UWM Holdings Corp: Form 10-Q for the period ended Sep 30, 2024

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, our condensed consolidated financial statements and the related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed under the heading “Cautionary Note Regarding Forward-Looking Statements,” in this report and in Part I. Item 1A. “Risk Factors” included in our Form 10-K filed with the SEC on February 28, 2024. Unless otherwise indicated or the context otherwise requires, when used in this Form 10-Q, the term “UWM” means United Wholesale Mortgage, LLC and “the Company,” “we,” “our” and “us” refer to UWM Holdings Corporation and our subsidiaries.

Business Overview

We are the largest overall residential mortgage lender in the U.S., by closed loan volume, despite originating mortgage loans exclusively through the wholesale channel. For the last nine years, including the year ended December 31, 2023 we have also been the largest wholesale mortgage lender in the U.S. by closed loan volume. 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 the District of Columbia.

Our mortgage origination business derives revenue from originating, processing and underwriting primarily government-sponsored enterprise ("GSE") conforming mortgage loans, along with FHA, USDA and VA mortgage loans, which are subsequently pooled and sold in the secondary market. For the three and nine months ended September 30, 2024, 91% and 88%, respectively, of the loans we originated were sold to Fannie Mae or Freddie Mac, or were transferred to Ginnie Mae pools in the secondary market, while the remainder were primarily jumbo loans that are underwritten to the same “Qualified Mortgage" underwriting standards and have a similar risk profile but are sold to third party investors primarily due to loan size. The mortgage origination process generally begins with a borrower entering into an IRLC with us that is arranged by an independent mortgage broker, 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 generally hedge that risk by selling forward-settling mortgage-backed securities and FLSCs in the To Be Announced ("TBA") market. When the mortgage loan is closed, we fund the loan with approximately 2-3%, on average, of our own funds and the remainder with funds drawn under one of our warehouse facilities (except when we opt to "self-warehouse" in which case we use our cash to fund the entire loan). At that point, the mortgage loan is legally owned by our warehouse facility lender and is subject to our repurchase right (other than when we self-warehouse). When we have identified a pool of mortgage loans to sell to the agencies, non-governmental entities, other investors, 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 currently retain the majority of the MSRs associated with our production, but we have, and intend to continue to opportunistically sell MSRs depending on market conditions. This nimble approach has provided us funding flexibility, and reduced legacy MSR asset exposure. When we sell MSRs, we typically sell them in the bulk MSR secondary market.

Our unique model, focusing exclusively on the wholesale channel, results in what we believe to be complete alignment with our clients and superior customer service arising from our investments in people and technology that has driven demand for our services from our clients.

New Accounting Pronouncements Not Yet Effective

See Note 1 – Organization, Basis of Presentation and Summary of Significant Accounting Policies to the condensed consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on the Company's condensed consolidated financial statements.

Components of Revenue

We generate revenue from the following three components of the loan origination business: (i) loan production income, (ii) loan servicing income, and (iii) interest income.

Loan production income. Loan production income includes all components related to the origination and sale of mortgage loans, including:

• primary gain (loss), which includes the following:
• the difference between the estimated fair value or sale price of newly originated loans when sold in the secondary market and the purchase price of such originated loans. The purchase price of originated loans includes the loan principal amount, as well as any compensation paid by us to our clients (i.e., the Independent Mortgage Brokers) and any lender credits provided by us to borrowers, offset by discount points (if any) paid by borrowers to us to reduce their interest rate. Primary gain (loss) also includes changes in the estimated fair value of loans from the origination date to the sale date, and any difference between proceeds received upon sale (net of certain fees charged by investors) and the current fair value of a loan when sold into the secondary market. When loans are sold with servicing retained, the estimated fair value of the retained and newly originated MSRs is separately recognized apart from the loan and is moved from the "primary gain (loss)" to the "capitalization of MSRs" components of loan production income;
• the change in fair value of IRLCs, FLSCs (used to economically hedge IRLCs and loans at fair value from the origination to the sale date) due to changes in estimated fair value, driven primarily by interest rates but also influenced by other valuation assumptions;
• loan origination and certain other fees related to the origination of a loan, which generally represent flat, per-loan fee amounts;
• provision for representation and warranty obligations, which represent the reserves initially established at the time of sale 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; and
• capitalization of MSRs, representing the estimated fair value of newly originated MSRs when loans are sold and the associated servicing rights are retained.

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).

Three and Nine Months Ended September 30, 2024 and 2023 Summary

For the three months ended September 30, 2024, we originated $39.5 billion in loans, which was an increase of $9.8 billion, or 32.9%, from the $29.7 billion of originations during the three months ended September 30, 2023. We reported net income of $31.9 million during the three months ended September 30, 2024, which was a decrease of $269.0 million, compared to net income of $301.0 million for the three months ended September 30, 2023. Adjusted EBITDA for the three months ended September 30, 2024 was $107.2 million as compared to $112.1 million for the three months ended September 30, 2023. Refer to the "Non-GAAP Financial Measures" section below for a detailed discussion of how we define and calculate Adjusted EBITDA.

For the nine months ended September 30, 2024, we originated $100.8 billion in loans, which was an increase of $16.9 billion, or 20.1%, from the $83.9 billion of originations during the nine months ended September 30, 2023. We reported net income of $288.8 million for the nine months ended September 30, 2024, which was a decrease of $102.4 million, compared to net income of $391.2 million for the nine months ended September 30, 2023. Adjusted EBITDA for the nine months ended September 30, 2024 was $341.8 million as compared to $378.7 million for the nine months ended September 30, 2023. Refer to the "Non-GAAP Financial Measures" section below for a detailed discussion of how we define and calculate Adjusted EBITDA.

Non-GAAP Financial Measures

To provide investors with information in addition to our results as determined by U.S. GAAP, we disclose Adjusted EBITDA as a non-GAAP measure, which our management believes provides useful information on our performance to investors. This measure is not a measurement of our financial performance under U.S. GAAP, and it may not be comparable to a similarly titled measure reported by other companies. Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as an alternative to revenue, net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.

We define Adjusted EBITDA as earnings before interest expense on non-funding debt, provision for income taxes, depreciation and amortization, stock-based compensation expense, the change in fair value of MSRs due to valuation inputs or assumptions, gains or losses on other interest rate derivatives, the impact of non-cash deferred compensation expense, the change in fair value of the Public and Private Warrants, the non-cash income/expense impact of the change in the Tax Receivable Agreement liability, and the change in fair value of retained investment securities. We exclude the non-cash income/expense impact of the change in the Tax Receivable Agreement liability, the change in fair value of the Public and Private Warrants, the change in fair value of retained investment securities, and the change in fair value of MSRs due to valuation inputs or assumptions as these represent non-cash, non-realized adjustments to our earnings, which is not indicative of our performance or results of operations. Adjusted EBITDA includes interest expense on funding facilities, which are recorded as a component of interest expense, as these expenses are a direct operating expense driven by loan origination volume. By contrast, interest expense on non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA. Non-funding debt includes the Company's senior notes, lines of credit, borrowings against investment securities, and finance leases.

We use Adjusted EBITDA to evaluate our operating performance, and it is one of the measures used by our management for planning and forecasting future periods. We believe the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by our management and may make it easier to compare our results with other companies that have different financing and capital structures.

The following table presents a reconciliation of net income, the most directly comparable U.S. GAAP financial measure, to Adjusted EBITDA:

($ in thousands)

(1) Reflects the change ((increase)/decrease) in fair value of MSRs due to changes in valuation inputs or assumptions. Refer to Note 5 - Mortgage Servicing Rights to the condensed consolidated financial statements.

(2) Reflects management incentive bonuses under our long-term incentive plan that are accrued when earned, net of cash payments.

(3) Reflects the change (increase/(decrease)) in the fair value of the Public and Private Warrants.

(4) Reflects the non-cash (income) expense impact of the change in the Tax Receivable Agreement liability. Refer to Note 1 - Organization, Basis of Presentation and Summary of Significant Accounting Policies to the condensed consolidated financial statements for additional information related to the Tax Receivable Agreement.

(5) Reflects the change ((increase)/decrease) in the fair value of the retained investment securities.

Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

($ in thousands)

Loan production income

The table below provides details of the composition of our loan production for each of the periods presented:

($ in thousands)

The components of loan production income for the periods presented were as follows:

($ in thousands)

MSRs are an element of the total fair value of originated mortgage loans recognized as part of primary gain (loss) upon loan origination, and are separately recognized and moved between the primary gain (loss) and capitalization of MSRs components of loan production income upon sale of a loan with servicing retained. These components of total loan production income are primarily impacted by market pricing competition, loan production volume, the estimated fair value of MSRs, and the effectiveness of our pipeline hedging strategies, which can be impacted by changes in market interest rates between the lock date and the date a loan is sold into the secondary market.

The total of primary loss and capitalization of MSRs increased approximately $128.7 million for the three months ended September 30, 2024 as compared to the same period in 2023. This increase was primarily due to an increase in loan production volume of $9.8 billion, or 32.9%, from $29.7 billion to $39.5 billion during the three months ended September 30, 2024, as compared to the same period in 2023 and the impacts of improved pricing.

The provision for representations and warranties obligations increased by $4.1 million for the three months ended September 30, 2024 as compared to the same period in 2023, due primarily to the increase in loan production volume. Loan origination fees increased by approximately $52.1 million for the three months ended September 30, 2024 as compared to the same period in 2023, due to the increase in loan production volume and increases in certain per loan origination and other fees.

The increase in production volume was primarily due to higher refinance volume as a result of lower market interest rates in the third quarter of 2024.

The total of primary loss and capitalization of MSRs increased approximately $228.8 million for the nine months ended September 30, 2024 as compared to the same period in 2023. This increase was primarily due to an increase in loan production volume of $16.9 billion, or 20.1%, from $83.9 billion to $100.8 billion during the nine months ended September 30, 2024, as compared to the same period in 2023, and the impacts of improved market pricing.

The provision for representations and warranties obligations increased by $11.4 million for the nine months ended September 30, 2024 as compared to the same period in 2023, due to an increase in expected loss rates and the increase in loan production volume. Loan origination fees increased by approximately $129.1 million for the nine months ended September 30, 2024 as compared to the same period in 2023, due to increases in loan production volume and increases in certain per loan origination and other fees.

The increase in production volume was primarily due to higher refinance volume, due to the generally lower market interest rate environment in the first nine months of 2024 as compared to 2023.

Loan servicing income and servicing costs

The table below summarizes loan servicing income and servicing 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):

($ in thousands)

($ in thousands)

Loan servicing income was $134.8 million for the three months ended September 30, 2024, a decrease of $65.7 million, or 32.8%, as compared to $200.4 million for the three months ended September 30, 2023. The decrease in loan servicing income during the three months ended September 30, 2024 was primarily driven by a decline in the average servicing portfolio, partially offset by an increase in the portfolio weighted average servicing fee as a result of increased retained excess servicing on new production.

Servicing costs decreased $8.6 million for the three months ended September 30, 2024 as compared to the same period in 2023 primarily as a result of a decline in the average servicing portfolio.

Loan servicing income was $463.4 million for the nine months ended September 30, 2024, a decrease of $148.8 million, or 24.3%, as compared to $612.2 million for the nine months ended September 30, 2023. The decrease in loan servicing income during the nine months ended September 30, 2024 was primarily driven by the same reasons mentioned above in the three months analysis.

Servicing costs decreased $21.0 million for the nine months ended September 30, 2024 as compared to the same period in 2023 primarily driven by the same reasons mentioned above in the three months analysis.

As of the dates presented below, our portfolio of loans serviced for others consisted of the following:

($ in thousands)

Change in Fair Value of Mortgage Servicing Rights

The change in fair value of MSRs for the three months ended September 30, 2024 was a decrease of $446.1 million, as compared with an increase of $92.9 million for the three months ended September 30, 2023. The decrease in fair value of MSRs for the three months ended September 30, 2024 was primarily attributable to a decrease in fair value of approximately $263.9 million as a result of changes in valuation inputs and assumptions due to the decline in market interest rates, a decrease in fair value of approximately $161.4 million due to realization of cash flows, decay, and other (including loans paid in full) and approximately $20.8 million of net reserves and transaction costs for bulk MSR sales and sales of excess servicing cash flows. The increase in fair value for the three months ended September 30, 2023 of approximately $92.9 million was primarily attributable to an increase of approximately $236.0 million resulting from changes in valuation inputs and assumptions, mainly due to changes in market interest rates, partially offset by a decline of approximately $127.8 million due to realization of cash flows, decay, and other (including loans paid in full) and approximately $15.3 million of net reserves and transaction costs for bulk MSR sales and sales of excess servicing cash flows.

The change in fair value of MSRs for the nine months ended September 30, 2024 was a decrease of $604.1 million, as compared with a decrease of $219.7 million for the nine months ended September 30, 2023. The decrease in fair value of MSRs for the nine months ended September 30, 2024 was primarily attributable to a decline in fair value of approximately $377.9 million due to realization of cash flows, decay, and other (including loans paid in full), a decrease in fair value of approximately $161.1 million due to changes in valuation inputs and assumptions (due primarily to changes in market interest rates) and approximately $65.2 million of net reserves and transaction costs for bulk MSR sales and sales of excess servicing cash flows. The decrease in fair value for the nine months ended September 30, 2023 of approximately $219.7 million was primarily attributable to a decline of approximately $360.5 million due to realization of cash flows, decay, and other (including loans paid in full) and approximately $36.9 million of net reserves and transaction costs for bulk MSR sales and sales of excess servicing cash flows, partially offset by an increase of approximately $177.7 million resulting from changes in valuation inputs and assumptions, primarily due to changes in market interest rates.

Gain on Other Interest Rate Derivatives

The gains on other interest rate derivatives of $226.9 million for the three months ended September 30, 2024 and $254.1 million for the nine months ended September 30, 2024 were due to gains on interest rate swap futures that we entered into during the second quarter of 2024, attributable declines in market 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:

($ in thousands)

Net interest income (interest income less interest expense on funding facilities) was $35.7 million for the three months ended September 30, 2024, a decrease of $8.2 million, or 19%, as compared to $44.0 million for the three months ended September 30, 2023, mainly as a result of higher interest expense on funding facilities, partially offset by an increase in interest income. Interest expense on funding facilities increased due to higher average warehouse balances and lower credits from warehouse lenders on custodial and other deposits. Interest income increased primarily as a result of higher average balances of mortgage loans at fair value due to increased loan production volume.

Interest expense on non-funding debt was $31.5 million for the three months ended September 30, 2024, a decrease from $42.8 million for the three months ended September 30, 2023, primarily due to a decrease in average borrowings on the MSR facilities.

Net interest income (interest income less interest expense on funding facilities) was $123.9 million for the nine months ended September 30, 2024, a decrease of $23.6 million, or 16%, as compared to $147.4 million for the nine months ended September 30, 2023, as a result of higher interest expense on funding facilities, partially offset by an increase in interest income. The increase in interest expense on funding facilities increased was primarily due to higher average warehouse balances from increased loan production. The increase in interest income was due to the same reasons mentioned in the three month analysis above.

Interest expense on non-funding debt was $103.7 million for the nine months ended September 30, 2024, a decrease from $128.6 million for the nine months ended September 30, 2023, due to the same reasons mentioned in the three month analysis above.

Other costs

Other costs (excluding servicing costs and interest expense, explained above) for the periods presented below were as follows:

($ in thousands)

Other costs were $328.0 million for the three months ended September 30, 2024, an increase of $80.0 million, or 32.3%, as compared to $248.0 million for the three months ended September 30, 2023. This increase was primarily due to an increase in salaries, commissions and benefits of $46.1 million, or 34.1%, primarily due to an increase in average team member count as we prepare for anticipated increases in production volume, an increase in direct loan production costs of $22.2 million, primarily due to higher costs associated with our free credit report program and down payment assistance programs as well as the increased loan production volume. General and administrative expenses increased $8.8 million primarily due to an increase in computer support services and professional service fees. Marketing, travel and entertainment expenses increased $2.3 million primarily due to our continued investment in our broker relationships through broker visits and training programs.

Other costs were $880.3 million for the nine months ended September 30, 2024, an increase of $188.1 million, or 27.2%, as compared to $692.2 million for the nine months ended September 30, 2023. This increase was primarily due to an increase in salaries, commissions and benefits of $108.3 million, or 27.9%, an increase in direct loan production costs of $59.0 million, an increase in general and administrative expenses of $17.3 million, as well as an increase in marketing, travel and entertainment expenses of $7.1 million. The increases were primarily due to the same reasons mentioned in the three month analysis above. These increases were partially offset by a decrease in other expense (income) of $3.3 million primarily due to lower expenses associated with the change in fair value of retained investment securities, partially offset by higher expenses related to the change in fair value of Public and Private Warrants.

Income Taxes

We recorded a $0.3 million provision for income taxes during the three months ended September 30, 2024, compared to a provision for income taxes of $0.7 million for the three months ended September 30, 2023. The decrease in income tax provision for the three months ended September 30, 2024, as compared to the same period in 2023, was primarily due to the decrease in pre-tax income attributable to the Company.

We recorded a $4.9 million provision for income taxes during the nine months ended September 30, 2024, compared to a provision for income taxes of $0.9 million for the nine months ended September 30, 2023. The increase in income tax provision for the nine months ended September 30, 2024, as compared to the same period in 2023, was primarily due to an increase in state taxes payable in both the current and future periods.

Net income

Net income was $31.9 million for the three months ended September 30, 2024, a decrease of $269.0 million or 89.4%, as compared to net income of $301.0 million for the three months ended September 30, 2023. The decrease in net income was primarily the result of a decrease in total revenue, net of $150.7 million and an increase in total expenses (including income taxes) of $118.4 million, as further described above.

Net loss attributable to the Company of $6.3 million and net income attributable to the Company of $18.2 million for the three months ended September 30, 2024 and 2023, respectively, includes the net income of UWM attributable to the Company due to its approximate 7% and 6% ownership interest in Holdings LLC as September 30, 2024 and 2023, respectively. Net loss attributable to the Company for the three months ended September 30, 2024 was also impacted by the change in fair value of the Public and Private Warrants due to the change in UWMC's stock price during the quarter.

Net income was $288.8 million for the nine months ended September 30, 2024, a decrease of $102.4 million or 26.2%, as compared to net income of $391.2 million for the nine months ended September 30, 2023. The increase in net income was primarily the result of an increase in total revenue, net of $177.6 million, partially offset by an increase in total expenses (including income taxes) of $280.0 million, as further described above.

Net income attributable to the Company of $5.5 million and $13.8 million for the nine months ended September 30, 2024 and 2023, respectively, includes the net income (loss) of UWM attributable to the Company due to its approximate 7% and 6% ownership interest in Holdings LLC as September 30, 2024 and 2023, respectively.

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 and certain other fees related to the origination of a loan;
• servicing fee income;
• interest income on mortgage loans; and
• sale of MSRs and excess servicing cash flows.

Historically, our primary uses of funds have included:

• origination of loans;
• retention of MSRs from our loan sales;
• payment of interest expense;
• payment of operating expenses; and
• dividends on, and repurchases of, our Class A common stock and distributions to SFS Corp., including tax distributions.

Our consolidated subsidiary, Holdings LLC, is generally required from time to time to make distributions in cash to SFS Corp. (as well as distributions to UWMC) in amounts sufficient to cover the taxes on its allocable share of the taxable income of Holdings LLC. We are also subject to contingencies which may have a significant impact on the use of our cash, including our obligations under the Tax Receivable Agreement that we entered into with SFS Corp. at the time of the business combination.

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 secured and unsecured indebtedness, available borrowing capacity and available equity, unsecured debt maturities, 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. Based on the upcoming maturity for our 2025 Senior Notes, we expect to

be opportunistic in evaluating the refinance market.

We currently believe that our cash on hand, as well as the sources of liquidity described above, will be sufficient to maintain our current operations and fund our loan originations capital commitments for the next twelve months.

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.

When we sell or securitize a pool of loans, the proceeds we receive from the sale or securitization of the loans are used to pay back the amounts we owe on the warehouse facilities. The remaining funds received then become available to be re-advanced to originate additional loans. We are dependent on the cash generated from the sale or securitization of loans to fund future loans and repay borrowings under our warehouse facilities. Delays or failures to sell or securitize loans in the secondary market could have an adverse effect on our liquidity position.

From a cash flow perspective, the vast majority of cash received from mortgage originations occurs at the point the loans are sold or securitized into the secondary market. The vast majority of servicing fee income relates to the retained servicing fee on the loans, where cash is received monthly over the life of the loan and is 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 generally 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 the principal balance. For those lines, we exchange collateral for modest changes in value. As of September 30, 2024, 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 September 30, 2024:

1 An aggregate of $750.0 million of these line amounts is committed as of September 30, 2024.

2 Subsequent to September 30, 2024, the funding limit on this line was increased to $1.0 billion.

3 Subsequent to September 30, 2024, the funding limit on this line was increased to $750.0 million.

4 Subsequent to September 30, 2024, the funding limit on this line was increased to $1.5 billion, $150.0 million of which is committed, for a total of $900.0 million of committed line amounts as of October 31, 2024.

5 Interest rates under these funding facilities are based on a reference interest rate benchmark plus a spread, which ranged from 1.35% to 1.95% for substantially all of our loan production volume as of September 30, 2024.

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 September 30, 2024, no amount was outstanding under the ASAP+ program and $105.0 million was outstanding through 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) profitability. 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 secured and unsecured lines of credit, includes cross default or cross acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility. We were in compliance with all covenants under these facilities as of September 30, 2024.

Other Financing Facilities

Senior Notes

On November 3, 2020, our consolidated subsidiary, UWM, issued $800.0 million in aggregate principal amount of senior unsecured notes due November 15, 2025 (the “2025 Senior Notes”). The 2025 Senior Notes accrue interest at a rate of 5.500% per annum. Interest on the 2025 Senior Notes is due semi-annually on May 15 and November 15 of each year. We used approximately $500.0 million of the net proceeds from the offering of 2025 Senior Notes for general corporate purposes to fund future growth and distributed the remainder to SFS Corp. for tax distributions.

Beginning on November 15, 2022, we may, at our option, redeem the 2025 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: November 15, 2022 at 102.750%; November 15, 2023 at 101.375%; or November 15, 2024 until maturity at 100%, of the principal amount of the 2025 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest.

On April 7, 2021, our consolidated subsidiary, UWM, issued $700.0 million in aggregate principal amount of senior unsecured notes due April 15, 2029 (the “2029 Senior Notes”). The 2029 Senior Notes accrue interest at a rate of 5.500% per annum. Interest on the 2029 Senior Notes is due semi-annually on April 15 and October 15 of each year. We used a portion of the proceeds from the issuance of the 2029 Senior Notes to pay off and terminate a line of credit that was in place at the time of issuance, and the remainder for general corporate purposes.

Beginning on April 15, 2024, we may, at our option, redeem the 2029 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: April 15, 2024 at 102.750%; April 15, 2025 at 101.375%; or April 15, 2026 until maturity at 100%, of the principal amount of the 2029 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest.

On November 22, 2021, our consolidated subsidiary, UWM, issued $500.0 million in aggregate principal amount of senior unsecured notes due June 15, 2027 (the "2027 Senior Notes"). The 2027 Senior Notes accrue interest at a rate of 5.750% per annum. Interest on the 2027 Senior Notes is due semi-annually on June 15 and December 15 of each year. We used the proceeds from the issuance of the 2027 Senior Notes for general corporate purposes.

Beginning on June 15, 2024, we may, at our option, redeem the 2027 Senior Notes in whole or in part during the twelve-month period beginning on the following dates at the following redemption prices: June 15, 2024 at 102.875%; June 15, 2025 at 101.438%; or June 15, 2026 until maturity at 100%, of the principal amount of the 2027 Senior Notes to be redeemed on the redemption date plus accrued and unpaid interest.

The indentures governing the 2025 Senior Notes, the 2029 Senior Notes, and the 2027 Senior Notes contain certain operating covenants and restrictions, subject to a number of exceptions and qualifications, including restrictions on our ability to (1) incur additional non-funding indebtedness unless either (y) the Fixed Charge Coverage Ratio (as defined in the applicable indenture) is no less than 3.0 to 1.0 or (z) the Debt-to-Equity Ratio (as defined in the applicable indenture) does not exceed 2.0 to 1.0, (2) merge, consolidate or sell assets, (3) make restricted payments, including distributions, (4) enter into transactions with affiliates, (5) enter into sale and leaseback transactions and (6) incur liens securing indebtedness. We were in compliance with the terms of these indentures as of September 30, 2024.

MSR Facilities

On September 30, 2022, the Company's consolidated subsidiary, UWM, entered into a Loan and Security Agreement with Citibank, 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 “Citi MSR Facility”). The Citi 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, as well as mandatory curtailments, under the Citi MSR Facility are based on the fair market value of the collateral, and borrowings under the Citi MSR Facility bear interest based on one-month term SOFR plus an applicable margin.

The Citi 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 September 30, 2024, we were in compliance with all applicable covenants.

On January 30, 2023, UWM, amended the Loan and Security Agreement with Citibank, to permit UWM, with the prior consent of Citibank, to enter into transactions for the sale of excess servicing cash flows (as discussed below) whereby Citibank will release its security interest in that portion of the collateral.

On June 27, 2024, UWM and Citibank, N.A. amended both the Loan and Security Agreement and the warehouse facility agreement between the parties. These amendments increased the combined total uncommitted borrowing capacity of the MSR Facility and the warehouse facility to $2.0 billion and extended the maturity dates to June 26, 2026. As of June 30, 2024, the Company was in compliance with all applicable covenants. As of September 30, 2024, $150.0 million was outstanding under the MSR Facility.

On March 20, 2023, our consolidated subsidiary, UWM, entered into a Credit Agreement with Goldman Sachs Bank USA, providing UWM with up to $500.0 million of uncommitted borrowing capacity to finance the origination, acquisition or holding of certain mortgage servicing rights (the "GNMA MSR facility"). The GNMA MSR facility is collateralized by all of UWM's mortgage servicing rights that are appurtenant to mortgage loans pooled in securitization by Ginnie Mae that meet certain criteria. Available borrowings, as well as mandatory curtailments, under the GNMA MSR facility are based on the fair market value of the collateral. Borrowings under the GNMA MSR facility bear interest based on SOFR plus an applicable margin. The draw period for the GNMA MSR facility ends on March 20, 2026, and the facility has a maturity date of March 20, 2027. As of September 30, 2024, $150.0 million was outstanding under the GNMA MSR facility.

The GNMA 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 September 30, 2024, we were in compliance with all applicable covenants.

The weighted average interest rate charged for borrowings under our MSR facilities was 8.14% and 9.04% for the three months ended September 30, 2024 and 2023, respectively, and 8.92% and 8.71% for the nine months ended September 30, 2024 and 2023, respectively.

Revolving Credit Facility

On August 8, 2022, UWM entered into the Revolving Credit Agreement, between UWM, as the borrower, and SFS Corp., as the lender. The Revolving Credit Agreement provides for, among other things, a $500.0 million unsecured revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility had an initial one-year term and automatically renews for successive one-year periods unless terminated by either party. 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. We were in compliance with these covenants as of September 30, 2024. No amounts were outstanding under the Revolving Credit Facility as of September 30, 2024.

Borrowings Against Investment Securities

In 2021, UWM began selling some of the mortgage loans that it originates through UWM's private label securitization transactions. In executing these transactions, UWM 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 UWM due to regulatory requirements. UWM entered into sale and repurchase agreements for a portion of the retained beneficial interests in the securitization trusts established to facilitate its private label securitization transactions which have been accounted for as borrowings against investment securities. As of September 30, 2024, we had $93.7 million outstanding under individual trades executed pursuant to a master repurchase agreement with a counterparty which is collateralized by the investment securities (beneficial interests in the trusts) that we retained due to regulatory requirements. The borrowings against investment securities have remaining terms ranging from one to three months as of September 30, 2024, and interest rates based on 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 72% of the outstanding principal balance, and exchanges of cash collateral are required if the fair value of the retained investment securities, less the haircut, is less than the principal balance plus accrued interest on the secured borrowings. As of September 30, 2024, we had delivered $0.8 million of collateral to the counterparty under these sale and repurchase agreements.

Finance Leases

As of September 30, 2024, our finance lease liabilities were $25.8 million, $25.0 million of which relates to leases with related parties. The Company’s financing lease agreements have remaining terms ranging from approximately three months to twelve years.

Cash flow data for the nine months ended September 30, 2024 and 2023

($ in thousands)

Net cash (used in) provided by operating activities

Net cash used in operating activities was $5.7 billion for the nine months ended September 30, 2024 compared to net cash provided by operating activities of $494.5 million for the same period in 2023. The decrease in cash flows from operating activities year-over-year was primarily driven by the increase in mortgage loans at fair value (funded in the normal course by borrowings on warehouse facilities) for the nine month period ended September 30, 2024, as compared to a decrease in mortgage loans at fair value for the comparable period in 2023.

Net cash provided by investing activities

Net cash provided by investing activities was $2.6 billion for the nine months ended September 30, 2024 compared to $1.7 billion of net cash provided by investing activities for the same period in 2023. The increase in cash flows provided by investing activities was primarily driven by an increase in proceeds from the sales of MSRs and excess servicing cash flows.

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $3.3 billion for the nine months ended September 30, 2024 compared to cash used in financing activities of $2.1 billion for the same period in 2023. Net cash provided by financing activities for the nine months ended September 30, 2024 was primarily driven by net borrowings under warehouse lines of credit (due to the increase in mortgage loans at fair value), partially offset by net repayments on our MSR facilities, member distributions (including tax distributions) and dividends. Net cash used in financing activities for the nine months ended September 30, 2023 was primarily driven by net repayments under warehouse lines of credit (due to the decrease in mortgage loans at fair value), along with net repayments on our MSR facilities, member distributions and dividends.

Contractual Obligations

Cash requirements from contractual and other obligations

As of September 30, 2024, 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, interest and principal payments under our MSR Facility and GNMA MSR Facility, payments under our financing and operating lease agreements, and required tax distributions to SFS Corp. There have been no other material changes in the cash requirements from known contractual and other obligations since December 31, 2023.

During the third quarter of 2024, the Board declared a dividend of $0.10 per share of Class A common stock for an aggregate $11.3 million. Concurrently with this declaration, the Board, in its capacity as the Manager of Holdings LLC, under the Holdings LLC Second Amended and Restated Operating Agreement, approved a proportional distribution of $148.5 million from Holdings LLC to SFS Corp. with respect to Class B Units of Holdings LLC. The dividend and the distributions were paid on October 10, 2024.

Our consolidated subsidiary, Holdings LLC, is generally required from time to time to make distributions in cash to SFS Corp. (as well as distributions to UWMC) in amounts sufficient to cover the taxes on its allocable share of the taxable income of Holdings LLC.

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 and excess servicing cash flows, sale or securitization of loans into the secondary market, loan origination fees and certain other fees related to the origination of a loan, 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 8 - Commitments and Contingencies to the condensed consolidated financial statements for further information.

Interest rate lock commitments, loan sale and forward commitments, and other interest rate derivatives

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. These commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. As many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.The blended average pullthrough rate was 78% and 76% as of September 30, 2024 and December 31, 2023, respectively.

We also enter into contracts to sell 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. In addition, we have entered into certain interest rate swap futures contracts, referred to as other interest rate derivatives. These financial instruments include margin call provisions that require us to transfer cash in an amount sufficient to eliminate any margin deficit. A margin deficit generally results from daily changes in the fair value of these financial instruments. We are generally required to satisfy the margin call on the day of or within one business day of such notice.

Following is a summary of the notional amounts of commitments as of dates indicated:

($ in thousands)

As of September 30, 2024, we had sold $3.1 billion of loans to a global insured depository institution and assigned the related trades to deliver the applicable loans into securities for end investors for settlement in October 2024.

Critical Accounting Estimates and Use of Significant Estimates

Preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We have identified certain accounting estimates as being critical because they require management's judgement to make difficult, subjective or complex judgements about matters that are uncertain. Actual results could differ and the use of other assumptions or estimates could result in material differences in our condensed consolidated financial statements. Our critical accounting policies and estimates relate to accounting for mortgage loans held at fair value and revenue recognition, mortgage servicing rights, derivative financial instruments and representations and warranties reserve. There were no significant changes to our policies, methodologies, or processes used in applying our critical accounting estimates from what was described in our 2023 Annual Report on Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements in this report include statements relating to:

• our financial and operational performance;
• our future growth, including our loan originations and position in the industry compared to our peers;
• our client-based business strategies, strategic initiatives, technological developments and product pipeline;
• the impact of interest rate risks on our business;
• our ability to renew our sale and repurchase and other financing agreements, and the impacts of counterparty risks on our business;
• our commitments to originate loans and its impact on our future cash requirements;
• our mitigation of credit risks and the impacts of defaults on our business, as well as our risk mitigation strategies;
• our accounting policies and the impacts to our agreements and financial results;
• macroeconomic conditions that may affect our business and the mortgage industry in general;
• political and geopolitical conditions that may affect our business and the mortgage industry in general;
• our utilization of our warehouse facilities, MSR facilities, and Revolving Credit Facility;
• the impact of litigation on our financial position;
• the sufficiency of our insurance coverage;
• our repurchase and indemnification obligations for loans sold to investors and other contractual indemnification obligations; and
• other statements preceded by, followed by or that include the words “may,” “can,” “should,” “will,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.

These forward-looking statements involve estimates and assumptions which may be affected by risks and uncertainties in our business, as well as other external factors, which could cause future results to materially differ from those expressed or implied in any forward-looking statement including the following risks:

• our dependence on macroeconomic and U.S. residential real estate market conditions, including changes in U.S. monetary policies that affect interest rates;
• the impact of inflation and other macroeconomic conditions on housing pricing, demand for mortgages and the ability of borrowers to qualify for and afford mortgages;
• our reliance on our warehouse and other short-term financing facilities to fund mortgage loans and otherwise operate our business, leveraging of assets under these facilities and the risk of a decrease in the value of the collateral underlying certain of our facilities causing an unanticipated margin call or curtailment, as well as changes in banking regulations and capital requirements which may impact the availability of warehouse financing or otherwise affect liquidity in the residential mortgage industry;
• our ability to access, and increase, warehouse lines to meet our anticipated growth;
• our ability to sell loans in the secondary market, including to government sponsored enterprises, and to securitize our loans into mortgage-backed securities through the GSEs and Ginnie Mae;
• our dependence on the GSEs and the risk of changes to these entities and their roles, including, as a result of GSE reform, termination of conservatorship or efforts to increase the capital levels of the GSEs;
• changes in the GSEs’, FHA, USDA and VA guidelines or GSE and Ginnie Mae guarantees;
• our dependence on licensed residential mortgage officers or entities, including brokers that arrange for funding of mortgage loans, or banks, credit unions or other entities that use their own funds or warehouse facilities to fund mortgage loans, but in any case do not underwrite or otherwise make the credit decision with regard to such mortgage loans to originate mortgage loans;
• our inability to continue to grow, or to effectively manage the growth of, our loan origination volume;
• our ability to continue to attract and retain our Independent Mortgage Broker relationships;
• the occurrence of a data breach or other failure in our cybersecurity or information security systems;
• reliance on third-party software and services in our operations;
• reliance on third-party sub-servicers to service our mortgage loans or our mortgage servicing rights;
• the occurrence of data breaches or other cybersecurity failures at our third-party sub-servicers or other vendors;
• intense competition in the mortgage industry;
• our ability to implement and maintain technological innovations in our operations;
• loss of key management;
• risks relating to SOFR and the volatility of reference rates;
• our ability to continue to comply with the complex state and federal laws regulations or practices applicable to mortgage loan origination and servicing in general, including maintaining the appropriate state licenses, managing the costs and operational risk associated with material changes to such laws;
• errors or the ineffectiveness of internal and external models or data we rely on to manage risk and make business decisions;
• risk of counterparty terminating servicing rights and contracts;
• the risk that we are or may become subject to legal actions that if decided adversely, could be detrimental to our business; and
• those risks described in Item 1A - Risk Factors in our 2023 Annual Report on Form 10-K, as well as those described from time to time in our other filings with the SEC.

All forward-looking statements speak only as of the date of this report and should not be relied upon as representing our views as of any subsequent date. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

In the normal course of business, we are subject to a variety of risks which can affect our operations and profitability. We broadly define these areas of risk as interest rate, credit and counterparty risk.

Interest rate risk

We are subject to interest rate risk which may impact our origination volume and associated revenue, MSR valuations, IRLCs and mortgage loans at fair value valuations, and the net interest margin derived from our funding facilities. The fair value of MSRs is driven primarily by interest rates, which impact expected prepayments. In periods of rising interest rates, the fair value of the MSRs generally increases as expected prepayments decrease, consequently extending the estimated life of the MSRs, and estimated float earnings increase, resulting in expected increases in cash flows. In a declining interest rate environment, the fair value of MSRs generally decreases as expected prepayments increase consequently truncating the estimated life of the MSRs, and estimated float earnings decrease, resulting in expected decreases in cash flows. Because origination volumes tend to increase in declining interest rate environments and decrease in increasing rate environments, we believe that our origination business provides a natural hedge to servicing. We periodically evaluate our overall interest rate risk management strategy with respect to MSRs, which includes consideration of our natural business model hedge, regular sales of MSRs and excess servicing cash flows, and at times entering into financial instruments to mitigate the interest rate risk associated with all or a portion of our MSR portfolio.

Our IRLCs and mortgage loans at fair value are exposed to interest rate volatility. During the origination, pooling, and delivery process, this pipeline value rises and falls with changes in interest rates. Because substantially all of our production is deliverable to Fannie Mae, Freddie Mac, and Ginnie Mae, we predominately utilize forward agency or Ginnie Mae To Be Announced ("TBA") securities as our primary hedge instrument. The TBA market is a secondary market where FLSCs or TBAs are sold by lenders seeking to hedge the risk that market interest rates may change and lock in a price for the mortgages they are in the process of originating.

We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates. Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled. We used September 30, 2024 market rates on our instruments to perform the sensitivity analysis. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated to our performance because the relationship of the change in fair value may not be linear nor does it factor ongoing operations. The following table summarizes the estimated change in the fair value of our mortgage loans at fair value, MSRs, IRLCs, FLSCs, and interest rate swap futures as of September 30, 2024 given hypothetical instantaneous parallel shifts in the yield curve. Actual results could differ materially.

($ in thousands)

Credit risk

We are subject to credit risk, which is the risk of default that results from a borrower’s inability or unwillingness to make contractually required mortgage payments. While our loans are sold into the secondary market without recourse, we do have repurchase and indemnification obligations to investors for breaches under our loan sale agreements. For loans that were repurchased or not sold in the secondary market, we are subject to credit risk to the extent a borrower defaults and the proceeds upon ultimate foreclosure and liquidation of the property are insufficient to cover the amount of the mortgage loan plus expenses incurred. We believe that this risk is mitigated through the implementation of stringent underwriting standards, strong fraud detection tools and technology designed to comply with applicable laws and our standards. In addition, we believe that this risk is mitigated through the quality of our loan portfolio. For the three and nine months ended September 30, 2024, our originated loans had a weighted average loan to value ratio of 83.04% and 82.46%, and a weighted average FICO score of 735 and 736. For the three and nine months ended September 30, 2023, our originated loans had a weighted average loan to value ratio of 82.67% and 83.15%, and a weighted average FICO score of 738 for both periods.

Counterparty risk

We are subject to risk that arises from our financing facilities and interest rate risk hedging activities. These activities generally involve an exchange of obligations with unaffiliated banks or companies, referred to in such transactions as “counterparties." If a counterparty were to default, we could potentially be exposed to financial loss if such counterparty were unable to meet its obligations to us. We manage this risk by selecting only counterparties that we believe to be financially strong, spreading the risk among many such counterparties, limiting singular credit exposures on the amount of unsecured credit extended to any single counterparty, and entering into master netting agreements with the counterparties as appropriate.

In accordance with the best practices outlines by The Treasury Market Practices Group, we execute Securities Industry and Financial Markets Association trading agreements with all material trading partners. Each such agreement provides for an exchange of margin should either party’s exposure exceed a predetermined contractual limit. Such margin requirements limit our overall counterparty exposure. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. We incurred no losses due to nonperformance by any of our counterparties during the three or nine months ended September 30, 2024 or September 30, 2023.

Also, in the case of our financing facilities, we are subject to risk if the counterparty chooses not to renew a borrowing agreement and we are unable to obtain financing to originate mortgage loans. With our financing facilities, we seek to mitigate this risk by ensuring that we have sufficient borrowing capacity with a variety of well-established counterparties to meet our funding needs as well as fostering long-term relationships.

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Principal Executive Officer and Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2024. Based upon their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.