loanDepot Inc

Previous wording

The following discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with our consolidated financial statements and the accompanying notes included under Part I. Item 1 of this report. The results of operations described below are not necessarily indicative of the results to be expected for any future periods. This discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management’s expectations. See our cautionary language at the beginning of this report under “Special Note Regarding Forward-Looking Statements” and for a more complete discussion of the factors that could affect our future results refer to Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our 2023 Form 10-K and elsewhere in our filings with the SEC. Capitalized terms used but not otherwise defined herein have the meanings set forth in our Form 10-K.

Current wording

The following discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with our consolidated financial statements and the accompanying notes included under Part I. Item 1 of this report. The results of operations described below are not necessarily indicative of the results to be expected for any future periods. This discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management’s expectations. See our cautionary language at the beginning of this report under “Special Note Regarding Forward-Looking Statements” and for a more complete discussion of the factors that could affect our future results refer to Part I, Item 1A "Risk Factors" and Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Form 10-K and elsewhere in our filings with the SEC. Capitalized terms used but not otherwise defined herein have the meanings set forth in our Form 10-K.

Previous wording

Our mortgage loan refinancing volumes (and to a lesser degree, our purchase volumes), balance sheets, and results of operations are influenced by changes in interest rates and how we effectively manage the related interest rate risk. The majority of our assets are subject to interest rate risk, including LHFS, IRLCs, servicing rights and mandatory trades, forward sales contracts, interest rate swap futures and put options. We refer to such mandatory trades, forward sales contracts, interest rate swap futures and put options collectively as “Hedging Instruments.” As interest rates increase, our LHFS and IRLCs generally decrease in value while our Hedging Instruments utilized to hedge against interest rate risk typically increase in value. Rising interest rates cause our expected mortgage loan servicing revenues to increase due to a decline in mortgage loan prepayments which extends the average life of our servicing portfolio and increases the value of our servicing rights. Conversely, as interest rates decrease, our LHFS and IRLCs generally increase in value while our Hedging Instruments decrease in value. In a declining interest rate environment, borrowers tend to refinance their mortgage loans, which increases prepayment speeds and causes expected mortgage loan servicing revenues to decrease, which reduces the average life of our servicing portfolio and decreases the value of our servicing rights. Changes in fair value of our servicing rights are recorded as unrealized gains and losses in changes in fair value of servicing rights, net, in our consolidated statements of operations.

Current wording

Our mortgage loan refinancing volumes (and to a lesser degree, our purchase volumes), balance sheets, and results of operations are influenced by changes in interest rates and how we effectively manage the related interest rate risk. The majority of our assets are subject to interest rate risk, including LHFS, LHFI, IRLCs, servicing rights and mandatory trades, forward sales contracts, interest rate swap futures and put options. We refer to such mandatory trades, forward sales contracts, interest rate swap futures and put options collectively as “Hedging Instruments.” As interest rates increase, our LHFS, LHFI and IRLCs generally decrease in value while our Hedging Instruments utilized to hedge against interest rate risk typically increase in value. Rising interest rates cause our expected mortgage loan servicing revenues to increase due to a decline in mortgage loan prepayments which extends the average life of our servicing portfolio and increases the value of our servicing rights. Conversely, as interest rates decrease, our LHFS, LHFI and IRLCs generally increase in value while our Hedging Instruments decrease in value. In a declining interest rate environment, borrowers tend to refinance their mortgage loans, which increases prepayment speeds and causes expected mortgage loan servicing revenues to decrease, which reduces the average life of our servicing portfolio and decreases the value of our servicing rights. Changes in fair value of our servicing rights are recorded as unrealized gains and losses in changes in fair value of servicing rights, net, in our consolidated statements of operations.

Previous wording

During 2022 and 2023, the Federal Reserve implemented a series of rate adjustments, resulting in a cumulative increase of 5.25 percentage points in the Federal Funds rate. The associated increase in mortgage interest rates has impacted mortgage loan origination volumes, impacting affordability and qualification for homebuyers. The mortgage industry continues to face decreased volumes due to elevated mortgage rates and low inventory of existing homes for sale, driven in part by a large number of existing homeowners benefiting from low-interest rates from previous purchases or refinance. In response to the challenges posed by these market dynamics, we introduced our Vision 2025 Plan in July 2022. Since the initial announcement of Vision 2025, we have consolidated our retail and corporate locations, exited our wholesale business, and expanded offerings on the HELOC platform. We established a joint venture with National HomeCorp, dedicated to extending credit to underserved communities and partnered with Habitat for Humanity to enhance housing conditions. We transitioned our servicing portfolio to an in-house platform; streamlined our leadership structures; and realigned other aspects of our cost structure. These non-volume related reductions were achieved through measures such as headcount reduction, business process optimization, and the consolidation of real estate assets. In November 2023, we announced an additional $120 million annualized productivity improvement program, including $100 million in non-volume related benefits such as vendor contract termination and renegotiation, optimized marketing spending, and corporate real estate cost reductions, that we expect will benefit our 2024 results. Through April 2024, we have achieved $111.6 million, or 93%, of our planned program improvements.

Current wording

During 2022 and 2023, the Federal Reserve implemented a series of rate adjustments, resulting in a cumulative increase of 5.25 percentage points in the Federal Funds rate. The associated increase in mortgage interest rates has impacted mortgage loan origination volumes, impacting affordability and qualification for homebuyers. The mortgage industry continues to face decreased volumes due to elevated mortgage rates and low inventory of existing homes for sale, driven in part by a large number of existing homeowners benefiting from low-interest rates from previous purchases or refinance. In response to the challenges posed by these market dynamics, we introduced our Vision 2025 Plan in July 2022. Since the initial announcement of Vision 2025, we have consolidated our retail and corporate locations, exited our wholesale business, and expanded offerings on the HELOC platform. We established a joint venture with National HomeCorp, dedicated to extending credit to underserved communities and partnered with Habitat for Humanity to enhance housing conditions. We transitioned our servicing portfolio to an in-house platform, streamlined our leadership structures, and realigned other aspects of our cost structure. These non-volume related reductions were achieved through measures such as headcount reduction, business process optimization, and the consolidation of real estate assets. In November 2023, we announced an additional $120 million annualized productivity improvement program, including $100 million in non-volume related benefits such as vendor contract termination and renegotiation, optimized marketing spending, and corporate real estate cost reductions, that we expect will benefit our 2024 results. During thethree months ended June 30, 2024, we achieved and surpassed our goal of $120.0 million in planned program improvements with a total of $121.1 million in annualized cost savings.

Previous wording

The cybersecurity incident had a material impact on the Company’s first quarter 2024 results, but, based on the information available to date, the Company does not expect the incident to have a material impact on full year 2024 results. In addition to lost revenue, the Company recorded approximately $14.7 million of expenses related to the cybersecurity incident, net of expected insurance recovery, during the three months ended March 31, 2024. The Company maintains cybersecurity insurance coverage to limit its exposure to losses such as those related to the Cybersecurity Incident. While the Company will be seeking reimbursement of some of the costs, expenses, and losses stemming from the Cybersecurity Incident by submitting claims to the Company’s cybersecurity insurers, the exact timing and amount of any such reimbursements is not known at this time.

Current wording

The Cybersecurity Incident had a material impact on the Company’s first and second quarter 2024 results, but, based on the information available to date, the Company does not expect the incident to have a material impact on full year 2024 results. In addition to lost revenue, the Company recorded approximately $26.9 million and $41.6 million of expenses related to the Cybersecurity Incident, net of expected insurance recovery, during the three and six months ended June 30, 2024, respectively, which includes an accrual of $25.0 million in connection with the related class action litigation. These cybersecurity related expenses are recognized in general and administrative expenses in the statements of operations. The Company maintains cybersecurity insurance coverage to limit its exposure to losses such as those related to the Cybersecurity Incident. While the Company has submitted claims to its cybersecurity insurers for reimbursement of some of the costs, expenses, and losses stemming from the Cybersecurity Incident, the exact timing and amount of any such reimbursements is not known at this time.

Previous wording

The Company has also been named as a defendant in several lawsuits related to this cybersecurity incident (Refer to Note 14. Commitments and Contingencies included in Item 1. Financial Statements), which are seeking various remedies, including monetary and injunctive relief. While we cannot presently quantify the full scope of expenses and other related impacts associated with this cybersecurity incident, including costs associated with any related current or future litigation or regulatory inquiries or investigations, the Company currently does not expect that the cybersecurity incident will have a material impact on its overall financial condition or on its ongoing results of operations.

Current wording

In connection with the Cybersecurity Incident, the Company has been named as a defendant in several lawsuits (Refer to Note 15. Commitments and Contingencies included in Item 1. Financial Statements), which are seeking various remedies, including monetary and injunctive relief. While we cannot presently quantify the full scope of expenses and other related impacts associated with this Cybersecurity Incident, including costs associated with any related current or future litigation or regulatory inquiries or investigations, in excess of the amounts accrued, the Company currently does not expect that the Cybersecurity Incident will have a material impact in excess of the amounts accrued on its overall financial condition or on its ongoing results of operations.

Previous wording

The decrease in net loss of $20.2 million was primarily due to a $14.9 million increase in total net revenues and a $6.5 million decrease in total expenses. The increase in total revenues was primarily due to an increase in gain on origination and sale of loans, net from higher gain on sale margin and an increase in servicing fee income due to an increase in ancillary income from higher interest rates and a higher average UPB of our servicing portfolio. The decrease in total expenses was driven by a reduction in salaries and benefits from fewer employees and lower marketing expense aligned with our Vision 2025 Plan.

Current wording

The increase in net loss of $16.1 million was primarily due to a $12.4 million increase in total expenses and $6.4 million decrease in total net revenues. The increase in total expenses was driven by costs associated with our cybersecurity incident and debt exchange transaction, offset by a reduction in salaries and benefits from fewer employees and lower marketing expense aligned with our Vision 2025 Plan. The decrease in total revenues was primarily due to a decrease in the fair value of servicing rights, net, partially offset by an increase in gain on origination and sale of loans, net from higher gain on sale margin and an increase in servicing fee income due to an increase in ancillary income from higher interest rates and higher average custodial balances.

Previous wording

Net Interest Income. Net interest income represents income earned on LHFS offset by interest expense on amounts borrowed under warehouse and other lines of credit to finance such loans until sold. A $68.0 million increase in the average balance of LHFS coupled with a $107.0 million increase in average balance of warehouse lines and higher cost of funds drove the decrease in net interest income.

Current wording

Net Interest Income. Net interest income primarily represents income earned on LHFS offset by interest expenses on amounts borrowed under warehouse and other lines of credit to finance these loans until sold. Our LHFS are generally tied to longer-term interest rates while our warehouse lines of credit are tied to short-term interest rates. Therefore, our net interest income is impacted by the term structure of market interest rates. The decrease in net interest income was due to higher cost of funds on warehouse lines as short-term interest rates were higher during the second quarter 2024 and a $60.0 million increase in average balance of warehouse lines, while the average balance of LHFS decreased $47.4 million.

Previous wording

Origination Income, Net. Origination income, net, reflects the fees that we earn, net of lender credits we pay, from originating loans. Origination income includes loan origination fees, processing fees, underwriting fees, and other fees collected from the borrower at the time of funding. Lender credits typically include rebates or concessions to borrowers for certain loan origination costs. The $1.6 million or 13.2% increase in origination income was the result of an increase in HELOC fees associated with the growth in HELOC volume, partially offset by a 7.8% decrease in loan origination volumes due to higher interest rates and lost volume during the Cybersecurity Incident.

Current wording

Origination Income, Net. Origination income, net, reflects the fees that we earn, net of lender credits we pay, from originating loans. Origination income includes loan origination fees, processing fees, underwriting fees, and other fees collected from the borrower at the time of funding. Lender credits typically include rebates or concessions to borrowers for certain loan origination costs. The $1.2 million, or 6.3%, increase in origination income, net, was the result of an increase in HELOC origination fees associated with the growth in HELOC volume, partially offset by a 2.9% decrease in loan origination volumes.

Previous wording

Servicing Fee Income. Servicing fee income reflects contractual servicing fees and ancillary and other fees (including late charges) related to the servicing of mortgage loans. The increase of $4.2 million or 3.5% reflects higher ancillary income from custodial funds due to higher interest rates.

Current wording

Servicing Fee Income. Servicing fee income reflects contractual servicing fees and ancillary and other fees (including late charges) related to the servicing of mortgage loans. The increase of $5.6 million or 4.6% reflects higher ancillary income from interest earned on custodial funds due to higher interest rates and higher average custodial balances.

Previous wording

Change in Fair Value of Servicing Rights, Net. Change in fair value of servicing rights, net includes (i) fair value gains or losses net of Hedging Instrument gains or losses; (ii) collection/realization of cash flows, which includes principal amortization and prepayments; and (iii) realized gains or losses on the sales of servicing rights. The increase of $7.5 million reflects lower fair value losses, net of hedge of $10.2 million, partially offset by higher prepayments of $1.3 million.

Current wording

Change in Fair Value of Servicing Rights, Net. Change in fair value of servicing rights, net includes (i) fair value gains or losses net of Hedging Instrument gains or losses; (ii) collection/realization of cash flows, which includes principal amortization and prepayments; and (iii) realized gains or losses on the sales of servicing rights. The decrease of $22.3 million reflects a increased loss of $15.7 million in fair value, net of hedging and a provision for losses of $5.0 million related to the two bulk sales completed during the quarter.

Previous wording

Personnel Expense. Personnel expense includes salaries, commissions, incentive compensation, benefits, and other employee costs. The $6.7 million or 4.8% decrease in personnel expense was attributable to lower salaries and benefits of $7.7 million from the 13.4% decrease in headcount related to previously announced cost savings initiatives, partially offset by increase in commissions of $1.0 million. Although loan origination volumes decreased, commissions increased due to guarantees paid associated with lost volume during the Cybersecurity Incident. As of March 31, 2024, we had 4,188 employees compared to 4,834 employees as of March 31, 2023.

Current wording

Personnel Expense. Personnel expense includes salaries, commissions, incentive compensation, benefits, and other employee costs. The $16.8 million or 10.6% decrease in personnel expense was attributable to lower salaries and benefits of $13.3 million from the 9.3% decrease in headcount related to previously announced costs savings initiatives, and volume- related declines in commissions of $3.5 million. As of June 30, 2024, we had 4,246 employees compared to 4,683 employees as of June 30, 2023.

Previous wording

Direct Origination Expense. Direct origination expense reflects the unreimbursed portion of direct out-of-pocket expenses that we incur in the loan origination process, including underwriting, appraisal, credit report, loan document and other expenses paid to non-affiliates. The $0.8 million or 4.6% increase in direct origination expense reflects higher credit reporting costs which more than offset the decrease in other costs associated with decreased loan originations volumes during the period.

Current wording

Direct Origination Expense. Direct origination expense reflects the unreimbursed portion of direct out-of-pocket expenses that we incur in the loan origination process, including underwriting, appraisal, credit report, loan document and other expenses paid to non-affiliates. The $4.3 million or 25.1% increase in direct origination expense was the result of increased credit reporting fees during the period.

Previous wording

General and Administrative Expense. General and administrative expense includes professional fees, data processing expense, communications expense, and other operating expenses. The $1.6 million or 2.9% increase in general and administrative expense included a $2.8 million increase in professional and consulting services primarily attributable to the Cybersecurity Incident, partially offset by a $0.8 million reduction in impairment and other real estate exit costs. In addition, $6.0 million of other cybersecurity expenses were incurred in the first quarter ended March 31, 2024 and were offset by decreases in data processing, communications, and other expenses.

Current wording

General and Administrative Expense. General and administrative expense includes professional fees, data processing expense, communications expense, and other operating expenses. The $18.3 million or 33.5% increase in general and administrative expense is primarily related to a $20.7 million increase in professional and consulting services as the result of cybersecurity related costs and litigation settlement accrual, offset by a $0.8 million reduction in impairment and other real estate exit costs.

Previous wording

The increase in gain on origination and sale of loans, net was primarily driven by higher gain on sale margin and lower provision for loan losses, partially offset by a reduction in volume due to higher interest rates and lost volume during the Cybersecurity Incident.

Current wording

The increase in gain on origination and sale of loans, net was primarily driven by higher gain on sale margin and a recovery of loan losses, partially offset by a reduction in volume due to higher interest rates and lost volume during the Cybersecurity Incident.

Previous wording

Other Income. Other income includes our pro rata share of net earnings from joint ventures, fee income from title, escrow and settlement services for mortgage loan transactions performed by LDSS, the fair value changes in our trading securities, and interest on cash deposits. The decrease of $5.3 million or 26.1% was primarily the result of a decrease of $1.2 million in escrow and title fee income due to decreased mortgage loan settlement activity, a $1.6 million decrease in trading security income from reduced fair value gains, a $1.5 million decrease in income from joint ventures, and a $0.9 million decrease in income on cash deposits from lower average cash balances, partially offset by increasing interest rates.

Current wording

Other Income. Other income includes our pro rata share of net earnings from joint ventures, fee income from title, escrow and settlement services for mortgage loan transactions performed by LDSS, the fair value changes in our trading securities, interest on cash deposits and interest income and fair value gains or losses from loans held for investment. The decrease of $7.0 million, or 18.8%, is primarily related to a $2.9 million decrease in income from joint ventures, a $2.6 million decrease in escrow and title fee income due to decreased mortgage loan settlement activity, and $2.3 million increase in trading securities fair value losses. partially offset by $0.8 million in income related to loans held for investment.

Previous wording

Marketing and Advertising Expense. The $7.6 million or 21.1% decrease in marketing expense primarily reflects the lower level of market refinance volume available to route to our consumer direct channel as well as our decision to suspend certain marketing expenditures during the Cybersecurity Incident.

Current wording

Marketing and Advertising Expense. The decrease of $11.1 million or 15.7% primarily reflects the lower level of market refinance volume available to route to our consumer direct channel as well as our decision to suspend certain marketing expenditures during the Cybersecurity Incident.

Previous wording

Servicing Expense. The increase of $3.4 million or 70.9% in servicing expense reflects an increase in default and loss mitigation expense associated with an increase in our servicing portfolio, increase in delinquencies and average age of loans serviced.

Current wording

Servicing Expense. The increase of $6.1 million or 58.1% in servicing expense reflects an increase in default and loss mitigation expense associated with an increase in delinquencies and average age of loans serviced, partially offset by a decrease in our servicing portfolio.

Previous wording

Loans Held for Sale, at Fair Value. Loans held for sale, at fair value, are primarily fixed and variable rate, 15- to 30-year term first-lien loans that are secured by residential property. The $167.2 million or 7.8% increase reflects $4.6 billion in loan originations and loan repurchase activity, partially offset by $4.4 billion in loan sales.

Current wording

Loans Held for Sale, at Fair Value. Loans held for sale, at fair value, are primarily fixed and variable rate, 15- to 30-year term first-lien loans that are secured by residential property. The $245.1 million or 11.5% increase reflects $10.5 billion in loan originations, partially offset by $10.2 billion in loan sales and a $122.5 million transfer of loans to loan held for investment.

Previous wording

Warehouse and Other Lines of Credit. The increase of $122.6 million or 6.3% was the result of loan originations outpacing loan sales by $119.0 million during the three months ended March 31, 2024.

Current wording

Warehouse and Other Lines of Credit. The increase of $266.1 million or 13.7% was the result of loan originations outpacing loan sales by $304.7 million during the six months ended June 30, 2024.

Previous wording

Equity. The decrease was primarily attributed to a net loss of $71.5 million and the repurchase of treasury shares, at a cost of $0.4 million to net settle and withhold tax on vested RSUs, partially offset by stock-based compensation of $4.9 million .

Current wording

Equity. Total equity was $578.9 million and $704.5 million as of June 30, 2024 and December 31, 2023, respectively. The decrease was attributed to a net loss of $137.4 million and the repurchase of treasury shares at cost of $1.0 million to net settle and withhold tax on vested RSUs, partially offset by stock-based compensation of $10.8 million and an increase to additional paid in capital of $2.1 million primarily related to the TRA liability and deferred taxes.

Previous wording

Our liquidity reflects our ability to meet current and potential cash requirements. We forecast the need to have adequate liquid funds available to operate and grow our business. As of March 31, 2024, unrestricted cash and cash equivalents were $603.7 million and committed and uncommitted available capacity under our warehouse and other lines of credit was $1.1 billion.

Current wording

Our liquidity reflects our ability to meet current potential cash requirements. We forecast the need to have adequate liquid funds available to operate and grow our business. As of June 30, 2024, unrestricted cash and cash equivalents were $533.2 million and committed and uncommitted available capacity under our warehouse and other lines of credit was $0.8 billion.

Previous wording

Our lenders require us to comply with various financial covenants including tangible net worth, liquidity, leverage ratios and profitability. As of March 31, 2024, the Company amended certain warehouse lines and debt obligations related to certain profitability covenants, following which the Company was in compliance with all covenants. Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we may amend or obtain waivers in the future in order to maintain compliance with such financial covenants. Our lenders are not required to grant any such amendments or waivers and may determine not to do so.

Current wording

Our lenders require us to comply with various financial covenants including tangible net worth, liquidity, leverage ratios and profitability. As of June 30, 2024, the Company amended certain warehouse lines and debt obligations related to certain profitability covenants, following which we were in full compliance with all financial covenants. Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to operate our business and obtain the financing necessary to achieve that purpose.

Previous wording

As seller and servicer, we are subject to minimum net worth, liquidity and other financial requirements. In 2022, both FHFA and Ginnie Mae revised these requirements. Effective from September 30, 2023, minimum net worth requirements for FHFA and Ginnie Mae include a base of $2.5 million plus percentages of the seller/servicer’s residential first lien mortgage servicing UPB serviced for each agency and a percentage of other non-agencies servicing UPB. Base liquidity for the agencies depends on the remittance type and includes specific percentages of the seller/servicer's residential first lien mortgage servicing UPB for each agency, along with a percentage for other non-agencies servicing UPB. Large non-depositories require a liquidity buffer based on UPB for FHFA and Ginnie Mae. The capital ratio for FHFA and Ginnie Mae requires tangible net worth/total assets to be equal to or greater than 6% for both agencies.

Current wording

As seller and servicer, we are subject to minimum net worth, liquidity and other financial requirements. In 2022, both FHFA and Ginnie Mae revised these requirements. Effective from September 30, 2023, minimum net worth requirements for FHFA and Ginnie Mae include a base of $2.5 million plus percentages of the seller/servicer’s residential first lien mortgage servicing UPB serviced for each agency and a percentage of other non-agencies servicing UPB. Base liquidity for the agencies depends on the remittance type and includes specific percentages of the seller/servicer's residential first lien mortgage servicing UPB for each agency, along with a percentage for other non-agencies servicing UPB. Large non-depositories require a liquidity buffer based on UPB for FHFA and Ginnie Mae. The capital ratio for FHFA and Ginnie Mae requires tangible net worth/total assets to be equal to or greater than 6% for both agencies. As of June 30, 2024, we were in compliance with these financial requirements.

Previous wording

Ginnie Mae is implementing a risk-based capital requirement effective December 31, 2024. We are assessing the impact of this upcoming requirement but anticipate no significant change in our ability to meet financial eligibility requirements.

Current wording

Ginnie Mae is implementing a risk-based capital requirement effective December 31, 2024. We are assessing the impact of these upcoming requirements but anticipate no significant change in our ability to meet financial eligibility requirements.

Previous wording

We primarily finance mortgage loans through borrowings under our warehouse and other lines of credit. Under these facilities, we transfer specific loans to our counterparties and receive funds from them. Simultaneously, there is an agreement in place where the counterparties commit to transferring the loans back to us, either at the date the loans are sold or upon our request , and we provide the funds in return. We do not recognize these transfers as sales for accounting purposes. During the three months ended March 31, 2024, our loans remained on warehouse lines for an average of 22 days. Our warehouse facilities are generally short-term borrowings with original maturities between one and two years and our securitization facility is a three year term. We utilize both committed and uncommitted loan funding facilities and we evaluate our needs under these facilities based on forecasted volume of loan originations and sales. Our liquidity could be affected as lenders may reassess their exposure to the mortgage origination industry and potentially limit access to uncommitted mortgage warehouse financing or increase associated costs. Moreover, there may be reduced demand from investors to acquire our mortgage loans in the secondary market, further impacting our liquidity. Approximately 73% of the mortgage loans that we originated during the three months ended March 31, 2024 were sold in the secondary mortgage market either directly to Fannie Mae and Freddie Mac or securitized into MBS guaranteed by Ginnie Mae. We also sell loans to many private investors.

Current wording

We primarily finance mortgage loans through borrowings under our warehouse and other lines of credit. Under these facilities, we transfer specific loans to our counterparties and receive funds from them. Simultaneously, there is an agreement in place where the counterparties commit to transferring the loans back to us, either at the date the loans are sold or upon our request, and we provide the funds in return. We do not recognize these transfers as sales for accounting purposes. During the three months ended June 30, 2024, our loans remained on warehouse lines for an average of 17 days. Our warehouse facilities are generally short-term borrowings with original maturities between one and two years and our securitization facility is a three year term. We utilize both committed and uncommitted loan funding facilities and we evaluate our needs under these facilities based on forecasted volume of loan originations and sales. Our liquidity could be affected as lenders may reassess their exposure to the mortgage origination industry and potentially limit access to uncommitted mortgage warehouse financing or increase associated costs. Moreover, there may be reduced demand from investors to acquire our mortgage loans in the secondary market, further impacting our liquidity. Approximately 72% of the mortgage loans that we originated during the six months ended June 30, 2024 were sold in the secondary mortgage market either directly to Fannie Mae and Freddie Mac or securitized into MBS guaranteed by Ginnie Mae. We also sell loans to many private investors.

Previous wording

As of March 31, 2024, we maintained revolving lines of credit with eight counterparties providing warehouse and securitization facilities with borrowing capacity totaling $3.1 billion of which $901.0 million was committed. Our $3.1 billion of capacity as of March 31, 2024 was comprised of $3.1 billion with maturities staggered throughout 2024. As of March 31, 2024, we had $2.1 billion of borrowings outstanding and $1.1 billion of additional availability under our facilities. Warehouse and other lines of credit are further discussed in Note 8-Warehouse and Other Lines of Credit of the Notes to Consolidated Financial Statements contained in Item 1.

Current wording

As of June 30, 2024, we maintained revolving lines of credit with eight counterparties providing warehouse and securitization facilities with borrowing capacity totaling $3.1 billion of which $0.9 billion was committed. Our $3.1 billion of capacity as of June 30, 2024 was comprised of $3.1 billion with maturities staggered throughout 2024 and through April 2025. As of June 30, 2024, we had $2.2 billion of borrowings outstanding and $0.8 billion of additional availability under our facilities. Warehouse and other lines of credit are further discussed in Note 9- Warehouse and Other Lines of Credit of the Notes to Consolidated Financial Statements contained in Item 1.

Previous wording

When we draw on our warehouse and securitization facilities we must pledge eligible loan collateral. Our warehouse line providers require us to make a capital investment, or “haircut.” upon financing the loan, which is generally based on product types and the market value of the loans. The haircuts are normally recovered from sales proceeds. As of March 31, 2024, we had a total of $8.4 million in restricted cash posted as collateral with our warehouse and securitization facilities, of which $5.3 million was the minimum requirement.

Current wording

When we draw on our warehouse and securitization facilities we must pledge eligible loan collateral. Our warehouse line providers require us to make a capital investment, or “haircut.” upon financing the loan, which is generally based on product types and the market value of the loans. The haircuts are normally recovered from sales proceeds. As of June 30, 2024, we had a total of $7.9 million in restricted cash posted as collateral with our warehouse and securitization facilities, of which $5.3 million was the minimum requirement.

Previous wording

MSR facilities and Term Notes provide financing for our servicing portfolio investments. As of March 31, 2024, the outstanding balance of our MSR facilities was $986.5 million net of $3.9 million deferred financing costs. The outstanding balance of Term Notes was $200.0 million. MSR facilities are secured by Ginnie Mae, Fannie Mae, or Freddie Mac MSRs, which amounted to $1.3 billion as of March 31, 2024 and Term Notes are secured by specific participation certificates relating to Ginnie Mae MSRs totaling $585.0 million as of the same date.

Current wording

MSR facilities and Term Notes provide financing for our servicing portfolio investments. As of June 30, 2024 the outstanding balance of our MSR facilities was $742.9 million net of $2.5 million deferred financing costs. The outstanding balance of Term Notes was $200.0 million. MSR facilities are secured by Ginnie Mae, Fannie Mae, or Freddie Mac MSRs, which amounted to $909.3 million as of June 30, 2024 and Term Notes are secured by specific participation certificates relating to Ginnie Mae MSRs totaling $596.1 million as of the same date.

Previous wording

Securities financing facilities provide financing for the retained interest securities associated with our securitizations. As of March 31, 2024, there were outstanding securities financing facilities of $77.5 million, secured by trading securities with a fair value of $91.5 million.

Current wording

Securities financing facilities provide financing for the retained interest securities associated with our securitizations. As of June 30, 2024 there were outstanding securities financing facilities of $75.3 million, secured by trading securities with a fair value of $89.5 million.

Previous wording

Servicing advance facilities provide financing for our servicing agreements. As servicer, we are required to fulfill contractual obligations such as principal and interest payments for certain investor as well as taxes, insurance, foreclosure costs, and other necessities to preserve the serviced assets. For GSE-backed mortgages, this obligation extends up to four months, and for other government agency-backed mortgages, it may extend even longer, especially for clients under forbearance plans. The size of servicing advance balances is influenced by delinquency rates and prepayment speeds. As of March 31, 2024, the outstanding balance on our servicing advance facilities was $59.8 million secured by servicing advance receivables totaling $75.6 million.

Current wording

Servicing advance facilities provide financing for our servicing agreements. As servicer, we are required to fulfill contractual obligations such as principal and interest payments for certain investor as well as taxes, insurance, foreclosure costs, and other necessities to preserve the serviced assets. For GSE-backed mortgages, this obligation extends up to four months, and for other government agency-backed mortgages, it may extend even longer, especially for clients under forbearance plans. The size of servicing advance balances is influenced by delinquency rates and prepayment speeds. As of June 30, 2024 the outstanding balance on our servicing advance facilities was $49.9 million secured by servicing advance receivables totaling $68.6 million.

Previous wording

Unsecured debt obligations as of March 31, 2024 consisted of Senior Notes totaling $1.0 billion net of $7.1 million of deferred financing costs. Periodically, and in accordance with applicable laws and regulations, we may take actions to reduce or repurchase our debt. These actions can include redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately-negotiated transactions. The decision on amount of debt to be reduced or repurchased depends on several factors, including market conditions, trading levels of our debt, our cash positions, compliance with debt covenants, and other relevant considerations. Debt obligations are further discussed in Note 9- Debt Obligations of the Notes to Consolidated Financial Statements contained in Item 1.

Current wording

Unsecured debt obligations as of June 30, 2024 consisted of Senior Notes totaling $805.3 million net of $10.4 million of deferred financing costs and a discount of $44.1 million. Periodically, and in accordance with applicable laws ,and regulations, we may take actions to reduce or repurchase our debt. These actions can include redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately-negotiated transactions. The decision on amount of debt to be reduced or repurchased depends on several factors, including market conditions, trading levels of our debt, our cash positions, compliance with debt covenants, and other relevant considerations. During the second quarter of 2024, we repurchased $478.0 million of 2025 Senior Notes in exchange for $340.6 million of 2027 Senior Notes and cash of $185.0 million resulting in a loss on extinguishment of debt of $5.7 million. Debt obligations are further discussed in Note 10- Debt Obligations of the Notes to Consolidated Financial Statements contained in Item 1.

Previous wording

Cash dividends are subject to the discretion of our board of directors and our compliance with applicable law, and depend on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, including the satisfaction of our obligations under the TRA, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant.

Current wording

Cash dividends are subject to the discretion of our board of directors and our compliance with applicable law, and depend on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, including the satisfaction of our obligations under the TRA, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant. Our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization or agreements of our subsidiaries, including agreements governing our indebtedness. Future agreements may also limit our ability to pay dividends.

Previous wording

As of March 31, 2024, we were party to mortgage loan participation purchase and sale agreements, pursuant to which we have access to uncommitted facilities that provide liquidity for recently sold MBS up to the MBS settlement date. These facilities, which we refer to as gestation facilities, are a component of our financing strategy and are off-balance sheet arrangements.

Current wording

As of June 30, 2024, we were party to mortgage loan participation purchase and sale agreements, pursuant to which we have access to uncommitted facilities that provide liquidity for recently sold MBS up to the MBS settlement date. These facilities, which we refer to as gestation facilities, are a component of our financing strategy and are off-balance sheet arrangements provided by certain warehouse lenders.

Previous wording

To provide investors with information in addition to our results as determined by GAAP, we disclose certain non-GAAP measures to assist investors in evaluating our financial results. We believe these non-GAAP measures provide useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. They facilitate company-to-company operating performance comparisons by backing out potential differences caused by variations in hedging strategies, changes in valuations, capital structures (affecting interest expense on non-funding debt), taxation, the age and book depreciation of facilities (affecting relative depreciation expense), and other cost or benefit items which may vary for different companies for reasons unrelated to operating performance. These non-GAAP measures include our Adjusted Total Revenue, Adjusted Net Income (Loss), Adjusted Diluted Earnings (Loss) Per Share (if dilutive), and Adjusted EBITDA (LBITDA). We exclude from these non-GAAP financial measures the change in fair value of MSRs and related hedging gains and losses as they represent non-cash, unrealized adjustments resulting from changes in valuation assumptions, mostly due to changes in market interest rates, and are not indicative of the Company’s operating performance or results of operation. We also exclude stock-based compensation expense, which is a non-cash expense, expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, professional fees and commission guarantees (but does not include ongoing costs such as associated litigation expenses), gains or losses on extinguishment of debt and disposal of fixed assets, non-cash goodwill impairment, and other impairment charges to intangible assets and operating lease right-of-use assets, as well as certain costs associated with our restructuring efforts, as management does not consider these costs to be indicative of our performance or results of operations. Adjusted EBITDA (LBITDA) includes interest expense on funding facilities, which are recorded as a component of “net interest income (expense)”, as these expenses are a direct operating expense driven by loan origination volume. By contrast, interest expense on our non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA (LBITDA). Adjustments for income taxes are made to reflect historical results of operations on the basis that it was taxed as a corporation under the Internal Revenue Code, and therefore subject to U.S. federal, state and local income taxes. Adjustments to Diluted Weighted Average Shares Outstanding assumes the pro forma conversion of weighted average Class C shares to Class A common stock. These non-GAAP measures hav…

Excerpt shortened here; the source contains the full paragraph.

Current wording

To provide investors with information in addition to our results as determined by GAAP, we disclose certain non-GAAP measures to assist investors in evaluating our financial results. We believe these non-GAAP measures provide useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. They facilitate company-to-company operating performance comparisons by backing out potential differences caused by variations in hedging strategies, changes in valuations, capital structures (affecting interest expense on non-funding debt), taxation, the age and book depreciation of facilities (affecting relative depreciation expense), and other cost or benefit items which may vary for different companies for reasons unrelated to operating performance. These non-GAAP measures include our Adjusted Total Revenue, Adjusted Net Income (Loss), Adjusted Diluted Earnings (Loss) Per Share (if dilutive), and Adjusted EBITDA (LBITDA). We exclude from these non-GAAP financial measures the change in fair value of MSRs, gains (losses) from the sale of MSRs, and related hedging gains and losses that represent realized and unrealized adjustments resulting from changes in valuation, mostly due to changes in market interest rates, and are not indicative of the Company’s operating performance or results of operation. Beginning in the second quarter of 2024, we began to include the gains (losses) from the sale of MSRs in valuation changes in servicing rights, net of hedging gains and losses to appropriately capture all valuation changes in MSRs up to and including the sales date. Prior periods have been revised to conform with this new presentation. We also exclude stock-based compensation expense, which is a non-cash expense, expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, professional fees, including legal expenses, litigation settlement costs, and commission guarantees, gains or losses on extinguishment of debt and disposal of fixed assets, non-cash goodwill impairment, and other impairment charges to intangible assets and operating lease right-of-use assets, as well as certain costs associated with our restructuring efforts, as management does not consider these costs to be indicative of our performance or results of operations. Adjusted EBITDA (LBITDA) includes interest expense on funding facilities, which are recorded as a component of “net interest income (expense)”, as these expenses are a direct operating expense driven by loan origination volume. By contrast, interest expense on our non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA (LBITDA). Adjustments for income taxes are made to reflect historical result…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

(1)Reflects netloss to Class A common stock and Class D common stock from the pro forma exchange of Class C common stock.

Current wording

(1)Reflects net loss to Class A common stock and Class D common stock from the pro forma exchange of Class C common stock.

Previous wording

(3)Represents the change in the fair value of servicing rights due to changes in valuation inputs or assumptions, net of gains or losses from derivatives hedging servicing rights.

Current wording

(3)Represents the change in the fair value of servicing rights due to changes in valuation inputs or assumptions, net of gains or losses from derivatives hedging servicing rights, and gains (losses) from the sale of MSRs. Beginning in the second quarter of 2024, we began to include the gains (losses) from the sale of MSRs in valuation changes in servicing rights, net of hedging gains and losses to appropriately capture all valuation changes in MSRs up to and including the sales date. Prior periods have been revised to conform with this new presentation. Refer to Note 5 - Servicing Rights, at Fair Value.

Previous wording

(5)Represents expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, as well as related professional fees and commission guarantees (but does not include ongoing costs such as associated litigation expenses).

Current wording

(5)Represents expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, professional fees including legal expenses, litigation settlement costs, and commission guarantees. During the quarter ended June 30, 2024, the Company recorded an accrual of $25 million in connection with class action litigation related to the Cybersecurity Incident.

Previous wording

(6)Amounts represent the income tax effect using the aforementioned effective income tax rates, excluding certain discrete tax items.

Current wording

(7)Amounts represent the income tax effect using the aforementioned effective income tax rates, excluding certain discrete tax items.

Previous wording

(1)Represents other interest expense, which includes gain on extinguishment of debt and amortization of debt issuance costs, in the Company’s consolidated statement of operations.

Current wording

(1)Represents other interest expense, which includes gain or loss on extinguishment of debt and amortization of debt issuance costs, in the Company’s consolidated statement of operations.

Previous wording

(4)Represents expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, as well as related professional fees and commission guarantees (but does not include ongoing costs such as associated litigation expenses).

Current wording

(4)Represents expenses directly related to the Cybersecurity Incident, net of expected insurance recoveries, including costs to investigate and remediate the Cybersecurity Incident, the costs of customer notifications and identity protection, professional fees including legal expenses, litigation settlement costs, and commission guarantees. During the quarter ended June 30, 2024, the Company recorded an accrual of $25 million in connection with class action litigation related to the Cybersecurity Incident.