UWM HOLDINGS CORPORATION 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 consolidated financial statements and the related notes and other information included elsewhere in this Annual Report on Form 10-K (the "Form 10-K"). 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" and elsewhere in this Form 10-K.
Business Overview
We are the largest overall residential mortgage lender in theU.S. , despite originating mortgage loans exclusively through the wholesale channel. With 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 theDistrict of Columbia . For the last eight years, including the year endedDecember 31, 2022 , we have also been the largest wholesale mortgage lender in theU.S. by closed loan volume, with approximately 38% market share of the wholesale channel for the year endedDecember 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 andVA 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, although there have been no loan sales through our private label securitization transactions in 2022. 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). As ofDecember 31, 2022 , the self-warehouse amount was$181.3 million , and our daily average self-warehouse balances were$185.1 million and$184.1 million for the years endedDecember 31, 2022 and 2021, respectively. 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 consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on the Company's 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:
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• 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 initially 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 Brokers, 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 increase or decrease, respectively, in the fair value of the liability for the Public and Private Warrants, the increase or decrease, respectively, in the Tax Receivable Agreement liability, and the decrease or increase, respectively, in the fair value of retained investment securities).
Years Ended
For the year endedDecember 31, 2022 , we originated$127.3 billion in residential mortgage loans, which was a decrease of$99.2 billion , or 44%, from the year endedDecember 31, 2021 . We generated$931.9 million of net income during the year endedDecember 31, 2022 , which was a decrease of$636.5 million , or 40.6%, compared to net income of$1.57 billion for the year endedDecember 31, 2021 . Adjusted EBITDA for the year endedDecember 31, 2022 was$282.4 million as compared to$1.42 billion for the year endedDecember 31, 2021 . Refer to the "Non-GAAP Financial Measures" section below for a detailed discussion of how we define and calculate Adjusted EBITDA. For the year endedDecember 31, 2021 , we originated$226.5 billion in residential mortgage loans, which was an increase of$44.0 billion , or 24%, from the year endedDecember 31, 2020 . We generated$1.57 billion of net income during the year endedDecember 31, 2021 , which was a decrease of$1.81 billion , or 53.6%, compared to net income of$3.38 billion for the year endedDecember 31, 2020 . Adjusted EBITDA for the year endedDecember 31, 2021 was$1.42 billion as compared to$3.45 billion for the year endedDecember 31, 2020 . 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 byU.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 underU.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 47 -------------------------------------------------------------------------------- Table of Contents be considered in isolation or as an alternative to revenue, net income or any other performance measures derived in accordance withU.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 (for periods subsequent to the election of the fair value method accounting for MSRs - see Note 1 to the consolidated financial statements), and the impairment or recovery of MSRs (for periods prior to the election of the fair value method of accounting for MSRs), 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, or impairment or recovery of MSRs prior to the election of the fair value method of accounting for MSRs, 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, 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
For the year ended December 31,
($ in thousands) 2022 2021 2020
Net income $ 931,858 $ 1,568,400 $ 3,382,510
Interest expense on non-funding debt 132,647 86,086 28,062
Provision for income taxes 2,811 9,841 2,450
Depreciation and amortization 45,235 35,098 16,820
Stock-based compensation expense 7,545 6,467 -
Change in fair value of MSRs due to valuation inputs or assumptions (1)
(868,803) (286,348) -
(Recovery)/Impairment of MSRs (2) - - 19,584
Deferred compensation, net(3) 7,370 21,900 4,665
Change in fair value of Public and Private Warrants (4)
(7,683) (36,105) -
Change in Tax Receivable Agreement liability (5) 3,200 11,937 -
Change in fair value of investment securities (6) 28,222 1,061 -
Adjusted EBITDA $ 282,402 $ 1,418,337 $ 3,454,091
(1)Reflects the change ((increase)/decrease) in fair value of MSRs 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 consolidated financial
statements.
(2)Reflects temporary impairments recorded as a valuation allowance against the
value of MSRs, and corresponding
subsequent recoveries.
(3)Reflects management incentive bonuses under our long-term incentive plan that
are accrued when earned, net of cash payments.
(4)Reflects the change (increase/(decrease)) in the fair value of the Public and
Private Warrants.
(5)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 consolidated financial statements for
additional information related to the Tax Receivable Agreement.
(6)Reflects the change (decrease/(increase)) in the fair value of the retained
investment securities.
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-------------------------------------------------------------------------------- Table of Contents Results of Operations for the Years EndedDecember 31, 2022 , 2021 and 2020 For the year ended December 31, ($ in thousands) 2022 2021 2020 Revenue Loan production income$ 981,988 $ 2,585,807 $ 4,551,415 Loan servicing income 792,072 638,738 288,304 Change in fair value of mortgage servicing rights 284,104 (587,813) - Gain on sale of mortgage servicing rights - 1,791 (62,285) Interest income 314,462 331,770 161,160 Total revenue, net 2,372,626 2,970,293 4,938,594 Expenses Salaries, commissions and benefits 552,886 697,680 552,143 Direct loan production costs 90,369 72,952 54,459 Marketing, travel, and entertainment 74,168 62,472 20,367 Depreciation and amortization 45,235 35,098 16,820 General and administrative 179,549 133,334 98,856 Servicing costs 166,024 108,967 70,835 Amortization, impairment and pay-offs of mortgage servicing rights - - 573,118 Interest expense 305,987 304,656 167,036 Other expense/(income) 23,739 (23,107) - Total expenses 1,437,957 1,392,052 1,553,634 Earnings before income taxes 934,669 1,578,241 3,384,960 Provision for income taxes 2,811 9,841 2,450 Net income 931,858 1,568,400 3,382,510 Net income attributable to non-controlling interest 890,143 1,469,955 N/A Net income attributable to UWM Holdings Corporation$ 41,715 $ 98,445 N/A 49
-------------------------------------------------------------------------------- Table of Contents Loan production income
The table below provides details of the composition of our loan production for each of the periods presented:
Loan Production Data: For the year ended December 31, ($ in thousands) 2022 2021 2020 Loan origination volume by type Purchase: Conventional$ 62,274,030 $ 63,026,794 $ 33,717,939 Government 23,773,422 14,833,808 8,619,874 Jumbo and other 4,782,879 9,395,143 583,299 Total purchase$ 90,830,331 $ 87,255,745 $ 42,921,112 Refinance: Conventional$ 27,059,252 $ 120,152,065 $ 119,807,647 Government 7,834,636 12,034,583 18,921,473 Jumbo and other 1,561,242 7,061,299 897,409 Total refinance 36,455,130 139,247,947 139,626,529 Total loan origination volume
$ 365 $ 346 $ 325 Weighted average loan-to-value ratio
79.67 % 71.68 % 71.01 %
Weighted average credit score 738 750 758
Weighted average note rate 4.82 % 2.90 % 3.01 %
Percentage of loans sold
To GSEs 94 % 90 % 99 %
To other counterparties 6 % 10 % 1 %
Servicing-retained 97 % 99 % 100 %
Servicing-released 3 % 1 % - %
The components of loan production income for the periods presented were as
follows:
For the year ended December
31, Change
($ in thousands) 2022 2021 Change %
Primary gain (loss) $ (1,479,762) $ (244,134) $ (1,235,628) 506.1 %
Loan origination fees 278,594 477,759 (199,165) (41.7) %
Provision for representation and
warranty obligations (30,416) (45,301) 14,885 (32.9) %
Capitalization of MSRs 2,213,572 2,397,483 (183,911) (7.7) %
Loan production income $ 981,988 $ 2,585,807 $ (1,603,819) (62.0) %
Gain margin(1) 0.77 % 1.14 % (0.37) %
For the year ended December
31, Change
($ in thousands) 2021 2020 Change %
Primary gain (loss) $ (244,134) $ 2,291,731 $ (2,535,865) (110.7) %
Loan origination fees 477,759 399,996 77,763 19.4 %
Provision for representation and
warranty obligations (45,301) (36,510) (8,791) 24.1 %
Capitalization of MSRs 2,397,483 1,896,198 501,285 26.4 %
Loan production income $ 2,585,807 $ 4,551,415 $ (1,965,608) (43.2) %
Gain margin(1) 1.14 % 2.49 % (1.35) %
(1) Represents total loan production income divided by total loan origination volume for the applicable period.
Loan production income was$982.0 million for the year endedDecember 31, 2022 , a decrease of$1.60 billion , or 62.0%, as compared to$2.59 billion for the year endedDecember 31, 2021 . The decrease in loan production income was 50 -------------------------------------------------------------------------------- Table of Contents primarily driven by a decrease in loan production volume, along with a decrease of 37 basis points in gain margin, from 114 basis points for the year endedDecember 31, 2021 to 77 basis points for the same period in 2022. Loan production volume declined$99.2 billion , or 44%, from$226.5 billion to$127.3 billion during the year endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to lower refinance volume as a result of the higher primary mortgage interest rate environment during 2022, partially offset by an increase in purchase volume despite the higher interest rate environment and an overall decline in purchase volume for the industry. The decrease in gain margin from the prior year period was primarily due to an increase in primary loss due to the increasing interest rate and the competitive mortgage pricing environments in 2022, impacted by a pricing initiative launched by UWM in the second half of 2022 aimed at long-term growth of the wholesale channel and our market share. Management believes that the pricing initiative has been successful, as evidenced by the Company becoming the largest residential mortgage lender in the country for the second half of 2022 and the increased market share of the wholesale channel. Loan production income was$2.59 billion for the year endedDecember 31, 2021 , a decrease of$1.97 billion , or 43.2%, as compared to$4.55 billion for the year endedDecember 31, 2020 . The decrease in loan production income was primarily driven by a decrease of 135 basis points in gain margin, from 249 basis points during the year endedDecember 31, 2020 to 114 basis points for the same period in 2021. The decrease in gain margin was due to a decline in the primary/secondary mortgage interest rate spread, driven by a rising interest rate environment in 2021 as well as increased marketplace competition. The effects of the decrease in gain margin were partially offset by an increase of$44.0 billion , or 24%, in loan production volume (from$182.5 billion to$226.5 billion ) during the year endedDecember 31, 2021 , as compared to the same period in 2020.
Loan servicing income and Servicing costs
The table below summarizes loan servicing income and costs for each of the periods presented (servicing costs include amounts paid to sub-servicers and other direct costs of servicing, but exclude the costs of team members that oversee UWM's servicing operations):
For the year ended December 31, Change Change
($ in thousands) 2022 2021 $ %
Contractual servicing fees $ 781,109 $ 632,276 $ 148,833 23.5 %
Late, ancillary and other fees 10,963 6,462 4,501 69.7 %
Loan servicing income $ 792,072 $ 638,738 $ 153,334 24.0 %
Servicing costs 166,024 108,967 57,057 52.4 %
For the year ended December 31, Change Change
($ in thousands) 2021 2020 $ %
Contractual servicing fees $ 632,276 $ 284,257 $ 348,019 122.4 %
Late, ancillary and other fees 6,462 4,047 2,415 59.7 %
Loan servicing income $ 638,738 $ 288,304 $ 350,434 121.6 %
Servicing costs 108,967 70,835 38,132 53.8 %
For the year ended December 31,
($ in thousands) 2022 2021 2020
Average UPB of loans serviced $ 309,141,653 $ 256,130,021 $ 121,467,440
Average number of loans serviced 961,140 821,406 387,791
Loan servicing income was $792.1 million for the year ended December 31, 2022 ,
an increase of $153.3 million , or 24.0%, as compared to $638.7 million for the
year ended December 31, 2021 . The increase in loan servicing income during the
year ended December 31, 2022 was primarily driven by the increased average
servicing portfolio.
Servicing costs increased $57.1 million for the year ended December 31, 2022
from the year ended December 31, 2021 as a result of the increase in the average
servicing portfolio and Ginnie Mae loan loss mitigation expenses in 2022.
Loan servicing income was $638.7 million for the year ended December 31, 2021 ,
an increase of $350.4 million , or 121.6%, as compared to $288.3 million for the
year ended December 31, 2020 . The increase in loan servicing income during
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the year ended December 31, 2021 was driven by the growing servicing portfolio
as a result of the additional origination volume, offset slightly by one bulk
sale of MSRs in 2021 (total UPB of $22.7 billion ).
Servicing costs increased
For the periods presented below, our loan servicing portfolio consisted of the
following:
December 31, December 31,
($ in thousands) 2022 2021
UPB of loans serviced 312,454,025 319,807,457
Number of loans serviced 967,050 1,017,027
MSR portfolio delinquency count (60+ days) as % of total 0.85 % 0.81 %
Weighted average note rate 3.64 % 2.94 %
Weighted average service fee 0.2862 % 0.2624 %
Change in Fair Value of Mortgage Servicing Rights
The change in fair value of MSRs was a net increase of$284.1 million for the year endedDecember 31, 2022 as compared with a net decrease of$587.8 million for the year endedDecember 31, 2021 . The change in fair value for the year endedDecember 31, 2022 was primarily attributable to an increase in fair value of approximately$868.8 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$556.9 million due to realization of cash flows and decay (including loans paid in full) and approximately$27.8 million of net reserves and transaction costs for bulk MSR sales. The net decrease in fair value for the year endedDecember 31, 2021 of approximately$587.8 million was attributable to declines of approximately$859.3 million due to realization of cash flows and decay (including loans paid in full) and approximately$14.9 million of net reserves and transaction costs for bulk MSR sales, offset by an increase of approximately$286.3 million resulting from changes in valuation inputs/assumptions, such as changes in interest rates.
Interest income and Interest expense
For the periods presented below, interest income and the components of and total interest expense were as follows:
December 31, December 31, December 31,
($ in thousands) 2022 2021 2020
Interest income $ 314,462 $ 331,770 $ 161,160
Less: Interest expense on funding facilities 173,340 218,570 138,974
Net interest income $ 141,122 $
113,200
Interest expense on non-funding debt$ 132,647 $ 86,086 $ 28,062 Total interest expense 305,987 304,656 167,036 Net interest income (interest income less interest expense on funding facilities) was$141.1 million for the yearDecember 31, 2022 , an increase of$27.9 million , or 25%, as compared to$113.2 million for the year endedDecember 31, 2021 . This increase was primarily driven by a decrease in interest expense on funding facilities, due to lower average warehouse borrowing balances (due to lower production volume in 2022) and higher escrow credits provided by warehouse lenders, offset by higher interest rates on warehouse facilities (all of which are based on variable interest rate benchmarks plus a spread). Interest income decreased by a lesser amount due to decreases in the average balances of mortgage loans at fair value (due to lower production volume in 2022), offset by higher average note rates on loans at fair value. Interest expense on non-funding debt was$132.6 million for the yearDecember 31, 2022 , an increase from$86.1 million for the year endedDecember 31, 2021 , due to additional interest in 2022 on the$700.0 million of 2029 Senior Notes issued inApril 2021 , and the$500.0 million of 2027 Senior Notes issued inNovember 2021 , as well as interest on borrowings on the the MSR Facility established at the end of the third quarter of 2022.
Net interest income was
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income due to increased loan production and longer loan hold times for certain
loans during the fourth quarter, which increased our average balances of loans
at fair value, partially offset by a slight decline in average loan interest
rates. This was partially offset by higher interest expense on warehouse
facilities resulting from increased loan production and longer loan hold times
during 2021.
Interest expense on non-funding debt was $86.1 million for the year December 31,
2021 , an increase from $28.1 million for the year ended December 31, 2020 . The
increase was primarily due to additional interest in 2021 on the $800.0 million
of 2025 Senior Notes issued in November of 2020, $700.0 million of 2029 Senior
Notes issued in April 2021 , and $500.0 million of 2027 Senior Notes issued in
November 2021 , offset slightly by lower interest on the operating lines of
credit which were paid off and terminated in early 2021.
Other expenses
Other expenses (excluding servicing costs and interest expense, explained above) for the periods presented were as follows:
For the year ended December 31, Change Change
2022 2021 $ %
Salaries, commissions and benefits $ 552,886 $ 697,680 $ (144,794) (20.8) %
Direct loan production costs 90,369 72,952 17,417 23.9 %
Marketing, travel, and entertainment 74,168 62,472 11,696 18.7 %
Depreciation and amortization 45,235 35,098 10,137 28.9 %
General and administrative 179,549 133,334 46,215 34.7 %
Other expense/(income) 23,739 (23,107) 46,846 (202.7) %
Other expenses $ 965,946 $ 978,429 $ (12,483) (1.3) %
For the year ended December 31, Change Change
2021 2020 $ %
Salaries, commissions and benefits $ 697,680 $ 552,143 $ 145,537 26.4 %
Direct loan production costs 72,952 54,459 18,493 34.0 %
Marketing, travel, and entertainment 62,472 20,367 42,105 206.7 %
Depreciation and amortization 35,098 16,820 18,278 108.7 %
General and administrative 133,334 98,856 34,478 34.9 %
Amortization, impairment and pay-offs of
mortgage servicing rights - 573,118 (573,118) (100.0) %
Other (income)/expense (23,107) - (23,107) - %
Other expenses $ 978,429 $ 1,315,763 $ (337,334) (25.6) %
Other expenses were $965.9 million for the year ended December 31, 2022 , a
decrease of $12.5 million , or 1.3%, as compared to $978.4 million for the year
ended December 31, 2021 . The decrease in other expenses was primarily due to a
decrease in salaries, commissions and benefits of $144.8 million , or 20.8%, due
to decreases in incentive compensation (primarily bonuses and commissions)
attributable to decreased loan production and a decrease in the average number
of team members. The decrease salaries, commissions and benefits was partially
offset by an increase in other expense of $46.8 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. Additionally, general and
administrative expenses increased $46.2 million , primarily as a result of a
reduction of a contingency reserve which was recorded in the year ended
December 31, 2021 , and an increase in the representations and warranties reserve
recorded in the year ended December 31, 2022 resulting from changes in
estimates. Direct loan production costs increased $17.4 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, offset by a decrease
in production volume. Marketing, travel and entertainment expenses increased
$11.7 million due to increased broker promotions, advertising and brand
marketing costs.
Other expenses were $978.4 million for the year ended December 31, 2021 , a
decrease of $337.3 million , or 25.6%, as compared to $1.32 billion for the year
ended December 31, 2020 . Effective January 1, 2021 , we made an election to
account for all classes of MSRs using the fair value method. Under this new
accounting policy for MSRs, the change in fair value of MSRs is reported as part
of total revenue, net, and MSRs are no longer amortized and subject to periodic
impairment testing. Therefore, there is no similar amount recorded for the
amortization, impairment and pay-offs of MSRs for the year ended
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December 31, 2021 , as compared to amortization, impairment and pay-offs of MSRs
of $573.1 million for the year ended December 31, 2020 .
Excluding the $573.1 million of amortization, impairment and pay-offs of MSRs in
2020, total other expenses increased by $235.8 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 . The increase was
primarily due to an increase in salaries, commissions and benefits of $145.5
million , or 26.4%, for the year ended December 31, 2021 as compared to the prior
year, primarily due to an increase in the average number of team members to
support our growth and increased loan production in 2021. Marketing, travel and
entertainment increased $42.1 million during the year ended December 31, 2021 as
compared to the same period in the prior year, which was primarily attributable
to increased advertising costs and brand marketing. In addition, the Company
recorded $23.1 million of other income for the year ended December 31, 2021
which represents a $36.1 million decrease in the fair value of the liability for
the Public and Private Warrants from the closing date of the business
combination transaction through December 31, 2021 , partially offset by an
increase of $11.9 million in the Tax Receivable Agreement liability resulting
from sales of MSRs and the valuation of certain intangible assets for tax
purposes in connection with the business combination transaction, and a $1.1
million decrease in the fair value of the retained investment securities.
Income Taxes
We recorded a$2.8 million provision for income taxes during the year endedDecember 31, 2022 , compared to a provision for income taxes of$9.8 million for the year endedDecember 31, 2021 and$2.5 million for the year endedDecember 31, 2020 . The decrease in income tax provision for the year endedDecember 31, 2022 , as compared to the same period in 2021, was primarily due to the decrease in pre-tax income attributable to the Company. The increase in the provision for income taxes for the year endedDecember 31, 2021 , as compared to the same period in 2020, was primarily due to the change in the Company's tax status upon completion of the business combination transaction. The variations between the Company's effective tax rate and theU.S. statutory rate in 2022 and 2021 are primarily due to the portion (approximately 94%) of the Company's earnings attributable to non-controlling interests, and the fact that the Company's interest inHoldings LLC was acquired as part of the business combination transaction onJanuary 21, 2021 . The effective tax rate calculation for 2021 includes income only fromJanuary 21, 2021 toDecember 31, 2021 , which represents the period in which the Company had an ownership interest inHoldings LLC . Net income
Net income was
Net income was$1.57 billion for the year endedDecember 31, 2021 , a decrease of$1.81 billion or 53.6%, as compared to$3.38 billion for the year endedDecember 31, 2020 . The decrease was primarily the result of the decrease in total revenue, net of$1.97 billion , partially offset by a decrease in total expenses of$161.6 million , as further described above. Net income attributable to the Company of$41.7 million for the year endedDecember 31, 2022 reflects the net income of UWM attributable to the Company due to its approximate 6% ownership interest inHoldings LLC for this period. Net income attributable to the Company of$98.4 million for the year endedDecember 31, 2021 reflects the net income of UWM attributable to the Company due to its approximate 6% ownership interest inHoldings LLC for the period fromJanuary 21, 2021 throughDecember 31, 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;
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•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
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.
Recent Developments
In accordance with the National Housing Act (NHA), as amended by the Housing and Economic Recovery Act of 2008, the FHA and FHFA are required to annually set single family forward mortgage loan limits based on median house prices. To allow our Independent Mortgage Brokers to provide borrowers with higher loan amounts with better pricing, in anticipation of the increase for 2023, we raised the loan limits on conforming loans that we originate to$715,000 effectiveSeptember 7, 2022 . We adopted a similar strategy in 2021 with respect to the increased loan limits for 2022. As a result of our early adoption of the higher loan size limits, we held conforming loans originated with principal balances between$625,000 (the 2022 cap) and$715,000 throughJanuary 2023 when these loans were sold to the GSEs. As a result of this strategy, our outstanding loan balances and the amounts outstanding under our warehouse lines materially increased through the fourth quarter of 2022 (as they did in the fourth quarter of 2021). However, these balances and amounts returned to more normalized levels when the loans accumulated during the fourth quarters of 2022 and 2021 were sold to the GSEs in early 2023 and 2022, respectively.
Loan Funding Facilities
Warehouse facilities
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 a reference interest rate benchmark plus a spread. As ofDecember 31, 2022 , eleven of our warehouse facility agreements had been amended to change the reference interest rate from LIBOR to variants of SOFR or other alternative index. We expect the remaining warehouse facilities to transition from LIBOR to a different reference interest rate at some point in 2023 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- 55 -------------------------------------------------------------------------------- Table of Contents 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 typically 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 (e.g., initiate a margin call) or reduce the amount outstanding with respect to the corresponding loan. 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 or requirements to reduce the amount outstanding with respect to the corresponding loan from a majority of our warehouse lenders. 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 ofDecember 31, 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 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
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Total Advanced
Date of Initial Against Line as of
Line Amount as of Agreement With Current Agreement December 31, 2022
Facility Type Collateral December 31, 20221 Warehouse Lender Expiration Date (in thousands)
MRA Funding:
Master Repurchase Agreement Mortgage Loans $400 Million2 8/21/2012 1/18/2023 $ 188,607
Master Repurchase Agreement Mortgage Loans$500 Million3 3/7/2019 3/22/2023
236,462
Master Repurchase Agreement Mortgage Loans$500 Million 4/23/2021 4/23/2023
185,502
Master Repurchase Agreement Mortgage Loans$150 Million 2/29/2012 5/23/2023
142,570
Master Repurchase Agreement Mortgage Loans$3.0 Billion 5/9/2019 7/28/2023
2,239,591
Master Repurchase Agreement Mortgage Loans$700 Million 7/24/2020 8/30/2023
642,544
Master Repurchase Agreement Mortgage Loans$200 Million 3/30/2018 9/6/2023
170,478
Master Repurchase Agreement Mortgage Loans$200 Million 10/30/2020 9/26/2023
97,216
Master Repurchase Agreement Mortgage Loans$300 Million 8/19/2016 11/8/2023
235,804
Master Repurchase Agreement Mortgage Loans$250 Million 2/26/2016 12/21/2023
193,023
Master Repurchase Agreement Mortgage Loans$1.0 Billion 7/10/2012 1/8/2024
521,440
Master Repurchase Agreement Mortgage Loans$2.5 Billion3 12/31/2014 2/21/2024 1,588,787 Early Funding: Master Repurchase Agreement Mortgage Loans$600 Million (ASAP+ - see below) No expiration - Master Repurchase Agreement Mortgage Loans$750 Million (EF - see below) No expiration 1,968$ 6,443,992
1 An aggregate of
2 This warehouse line of credit agreement expired pursuant to its terms
subsequent to
3 Represents the current agreement expiration date pursuant to an amendment
entered into subsequent to
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 December 31, 2022 , no amount was outstanding
through the ASAP+ program and $2.0 million was outstanding under the EF program.
Covenants
Our warehouse facilities 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 ofDecember 31, 2022 . Other Financing Facilities Senior Notes OnNovember 3, 2020 , our consolidated subsidiary, UWM, issued$800.0 million in aggregate principal amount of senior unsecured notes dueNovember 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 onMay 15 andNovember 15 of each year, beginning onMay 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 toSFS Corp. for tax distributions. 58 -------------------------------------------------------------------------------- Table of Contents On or afterNovember 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%; orNovember 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. OnApril 7, 2021 , our consolidated subsidiary, UWM, issued$700.0 million in aggregate principal amount of senior unsecured notes dueApril 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 onApril 15 andOctober 15 of each year, beginning onOctober 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, effectiveApril 20, 2021 , and the remainder for general corporate purposes. On or afterApril 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%; orApril 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 toApril 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 toApril 15, 2024 at a price equal to 100% of the principal amount redeemed plus a "make-whole" premium, plus accrued and unpaid interest. OnNovember 22, 2021 , our consolidated subsidiary, UWM, issued$500.0 million in aggregate principal amount of senior unsecured notes dueJune 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 onJune 15 andDecember 15 of each year, beginning onJune 15, 2022 . We used the proceeds from the issuance of the 2027 Senior Notes for general corporate purposes. On or afterJune 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%; orJune 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 toJune 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 toJune 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 ofDecember 31, 2022 .
MSR Facility
OnSeptember 30, 2022 , the Company's consolidated subsidiary, UWM, entered into a Loan and Security Agreement withCitibank, N.A . ("Citibank"), providing UWM with up to$1.5 billion of uncommitted borrowing capacity to finance the origination, acquisition or holding of certain mortgage servicing rights (the "MSR Facility"). The MSR Facility is collateralized by all of UWM's mortgage servicing rights that are appurtenant to mortgage loans pooled in securitizations by Fannie Mae or Freddie Mac that meet certain criteria. Available borrowings under the MSR Facility are based on the fair market value of the collateral, and borrowings under the MSR Facility will bear interest based on one-month term SOFR plus an applicable margin. As ofDecember 31, 2022 ,$750.0 million was outstanding under the MSR Facility.
The MSR Facility contains 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
agreement. As of
OnJanuary 30, 2023 , UWM, entered into Amendment No. 1 to the Loan and Security Agreement with Citibank, permitting UWM, with the prior consent of Citibank, to enter into Excess Yield Transactions (as defined in the Loan and Security Agreement) whereby Citibank will release its security interest in that portion of the collateral involved with each transaction. 59
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Revolving Credit Facility
OnAugust 8, 2022 , UWM entered into the Revolving Credit Agreement, between UWM, as the borrower, andSFS 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 ofAugust 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
Company was in compliance with these covenants as of
Borrowings
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 ofDecember 31, 2022 , we had$101.3 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 four to eight months as ofDecember 31, 2022 , and interest rates based on twelve-month LIBOR or SOFR 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 ofDecember 31, 2022 , the Company had delivered$5.3 million of collateral to counterparty under these sale and repurchase agreements.
Finance Leases
As ofDecember 31, 2022 , our finance lease liabilities were$43.5 million ,$27.9 million of which relates to leases with related parties. The Company's financing lease agreements have remaining terms ranging from approximately three months to thirteen years.
Cash flow data for the year ended
For the year ended December 31,
($ in thousands) 2022 2021 2020
Net cash provided by (used in) operating
activities $ 8,268,182 $ (9,956,963) $ 56,412
Net cash provided by investing activities 1,290,346 199,751 231,882
Net cash (used in) provided by financing
activities (9,584,718) 9,264,463 802,260
Net (decrease) increase in cash and cash
equivalents $ (26,190) $ (492,749) $ 1,090,554
Cash and cash equivalents at the end of the
period 704,898 731,088 1,223,837
Net cash provided by operating activities
Net cash provided by operating activities was$8.27 billion for the year endedDecember 31, 2022 compared to net cash used in operating activities of$9.96 billion for the same period in 2021. The increase in cash flows from operating 60 -------------------------------------------------------------------------------- Table of Contents activities was primarily driven by the decrease in mortgage loans at fair value as ofDecember 31, 2022 , notwithstanding the early roll-out of the increased loan size limits discussed above, offset by a decrease in net income 2022, adjusted for non-cash items, including the capitalization and change in fair value of MSRs. Net cash used in operating activities was$9.96 billion for the year endedDecember 31, 2021 compared to net cash provided by operating activities of$56.4 million for the same period in 2020. The decrease in cash flows from operating activities was primarily driven by the early roll-out of the increased loan size limits and the aggregation of loans for private label securitization transactions discussed above which materially increased our mortgage loans at fair value as ofDecember 31, 2021 , as well as a decrease in net income in 2021, adjusted for non-cash items, including an increase in the capitalization of MSRs (due to increased loan sale volume).
Net cash provided by investing activities
Net cash provided by investing activities was$1.29 billion for the year endedDecember 31, 2022 compared to$199.8 million of net cash provided by 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 provided by investing activities was$199.8 million for the year endedDecember 31, 2021 compared to$231.9 million of net cash provided by investing activities for the same period in 2020. The decrease in cash flows provided by investing activities was primarily driven by an increase in purchases of premises and equipment, and a decrease in proceeds from the sale of MSRs.
Net cash used in financing activities
Net cash used in financing activities was$9.58 billion for the year endedDecember 31, 2022 compared to cash provided by financing activities of$9.26 billion for the same period in 2021. The change year over year was primarily driven by net repayments under the warehouse lines of credit for the year endedDecember 31, 2022 , primarily attributable to the decrease in loans at fair value, as compared to net borrowings under the warehouse lines of credit for the year endedDecember 31, 2021 due to the increase in loans at fair value. Net secured line of credit borrowings were$750.0 million in 2022, compared to net repayments of$320.3 million in 2021, and Class A common stock dividends and distributions toSFS Corp. decreased$711.5 million in 2022 as compared to 2021. The year endedDecember 31, 2021 also included the impacts of the business combination transaction (net proceeds and higher distributions toSFS 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 ofDecember 31, 2021 , which were paid down in earlyJanuary 2022 in connection with the sale of these mortgage loans. Net cash provided by financing activities was$9.3 billion for the year endedDecember 31, 2021 compared to cash provided by financing activities of$802.3 million for the same period in 2020. The increase in cash flows provided by financing activities in 2021 was primarily driven by an increase in net borrowings under warehouse lines of credit (due to increased mortgage loans at fair value as a result of increased loan production and the early roll-out of the increase in loan size limits discussed above), additional net proceeds from the issuance of Senior Notes in 2021, proceeds from borrowings against investment securities in 2021, net proceeds from the business combination transaction in 2021, and a decrease in distributions toSFS Corp. in 2021, partially offset by 2021 dividends paid to Class A common stockholders, an increase in net repayments under operating lines of credit, Class A common stock repurchases, and increases in net repayments under equipment notes payable and finance lease liabilities. Contractual Obligations
Cash requirements from contractual and other obligations
As ofDecember 31, 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. In addition, in the third quarter of 2022, UWM entered into the MSR Facility, which has a one-year term and provides for up to$1.5 billion of available borrowing capacity secured by certain MSRs, and the Revolving Credit Agreement withSFS Corp. , which also has a one-year term and provides for up to$500 million of unsecured borrowing capacity. As ofDecember 31, 2022 ,$750.0 million was outstanding under the MSR Facility and no amount was outstanding under the Revolving Credit Agreement. Annual cash payments for interest under our 61 -------------------------------------------------------------------------------- Table of Contents Senior Notes total approximately$111.3 million and the Senior Notes are due in 2025 ($800.0 million ), 2027 ($500.0 million ), and 2029 ($700.0 million ). The principal amount of the borrowings against investment securities of$118.8 million is due within one year ofDecember 31, 2022 , but we intend to renew the applicable sale and repurchase agreements upon their maturity during the required holding period for the retained investment securities. Our weighted average remaining lease term for operating leases is approximately 13.6 years, and remaining contractual operating leases payments totaled$175.4 million as ofDecember 31, 2022 , of which$12.9 million is due in 2023. Our weighted average remaining lease term for financing leases is approximately 8.8 years, and remaining contractual financing lease payments totaled$51.1 million as ofDecember 31, 2022 , of which$14.1 million is due in 2023. We do not have material commitments for capital expenditures as ofDecember 31, 2022 given the nature of our business. We declared dividends of$0.10 per share on its Class A common stock each quarter in 2022. In connection with its decision to declare a dividend on its Class A common stock, our Board of Directors, in its capacity as the Manager ofHoldings LLC , under the Holdings LLC Second Amended and Restated Operating Agreement, can determine whether to (a) make distributions fromHoldings LLC to onlyUWM Holdings Corporation , as the owner of the Class A Units ofHoldings LLC with the proportional amount due toSFS Corp. as the owner of the ClassB Units ofHoldings LLC , being distributed upon the sooner to occur of (i) the Board making a determination to do so or (ii) the date on which ClassB Units ofHoldings LLC are converted into shares of our Class B common stock or (b) make proportional and simultaneous distributions fromHoldings LLC toUWM Holdings Corporation , as the owner of the Class A Units ofHoldings LLC and toSFS Corp. as the owner of the ClassB Units ofHoldings LLC . During 2022, the Company paid cash dividends of$36.9 million to its Class A common stockholders, representing$0.10 per share of Class A Common Stock declared in the fourth quarter of 2021 and the first three quarters of 2022, and declared a dividend for the fourth quarter of 2022 of$0.10 per share of Class A common stock which was paid onJanuary 6, 2023 . In earlyJanuary 2022 , the Board declared andHoldings LLC paid cumulative proportional distributions toSFS Corp. of approximately$300.4 million related to the third and fourth quarter 2021 Class A common stock dividends. Additionally, for each of the first, second and third quarters of 2022, the Board determined to make proportional and simultaneous distributions totaling$450.6 million toSFS Corp. , representing$0.10 per Holdings LLC ClassB Unit . The proportional distribution toSFS Corp. related to the fourth quarter 2022 Class A common stock dividend of approximately$150.2 million was declared byHoldings LLC , and was paid onJanuary 6, 2023 .
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 an assessment of our 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 10 - Commitments and Contingencies to the 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. The blended average pullthrough rate was 77% and 86%, as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Management believes that the decrease in pullthrough rates year over year is primarily attributable to market volatility as well as a shift to primarily a purchase mortgage market in 2022 as a result of significant increases in primary mortgage interest rates observed throughout most of the year.
Following is a summary of the notional amounts of commitments as of dates indicated:
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($ in thousands) December 31, 2022 December 31, 2021 Interest rate lock commitments-fixed rate (a)$ 5,350,845 $ 13,402,401 Interest rate lock commitments-variable rate (a) 8,839 48,566 Commitments to sell loans 608,703 3,130,203 Forward commitments to sell mortgage-backed securities 10,336,172 25,756,975
(a)Adjusted for pullthrough rates of 77% and 86%, respectively.
As ofDecember 31, 2022 , we had sold$1.2 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 inJanuary 2023 .
Critical Accounting Estimates and Use of Significant Estimates
Preparation of financial statements in accordance withU.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 consolidated financial statements. Our critical accounting policies and estimates are discussed below and primarily relate to the fair value and other estimates.
Mortgage loans held at fair value and revenue recognition
We record mortgage loans at estimated fair value. Mortgage loans at fair value is comprised of loans that are expected to be sold into the secondary market. When we have the unilateral right to repurchaseGinnie Mae pool loans we have previously sold (generally loans that are more than 90 days past due) and the call option results in a more than trivial benefit to us, the previously sold assets are required to be re-recognized on the balance sheet. We record our potential purchase obligation at the gross amount of the loan eligible to be repurchased. The related asset and liability for the Ginnie Mae pool loans eligible for repurchase are presented separately on the consolidated balance sheet. The fair value of mortgage loans is estimated using observable market information including pricing from current cash commitments from government sponsored enterprises, recent market commitment prices, or broker quotes, as if the loans were to be sold currently into the secondary market. Loans at fair value for which there is little to no observable trading activity of similar instruments (e.g., scratch and dent buyers) are valued using dealer price quotations which typically results in purchase price discounts. We also factor our loans' readiness to be sold to loan outlets and adjust the fair value accordingly. A majority of the revenues from mortgage loan originations are recognized as a component of "loan production income" in the consolidated statements of operations when the loan is originated, which is the primary revenue recognition event as the loans are recorded at estimated fair value upon origination. Loan production income also includes the unrealized gains and losses associated with the changes in the fair value of mortgage loans at fair value and the realized and unrealized gains and losses from derivative assets and liabilities. Other companies recognize a majority of the revenue related to lending activity when they make an interest rate lock commitment with a borrower.
Mortgage loans at fair value were
Mortgage servicing rights
MSRs represent the fair value assigned to the rights to the contracts that
obligate us to service the loans sold in exchange for a servicing fee. At the
date the loan is sold with servicing retained, the fair value of the MSR is
capitalized and recognized as a component of "loan production income" in the
consolidated statements of operations.
For purposes of both initial and subsequent measurement, the fair value of MSRs
is determined using a valuation model that calculates the present value of
estimated net future servicing fee income. The model includes estimates of
prepayment speeds, discount rate, cost to service, float earnings, contractual
servicing income, and ancillary income and late fees, among others. Changes in
the estimates used to value MSRs could materially change the estimated fair
value. Judgement is made when determining these assumptions, however, these
estimates are supported by market and economic data collected from various
outside sources. The key unobservable inputs used in determining the fair value
of our MSRs include the discount rate, prepayment speeds, and the cost of
servicing.
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Changes in economic and other relevant conditions could cause actual results to differ from assumptions used to determine fair value. Markets, specifically buyers of MSRs, may change perspective on assumptions or MSR value entirely which can lead to different values and outcomes. Assumptions emanate from recent market transactions as well as current expectations and vary over time. There are also differences between assumptions used to determine fair value (what a buyer would pay) and what we can achieve in its operations. Prepayment speeds can change quickly and be materially different between buyers. Consequently, prepayment speed assumptions often differ from our estimates. Increases in prepayment speeds generally have an adverse effect on the fair value of MSRs. Discount rates imply a rate of return. Similarly, discount rates are subjective and, in practice, are often imputed to reconcile to current trades. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. The cost to service assumption can vary based upon buyer expectation, bidding strategy, and can depend upon the cost structure of a potential bidder. The higher the servicing cost assumption, the lower the MSR value. If we are unable to achieve the cost assumption, the MSRs' operational economics will lag fair value. Other assumptions used, while not as significant, have similar impacts to fair value of MSRs. Refer to Note 5 - Mortgage Servicing Rights to the consolidated financial statements for additional detail regarding the quantitative impact on the fair value of MSRs as a result of adverse changes in key unobservable inputs. MSRs were$4.5 billion as ofDecember 31, 2022 , compared to$3.3 billion as ofDecember 31, 2021 . For the year endedDecember 31, 2022 , we recognized$868.8 million of income due to changes in the fair value of MSRs as a result of changes in valuation inputs and assumptions, primarily as a result of increases in market interest rates, compared to$286.3 million for the same period in the prior year.
Derivative Financial Instruments
Derivatives are recognized as assets or liabilities on the balance sheets and are measured at estimated fair value with changes recorded in the consolidated statements of operations within "loan production income" in the period in which they occur. IRLCs on mortgage loans to be originated or purchased which are intended to be sold are considered derivative financial instruments and are the primary basis of our interest rate or pricing risk. We enter into FLSCs to mitigate risk of IRLCs as well as loans, and to efficiently facilitate sale of loans into the secondary market. IRLCs and FLSCs are free standing derivative financial instruments. We estimate the value of derivatives based on estimates of the price that would be received to sell an asset or paid to transfer a liability. Each individual contract is the basis for the determination. FLSCs are firm commitments and the value is almost exclusively determined based upon the underlying difference in interest rates between the contract's terms and current market. Similarly, we value IRLCs based upon the difference between the terms of the individual contract and the current market interest rates. Fair value estimates of IRLCs also take into account the probability that loan commitments may not be expected to be exercised by borrowers (the "pullthrough" rate), which is estimated based on historical experience. We consider the value of net future cash flows related to the associated servicing right of the eventual loan (however, the loan must first be originated, then the loan would need to be sold, with servicing retained or contractually separated, for MSR cash flows to distinctively exist), because if we did not, in most market conditions, IRLCs would result in a somewhat arbitrary loss recognition at inception. For valuation of IRLCs, we prioritize determination of exit price (what a buyer would pay) of the contract in its current form, over future components or elements. This approach results in revenue recognition for relative changes in the fair value of IRLCs during the interest rate lock period (as opposed to the primary revenue recognition event of accepting an interest rate lock), and full revenue recognition when the loan is originated. IRLCs and loans at fair value expose us to the risk that the price of the existing loans and future loans to be made, which underlie the commitments, might decline in value due to increases in mortgage interest rates. To protect against this risk, we use FLSCs to economically hedge the risk of potential changes in the value of the loans and IRLCs (future loans). We expect that the changes in fair value of the forward commitments will either substantially or partially offset the changes in fair value of the loans and IRLCs.
Derivative assets and liabilities were
Representations and warranties reserve
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 our contingent and non-contingent
obligations, including the universe of loans which may still be at risk for
indemnity, expected
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Table of Contents frequency, appeal rate success, expected loss severity, expected economic conditions, as well as an estimate for the cost of a market participant's potential readiness to stand by to perform on such obligations. We also consider our historical repurchase and loss experience when making these estimates. The reserve includes amounts for repurchase demands received but still under review as well as a reserve for the expected future losses on loans sold to investors for which no request for repurchase or indemnification demand has yet been received. The initial estimated provision for these losses is included in "loan production income" in the consolidated statements of operations, with subsequent changes in estimates recorded as part of "general and administrative" expenses. The maximum exposure under our representations and warranties obligations would be the outstanding principal balance, any premium received on all loans ever sold by us that are not subject to agency certainty clauses, as well as potential costs associated with repurchasing or indemnifying the buyers, less any loans that have already been paid in full by the borrower, loans that have defaulted without a breach of representations and warranties, that have been indemnified via settlement or make whole, or that have been repurchased. The Company repurchased$355.8 million ,$133.4 million and$53.1 million in UPB of loans during the years endedDecember 31, 2022 , 2021 and 2020, respectively, related to its representations and warranties obligations.
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