Guild pany(US:GHLD)2022-11-04 22:07Cautionary Statement Regarding Forward-Looking Statements This section advises readers that the report contains forward-looking statements based on current views and projections, which are inherently uncertain and subject to risks. Actual results may differ materially, and the company disclaims any obligation to update these statements unless legally required - Forward-looking statements are not guarantees of future performance and are subject to difficult-to-predict risks, assumptions, and uncertainties.6 - Readers should not rely on forward-looking statements as predictions of future events, as actual results, events, or circumstances could differ materially from those described.8 Summary of Risk Factors This section provides a concise overview of the primary factors that make an investment in the company's common stock speculative or risky, directing readers to a more comprehensive discussion in Part II, Item 1A - Key risks include disruptions in the secondary home loan market, adverse macroeconomic and U.S. residential real estate market conditions, and high dependence on U.S. government-sponsored entities and government agencies.13 - Other significant risks involve changes in prevailing interest rates, potential termination of servicing rights, existing and future indebtedness, technology disruptions, and challenges from the RMS acquisition.15 Part I - Financial Information This part presents the company's unaudited condensed consolidated financial statements for the interim period, along with management's discussion and analysis of financial condition and results of operations, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This item includes the company's unaudited condensed consolidated financial statements, comprising the balance sheets, statements of income, changes in stockholders' equity, and cash flows, along with their accompanying notes Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total assets | $3,344,091 | $4,383,204 | $(1,039,113) | -23.7% | | Total liabilities | $2,078,500 | $3,463,191 | $(1,384,691) | -40.0% | | Total stockholders' equity | $1,265,591 | $920,013 | $345,578 | 37.6% | | Mortgage loans held for sale | $929,561 | $2,204,216 | $(1,274,655) | -57.8% | | Mortgage servicing rights, net | $1,129,551 | $675,340 | $454,211 | 67.2% | | Warehouse lines of credit | $819,892 | $1,927,478 | $(1,107,586) | -57.4% | Condensed Consolidated Statements of Income | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net revenue | $261,220 | $412,957 | $(151,737) | -36.8% | | Total expenses | $174,532 | $315,497 | $(140,965) | -44.7% | | Net income attributable to Guild | $77,374 | $72,096 | $5,278 | 7.3% | | Basic EPS | $1.27 | $1.18 | $0.09 | 7.6% | | Diluted EPS | $1.26 | $1.17 | $0.09 | 7.7% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net revenue | $1,030,519 | $1,233,253 | $(202,734) | -16.4% | | Total expenses | $587,275 | $908,260 | $(320,985) | -35.3% | | Net income attributable to Guild | $343,604 | $241,638 | $101,966 | 42.2% | | Basic EPS | $5.63 | $4.01 | $1.62 | 40.4% | | Diluted EPS | $5.56 | $3.99 | $1.57 | 39.3% | Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total stockholders' equity | $1,265,591 | $920,013 | $345,578 | 37.6% | | Retained earnings | $1,220,863 | $877,194 | $343,669 | 39.2% | | Class A common stock shares outstanding | 20,477,053 | 20,723,912 | (246,859) | -1.2% | - The company repurchased and retired 280,914 shares of Class A common stock for $3.0 million during the nine months ended September 30, 2022.2196 Condensed Consolidated Statements of Cash Flows | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net cash provided by operating activities | $1,181,081 | $769,313 | $411,768 | 53.5% | | Net cash used in investing activities | $(2,981) | $(90,287) | $87,306 | -96.7% | | Net cash used in financing activities | $(1,256,270) | $(709,706) | $(546,564) | 77.0% | | Decrease in cash, cash equivalents and restricted cash | $(78,170) | $(30,680) | $(47,490) | 154.8% | | Cash, cash equivalents and restricted cash, end of period | $169,950 | $308,953 | $(139,003) | -45.0% | Notes to Condensed Consolidated Financial Statements NOTE 1 - Business, Basis of Presentation, and Accounting Policies This note describes Guild Holdings Company's primary business of originating, selling, and servicing residential mortgage loans, its basis of financial statement presentation in accordance with GAAP, principles of consolidation, and the use of estimates, including the ongoing monitoring of the COVID-19 pandemic's impact - Guild Holdings Company originates, sells, and services residential mortgage loans within the United States.25 - The company's financial statements are prepared in accordance with SEC rules and U.S. generally accepted accounting principles (GAAP), reflecting all normal recurring adjustments for interim periods.26 - The company continues to monitor the economic impact of the COVID-19 pandemic on its operations, which remain fully functional in both origination and servicing.31 NOTE 2 - Fair Value Measurements This note details the company's fair value measurement methodologies, categorizing assets and liabilities into a three-level hierarchy based on input observability, and provides tables summarizing recurring and non-recurring fair value measurements - Fair value is defined as the exit price in an orderly transaction between market participants, with inputs prioritized into Level One (quoted prices in active markets), Level Two (observable inputs other than quoted prices), and Level Three (unobservable inputs).3435 | Description | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Total assets at fair value | $2,131,982 | $2,907,624 | | Total liabilities at fair value | $23,577 | $61,579 | - Mortgage Servicing Rights (MSRs) are classified as Level Three due to significant unobservable inputs, with fair value estimated based on projections of future cash flows, prepayment estimates, interest rates, and costs to service.43 NOTE 3 - Acquisition This note describes the acquisition of Residential Mortgage Services Holdings, Inc. (RMS) on July 1, 2021, which expanded Guild's presence in the Northeast and added loan officers. It details the purchase price allocation, contingent consideration, and goodwill recognized - On July 1, 2021, Guild acquired Residential Mortgage Services Holdings, Inc. (RMS) for approximately $265.0 million, expanding its presence in the Northeast.5355 - The acquisition included $64.0 million in contingent consideration based on estimated future net income from RMS branch locations, with no maximum payment.5556 - Goodwill of $110.6 million was recognized, primarily attributable to the assembled workforce and expected future growth, and assigned to the Origination segment.5758 NOTE 4 - Accounts and Interest Receivable This note provides a breakdown of accounts and interest receivable, including trust advances, foreclosure advances, and receivables related to loan sales, and details the activity of the foreclosure loss reserve | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total accounts and interest receivable | $32,095 | $68,359 | $(36,264) | -53.0% | | Trust advances | $18,974 | $43,660 | $(24,686) | -56.5% | | Foreclosure advances, net | $10,690 | $19,311 | $(8,621) | -44.6% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Balance — beginning of period | $10,355 | $12,402 | | Reversal of provision for foreclosure losses | $(1,974) | $(306) | | Balance — end of period | $6,945 | $10,669 | NOTE 5 - Other Assets This note details the composition of other assets, including prepaid expenses, company-owned life insurance, property and equipment, right-of-use assets, and income tax receivable, along with depreciation and amortization expenses | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total other assets | $194,997 | $214,061 | $(19,064) | -8.9% | | Property and equipment, net | $13,260 | $15,834 | $(2,574) | -16.2% | | Right-of-use assets | $75,677 | $86,484 | $(10,807) | -12.5% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Depreciation and amortization expense | $5,700 | $5,400 | NOTE 6 - Derivative Financial Instruments This note explains the company's use of derivative instruments, primarily forward commitments, to hedge interest rate risk, and details the changes in fair value and notional amounts of these instruments - The company uses forward commitments to hedge interest rate risk on fixed and adjustable rate commitments, with changes in fair value recognized in current period earnings.64 | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Unrealized hedging gains (losses) | $22,366 | $(52,758) | $75,124 | | Derivative Type | Sep 30, 2022 Notional Value (in thousands) | Dec 31, 2021 Notional Value (in thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Interest Rate Lock Commitments (IRLCs) | $1,423,205 | $2,388,097 | | Forward delivery commitments and best efforts sales commitments | $1,780,910 | $3,217,162 | NOTE 7 - Mortgage Servicing Rights This note details the activity and valuation of mortgage servicing rights (MSRs), including changes in fair value due to cash flows and valuation model assumptions, and the key unobservable inputs used in their fair value determination | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Balance — beginning of period | $675,340 | $446,998 | $228,342 | 51.1% | | MSRs originated and acquired | $206,772 | $262,732 | $(55,960) | -21.3% | | Changes in fair value (model inputs/assumptions) | $317,819 | $32,538 | $285,281 | 876.8% | | Balance — end of period | $1,129,551 | $625,149 | $504,402 | 80.7% | - Key unobservable inputs for MSR valuation include a weighted average discount rate of 9.8% (Sep 2022) vs 9.9% (Dec 2021), prepayment rate of 8.0% (Sep 2022) vs 13.6% (Dec 2021), and cost to service of $90.7 (Sep 2022) vs $91.4 (Dec 2021).70 - The UPB of mortgage loans serviced increased to $77.7 billion at September 30, 2022, from $70.9 billion at December 31, 2021.71 NOTE 8 - Mortgage Loans Held for Sale This note reconciles the changes in mortgage loans held for sale (MLHS), detailing originations, sales, and valuation adjustments, and states that the company sells substantially all originated loans into the secondary market | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Balance at beginning of period | $2,204,216 | $2,368,777 | $(164,561) | -6.9% | | Origination of mortgage loans held for sale | $16,265,741 | $28,192,471 | $(11,926,730) | -42.3% | | Proceeds on sale of and payments from MLHS | $(17,916,073) | $(29,847,321) | $11,931,248 | -40.0% | | Balance at end of period | $929,561 | $2,139,346 | $(1,209,785) | -56.5% | NOTE 9 - Investor Reserves This note outlines the company's investor reserves for potential losses from loan repurchases and indemnifications due to breaches of representations and warranties, or early payment defaults, and details the activity of these reserves - The company maintains investor reserves for potential losses from loan repurchases and indemnifications, with maximum exposure being the outstanding principal balance and any premium received on all loans ever sold.76 | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Balance — beginning of period | $18,437 | $14,535 | $3,902 | 26.8% | | Provision for investor reserves | $679 | $7,581 | $(6,902) | -91.0% | | Balance — end of period | $16,015 | $18,665 | $(2,650) | -14.2% | NOTE 10 - Goodwill and Intangible Assets This note presents the changes in goodwill allocated to the origination segment and details the company's intangible assets, including referral networks and non-compete agreements, along with their amortization | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Goodwill | $173,434 | $175,144 | $(1,710) | -1.0% | | Total intangible assets, net | $35,063 | $41,025 | $(5,962) | -14.5% | - A measurement period adjustment resulted in a $1.7 million decrease to goodwill and a corresponding increase to income tax receivable, with no impact on the income statement.78 | Intangible Asset | Estimated Fair Value (in thousands) | Estimated Useful Life (Years) | | :--------------------- | :-------------------------------- | :---------------------------- | | Referral network | $42,300 | 6 | | Non-compete agreements | $2,700 | 3 | NOTE 11 - Warehouse Lines of Credit This note provides a detailed breakdown of the company's warehouse lines of credit, including their maturity dates, outstanding balances, and interest rates, and confirms compliance with all debt covenants | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Net warehouse lines of credit | $819,892 | $1,927,478 | $(1,107,586) | -57.4% | - The weighted average interest rate for warehouse lines of credit increased from 2.40% at December 31, 2021, to 2.95% at September 30, 2022.82 - The company was in compliance with all debt covenants, including maximum adjusted leverage ratio, minimum net worth, and minimum liquidity, as of September 30, 2022.84 NOTE 12 - Notes Payable This note details the company's revolving and term notes, primarily collateralized by MSRs, including their committed amounts, outstanding balances, interest rates, and maturity dates | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Notes payable | $112,500 | $250,227 | $(137,727) | -55.0% | - The company had no outstanding balance on its GNMA MSR revolving note (max $135 million) and FHLMC MSR revolving note (max $100 million) as of September 30, 2022, down from $60 million and $65 million respectively at Dec 31, 2021.8687 - The FNMA MSR term note had an outstanding balance of $112.5 million at September 30, 2022, maturing in March 2024.8889 NOTE 13 - Stockholders' Equity and Earnings Per Share This note explains the computation of basic and diluted earnings per share using the two-class method, details the company's dual-class common stock structure, and provides information on restricted stock units and the share repurchase program | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Basic EPS | $1.27 | $1.18 | $0.09 | 7.6% | | Diluted EPS | $1.26 | $1.17 | $0.09 | 7.7% | | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Basic EPS | $5.63 | $4.01 | $1.62 | 40.4% | | Diluted EPS | $5.56 | $3.99 | $1.57 | 39.3% | - The company repurchased and retired 280,914 shares of Class A common stock for $3.0 million during the nine months ended September 30, 2022, with $17.0 million remaining available under the $20.0 million repurchase program.96 NOTE 14 - Stock-Based Compensation This note details the stock-based compensation expenses recognized from Restricted Stock Units (RSUs) under the 2020 Omnibus Incentive Plan, including the associated income tax benefits and unrecognized compensation costs | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Stock-based compensation costs | $4,917 | $4,596 | $321 | 7.0% | - As of September 30, 2022, there was approximately $15.6 million of unrecognized compensation costs related to non-vested RSUs, expected to be recognized over the next 2.2 years.97 NOTE 15 - Commitments and Contingencies This note discloses the company's commitments to extend credit through Interest Rate Lock Commitments (IRLCs) and derivative loan instruments, and addresses its involvement in various legal proceedings | Commitment Type | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total commitments to originate loans | $1,400,000 | $2,400,000 | $(1,000,000) | -41.7% | | Total commitments related to derivatives | $1,800,000 | $3,200,000 | $(1,400,000) | -43.8% | - The company is involved in various lawsuits arising in the ordinary course of business, but management does not expect them to have a material adverse effect on its financial position or results of operations.101 NOTE 16 - Minimum Net Worth Requirements This note details the minimum net worth, capital ratio, and liquidity requirements imposed by secondary market investors and state regulators, including Fannie Mae, Freddie Mac, and Ginnie Mae, and confirms the company's compliance - The company is subject to minimum net worth, capital ratio (Adjusted/Tangible Net Worth to Total Assets greater than 6%), and liquidity requirements from Fannie Mae, Freddie Mac, and Ginnie Mae.103104105 - As of December 31, 2021, the company was in compliance with the most restrictive requirement of maintaining a minimum adjusted net worth balance of $84.5 million.105 NOTE 17 - Segments This note identifies the company's two reportable segments, Origination and Servicing, describing their primary responsibilities and financial performance, and explains that assets and certain corporate expenses are not allocated to segments - The company operates two reportable segments: Origination (loan origination, acquisition, and sale activities) and Servicing (collection and remittance of loan payments, impound accounts, loss mitigation).107108109 - The Servicing segment provides a steady cash flow to support Origination and builds client relationships for repeat business, while Origination volume drives Servicing portfolio growth.109119 | Segment Net Income (Loss) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Origination | $1,519 | $90,569 | $100,480 | $339,377 | | Servicing | $96,794 | $387,451 | $10,106 | $28,322 | | All Other | $(20,946) | $(134,391) | $(38,490) | $(126,061) | | Total Net Income | $77,367 | $343,629 | $72,096 | $241,638 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operating results, highlighting key trends, performance indicators, and significant changes, and includes a discussion of non-GAAP financial measures Business and Executive Overview This section describes the company's business model, emphasizing its relationship-based loan sourcing strategy and balanced approach with both origination and servicing segments, which helps mitigate interest rate environment risks - The company, founded in 1960, is a growth-oriented mortgage company focused on personalized mortgage experiences through a relationship-based loan sourcing strategy.117 - Maintaining both origination and servicing segments provides a balanced business model, especially in rising interest rate environments where the focus tends to shift to purchase originations.118 - The servicing segment aims to build long-standing client relationships to drive repeat and referral business back to the origination segment.119 Executive Summary This summary highlights key financial and operational results, including origination volumes, purchase origination percentages, servicing portfolio growth, net income, and non-GAAP measures like Adjusted Net Income and Adjusted EBITDA, noting the impact of rising mortgage rates on MSR valuation | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Jun 30, 2022 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Mortgage loans originated (in billions) | $4.4 | $5.8 | $16.3 | $28.0 | | Purchase originations (% of total) | 90.8% | 84.2% | 79.0% | 52.3% | | Servicing portfolio UPB (in billions) | $77.7 | N/A | $77.7 | $68.0 | | Net income (in millions) | $77.4 | $58.3 | $343.6 | $241.6 | | Adjusted Net Income (in millions) | $24.1 | $13.9 | $70.1 | $236.1 | | Adjusted EBITDA (in millions) | $32.9 | $22.0 | $101.6 | $327.6 | - Net income for the three and nine months ended September 30, 2022, included significant gains from MSR valuation adjustments ($41.8 million and $247.4 million, respectively), driven by rising mortgage rates and lower prepayment speeds.123 Recent Developments This section discusses recent market and economic trends, including interest rate hikes by the Federal Reserve, their impact on mortgage originations and gain on sale margins, and the ongoing effects of the COVID-19 pandemic on the housing market and servicing operations Market and Economic Overview - The Federal Reserve raised interest rates by 300 basis points through September 2022, with plans for additional hikes, leading to fewer refinancings and lower prepayment activity.126 - The MBA forecasts a 14.9% decrease in purchase originations to $1.6 trillion and a 73.9% decrease in refinance originations to $700 billion in 2022.126 - The housing market faces supply chain challenges, tightening labor, and limited inventory, leading to affordability issues and pricing pressures due to rising interest rates.127 COVID-19 Pandemic - The 60-plus day delinquency rate on the servicing portfolio decreased to 1.6% at September 30, 2022, from 1.9% at December 31, 2021.128 - Approximately 0.9% of loans in the servicing portfolio had elected the forbearance option as of September 30, 2022, comparable to the industry average of 0.7%.129 Description of Certain Components of Financial Data This section defines and explains the primary components of the company's revenue and expenses, providing clarity on how various financial items are recognized and categorized in the financial statements Our Components of Revenue - Loan origination fees and gain on sale of loans, net, include net proceeds from loan sales, client fees, fair value of MSRs at sale, changes in fair value of IRLCs and MLHS, and changes in fair value of forward delivery commitments.132 - Loan servicing and other fees comprise contractual servicing fees, late fees, other ancillary revenue, and impound interest.132143 - Valuation adjustment of MSRs reflects periodic reevaluation of MSR fair value due to changes in valuation model inputs or assumptions and collections of servicing cash flows.134 Our Components of Expenses - Salaries, incentive compensation and benefits expense includes all payroll, incentive compensation (variable based on origination volume), and employee benefits.138 - General and administrative expenses include professional services, office expenses, and adjustments to the fair value of contingent liabilities from acquisitions (earn-out payments).139140 - Provision for foreclosure losses accounts for estimated losses on government loans due to unreimbursed interest and foreclosure costs, reserved based on historical experience and future expectations.143 Key Performance Indicators Management uses various key performance indicators (KPIs) to evaluate business results, measure performance, identify trends, and inform strategic decisions, covering both origination and servicing metrics - Origination KPIs monitor revenue generation, market share, and origination quality, while servicing KPIs track customer base size, MSR value, delinquency rates, and customer retention.147 | Origination Data | 3 Months Ended Sep 30, 2022 | 3 Months Ended Jun 30, 2022 | % Change QoQ | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | % Change YoY | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Total originations (in thousands) | $4,406,712 | $5,787,206 | -23.9% | $16,308,566 | $28,038,244 | -41.8% | | Purchase (% of total) | 90.8% | 84.2% | 7.8% | 79.0% | 52.3% | 51.1% | | Refinance (% of total) | 9.2% | 15.8% | -41.8% | 21.0% | 47.7% | -56.0% | | Gain on sale margin (bps) | 354 | 363 | -2.5% | 375 | 420 | -10.7% | | Weighted average note rate | 5.6% | 4.9% | 14.3% | 4.6% | 3.0% | 53.3% | | Servicing Data | 3 Months Ended Sep 30, 2022 | 3 Months Ended Jun 30, 2022 | % Change QoQ | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | % Change YoY | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | UPB (period end, in thousands) | $77,735,730 | $75,856,564 | 2.5% | $77,735,730 | $67,964,979 | 14.4% | | MSR multiple (period end) | 4.9 | 4.7 | 4.3% | 4.9 | 3.2 | 53.1% | | Loan payoffs (in thousands) | $1,348,480 | $1,847,489 | -27.0% | $5,603,182 | $14,485,469 | -61.3% | | Loan delinquency rate 60-plus days (period end) | 1.6% | 1.6% | 0.0% | 1.6% | 2.3% | -30.4% | Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, including Adjusted Net Income, Adjusted EBITDA, and Adjusted Return on Equity, to their most directly comparable GAAP measures, explaining their use for evaluating operating performance - Adjusted Net Income excludes non-cash expenses like MSR fair value changes, contingent liabilities adjustments, amortization of acquired intangibles, and stock-based compensation, adjusted for tax impact.157 - Adjusted EBITDA excludes interest (without adjustment for net warehouse interest related to loan fundings and payoff interest related to loan prepayments), taxes, depreciation, amortization, and non-controlling interest, further adjusted for MSR fair value changes, contingent liabilities, and stock-based compensation.158 | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income attributable to Guild | $77,374 | $58,272 | $343,604 | $241,638 | | Adjusted Net Income | $24,092 | $13,858 | $70,089 | $236,149 | | Adjusted EBITDA | $32,934 | $21,966 | $101,583 | $327,581 | | Adjusted Return on Equity | 7.9% | 4.8% | 8.6% | 37.6% | Results of Operations for the Three Months Ended September 30, 2022 and June 30, 2022 This section provides a comparative analysis of the company's consolidated statements of operations for the three months ended September 30, 2022, versus the preceding quarter ended June 30, 2022, highlighting changes in revenue and expense items | Metric | Sep 30, 2022 (in thousands) | Jun 30, 2022 (in thousands) | $ Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Net revenue | $261,220 | $287,537 | $(26,317) | -9.2% | | Total expenses | $174,532 | $209,140 | $(34,608) | -16.5% | | Income before income tax expense | $86,688 | $78,397 | $8,291 | 10.6% | | Net income | $77,367 | $58,289 | $19,078 | 32.7% | Results of Operations for the Nine Months Ended September 30, 2022 and 2021 This section provides a comparative analysis of the company's consolidated statements of operations for the nine months ended September 30, 2022, versus the same period in 2021, detailing significant year-over-year changes in revenue and expense categories Revenue Revenue for the nine months ended September 30, 2022, decreased compared to 2021, primarily due to a significant decline in loan origination fees and gain on sale of loans, partially offset by increased loan servicing fees and a positive valuation adjustment of mortgage servicing rights | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Loan origination fees and gain on sale of loans, net | $605,229 | $1,174,308 | $(569,079) | -48.5% | | Loan servicing and other fees | $165,419 | $143,099 | $22,320 | 15.6% | | Valuation adjustment of mortgage servicing rights | $247,439 | $(84,581) | $332,020 | 392.5% | | Net revenue | $1,030,519 | $1,233,253 | $(202,734) | -16.4% | Loan Origination Fees and Gain on Sale of Loans, Net Loan origination fees and gain on sale of loans, net, significantly decreased for both the three and nine months ended September 30, 2022, primarily driven by declines in loan sales volume and lower gain on sale margins due to increased competition and rising interest rates | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Gain on sale of loans | $91,126 | $159,469 | $(68,343) | -42.9% | | Loan origination fees | $13,006 | $15,603 | $(2,597) | -16.6% | | Fair value of originated MSRs | $53,314 | $67,135 | $(13,821) | -20.6% | | Fair value adjustment to MLHS and IRLCs | $(68,720) | $40,903 | $(109,623) | -268.0% | | Changes in fair value of forward commitments | $67,467 | $(73,407) | $140,874 | -191.9% | | Total loan origination fees and gain on sale of loans, net | $154,618 | $207,972 | $(53,354) | -25.7% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total loan origination fees and gain on sale of loans, net | $605,229 | $1,174,308 | $(569,079) | -48.5% | | Total in-house originations | $16,147,287 | $27,973,347 | $(11,826,060) | -42.3% | | Gain on sale margin (bps) | 375 | 420 | (45) | -10.7% | - The decrease in gain on sale margins from 420 bps (9M 2021) to 375 bps (9M 2022) reflects increased competition and lower demand due to rising mortgage rates.176 Loan Servicing and Other Fees Loan servicing and other fees increased for both the three and nine months ended September 30, 2022, driven by growth in the average servicing portfolio and the number of loans serviced, as customers exited forbearance programs | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Servicing fee income | $56,410 | $53,368 | $3,042 | 5.7% | | Total loan servicing and other fees | $57,647 | $54,595 | $3,052 | 5.6% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Servicing fee income | $161,342 | $138,604 | $22,738 | 16.4% | | Total loan servicing and other fees | $165,419 | $143,099 | $22,320 | 15.6% | - The average UPB of the servicing portfolio increased by 3.0% QoQ and 16.2% YoY, contributing to higher servicing fees.181183185 Valuation Adjustment of Mortgage Servicing Rights The valuation adjustment of mortgage servicing rights (MSRs) showed a significant positive change for both the three and nine months ended September 30, 2022, primarily due to increasing interest rates and a decrease in the weighted average estimated prepayment speed, which increases MSR value | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | MSR valuation adjustment | $41,764 | $21,074 | $20,690 | 98.2% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | MSR valuation adjustment | $247,439 | $(84,581) | $332,020 | 392.5% | - Average 30-year mortgage rates increased by 30 bps QoQ and 250 bps YoY, leading to lower prepayment speeds (8.2% at Sep 30, 2022 vs. 14.5% at Sep 30, 2021) and an increase in MSR value.187 Interest Income Interest income increased for the three and nine months ended September 30, 2022, primarily due to higher earnings credit rates on cash balances, despite a decrease in funding interest income for the nine-month period due to lower origination volume | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total interest income | $17,575 | $14,823 | $2,752 | 18.6% | | Interest income earnings credit | $4,387 | $948 | $3,439 | 362.8% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total interest income | $47,661 | $46,386 | $1,275 | 2.7% | | Interest income earnings credit | $5,602 | $2,385 | $3,217 | 134.9% | - Interest income earnings credit increased significantly due to higher earnings credit rates on non-interest bearing deposits from banking partners.190 Interest Expense Total interest expense for the nine months ended September 30, 2022, decreased compared to 2021, primarily due to lower origination volume leading to decreased borrowings on warehouse lines of credit and reduced bank servicing charges | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total interest expense | $(36,411) | $(46,030) | $9,619 | -20.9% | | Interest expense, funding facilities | $(18,134) | $(23,846) | $5,712 | -24.0% | | Bank servicing charges | $(6,707) | $(8,830) | $2,123 | -24.0% | - The decrease in interest expense was mainly driven by an $11.8 billion decrease in origination volume, resulting in lower warehouse line of credit borrowings.194 Summary of Expenses Total expenses decreased for both the three and nine months ended September 30, 2022, primarily due to significant reductions in salaries, incentive compensation, and general and administrative expenses, partially offset by increases in occupancy and depreciation | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total expenses | $174,532 | $209,140 | $(34,608) | -16.5% | | Salaries, incentive compensation and benefits | $137,372 | $178,192 | $(40,820) | -22.9% | | General and administrative | $19,412 | $6,371 | $13,041 | 204.7% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total expenses | $587,275 | $908,260 | $(320,985) | -35.3% | | Salaries, incentive compensation and benefits | $502,893 | $770,181 | $(267,288) | -34.7% | | General and administrative | $20,153 | $83,508 | $(63,355) | -75.9% | Salaries, Incentive Compensation and Benefits Salaries, incentive compensation, and benefits expense decreased significantly for both the three and nine months ended September 30, 2022, primarily due to reduced origination volumes leading to lower variable incentive compensation and headcount reductions | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Incentive compensation | $205,110 | $430,164 | $(225,054) | -52.3% | | Salaries | $235,837 | $258,568 | $(22,731) | -8.8% | | Benefits | $61,946 | $81,449 | $(19,503) | -23.9% | | Total salaries, incentive compensation and benefits expense | $502,893 | $770,181 | $(267,288) | -34.7% | - The company realized approximately $75.0 million in annualized cost savings through September 30, 2022, primarily from headcount reductions.203 General and Administrative General and administrative expenses showed significant fluctuations, with a large increase QoQ due to a contingent liability valuation adjustment and a substantial decrease YoY primarily driven by a gain from the contingent earn-out liability adjustment | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Contingent liability fair value adjustment | $327 | $(16,511) | $16,838 | 102.0% | | Total general and administrative expense | $19,412 | $6,371 | $13,041 | 204.7% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Contingent liability fair value adjustment | $(45,075) | $18,587 | $(63,662) | -342.5% | | Total general and administrative expense | $20,153 | $83,508 | $(63,355) | -75.9% | - The remaining contingent earn-out liability was adjusted to zero at September 30, 2022, due to the expectation of no future payments for the RMS acquisition.204 Occupancy, Equipment and Communication Occupancy, equipment, and communication expenses decreased QoQ due to lower communication costs from headcount reductions, but increased YoY primarily due to additional rental and communication services incurred from the RMS acquisition | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Total occupancy, equipment and communication expense | $54,587 | $47,508 | $7,079 | 14.9% | | Occupancy | $30,805 | $26,494 | $4,311 | 16.3% | | Communication | $17,235 | $14,541 | $2,694 | 18.5% | - The increase in occupancy and communication expenses YoY is attributed to nine months of expenses from the RMS acquisition in 2022, compared to three months in 2021.207 Provision for Foreclosure Losses The provision for foreclosure losses was a reversal for both the three and nine months ended September 30, 2022, reflecting decreased foreclosure losses per loan due to higher home values, housing supply shortages, and higher interest rates, leading to a revision of the reserve | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | | (Reversal of) provision for foreclosure losses | $(3,449) | $1,796 | $(5,245) | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | | Reversal of provision for foreclosure losses | $(1,974) | $(306) | $(1,668) | - Decreased foreclosure losses per loan, driven by higher home values and housing market conditions, led to a revision and reversal of the foreclosure loss reserve.208 Income Tax Expense Income tax expense decreased for both the three and nine months ended September 30, 2022, primarily due to a lower estimated effective tax rate resulting from permanent tax benefits related to a previous acquisition | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Income tax expense | $9,321 | $20,108 | $(10,787) | -53.6% | | Estimated effective tax rate | 6.8% | 25.6% | -18.8% | -73.4% | | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Income tax expense | $99,615 | $83,355 | $16,260 | 19.5% | | Estimated effective tax rate | 22.3% | 25.5% | -3.2% | -12.5% | Segment Results for the Three Months Ended September 30, 2022 and June 30, 2022 and the Nine Months Ended September 30, 2022 and 2021 This section analyzes the financial performance of the Origination and Servicing segments, highlighting changes in net revenue, expenses, and net income, noting that unallocated corporate costs are not included in segment results Origination | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total in-house originations | $4,363,803 | $5,721,931 | $16,147,287 | $27,973,347 | | Net revenue | $158,675 | $212,098 | $616,411 | $1,177,873 | | Salaries, incentive compensation and benefits | $124,909 | $165,133 | $464,368 | $722,604 | | Net income allocated to origination | $1,519 | $25,615 | $90,569 | $339,377 | - The decrease in net revenue was driven by a 23.7% QoQ and 42.3% YoY decline in origination volume and lower gain on sale margins.211 - General and administrative expenses decreased YoY due to a $45.1 million gain from the contingent earn-out liability adjustment in 2022, compared to an $18.6 million expense in 2021.213 Servicing | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Jun 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | UPB of servicing portfolio (period end) | $77,735,730 | $75,856,564 | $77,735,730 | $67,964,979 | | Net revenue | $104,081 | $76,894 | $418,623 | $59,930 | | Valuation adjustment of MSRs | $41,764 | $21,074 | $247,439 | $(84,581) | | Net income allocated to servicing | $96,794 | $63,880 | $387,451 | $28,322 | - The significant increase in net income was primarily due to a higher upward adjustment to the fair value of MSRs ($41.8 million QoQ and $247.4 million YoY).216 - Loan servicing and other fees increased due to the growth in the UPB of the servicing portfolio.217 Liquidity, Capital Resources and Cash Flows This section discusses the company's primary sources and uses of liquidity, debt obligations (warehouse lines of credit, MSR notes payable), compliance with covenants, and cash flow activities, emphasizing the impact of market conditions and the share repurchase program Debt Obligations - The company relies on committed and uncommitted loan funding facilities, primarily warehouse lines of credit, to fund mortgage loan originations.222223 | Facility Type | Aggregate Available Amount (in billions) | Outstanding Balances (in billions) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | Warehouse lines of credit | $2.6 | $0.8 | | MSR notes payable | $0.475 | $0.1125 | - The company was in compliance with all operating and financial covenants for its loan funding facilities and MSR notes payable as of September 30, 2022.230 Secondary Market Investors - Secondary market investors require compliance with minimum net worth, liquidity, total liquid assets, and maximum adjusted net worth to total assets ratios.233 - A breach of these covenants could result in default, disallowing the sale of mortgage loans to investors and significantly impacting liquidity and operations.233 - The company may be obligated to make cash payments to investors for delinquent loans it services or repurchase loans with origination defects, which could impact liquidity.234 Cash Flows Operating activities | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Net cash provided by operating activities | $1,181,081 | $769,313 | $411,768 | 53.5% | | Cash provided by loans held for sale | $1,274,655 | $694,451 | $580,204 | 83.6% | Investing activities | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Net cash used in investing activities | $(2,981) | $(90,287) | $87,306 | -96.7% | - The decrease in cash used was primarily due to the $86.9 million acquisition of RMS in July 2021, which did not recur in 2022.237 Financing activities | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------- | :------- | | Net cash used in financing activities | $(1,256,270) | $(709,706) | $(546,564) | 77.0% | | Warehouse lines of credit | $(1,106,718) | $(667,192) | $(439,526) | 65.9% | | Other financing sources | $(149,552) | $(42,514) | $(107,038) | 251.8% | - The increase in cash used was driven by $137.5 million in MSR notes payable repayments and $7.3 million in acquisition-related contingent liability payments, along with $3.0 million for Class A common stock repurchases.239 Share Repurchase Program - A $20.0 million share repurchase program for Class A common stock was authorized in May 2022, to be executed over 24 months.240 - As of September 30, 2022, 280,914 shares of Class A common stock were repurchased for $3.0 million, with $17.0 million remaining under the program.240 Material Cash Requirements - Material cash requirements include servicing debt obligations, potential repurchase and indemnification obligations for loans sold, and commitments from interest rate lock commitments (IRLCs) and loan sales.241242243 - Total commitments to originate loans, adjusted for pull-through, were approximately $1.3 billion at September 30, 2022, down from $2.2 billion at December 31, 2021.243 Critical Accounting Estimates and Significant Accounting Policies The preparation of financial statements requires management to make significant estimates and assumptions, particularly concerning the fair value of MLHS, MSRs, IRLCs, forward delivery commitments, and contingent liabilities due to acquisitions. No material changes to methods or judgments were made during the nine months ended September 30, 2022 - Critical accounting estimates primarily relate to the fair value of Mortgage Loans Held for Sale (MLHS), Mortgage Servicing Rights (MSRs), Interest Rate Lock Commitments (IRLCs), forward delivery commitments, and contingent liabilities due to acquisitions.245 - No material changes were made to critical accounting estimates or significant accounting policies during the nine months ended September 30, 2022, compared to the 2021 Annual Report.246 Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Guild Holdings Company is not required to provide specific quantitative and qualitative disclosures about market risk in this report - As a smaller reporting company, Guild Holdings Company is exempt from providing quantitative and qualitative disclosures about market risk.249 Item 4. Controls and Procedures This item discusses the effectiveness of the company's disclosure controls and procedures, acknowledging material weaknesses in internal control over financial reporting that remain unremediated, and outlines ongoing remediation efforts Evaluation of Disclosure Controls and Procedures - Disclosure controls and procedures were deemed not effective as of September 30, 2022, due to unremediated material weaknesses in internal controls over financial reporting.251 - Inherent limitations mean control systems provide reasonable, not absolute, assurance, and may not prevent all errors or fraud.250254 Remediation - Material weaknesses include insufficient personnel experience in control design/operation, ineffective risk assessment (including fraud), and ineffective IT controls over user access and change management.252 - Remediation efforts involve hiring additional finance, accounting, and IT resources, enhancing risk assessment, designing formal roles and review responsibilities, and engaging third-party specialists for control review and enhancement.252253347 Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting were identified during the quarter ended September 30, 2022, other than ongoing remediation efforts for previously identified material weaknesses.253 Inherent Limitations on Effectiveness of Controls - Control systems, regardless of design, can only provide reasonable assurance, not absolute, that objectives are met due to inherent limitations.254 - These limitations include faulty judgments, simple errors, and the inability to anticipate every economic and financial outcome.254353 Part II - Other Information This part contains other information not included in the financial statements, such as legal proceedings, detailed risk factors, information on unregistered sales of equity securities, and a list of exhibits Item 1. Legal Proceedings The company is routinely involved in various legal and regulatory proceedings in the ordinary course of business but does not currently expect any of these matters to have a material adverse effect on its consolidated financial position or results of operations - The company is involved in routine legal and regulatory proceedings but does not anticipate a material adverse effect on its financial position or results.257 Item 1A. Risk Factors This item details various risks and uncertainties that could materially and adversely affect the company's business, financial condition, operating results, cash flow, and prospects, potentially causing a decline in its Class A common stock trading price Risks Related to Our Business - Disruptions in the secondary home loan market or inability to sell originated loans, especially to GSEs, could detrimentally affect the business.260 - Macroeconomic factors like rising interest rates, inflation, and limited housing supply adversely affect origination volume and could increase servicing costs due to delinquencies.261262 - Dependence on U.S. government-sponsored entities (GSEs) and government agencies (FHA, VA, USDA, Ginnie Mae) means changes in their roles, guidelines, or pricing could materially affect the business.264 - Changes in interest rates directly