
Company sells mortgage loans to a securitization trust for cash and, in some cases, retained interests in the trust. The Company has elected the fair value option for subsequently measuring the retained beneficial interests in the securitization trusts. The fair value of these investment securities is primarily based on observable market data and therefore categorized as Level 2.
Public and Private Warrants: The fair value of Public Warrants is based on the price of
trades of these securities in active markets and therefore categorized as Level 1. The fair value of the Private Warrants is based on observable market data and therefore categorized as Level 2.
Financial Instruments - Assets and Liabilities Measured at Fair Value on a Recurring Basis
i
The following are the major categories of financial assets and liabilities measured at fair value on a recurring basis (in thousands):
The
following table presents quantitative information about the inputs used in recurring Level 3 fair value financial instruments and the fair value measurements for IRLCs:
Refer
to Note 5 - Mortgage ServicingRights for further information on the unobservable inputs used in measuring the fair value of the Company’s MSRs and for the roll-forward of MSRs for the three and six months ended June 30, 2022.
Level 3 Issuances and Transfers
The Company enters into IRLCs which are considered derivatives. If the contract converts to a loan, the implied value, which is solely based upon interest rate changes, is
incorporated in the basis of the fair value of the loan. If the IRLC does not convert to a loan, the basis is reduced to zero as the contract has no continuing value. The Company does not track the basis of the individual IRLCs that convert to a loan, as that amount has no relevance to the presented condensed consolidated financial statements.
The
following table presents the carrying amounts and estimated fair value of the Company's financial liabilities that are not measured at fair value on a recurring or nonrecurring basis (in thousands):
The
fair value of the 2025, 2029 and 2027 Senior Notes was estimated using Level 2 inputs, including observable trading information in inactive markets.
Due to their nature and respective terms (including the variable interest rates on warehouse and operating lines of credit and borrowings against investment securities), the carrying value of cash and cash equivalents, receivables, payables, equipment notes payable, borrowings against investment securities and warehouse and operating lines of credit approximate their fair value as of June 30, 2022 and December 31, 2021, respectively.
NOTE
13 – iRELATED PARTY TRANSACTIONS
The Company has engaged in the following significant related party transactions in the three and six months ended June 30, 2022 and 2021:
•The
Company’s corporate campus is located in buildings and on land that are owned by entities controlled by the Company’s founder and its CEO and leased by the Company from these entities. The Company also makes leasehold improvements to these properties for the benefit of the Company, for which the Company is responsible pursuant to the terms of the lease agreements;
•Legal services are provided to the
Company by a law firm in which the Company’s founder is a partner;
•The Company leases aircraft owned by entities controlled by the Company’s CEO to facilitate travel of Company executives for business purposes;
•Home appraisal contracting and review services are provided by home appraisal management companies, one of which was partially owned by the Company’s CEO (prior to March 31, 2021). An executive of the
Company and a member of the Company's board of directors was also on the board of directors of this home appraisal management company prior to March 31, 2021, the second of which is owned by the CEO's brother who is also a member of the Company's board of directors. Each agreement with the home appraisal management companies is for an initial itwelve-month term which automatically renews for successive itwelve
month periods unless sooner terminated by the Company upon prior notice. Additionally, each such agreement is on substantially similar terms and conditions, including with regard to pricing, as the Company's other agreements for such services.
•Employee lease agreements, pursuant to which the Company’s team members provide certain administrative services to entities controlled by the Company’s founder and its CEO in exchange for fees paid by these entities to the Company.
For
the three months ended June 30, 2022 and 2021, the Company made payments of approximately $i9.9 million and $i4.3
million, respectively, to various companies related through common ownership. Such payments were comprised of, (i) with respect to the three months ended June 30, 2022 approximately $i9.7 million in rent and other occupancy related fees and $i0.2
million in legal fees, and (ii) with respect to the three months ended June 30, 2021, approximately $i3.7 million in rent and other occupancy related fees, $i0.2 million
in legal fees, and $i0.4 million in other general and administrative expenses.
For the six months ended June 30, 2022 and 2021, the Company made payments of approximately $i15.5
million and $i8.5 million, respectively, to various companies related through common ownership. Such related party payments were comprised of, (i) with respect to the six months ended June 30, 2022, approximately $i15.0
million in rent and other occupancy related fees, $i0.3 million in legal fees, and $i0.2 million in other general and administrative expenses and (ii) with respect to the six months ended
June 30, 2021, approximately $i7.6 million in rent and other occupancy related fees, $i0.3 million in legal fees, $i0.1
million in direct origination costs and $i0.4 million in other general and administrative expenses.
The Company’s income tax expense varies from the expense that would be expected based on statutory rates due principally to its organizational structure, under which the net income attributable to the non-controlling interest is not subject to tax.
Following the closing of the Business Combination Agreement, UWM is treated as single member LLC owned by Holdings LLC. As a single member LLC, all
taxable income or loss generated by UWM will pass through and be included in the income or loss of Holdings LLC. Holdings LLC is treated as a partnership for federal and most state and local income tax jurisdictions. Due to its partnership tax treatment, Holdings LLC is not subject to U.S. federal or most state and local incomes taxes. Any taxable income or loss generated by Holdings LLC after the Company’s acquisition of its portion of Holdings LLC is passed through and included in the taxable income or loss of its members, including the Company. The Company is a C Corporation and is subject to U.S. federal, state and local income taxes with respect to its attributable share of any taxable
income of Holdings LLC. Pursuant to the Holdings LLC Second Amended & Restated Limited Liability Company Agreement, Holdings LLC will generally be required to make pro-rata distributions in cash to the Company and to SFS Corp. in amounts sufficient to cover the expected taxes resulting from their allocable share of the taxable income of Holdings LLC.
The tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of its annual effective tax rate, and if the estimated annual effective tax rate changes,
the Company makes a cumulative adjustment in such period. The quarterly tax provision and estimate of the Company’s annual effective tax rate are subject to variation due to several factors including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company conducts business, and tax law developments.
For the three months ended June 30, 2022 and 2021, the Company’s effective tax rate was i0.36%
and i1.04%, respectively. For the six months ended June 30, 2022 and 2021, the Company’s effective tax rate was i0.71%
and i1.42%, respectively. The variations between the Company’s effective tax rate and the U.S. statutory rate are primarily due to the portion (approximately ii94/%)
of the Company’s earnings attributable to non-controlling interests, and the fact that the Company's interest in Holdings LLC was acquired as part of the business combination transaction on January 21, 2021.
The Company recognizes deferred tax assets to the extent it believes these assets are more-likely-than-not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future
taxable income, tax planning strategies and recent results of operations.
The Company recognizes uncertain income tax positions when it is not more-likely-than-not that a tax position will be sustained upon examination. As of June 30, 2022, the Company has inot recognized any uncertain tax positions.
The Company accrues interest and penalties related to uncertain tax positions as a component of the income tax provision. iiiiNo///
interest or penalties were recognized in income tax expense for the three and six months ended June 30, 2022 or 2021. The Company may be subject to potential examination by U.S. federal or state jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income amounts in various tax jurisdictions and compliance with U.S. federal or state tax laws. Both 2019 and 2020 remain open under applicable statute of limitations with relevant taxing authorities.
NOTE 15 – iSTOCK-BASED
COMPENSATION
Pursuant to the 2020 Plan, the Company reserved a total of i80,000,000 shares of common stock for issuance of stock-based compensation awards. The Company's Compensation Committee approved, effective April
2, 2021, the issuance of i3.2 million restricted stock units to the Company's team members. These restricted stock units had an aggregate grant date fair value of approximately $i25.2 million.
The restricted stock units vest over ithree years, ii33/%
on each of February 1, 2022 and 2023 and i34% on February 1, 2024. In addition, the Company granted shares to non-employee directors during second quarters of both 2021 and 2022 that were fully vested upon grant.
iThe
following is a summary of RSU activity for the three and six months ended June 30, 2022:
Stock-based compensation expense recognized for the three months ended June 30, 2022 and 2021
was $i1.7 million and $i2.3 million, respectively. Stock-based compensation expense recognized for the six months
ended June 30, 2022 was $i3.5 million. As of June 30, 2022, there was $i10.8
million of unrecognized compensation expense related to unvested awards which is expected to be recognized over a weighted average period of i1.7 years.
NOTE 16 – iEARNINGS
PER SHARE
As of June 30, 2022, the Company had two classes of economic shares authorized - Class A and Class B common stock. The Company applies the two-class method for calculating earnings per share for Class A common stock and Class B common stock. In applying the two-class method, the Company allocates undistributed earnings equally on a per share basis between Class A and Class B common stock. According to the Company’s certificate of incorporation,
the holders of the Class A and Class B common stock are entitled to participate in earnings equally on a per-share basis, as if all shares of common stock were of a single class, and in such dividends as may be declared by the board of directors. RSUs awarded as part of the Company’s stock compensation plan are included in weighted-average Class A shares outstanding in the calculation of basic earnings per share once the RSUs are vested and shares are issued.
Basic earnings per share of Class A common stock and Class B common stock is computed by dividing net income attributable to UWM Holdings Corporation by the weighted-average number of shares of Class A common stock and Class B common stock outstanding during the period. Diluted earnings per share of Class A common stock and Class B common stock is computed by dividing net income by
the weighted-average number of shares of Class A common stock or Class B common stock, respectively, outstanding adjusted to give effect to potentially dilutive securities. See Note 10, Non-Controlling Interests for a description of the Stapled Interests. Refer to Note 1 - Organization, Basis of Presentation and Summary of Significant Accounting Policies - for additional information related to the Company's capital structure.
Earnings per share for the six months ended June 30, 2021 is based on earnings for the period from January 21, 2021 to June 30,
2021, which represents the period in which the Company had outstanding Class A common stock. There was iino/
Class B common stock outstanding as of June 30, 2022 or June 30, 2021.
iThe following table sets forth the calculation of basic and diluted earnings per share for the three and six month periods ended June 30, 2022 and 2021 (in thousands, except shares and per share amounts):
Net
income attributable to non-controlling interests
i207,079
i130,448
i638,436
i942,468
Net
income attributable to UWMC
i8,366
i8,264
i30,296
i56,249
Numerator:
Net
income attributable to Class A common shareholders
$
i8,366
$
i8,264
$
i30,296
$
i56,249
Net
income attributable to Class A common shareholders - diluted
$
i8,366
$
i106,824
$
i515,712
$
i630,992
Denominator:
Weighted
average shares of Class A common stock outstanding - basic
i92,533,620
i102,760,823
i92,374,988
i102,908,906
Weighted
average shares of Class A common stock outstanding - diluted
i92,533,620
i1,605,067,478
i1,594,444,775
i1,605,215,562
Earnings
per share of Class A common stock outstanding - basic
$
i0.09
$
i0.08
$
i0.33
$
i0.55
Earnings
per share of Class A common stock outstanding - diluted
$
i0.09
$
i0.07
$
i0.32
$
i0.39
For
purposes of calculating diluted earnings per share, it was assumed that the i1,502,069,787 shares of Class D common stock were exchanged for Class B common stock and converted to Class A common stock under the if-converted method, and it was determined that the conversion would be anti-dilutive for the three months ended June 30, 2022 and dilutive for the six months ended June 30,
2022. Under the if-converted method, all of the Company's net income for the applicable periods is attributable to Class A common shareholders. The net income of the Company under the if-converted method is calculated using a blended statutory effective tax rate.
The Public and Private Warrants were not in the money and the triggering events for the issuance of earn-out shares were not met during the three or six months ended June 30, 2022 or 2021. Therefore, these potentially dilutive securities were excluded from the computation of diluted earnings per share. Unvested RSUs have been considered in the calculations of diluted earnings per share for the three and six months ended June 30, 2022
and 2021 using the treasury stock method and the impact was either anti-dilutive or immaterial.
NOTE 17 – iSUBSEQUENT EVENTS
Subsequent to June 30, 2022, the
Company entered into agreements to sell MSRs with an aggregate UPB of approximately $i28.5 billion for proceeds of approximately $i359.0 million.
Subsequent
to June 30, 2022, the Board declared a cash dividend of $i0.10 per share on the outstanding shares of Class A common stock. The dividend is payable on October 10, 2022 to stockholders of record at the close of business on September 20, 2022. Additionally, the Board approved a proportional distribution to SFS Corp. of $i150.2 million
which is payable on October 10, 2022.
On August 8, 2022, UWM entered into the Revolving Credit Agreement, (the “Revolving Credit Agreement”), between UWM, as the borrower, and SFS Corp., as the lender. The Revolving Credit Agreement provides for, among other things, a $i500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”).The Revolving Credit Facility has an initial maturity date of August 8, 2023. Amounts borrowed under the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time, and accrue interest at the Applicable Prime Rate (as defined in the Revolving Credit Agreement). UWM may utilize the Revolving Credit Facility in connection with: (i) operational and investment activities, including but not limited to funding and/or advances related to (a) servicing rights, (b) ‘scratch and dent’ loans, (c) margin requirements, and (d) equity in loans held for sale; and (ii) general corporate purposes.
The Revolving Credit Agreement contains certain financial and operating covenants and restrictions, subject to a number of exceptions and qualifications, and the availability of funds under the Revolving Credit Facility is subject to our continued compliance
with these covenants. The covenants include restrictions on our ability to (1) incur additional non-funding indebtedness unless either (y) the Fixed Charge Coverage Ratio (as defined in the Revolving Credit Agreement) is no less than i3.0 to 1.0 or (z) the Debt-to-Equity Ratio (as defined in the Revolving Credit Agreement) does not exceed i2.0
to 1.0,
(2) merge, consolidate or sell assets, (3) make restricted payments, including distributions, (4) enter into transactions with affiliates, (5) enter into sale and leaseback transactions and (6) incur liens securing indebtedness.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, our condensed consolidated financial statements and the related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed under the heading “Cautionary Note Regarding Forward-Looking Statements,” in this report and in Part
I. Item 1A. “Risk Factors” included in our Form 10-K filed with the SEC on March 1, 2022. Unless otherwise indicated or the context otherwise requires, when used in this Form 10-Q, the term “UWM” means United Wholesale Mortgage, LLC and “the Company,”“we,”“our” and “us” refer to UWM Holdings Corporation and our subsidiaries.
Business Overview
We are the second largest direct residential mortgage lender and the largest wholesale mortgage lender in the U.S., originating mortgage loans exclusively through the wholesale channel. With
approximately 7,000 team members as of June 30, 2022 and a culture of continuous innovation of technology and enhanced client experience, we lead our market by building upon our proprietary and exclusively licensed technology platforms, superior service and focused partnership with the independent mortgage broker community. We originate primarily conforming and government loans across all 50 states and the District of Columbia. For the last seven years, including the year ended December 31, 2021, we have been the largest wholesale mortgage lender in the U.S. by closed loan volume, with approximately 35% market share of the wholesale channel for the three months ended March 31, 2022 (based on the most recent data released by Inside Mortgage Finance).
Our
mortgage origination business derives revenue from originating, processing and underwriting primarily Government-sponsored enterprises ("GSE") conforming mortgage loans, along with FHA, USDA and VA mortgage loans, which are subsequently pooled and sold in the secondary market. During the second quarter of 2021, we began selling pools of originated mortgage loans through private label securitization transactions. The mortgage origination process generally begins with a borrower entering into an IRLC with us that is arranged by an independent mortgage advisor, pursuant to which we have committed to enter into a mortgage at specified interest rates and terms within a specified period of time with a borrower who has applied for a loan and met certain credit and underwriting criteria. As we have committed to providing a mortgage loan at a specific interest rate, we hedge that risk by selling forward-settling mortgage-backed securities and FLSCs in the To Be Announced
("TBA") market. When the mortgage loan is closed, we fund the loan with approximately 2-3%, on average, of our own funds and the remainder with funds drawn under one of our warehouse facilities (except when we opt to "self-warehouse" in which case we use our cash to fund the entire loan). At that point, the mortgage loan is legally owned by our warehouse facility lender and is subject to our repurchase right (other than when we self-warehouse). When we have identified a pool of mortgage loans to sell to the agencies, non-governmental entities, or through our private label securitization transactions, we repurchase loans not already owned by us from our warehouse lender and sell the pool of mortgage loans into the secondary market, but in most instances retain the mortgage servicing rights, or MSRs, associated with those loans. We retain MSRs for a period of time depending on business and liquidity considerations. When we sell MSRs, we typically sell them
in the bulk MSR secondary market.
Our unique model, focusing exclusively on the wholesale channel, results in what we believe to be complete alignment with our clients and superior customer service arising from our investments in people and technology that has driven demand for our services from our clients.
New Accounting Pronouncements Not Yet Effective
See Note 1 – Organization, Basis of Presentation and Summary of Significant Accounting Policies to the condensed consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on the Company's condensed
consolidated financial statements.
Components of Revenue
We generate revenue from the following three components of the loan origination business: (i) loan production income, (ii) loan servicing income, and (iii) interest income.
Loan production income. Loan production income includes all components related to the origination and sale of mortgage loans, including:
• primary gain, which
represents the premium we may receive in excess of the loan principal amount adjusted for previous fair value adjustments, and certain fees charged by investors upon sale of loans into the secondary market. When the mortgage loan is sold into the secondary market, any difference between the proceeds received and the current fair value of the loan is recognized in current period earnings;
• loan origination fees we charge to originate a loan, which generally represent flat, per-loan fee amounts;
• provision for representation and warranty obligations, which represent the reserves established for our estimated liabilities associated with the potential repurchase or indemnity of purchasers of loans previously sold due to representation and warranty claims by investors. Included within these reserves are amounts for estimated liabilities for requirements to repay a portion of
any premium received from investors on the sale of certain loans if such loans are repaid in their entirety within a specified time period after the sale of the loans;
• the change in fair value of IRLCs, FLSCs and recorded loans on the balance sheet, due to changes in estimated fair value, driven primarily by interest rates but also influenced by other assumptions; and
•capitalization of MSRs, representing the estimated fair value of newly originated MSRs when loans are sold and the associated servicing rights are retained.
Compensation earned by our clients, Independent Mortgage Advisors, is included in the cost of the loans we originate, and therefore netted within loan production income.
Loan servicing
income. Loan servicing income consists of the contractual fees earned for servicing the loans and includes ancillary revenue such as late fees and modification incentives. Loan servicing income is recorded upon collection of payments from borrowers.
Interest income. Interest income represents interest earned on mortgage loans at fair value.
Components of operating expenses
Our operating expenses include salaries, commissions and benefits, direct loan production costs, marketing, travel and entertainment, depreciation and amortization, servicing costs, general and administrative (including professional services, occupancy and equipment), interest expense, and other expense/(income) (primarily related to
the decrease or increase, respectively, in the fair value of the liability for the Public and Private Warrants, the decrease or increase, respectively, in the Tax Receivable Agreement liability, and the increase or decrease, respectively, in the fair value of retained investment securities).
For the three months ended June 30, 2022, we originated $29.9 billion in residential mortgage loans, which was a decrease of $29.3 billion, or 50%, from the three months ended June 30, 2021. We generated $215.4 million of net income during the three months ended June 30,
2022, which was an increase of $76.7 million, or 55.3%, compared to net income of $138.7 million for the three months ended June 30, 2021. Adjusted EBITDA for the three months ended June 30, 2022 was $95.0 million as compared to $209.7 million for the three months ended June 30, 2021. Refer to the "Non-GAAP Financial Measures" section below for a detailed discussion of how we define and calculate Adjusted EBITDA.
For the six months ended June 30, 2022, we originated $68.7 billion in residential mortgage loans, which was a decrease of $39.6 billion, or 37%, from the six months ended June 30,
2021. We generated $668.7 million of net income during the six months ended June 30, 2022, which was a decrease of $330.0 million, or 33.0%, compared to net income of $998.7 million for the six months ended June 30, 2021. Adjusted EBITDA for the six months ended June 30, 2022 was $223.4 million as compared to $921.1 million for the six months ended June 30, 2021. Refer to the "Non-GAAP Financial Measures" section below for a detailed discussion of how we define and calculate Adjusted EBITDA.
Non-GAAP Financial Measures
To provide investors with information in addition to our
results as determined by U.S. GAAP, we disclose Adjusted EBITDA as a non-GAAP measure, which our management believes provides useful information on our performance to investors. This measure is not a measurement of our financial performance under U.S. GAAP, and it may not be comparable to a similarly titled measure reported by other companies. Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as an alternative to revenue, net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.
We
define Adjusted EBITDA as earnings before interest expense on non-funding debt, provision for income taxes, depreciation and amortization, stock-based compensation expense, the change in fair value of MSRs due to valuation inputs or assumptions, the impact of non-cash deferred compensation expense, the change in fair value of the Public and Private Warrants, the change in the Tax Receivable Agreement liability, and the change in fair value of retained investment securities. We exclude the change in the Tax Receivable Agreement liability, the change in fair value of the Public and Private Warrants, the change in fair value of retained investment securities, and the change in fair value of MSRs due to valuation inputs or assumptions as these represent non-cash, non-realized adjustments to our earnings, which is not indicative of our performance or results of operations. Adjusted EBITDA includes interest expense on funding
facilities, which are recorded as a component of interest expense, as these expenses are a direct operating expense driven by loan origination volume. By contrast, interest expense on non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA. Non-funding debt includes the Company's senior notes, operating lines of credit, borrowings against investment securities, equipment notes payable, and finance leases.
We use Adjusted EBITDA to evaluate our operating performance, and it is one of the measures used by our management for planning and forecasting future periods. We believe the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by our management and may make it easier
to compare our results with other companies that have different financing and capital structures.
The following table presents a reconciliation of net income, the most directly comparable U.S. GAAP financial measure, to Adjusted EBITDA:
For
the three months ended June 30,
For the six months ended June 30,
($ in thousands)
2022
2021
2022
2021
Net income
$
215,445
$
138,712
$
668,732
$
998,717
Interest
expense on non-funding debt
29,692
22,292
59,250
38,635
Provision for income taxes
769
1,462
4,814
14,348
Depreciation
and amortization
11,181
8,353
22,096
15,642
Stock-based compensation expense
1,676
2,327
3,504
2,327
Change
in fair value of MSRs due to valuation inputs or assumptions (1)
(176,456)
38,035
(567,436)
(159,767)
Deferred
compensation, net(2)
3,125
—
15,377
30,000
Change in fair value of Public and Private Warrants (3)
(2,850)
(1,530)
(6,982)
(18,834)
Change
in Tax Receivable Agreement liability (4)
2,500
—
3,200
—
Change in fair value of investment securities (5)
9,912
—
20,846
—
Adjusted
EBITDA
$
94,994
$
209,651
$
223,401
$
921,068
(1)Reflects the change ((increase)/decrease) in fair value due to changes in valuation inputs or assumptions, including discount rates and prepayment speed assumptions,
primarily due to changes in market interest rates. Refer to Note 5 - Mortgage Servicing Rights to the condensed consolidated financial statements.
(2)Reflects management incentive bonuses under our long-term incentive plan that are accrued when earned, net of cash payments.
(3)Reflects the change (increase/(decrease)) in the fair value of the Public and Private Warrants.
(4)Reflects the change (increase/(decrease)) in the Tax Receivable Agreement liability. Refer to Note 1 - Organization, Basis of Presentation and Summary of Significant Accounting Policies to the condensed consolidated financial statements for additional information related to the Tax Receivable Agreement.
(5)Reflects
the change (decrease/(increase)) in the fair value of the retained investment securities.
The components of loan production income for the periods presented were as follows:
For the three months ended June 30,
Change $
Change %
($
in thousands)
2022
2021
Primary gain (loss)
$
(173,691)
$
(211,694)
$
38,003
(18.0)
%
Loan
origination fees
63,525
121,585
(58,060)
(47.8)
%
Provision for representation and warranty obligations
(5,977)
(11,843)
5,866
(49.5)
%
Capitalization
of MSRs
412,678
581,226
(168,548)
(29.0)
%
Loan production income
$
296,535
$
479,274
$
(182,739)
(38.1)
%
For
the six months ended June 30,
Change $
Change %
($ in thousands)
2022
2021
Primary gain (loss)
$
(513,659)
$
160,991
$
(674,650)
(419.1)
%
Loan
origination fees
149,689
233,994
(84,305)
(36.0)
%
Provision for representation and warranty obligations
(13,739)
(21,661)
7,922
(36.6)
%
Capitalization
of MSRs
1,058,115
1,180,615
(122,500)
(10.4)
%
Loan production income
$
680,406
$
1,553,939
$
(873,533)
(56.2)
%
Loan
production income was $296.5 million for the three months ended June 30, 2022, a decrease of $182.7 million, or 38.1%, as compared to $479.3 million for the three months ended June 30, 2021. The decrease in loan production income was primarily driven by a decrease in loan production volume, offset partially by an increase in gain margin. Loan production volume decreased $29.3 billion, or 50%, from $59.2 billion to $29.9 billion during the three months ended June 30, 2022, as compared to the same period in 2021. The decline in loan production volume was primarily driven by a rising interest rate environment during the period as well as increased marketplace competition. Gain margin increased by 18 basis points, from 81 basis points for the three months
ended June 30, 2021 to 99 basis points for the same period in 2022. The increase in gain margin was due, in part, to a slight increase in the primary/secondary mortgage interest rate spread, and higher MSR capitalization rates resulting from the rising interest rate environment.
Loan production income was $680.4 million for the six months ended June 30, 2022, a decrease of $873.5 million, or 56.2%, as compared to $1.55 billion for the six months ended June 30, 2021. The decrease in loan production income was primarily driven by a decrease in loan production volume, along with a decrease of 44 basis points in gain margin, from 143 basis points for the six months ended June 30,
2021 to 99 basis points for the same period in 2022. Loan production volume decreased $39.6 billion, or 37%, from $108.3 billion to $68.7 billion during the six months ended June 30, 2022, as compared to the same period in 2021. The decline in loan production volume from the prior year period was due to the same reasons mentioned in the three months analysis. The decrease in gain margin was due to a decline in the primary/secondary mortgage interest rate spread, as well as increased marketplace competition, partially offset by higher MSR capitalization rates resulting from the rising interest rate environment.
Loan servicing income
The table below summarizes loan servicing income for each of the periods presented:
Loan
servicing income was $179.5 million for the three months ended June 30, 2022, an increase of $34.2 million, or 23.6%, as compared to $145.3 million for the three months ended June 30, 2021. The increase in loan servicing income during the three months ended June 30, 2022 was primarily driven by the increased average servicing portfolio.
Loan servicing income was $378.1 million for the six months ended June 30, 2022, an increase of $109.0 million, or 40.5%, as compared to $269.1 million for the six months ended June 30, 2021. The increase in loan servicing income during the six months ended June 30,
2022 was primarily driven by the increased average servicing portfolio.
For the periods presented below, our loan servicing portfolio consisted of the following:
MSR portfolio delinquency count (60+ days) as % of total
0.69
%
0.81
%
Weighted average note rate
3.19
%
2.94
%
Weighted average service
fee
0.2664
%
0.2624
%
Change in Fair Value of Mortgage Servicing Rights
The change in fair value of MSRs was a net increase of $26.2 million for the three months ended June 30, 2022 as compared with a net decrease of $219.1 million for the three months ended June 30, 2021. The change in fair value for the three months ended June 30, 2022 was primarily attributable to an increase of approximately $176.5 million due to changes in
valuation inputs/assumptions, mainly as a result of higher interest rates, partially offset by a decline in fair value of approximately $150.8 million due to realization of cash flows and decay (including loans paid in full). The decline in fair value for the three months ended June 30, 2021 of $219.1 million was attributable to declines of approximately $181.1 million due to realization of cash flows and decay (including loans paid in full), and approximately $38.0 million due to changes in valuation inputs/assumptions.
The change in fair value of MSRs was a net increase of $198.1 million for the six months ended June 30, 2022 as compared with a net decrease of $278.4 million for the six months ended June 30, 2021. The change in fair value
for the six months ended June 30, 2022 was primarily attributable to an increase of approximately $567.4 million due to changes in valuation inputs/assumptions, mainly as a result of higher interest rates, partially offset by a decline in fair value of approximately $331.3 million due to realization of cash flows and decay and approximately $38.4 million of reserves and transaction costs for bulk MSR sales. The net decrease in fair value for the six months ended June 30, 2021 of approximately $278.4 million, was attributable to declines of approximately $438.1 million due to realization of cash flows and decay (including loans paid in full), offset by an increase of approximately $159.8 million resulting from changes in valuation inputs/assumptions, such as changes in interest rates.
Interest income
Interest
income was $62.0 million for the three months ended June 30, 2022, a decrease of $17.2 million, or 21.7%, as compared to $79.2 million for the three months ended June 30, 2021. This decrease was primarily driven by decreases in the average balances of mortgage loans at fair value, partially offset by increased interest rates year over year.
Interest income was $129.4 million for the six months ended June 30, 2022, an increase of $4.3 million, or 3%, as compared to $125.1 million for the six months ended June 30, 2021. This increase was primarily driven by increases in interest rates year over year, partially offset by the decrease in average balances of mortgage loans at fair value.
Expenses
Expenses
for the periods presented were as follows:
Total expenses were $348.0 million for the three months ended June 30, 2022, an increase of $3.5 million, or 1.0%, as compared to $344.5 million for the three months ended June 30, 2021. The increase was primarily due to an increase in servicing costs of $21.4 million, resulting from the increase in the average servicing portfolio and additional loss mitigation expenses. Other (income)/expense increased $11.1 million, primarily due to a decline in the fair value of investment securities retained from the private label securitization transactions executed during the second half of 2021. Direct loan production costs increased $10.2 million, primarily due to a change in presentation whereby certain loan origination fees are being presented on a gross basis (within loan production
income and direct loan production costs) beginning in the fourth quarter of 2021. Marketing, travel and entertainment expenses increased $9.3 million, due to increased broker promotions, advertising and brand marketing costs. These increases were partially offset by a decrease in salaries, commissions and benefits of $34.0 million, or 19.6%, resulting from decreases in incentive compensation (primarily bonuses and commissions), attributable to decreased loan production and a decrease in average headcount arising from normal attrition. Interest expense decreased $15.1 million primarily due to the lower interest expense on warehouse borrowings from decreased loan production and loans at fair value, partially offset by increases in interest expense on the $500.0 million of 2027 Senior Notes issued in November 2021.
Total expenses were $712.5 million for the six months ended June 30,
2022, an increase of $51.0 million, or 7.7%, as compared to $661.5 million for the six months ended June 30, 2021. The increase was primarily attributable to an increase in servicing costs of $48.0 million due to the same reasons mentioned above. Other (income)/expense increased $35.9 million, primarily due to decline in fair value of retained investment securities and a smaller decline in the fair value of the Public and Private Warrants. General and administrative expenses increased $19.3 million, primarily as a result of a reduction of a contingency reserve which was recorded in the six months ended June 30, 2021. Direct loan production costs increased $23.8 million due primarily to the same reasons mentioned above. Marketing, travel and entertainment expenses increased $11.6 million for the same reasons mentioned
above. These increases in expenses were partially offset by a decrease in salaries, commissions and benefits of $86.4 million, or 22.4%, primarily attributable to the same reasons mentioned in the above analysis, and a decrease in interest expense of $7.7 million due to the lower interest expense on warehouse borrowings from decreased loan production and loans at fair value.
IncomeTaxes
We recorded a $0.8 million provision for income taxes during the three months ended June 30, 2022 compared to a provision for income taxes of $1.5 million for the three months ended June 30, 2021. We recorded a $4.8 million provision for income taxes during the six months ended June 30,
2022, compared to a provision for income taxes of $14.3 million for the six
months ended June 30, 2021. The decreases in income tax provision year-over-year were primarily due to the decreases in pre-tax income attributable to the Company.
Net income
Net income was $215.4 million for the three months ended June 30,
2022, an increase of $76.7 million or 55.3%, as compared to $138.7 million for the three months ended June 30, 2021. The increase in net income was primarily the result of the increase in total revenue, net of $79.6 million, partially offset by a net increase in total expenses (including income taxes) of $2.8 million, as further described above.
Net income was $668.7 million for the six months ended June 30, 2022, a decrease of $330.0 million or 33.0%, as compared to $998.7 million for the six months ended June 30, 2021. The decrease in net income was primarily the result of a decrease in total revenue, net of $288.5 million, and a net increase in total expenses (including income taxes) of $41.5 million, as further described above.
Net
income attributable to the Company of $8.4 million and $30.3 million for the three and six months ended June 30, 2022, respectively, and net income attributable to the Company of $8.3 million for the three months ended June 30, 2021 reflects the net income of UWM attributable to the Company due to its approximate 6% ownership interest in Holdings LLC for these respective periods. Net income attributable to the Company of $56.2 million for the six months ended June 30, 2021 reflects
the net income of UWM attributable to the Company due to its approximate 6% ownership interest in Holdings LLC for the period from January 21, 2021 through June 30, 2021.
Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity have included:
•borrowings including under our warehouse facilities and other financing facilities;
•cash
flow from operations and investing activities, including:
◦sale or securitization of loans into the secondary market;
◦loan origination fees;
◦servicing fee income;
◦interest income on mortgage loans; and
◦sale of MSRs.
Historically, our primary uses of funds have included:
•origination of loans;
•retention of MSRs from our loan sales;
•payment
of interest expense;
•payment of operating expenses; and
•dividends on, and repurchases of, our Class A common stock and distributions to SFS Corp.
We are also subject to contingencies which may have a significant impact on the use of our cash.
To originate and aggregate loans for sale or securitization into the secondary market, we use our own working capital and borrow or obtain funding on a short-term basis primarily through uncommitted and committed warehouse facilities that we have established with large global banks, regional or specialized banks and certain agencies.
We continually evaluate our capital
structure and capital resources to optimize our leverage and profitability and take advantage of market opportunities. As part of such evaluation, we regularly review our levels of indebtedness and available equity, our strategic investments, including technology and growth of the wholesale channel, the availability or desirability of growth through the acquisition of other companies or other mortgage portfolios, the repurchase or redemption of our outstanding indebtedness, or repurchases of our common stock or common stock derivatives.
Our warehouse facilities, which are our primary loan funding facilities used to fund the origination of our mortgage loans, are primarily in the form of master repurchase agreements. Loans financed under these facilities are generally financed, on average, at approximately 97% to 98% of the principal balance of the loan, which requires us to fund the remaining 2-3% of the unpaid principal balance from cash generated from our operations. Once closed, the underlying residential mortgage loan is pledged as collateral for the borrowing or advance that was made under these loan funding facilities. In most cases, the loans we originate will remain in one of our warehouse facilities for less than one month, until the loans are pooled and sold. During the time we hold the loans pending sale, we earn interest income from the borrower on the underlying mortgage loan note. This income is partially
offset by the interest and fees we have to pay under the warehouse facilities. Interest rates under the warehouse facilities are typically based on one-month LIBOR plus a spread. During the first half of 2022, nine of our warehouse facility agreements were amended to change the reference interest rate from LIBOR to variants of SOFR due to the pending discontinuation of LIBOR. We expect the remaining warehouse facilities to transition from LIBOR to a different reference interest rate at some point in 2022 due to the pending discontinuation of LIBOR.
When we sell or securitize a pool of loans, the proceeds we receive from the sale or securitization of the loans are used to pay back the amounts we owe on the warehouse facilities. The remaining funds received then become available to be re-advanced to originate additional loans. We are dependent on the cash generated from the
sale or securitization of loans to fund future loans and repay borrowings under our warehouse facilities. Delays or failures to sell or securitize loans in the secondary market could have an adverse effect on our liquidity position.
From a cash flow perspective, the vast majority of cash received from mortgage originations occurs at the point the loans are sold or securitized into the secondary market. The vast majority of servicing fee income relates to the retained servicing fee on the loans, where cash is received monthly over the life of the loan and is a product of the borrowers’ current unpaid principal balance multiplied by the weighted average service fee. For a given mortgage loan, servicing revenue from the retained servicing fee declines over time as the principal balance of the loan is reduced.
The amount of financing
advanced to us under our warehouse facilities, as determined by agreed upon advance rates, may be less than the stated advance rate depending, in part, on the fair value of the mortgage loans securing the financings and premium we pay the broker. Each of our warehouse facilities allows the bank extending the advances to evaluate regularly the market value of the underlying loans that are serving as collateral. If a bank determines that the value of the collateral has decreased, the bank can require us to provide additional collateral or reduce the amount outstanding with respect to the corresponding loan (e.g., initiate a margin call). Our inability to satisfy the request could result in the termination of the facility and, depending on the terms of our agreements, possibly result in a default being declared under our other warehouse facilities.
Warehouse lenders generally conduct daily evaluations
of the adequacy of the underlying collateral for the warehouse loans based on the fair value of the mortgage loans. As the loans are generally financed at 97% to 98% of principal balance and our loans are typically outstanding on warehouse lines for short periods (e.g., less than one month), significant increases in market interest rates would be required for us to experience margin calls from a majority of our warehouse lenders. When considering the full fair value of the loans, the required decline is even more significant. Typically, we do not receive margin calls on a majority of our warehouse lines. Four of our warehouse lines advance based on the fair value of the loans, rather than principal balance. For those lines, we exchange collateral for modest changes in value. As of June 30, 2022, there were no outstanding exchanges
of collateral.
The amount owed and outstanding on our warehouse facilities fluctuates based on our origination volume, the amount of time it takes us to sell the loans we originate, our cash on hand, and our ability to obtain additional financing. From time to time, we will increase or decrease the size of the lines to reflect anticipated increases or decreases in volume, strategies regarding the timing of sales of mortgages to the GSEs or secondary markets and costs associated with not utilizing the lines. We reserve the right to arrange for the early payment of outstanding loans and advances from time to time. As of June 30, 2022, the self-warehouse amount was $221.8 million. As we accumulate loans, a significant portion of our total warehouse facilities may be utilized to fund loans.
The
table below reflects the current line amounts of our principal warehouse facilities and the amounts advanced against those lines as of June 30, 2022:
Total Advanced Against Line as of June 30, 2022 (in thousands)
MRA Funding:
Master
Repurchase Agreement
Mortgage Loans
$200 Million
3/30/2018
9/5/2022
$
101,877
Master Repurchase Agreement
Mortgage Loans
$400 Million
8/21/2012
10/20/2022
222,476
Master
Repurchase Agreement
Mortgage Loans
$300 Million
8/19/2016
11/9/2022
226,252
Master Repurchase Agreement
Mortgage Loans
$250 Million
2/26/2016
12/22/2022
193,674
Master
Repurchase Agreement
Mortgage Loans
$1.0 Billion
7/10/2012
1/9/2023
305,159
Master Repurchase Agreement
Mortgage Loans
$2.5 Billion
12/31/2014
2/22/2023
272,092
Master
Repurchase Agreement
Mortgage Loans
$500 Million
3/7/2019
2/22/2023
124,825
Master Repurchase Agreement
Mortgage Loans
$500 Million
4/23/2021
4/23/2023
131,439
Master
Repurchase Agreement
Mortgage Loans
$150 Million
2/29/2012
5/23/2023
132,095
Master Repurchase Agreement
Mortgage Loans
$1.0 Billion
10/30/2020
5/25/2023
314,909
Master
Repurchase Agreement
Mortgage Loans
$3.0 Billion
5/9/2019
7/28/2023
1,844,768
Master Repurchase Agreement
Mortgage Loans
$700 Million
7/24/2020
8/30/2023
330,900
Master
Repurchase Agreement
Mortgage Loans
$150 Million
9/8/2020
9/18/2023
44,533
Early Funding:
Master Repurchase Agreement
Mortgage
Loans
$500 Million (ASAP+ - see below)
No expiration
120,496
Master Repurchase Agreement
Mortgage Loans
$1.5 Billion (EF - see below)
No expiration
131,858
$
4,497,353
1
An aggregate of $401.0 million of these line amounts is committed as of June 30, 2022.
Early Funding Programs
We are an approved lender for loan early funding facilities with Fannie Mae through its As Soon As Pooled Plus (“ASAP+”) program and Freddie Mac through its Early Funding (“EF”) program. As an approved lender for these early funding programs, we enter into an agreement to deliver closed and funded one-to-four family residential mortgage loans, each secured by related mortgages and deeds of trust, and receive funding in exchange for such mortgage loans in some cases before the lender has grouped them into pools to be securitized by Fannie Mae or Freddie Mac. All such mortgage loans must adhere to a set of eligibility criteria to
be acceptable. As of June 30, 2022, the amount outstanding through the ASAP+ program was approximately $120.5 million and $131.9 million was outstanding under the EF program.
In addition to the arrangements with Fannie Mae and Freddie Mac, we are also party to one early funding (or “gestation”) line with a financial institution. Through this arrangement, we enter into agreements to deliver certified pools consisting of mortgage loans securitized by Ginnie Mae, Fannie Mae, and/or Freddie Mac, as applicable, for the gestation line. As with the ASAP+ and EF programs, all mortgage loans under this gestation line must adhere to a set of eligibility criteria.
The gestation line has a transaction limit of $150.0 million, and
it is an evergreen agreement with no stated termination or expiration date that can be terminated by either party upon written notice. As of June 30, 2022, no amount was outstanding under this line.
Covenants
Our warehouse facilities also generally require us to comply with certain operating and financial covenants and the availability of funds under these facilities is subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining (i) a certain minimum tangible net worth, (ii) minimum liquidity, (iii) a maximum ratio of total liabilities or total debt to tangible net worth, and (iv) pre-tax net income requirements. A breach of these covenants can result in an event of default
under these facilities and as such would allow the lenders to pursue certain remedies. In addition, each of these facilities, as well as our unsecured lines of credit, includes cross default or cross acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility. We were in compliance with all covenants under these facilities as of June 30, 2022.
On
November 3, 2020, our consolidated subsidiary, UWM, issued $800.0 million in aggregate principal amount of senior unsecured notes due November 15, 2025 (the “2025 Senior Notes”). The 2025 Senior Notes accrue interest at a rate of 5.500% per annum. Interest on the 2025 Senior Notes is due semi-annually on May 15 and November 15 of each year, beginning on May 15, 2021. We used approximately $500.0 million of the net proceeds from the offering of 2025 Senior Notes for general corporate purposes to fund future growth and distributed the remainder to SFS Corp. for tax distributions.
On or after November 15, 2022, we may, at our option, redeem the 2025 Senior Notes in whole or in part during the twelve-month
period beginning on the following dates at the following redemption prices: November 15, 2022 at 102.750%; November 15, 2023 at 101.375%; or November 15, 2024 until maturity at 100.000%, of the principal amount of the 2025 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to November 15, 2022, we may, at our option, redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes originally issued at a redemption price of 105.500% of the principal amount of the 2025 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, we may, at our option, redeem the 2025 Senior Notes prior to November 15,
2022 at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest.
On April 7, 2021, our consolidated subsidiary, UWM, issued $700.0 million in aggregate principal amount of senior unsecured notes due April 15, 2029 (the “2029 Senior Notes”). The 2029 Senior Notes accrue interest at a rate of 5.500% per annum. Interest on the 2029 Senior Notes is due semi-annually on April 15 and October 15 of each year, beginning on October 15, 2021. We used a portion of the proceeds from the issuance of the 2029 Senior Notes to pay off and terminate the $400.0 million line of credit, effective April
20, 2021, and the remainder for general corporate purposes.
On or after April 15, 2024, we may, at our option, redeem the 2029 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: April 15, 2024 at 102.750%; April 15, 2025 at 101.375%; or April 15, 2026 until maturity at 100.000%, of the principal amount of the 2029 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to April 15, 2024, we may, at our option, redeem up to 40% of the aggregate principal amount of the 2029 Senior Notes originally issued at a redemption price
of 105.500% of the principal amount of the 2029 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, we may, at our option, redeem the 2029 Senior Notes prior to April 15, 2024 at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest.
On November 22, 2021, our consolidated subsidiary, UWM, issued $500.0 million in aggregate principal amount of senior unsecured notes due June 15, 2027 (the "2027 Senior Notes"). The 2027 Senior Notes accrue interest at a rate of 5.750% per annum. Interest on the 2027 Senior Notes is due semi-annually on June 15 and December 15 of each year,
beginning on June 15, 2022. We used the proceeds from the issuance of the 2027 Senior Notes for general corporate purposes.
On or after June 15, 2024, we may, at our option, redeem the 2027 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: June 15, 2024 at 102.875%; June 15, 2025 at 101.438%; or June 15, 2026 until maturity at 100.000%, of the principal amount of the 2027 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest. Prior to June 15, 2024, we may,
at our option, redeem up to 40% of the aggregate principal amount of the 2027 Senior Notes originally issued at a redemption price of 105.75% of the principal amount of the 2027 Senior Notes redeemed on the redemption date plus accrued and unpaid interest with the net proceeds of certain equity offerings. In addition, we may, at our option, redeem the 2027 Senior Notes prior to June 15, 2024 at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest.
The indentures governing the 2025 Senior Notes, the 2029 Senior Notes, and the 2027 Senior Notes contain certain operating covenants and restrictions, subject to a number of exceptions and qualifications, including restrictions on our
ability to (1) incur additional non-funding indebtedness unless either (y) the Fixed Charge Coverage Ratio (as defined in the applicable indenture) is no less than 3.0 to 1.0 or (z) the Debt-to-Equity Ratio (as defined in the applicable indenture) does not exceed 2.0 to 1.0, (2) merge, consolidate or sell assets, (3) make restricted payments, including distributions, (4) enter into transactions with affiliates, (5) enter into sale and leaseback transactions and (6) incur liens securing indebtedness. We were in compliance with the terms of these indentures as of June 30, 2022.
On August 8, 2022, UWM entered into the Revolving Credit Agreement, (the “Revolving Credit Agreement”), between UWM, as the borrower, and SFS Corp., as the lender. The Revolving Credit Agreement provides for, among other things, a $500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”).The Revolving Credit Facility has an initial maturity date of August 8, 2023. Amounts borrowed under the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time, and accrue interest at the Applicable Prime Rate (as defined in the Revolving Credit Agreement). UWM may utilize the Revolving Credit Facility in connection
with: (i) operational and investment activities, including but not limited to funding and/or advances related to (a) servicing rights, (b) ‘scratch and dent’ loans, (c) margin requirements, and (d) equity in loans held for sale; and (ii) general corporate purposes.
The Revolving Credit Agreement contains certain financial and operating covenants and restrictions, subject to a number of exceptions and qualifications, and the availability of funds under the Revolving Credit Facility is subject to our continued compliance with these covenants. The covenants include restrictions on our ability to (1) incur additional non-funding indebtedness unless either (y) the Fixed Charge Coverage Ratio (as defined in the Revolving Credit Agreement) is no less than 3.0 to 1.0 or (z) the Debt-to-Equity Ratio (as defined in the Revolving Credit Agreement) does not exceed 2.0 to 1.0, (2) merge, consolidate or sell assets, (3) make restricted
payments, including distributions, (4) enter into transactions with affiliates, (5) enter into sale and leaseback transactions and (6) incur liens securing indebtedness.
Borrowings Against Investment Securities
In 2021, the Company's consolidated subsidiary, UWM, began selling some of the mortgage loans that it originates through private label securitization transactions. In executing these transactions, the Company sells mortgage loans to a securitization trust for cash and, in some cases, retained interests in the trust. The securitization entities are funded through the issuance of beneficial interests in the securitized assets. The beneficial interests
take the form of trust certificates, some of which are sold to investors and some of which may be retained by the Company due to regulatory requirements. The Company entered into sale and repurchase agreements for a portion of the retained beneficial interests in the securitization trusts established to facilitate its private label securitization transactions which have been accounted for as borrowings against investment securities. As of June 30, 2022, we had $118.8 million outstanding under individual trades executed pursuant to a master repurchase agreement with a counterparty which is collateralized by the investment securities (beneficial interests in the trusts) that we retained due to regulatory requirements. The borrowings against investment
securities have remaining terms ranging from one to five months as of June 30, 2022, and interest rates based on twelve-month LIBOR plus a spread. We intend to renew these sale and repurchase agreements upon their maturity during the required holding period for the retained investment securities.
The counterparty under these sale and repurchase agreements conducts daily evaluations of the adequacy of the underlying collateral based on the fair value of the retained investment securities less specified haircuts. These investment securities are financed on average at approximately 80% of the outstanding principal balance, and exchanges of cash collateral are required if the fair value of the retained investment securities less the haircut is less than the principal balance plus accrued interest
on the secured borrowings. As of June 30, 2022, the Company had delivered $12.3 million of collateral to the counterparty under these sale and repurchase agreements.
Finance Leases
As of June 30, 2022, our finance lease liabilities were $51.4 million, $28.6 million of which relates to leases with related parties. The Company’s financing lease agreements have remaining terms ranging from approximately three months to fourteen years.
Net cash provided by (used in) operating activities
Net cash provided by operating activities was $11.36 billion for the six months ended June 30,
2022 compared to net cash used in operating activities of $4.35 billion for the same period in 2021. The increase in cash flows from operating activities was primarily driven by the decrease in mortgage loans at fair value for the six months ended June 30, 2022, as compared to the increase in mortgage loans and fair value for the six months ended June 30, 2021, partially offset by a decrease in net income in for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, adjusted for non-cash items. The early roll-out of increased conforming loan size limits and the aggregation of loans for private label securitization transactions materially increased mortgage loans at fair value as of December
31, 2021, which were sold in early January 2022, returning the mortgage loans at fair value balance to a more normalized level as of June 30, 2022.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $802.6 million for the six months ended June 30, 2022 compared to $29.6 million of net cash used in investing activities for the same period in 2021. The increase in cash flows provided by investing activities was primarily driven by an increase in proceeds from the sales of MSRs.
Net cash (used in) provided by financing activities
Net cash used in financing
activities was $11.94 billion for the six months ended June 30, 2022 compared to cash provided by financing activities of $4.20 billion for the same period in 2021. The change year over year was primarily driven by a net decrease in borrowings under the warehouse lines of credit for the six months ended June 30, 2022, driven by the decrease in loans at fair value, as compared to a net increase in borrowings under the warehouse lines of credit for the six months ended June 30, 2021 due to the increase in loans at fair value. The six months ended June 30, 2021 also included the impacts of the business combination transaction (net proceeds and distributions to SFS Corp.), proceeds from the issuance of the 2029 Senior Notes and the repayment of the secured line of credit.
The
early roll-out of increased conforming loan size limits and the aggregation of loans for private label securitization transactions materially increased the warehouse line of credit balances as of December 31, 2021, which were paid down in early January 2022 in connection with the sale of the mortgage loans, returning these balances to more normalized levels as of June 30, 2022.
Contractual Obligations
Cash requirements from contractual and other obligations
As of June 30, 2022, our material cash requirements from known contractual and other obligations include interest and principal payments under our
Senior Notes, principal payments under our borrowings against investment securities, and payments under our financing and operating lease agreements. There have been no material changes in the cash requirements from known contractual and other obligations since December 31, 2021.
During the second quarter of 2022, the Board declared a dividend of $0.10 per share of Class A Common Stock for an aggregate of $9.3 million. Concurrently with this declaration, the Board, in its capacity as the Manager of Holdings LLC, under the Holdings LLC Second Amended and Restated Operating Agreement, approved a proportional distribution of $150.2 million from Holdings LLC to SFS Corp. with respect to the Class B Units of Holdings LLC. The dividend and the distribution were paid on July 11, 2022.
The
sources of funds needed to satisfy these cash requirements include cash flows from operations and investing activities, including cash flows from sales of MSRs, sale or securitization of loans into the secondary market, loan origination fees, servicing fee income, and interest income on mortgage loans.
Repurchase and indemnification obligations
Loans sold to investors which we believe met investor and agency underwriting guidelines at the time of sale may be subject to repurchase in the event of specific default by the borrower or subsequent discovery that underwriting or documentation standards were not explicitly satisfied. We establish a reserve which is estimated based on our assessment of its contingent and non-contingent obligations, including expected losses, expected frequency, the overall potential remaining exposure, as well as an estimate
for a market participant’s potential readiness to stand by to perform on such obligations. See Note 8 - Commitments and Contingencies to the condensed consolidated financial statements for further information.
Interest rate lock commitments, loan sale and forward commitments
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit to borrowers at either fixed or floating
interest rates. IRLCs are binding agreements to lend to a borrower at a specified interest rate within a specified period of time as long as there is no violation of conditions established in the contract. Forward commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. As many of the commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition, we have contracts to sell mortgage loans into the secondary market at specified future dates (commitments to sell loans), and forward commitments to sell MBS at specified future dates and interest rates.
Following is a summary of the notional
amounts of commitments as of dates indicated:
Forward commitments to sell mortgage-backed securities
13,789,784
25,756,975
(a)Adjusted
for pullthrough rates of 75% and 86%, respectively.
As of June 30, 2022, we had sold $1.6 billion of loans to a global insured depository institution and assigned the related trades to deliver the applicable loans into securities for end investors for settlement in July 2022.
Critical Accounting Estimates and Use of Significant Estimates
Preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We have
identified certain accounting estimates as being critical because they require management's judgement to make difficult, subjective or complex judgements about matters that are uncertain. Actual results could differ and the use of other assumptions or estimates could result in material differences in our condensed consolidated financial statements. Our critical accounting policies and estimates relate to accounting for mortgage loans held at fair value and revenue recognition, mortgage servicing rights, derivative financial instruments and representations and warranties reserve. There were no significant changes to our policies, methodologies, or processes used in applying our critical accounting estimates from what was described in our 2021 Annual Report on Form 10-K.
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements in this report include statements relating to:
•the future financial performance of our business;
•changes in the market for our services;
•expansion plans and opportunities;
•our future growth, including
our pace of loan originations;
•our current infrastructure, client-based business strategies, strategic initiatives and product pipeline;
•expectations regarding the impact and timing of discontinuation of LIBOR on our warehouse facilities;
•the impact of interest rate risk on our business;
•our ability to renew our sale and repurchase agreements;
•our accounting policies and recent amendments to the FASB rules regulations;
•macroeconomic conditions that may affect our business and the mortgage industry in general;
•political and geopolitical conditions that may affect our business and the mortgage industry in general;
•the impact of litigation on our financial position;
•other statements preceded by, followed by or that include the words “may,”“can,”“should,”“will,”“estimate,”“plan,”“project,”“forecast,”“intend,”“expect,”“anticipate,”“believe,”“seek,”“target” or similar expressions.
These forward-looking statements involve estimates and assumptions which may be affected by risks and uncertainties in our business, as well as other external factors, which could cause future
results to materially differ from those expressed or implied in any forward-looking statement including the following risks:
•our dependence on macroeconomic and U.S. residential real estate market conditions, including changes in U.S. monetary policies that affect interest rates;
•the impact of inflation on housing pricing, demand for mortgages and the ability of borrowers to qualify for mortgages;
•our reliance on our warehouse facilities to fund mortgage loans and otherwise operate our business, leveraging of assets under these facilities and the risk of a decrease in the value of the collateral underlying certain of our facilities causing an unanticipated margin call;
•our
ability to sell loans in the secondary market, including to government sponsored enterprises, and to securitize our loans into mortgage-backed securities through the GSEs and Ginnie Mae;
•our dependence on the GSEs and the risk of changes to these entities and their roles, including, as a result of GSE reform, termination of conservatorship or efforts to increase the capital levels of the GSEs;
•changes in the GSEs’, FHA, USDA and VA guidelines or GSE and Ginnie Mae guarantees;
•our dependence on licensed residential mortgage officers or entities, including brokers that arrange for funding of mortgage loans, or banks, credit unions or other entities that use their own funds or warehouse facilities to fund mortgage loans, but in any case do not underwrite or otherwise
make the credit decision with regard to such mortgage loans to originate mortgage loans;
•our inability to continue to grow, or to effectively manage the growth of, our loan origination volume;
•our ability to continue to attract and retain our Independent Mortgage Advisor relationships;
•the occurrence of a data breach or other failure of our cybersecurity;
•loss of key management;
•reliance on third-party software and services;
•reliance on third-party sub-servicers to service our mortgage loans or our mortgage servicing rights;
•intense
competition in the mortgage industry;
•our ability to implement technological innovation;
•our exposure to risk relating to the transition from LIBOR and the volatility of LIBOR or any replacement reference rate, which can result in higher than market interest rates;
•our ability to continue to comply with the complex state and federal laws regulations or practices applicable to mortgage loan origination and servicing in general, including maintaining the appropriate state licenses, managing the costs and operational risk associated with material changes to such laws;
•errors or the ineffectiveness of internal and external models or data we rely on to manage risk and make business decisions;
•risk
of counterparty terminating servicing rights and contracts;
•the risk that we may become subject to legal actions that if decided adversely, could be detrimental to our business; and
•those risks described in Item 1A - Risk Factors in our 2021 10-K Report, as well as those described from time to time in our other filings with the SEC.
All forward-looking statements speak only as of the date of this report and should not be relied upon as representing our views as of any subsequent date. We do not undertake any obligation to update forward-looking statements to reflect events
or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are subject to a variety of risks which can affect our operations and profitability. We broadly define these areas of risk as interest rate, credit and counterparty risk.
Interest rate risk
We are subject to interest rate risk which may impact
our origination volume and associated revenue, MSR valuations, IRLCs and mortgage loans at fair value valuations, and the net interest margin derived from our funding facilities. The fair value of MSRs is driven primarily by interest rates, which impact expected prepayments. In periods of rising interest rates, the fair value of the MSRs generally increases as expected prepayments decrease, consequently extending the estimated life of the MSRs resulting in expected increases in cash flows. In a declining interest rate environment, the fair value of MSRs generally decreases as expected prepayments increase consequently truncating the estimated life of the MSRs resulting in expected decreases in cash flows. Because origination volumes tend to increase in declining interest rate environments and decrease in increasing rate environments, we believe that servicing provides a natural hedge to our origination business. We do not specifically hedge MSRs but manage the economic
risk through partially offsetting impact of servicing and mortgaging originations.
Our IRLCs and mortgage loans at fair value are exposed to interest rate volatility. During the origination, pooling, and delivery process, this pipeline value rises and falls with changes in interest rates. Because substantially all of our production is deliverable to Fannie Mae, Freddie Mac, and Ginnie Mae, we predominately utilize forward agency or Ginnie Mae To Be Announced ("TBA") securities as our primary hedge instrument. The TBA market is a secondary market where FLSCs or TBAs are sold by lenders seeking to hedge the risk that market interest rates may change and lock in a price for the mortgages they are in the process of originating.
Interest rate risk also occurs in periods where changes in short-term interest rates result
in mortgage loans being originated with terms that provide a smaller interest rate spread above the financing terms of our warehouse facilities, which can negatively impact our net interest income. This is primarily mitigated through expedited sale of our loans.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates. Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled. We
used June 30, 2022 market rates on our instruments to perform the sensitivity analysis. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated to our performance because the relationship of the change in fair value may not be linear nor does it factor ongoing operations. The following table summarizes the estimated change in the fair value of our mortgage loans at fair value, MSRs, IRLCs and FLSCs as of June 30, 2022 given hypothetical instantaneous parallel shifts in the yield curve. Actual results could differ materially.
We are subject to credit risk, which is the risk of default that results from a borrower’s inability or unwillingness to make contractually required mortgage payments. While our loans are sold into the secondary market without recourse, we do have repurchase and indemnification obligations to investors for breaches under our loan sale agreements. For loans that were repurchased or not sold in the secondary market, we are subject to credit risk to the extent a borrower defaults and the proceeds upon ultimate foreclosure and liquidation of the property are insufficient to cover the amount of the mortgage loan plus expenses
incurred. We believe that this risk is mitigated through the implementation of stringent underwriting standards, strong fraud detection tools and technology designed to comply with applicable laws and our standards. In addition, we believe that this risk is mitigated through the quality of our loan portfolio. For the three and six months ended June 30, 2022, our originated loans had a weighted average loan to value ratio of 80.06% and 77.24%, and a weighted average FICO score of 737 and 740, respectively. For the three and six months ended June 30, 2021, our originated loans had a weighted average loan to value ratio of 71.78% and 70.87%, and a weighted average FICO score of 752 and 754, respectively.
Counterparty risk
We are subject
to risk that arises from our financing facilities and interest rate risk hedging activities. These activities generally involve an exchange of obligations with unaffiliated banks or companies, referred to in such transactions as “counterparties.” If a counterparty were to default, we could potentially be exposed to financial loss if such counterparty were unable to meet its obligations to us. We manage this risk by selecting only counterparties that we believe to be financially strong, spreading the risk among many such counterparties, limiting singular credit exposures on the amount of unsecured credit extended to any single counterparty, and entering into master netting agreements with the counterparties as appropriate.
In accordance with the best practices outlines by The Treasury Market Practices Group, we execute Securities Industry and Financial Markets Association trading agreements
with all material trading partners. Each such agreement provides for an exchange of margin money should either party’s exposure exceed a predetermined contractual limit. Such margin requirements limit our overall counterparty exposure. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. We incurred no losses due to nonperformance by any of our counterparties during the three and six months ended June 30, 2022 or June 30, 2021.
Also, in the case of our financing facilities, we are subject to risk if the counterparty chooses not to renew a borrowing agreement and we are unable to obtain financing to originate mortgage loans. With our financing facilities, we seek to mitigate this risk by ensuring that we have sufficient borrowing capacity with
a variety of well-established counterparties to meet our funding needs as well as fostering long-term relationships.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company
reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Principal Executive Officer and Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based upon their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes in Internal Control over
Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We operate in a heavily regulated industry that is highly sensitive to consumer protection, and we are subject to numerous federal, state and local laws. We are routinely involved in consumer complaints, regulatory actions and legal proceedings in the ordinary course of our business. We are also routinely involved in state regulatory audits and examinations, and occasionally involved in other governmental proceedings arising in connection with our respective business. The resolution of these matters, including the matters specifically described below, is not currently expected to have a material adverse effect on our financial position, financial performance or cash flows.
On December 11, 2020, a complaint was filed against UWM (f/k/a United Shore Financial Services, LLC)
in the U.S. District Court for the Eastern District of Michigan by three independent mortgage brokers. The plaintiffs in this matter seek class certification and monetary damages for alleged unpaid origination fees arising from a change in UWM’s commission policy. Following the Court’s opinion granting in part and denying in part UWM’s motion to dismiss, UWM filed its answer to the complaint on April 11, 2022. UWM denies the claims and intends to vigorously defend the matter.
On April 23, 2021, a complaint was filed in the U.S. District Court for the Middle District of Florida against the Company and Mat Ishbia, individually by
The Okavage Group, LLC ("Okavage") on behalf of itself and all other mortgage brokers who are, or have been clients of UWM and either Fairway Independent Mortgage or Rocket Pro TPO. After the Company and Mat Ishbia filed a motion to dismiss the complaint, Okavage filed a motion for leave to amend its complaint on August 2, 2021, and on August 3, 2021, the Court granted Okavage's motion and ordered the clerk to file Plaintiff’s First Amended Class Action Complaint with its corresponding attachments. In its amended complaint, Okavage dropped the Company as a defendant and added UWM as a defendant. Okavage purports to represent
the same set of mortgage brokers as in its original complaint and alleges that UWM’s new policy to no longer enter into new transactions with independent mortgage brokers who also sold mortgage loans to these two market participants amounted to anticompetitive conduct under federal and Florida antitrust laws. Okavage seeks class certification, treble damages, attorneys’ fees and injunctive relief. Our renewed motion to dismiss this action was filed on September 7, 2021. On July 27, 2022, the magistrate judge assigned to consider our motion to dismiss recommended that the amended complaint be dismissed in its entirety without prejudice, and that plaintiff be given fourteen days to file a second amended complaint if it so chooses.
On July 27,
2021, a complaint was filed against UWM in the U.S. District Court for the Eastern District of Michigan by a former employee of UWM. The complaint alleges that the former employee and similarly situated employees were required to work beyond a forty-hour work week and were not paid overtime in violation of the Fair Labor Standards Act. The former employee sought class certification and monetary damages for unpaid overtime wages, interest, liquidated damages, attorneys’ fees and costs. The parties entered into an agreement to settle all claims which was approved by the court on May 6, 2022. The amount of the settlement, which was immaterial, was previously reserved.
On February 3, 2022, UWM filed a complaint against America’s Moneyline, Inc. (“AML”), a former client, in the U.S.
District Court for the Eastern District of Michigan. The complaint alleges that AML breached the parties’ wholesale broker agreement by submitting mortgage loans and mortgage loan applications to certain select retail lenders. On February 25, 2022, AML filed its answer to the complaint and included certain counterclaims, including fraud and misrepresentation, against UWM. Our motion to dismiss the counterclaims is currently pending.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Share Repurchase Program
On May 9, 2021, the
Company's Board of Directors authorized a share repurchase program of up to $300.0 million in aggregate value of the Company’s Class A common stock effective May 11, 2021. The share repurchase program authorizes the Company to repurchase shares of the Company’s Class A common stock from time to time, in the open market or through privately negotiated transactions, at management's discretion based on market and business conditions, applicable legal requirements and other factors. Shares purchased will be retired. The program will expire on May 11, 2023 unless otherwise modified or terminated by the
Company's Board of Directors at any time in the Company's sole discretion.
There were no repurchases of the Company’s shares of its outstanding Class A common stock during the three and six months ended June 30, 2022. As of June 30, 2022, the remaining amount authorized under the share repurchase program was $218.4 million.
Item 5. Other Information
Item 1.01 Entry into a Material Definitive Agreement.
On
August 8, 2022, UWM entered into the Revolving Credit Agreement, (the “Revolving Credit Agreement”), between UWM, as the borrower, and SFS Corp., as the lender. The Revolving Credit Agreement provides for, among other things, a $500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”).The Revolving Credit Facility has
an initial maturity date of August 8, 2023. Amounts borrowed under the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time,
and accrue interest at the Applicable Prime Rate (as defined in the Revolving Credit Agreement). UWM may utilize the Revolving Credit Facility in connection with: (i) operational and investment activities, including but not limited to funding and/or advances related to (a) servicing rights, (b) ‘scratch and dent’ loans, (c) margin requirements, and (d) equity in loans held for sale; and (ii) general corporate purposes.
The term of the Revolving Credit Facility shall automatically extend for an additional one year, unless notice for termination is provided by us or the Lender at least 60 days prior to the applicable Maturity Date (as defined in the Revolving Credit Agreement). Additionally, either we or the Lender may terminate all or any portion of the unutilized commitment under the Revolving Credit Facility upon 30 days prior notice, provided that any Revolving Loans outstanding upon the termination of Revolving Credit Facility
shall mature on the Maturity Date.
The Revolving Credit Agreement contains certain financial and operating covenants and restrictions, subject to a number of exceptions and qualifications, and the availability of funds under the Revolving Credit Facility is subject to our continued compliance with these covenants. The covenants include restrictions on our ability to (1) incur additional non-funding indebtedness unless either (y) the Fixed Charge Coverage Ratio (as defined in the Revolving Credit Agreement) is no less than 3.0 to 1.0 or (z) the Debt-to-Equity Ratio (as defined in the Revolving Credit Agreement) does not exceed 2.0 to 1.0, (2) merge, consolidate or sell assets, (3) make restricted payments, including distributions, (4) enter into transactions with affiliates, (5) enter into sale and leaseback transactions and (6) incur liens securing indebtedness.
UWM is a wholly
owned subsidiary of UWM Holdings, LLC. SFS Corp. currently holds approximately 94% of the Class B Common Units in UWM Holdings, LLC and controls approximately 79% of the combined voting power of our common stock.Mat Ishbia, our Chief Executive Officer and Chairman, is the President and sole director of SFS Corp. All of the voting stock of SFS Corp. is held by the Mat Ishbia South Dakota Trust, a directed trust (the “Trust”). The trustee of the Trust takes direction from Mat Ishbia, as trust advisor of the Trust, with respect to the voting and disposition of our common stock held by SFS Corp.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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Certain confidential portions of this exhibit were omitted by means of marking
such portions with brackets and asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed, or constituted personally identifiable information that is not material.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
